Award winning restaurant Alinea once crashed the Chicago phone exchange 312-867 because its call volume was huge on the day that monthly reservations opened up. To manage so large a number of reservation requests for just 20 tables, Alinea required three full time employees that cost them $140,000 a year. Sadly, it was the reservationists’ job to say “No” to most of the calls that got through and to hundreds of voicemails. Perhaps even sadder, eight percent of the people who did get reservations were no-shows–a $260,000 annual revenue loss.
This great Sex and the City excerpt shows how getting a table can be infuriating:
Realizing that the current system was flawed, one of Alinea’s owners said, “There has to be a better way.”
Where are we going? To how restaurants are solving the reservations problem.
“Tickets go on sale soon.”
When the owners of Alinea planned the opening of a second restaurant in 2010, they decided that this time would be different. Concluding a 60 second video about their new eatery, they used the teaser, “Tickets go on sale soon.” And people said whaat??
Now sister restaurants Alinea and Next sell tickets that cover the price of the food and the gratuity. Like a concert, you pay in advance for a non-refundable ticket and cannot cancel a reservation. From the restaurant’s perspective, there is no such thing as a no-show. They have guaranteed revenue and tables for two, four or six to create capacity utilization (odd numbers waste seating room). As a result, the expense of a reservations staff is gone, they know their cash flow, their no-show numbers have plunged and they throw out much less food. Next had 72 tables booked and more than one half million dollars within two days of initiating the new approach.
Here you can see their graph of the short-sat problem where diners make a reservation for four people and then show up with only two. Once diners paid in advance, they brought fewer people much less frequently.
Alinea’s ownes have also had success with dynamic pricing. Charging more for that Saturday night 7:30 slot than Tuesday at 9:30, they have optimized their customer flow. During the Super Bowl they tweeted, “Don’t care about football tonight? Come eat at Alinea instead. $165 super bowl special.” That 35 percent discount meant $ 23,800 of extra revenue or as they explained, “Not a normal night, but not a disaster.”
On the customer side, the tickets and pricing can be plusses. You can get a better deal on off nights and have a less-frustrating, more transparent reservation experience. Furthermore, tickets can be resold in secondary markets.
Our Bottom Line: Pricing Power
I know you can say that their success was based on their stupendous popularity. However, through a new business model that offers a menu of payment systems, the restaurant business can become more productive and profitable. When there is a payment system choice, restaurants enhance their pricing power. On both the supply and demand sides of the market, incentives change.