Restaurant blog imageWhen you think of variable pricing for revenue management, you tend to think of the travel industry. After all, airlines invented yield management  and hotels soon followed. But along the way came a lot of customer frustration and confusion.

Restaurants, on the other hand, have been at dynamic pricing for even longer and don’t get such a bad rap. Cutesy names like Happy Hour and Early Bird Special take the bite out of revenue management.

Despite the long history, restaurants are only beginning to tap into the power of revenue management.

“Restaurants are catching up,” Sheryl E. Kimes, professor at Cornell’s school of hotel administration, told the New York Times. “They are doing so at an increasing rate enabled by new technologies.  Applied Predictive Technologies  (APT) recently asked, “Should Restaurants Change Prices by the Hour?”

The two most prevalent new approaches are social deals and online reservation tools.

Social deals like Groupon or Gilt City create impulse opportunities. They can provide time-restricted offers promoting less popular days or hours. Mobile tools like Leloca send out first-come, first-serve deals when restaurants have slow nights or large cancellations.

“[Restaurants] have complete control of what they offer, the area that the deal will be offered within and when the deal will start and end,” Leloca CEO Douglas Krone told Daily Deal Media.  “The merchant gets the customers right when they need them, maximizing their profit and minimizing waste such as electricity, staff, food, etc.”

Online reservation tools approach diners who are already in the decision process. Groupon unit offers discounted meals based on reservation time. Typical discounts of 20% are deducted from bills before they are presented to customers at their tables. Savings are determined via analytics, and can range from 15-30% depending on a restaurant’s own traffic patterns as well as those of its competitors.

Savored serves 1000 restaurants and is in the process of integrating with the industry leader, OpenTable, used by 44% of US restaurants that take reservations. OpenTable has tools of its own, such as time-targeted digital advertising.

To make the most of the revenue management opportunity, restaurants should consider three strategies:

  • Vary discounts by location, reflecting different traffic composition (business, family) demand levels and competitive situations
  • Examine the item level, not just traffic. Off-peak promotions may not only increase traffic but also trade-up to higher priced items. Combining discounts with combination meals can grow average check
  • Vary not just the price but the experience—offering meal pairings, chef visits, limited specials, and the like

Unlike travelers, who tend to get annoyed by the complexity of high peak pricing for airlines and hotels, diners are more conditioned to different prices because the rules are simple and clear. While weekday prix fixe dinners and lunch specials are part of US restaurant history, the upside of variable pricing is enormous—if restaurants avoid complexifying things to the point patrons feel they’ve been tricked or gamed.

Speaking to the Times, Savored’s co-founder and CEO Ben McKean said: “The challenge that every single restaurant is faced with is the elasticity of demand from consumers. In an off-peak hour, you might get only a couple people who want to go to the restaurant, and in a peak hour you might get people out the door. [Restaurants are] leaving so much on the table.”

Thanks, Ben, the “table” pun was worthy of the headline and the closing quote.

Categories: Analytics, Local, Promotions | Tags: , , , , , | 4 Comments

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  1. YeahBut

    The other side of the coin is the large premiums restaurants charge for popular days/times. Dining on Saturday night has become like purchasing a first class ticket. But in this case the food and wine ain’t free, it costs an arm and a leg.

    Given the failure rate of restaurants, I can sympathize. I like my weekend nights to be “out” as much as anybody. And the market will certainly bear it, so I’m shouting at the ocean.

    As long a restaurants up their “game” for more discerning customers during these peak times, they will justify the price premium. Otherwise, look for daily deals, coupons and other incentives to increase in step with premium prices.

    • Yes, that is the other side of the coin. Segments are important. Restaurants themselves fall into different tiers that diners will reward or penalize when it comes to price premium. Restaurants will find themselves competing for different segments of customers at these different time periods. The more price-sensitive will patronize during more affordable periods and more experience-sensitive will fill the evening tables. And depending on circumstances, they may or may not be different people.

  2. Hi Dan Frechtling, this is an interesting article that prompted me to delve further into the topic on my blog, The Revenue Management Blog.

    • David–Thanks for dropping the link. I like your reasoning around revenue per seat hour and the importance of turning tables to increase throughput rather than focusing on check size. A good read!

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