Pricing menus like airline tickets
The airline industry learned long ago that, since the availability of seats is fixed, prices can be adjusted with demand. They charge more during peak times, less off-peak; over time, their customers have become accustomed to this variability. So, with a limited number of seats in your restaurant and a similar variability in demand, why can’t you do the same?
While some classify the restaurant business as a form of “retail” transaction, others view it as “service” oriented. Depending on your orientation, and your customers’, you may or may not see an opportunity in your pricing strategy.
In most retail transactions, both demand and capacity are widely variable. In this situation, a retailer can stock up on inventory, reduce prices to stimulate demand and realize a boost in sales and profits. We see this strategy in action almost every day through advertisements for special sales and promotional pricing schemes. Another important factor of retail transactions is the timing of the benefit gained, or “utility,” of the product. If you buy a shirt, or a garden hose today, you can use it any time you like.
The service industry is different in both capacity and timing. Because a service organization typically has a limit to its capacity, the pricing can, and should, be set at the highest competitive market rate that sells the maximum capacity. More importantly, customers are willing to pay a higher competitive rate based on the timing of when they need the service. And the value of a service can expire quickly.
What exactly is your restaurant? Too often it gets lumped in with retail. But it’s not. It’s a service industry. Just like airlines, restaurants have a certain number of seats to fill. If those seats aren’t occupied there’s still a cost associated: lighting, heat, staffing, etc. So is it crazy to think that what works for the airlines could also work for restaurants? Maybe not. We have borrowed ideas from the airlines before. The most obvious is frequent flyer programs: rewarding repeat customers. It’s hard to find a restaurant today that doesn’t offer a similar rewards program. So let’s take a look at how airline pricing could be adapted to our setting.
First, let’s identify the peak hours in the restaurant industry. Easy enough: for most restaurants its Friday and Saturday night. We’ll offer several strategies to boost profits during those busy times as well as during off-peak hours, but this is by no means exhaustive. What you should ask yourself is, how flexible can I be with my menu prices to take advantage of customer flow? See what ideas come to mind.
If you have the capability to print your menu in house, you could simply raise prices on Friday and Saturday nights when your traffic is at its highest. There’s no contract with the guests that says prices have to be the same every night of the week. But, given the traditional pricing practices of our industry, be aware that this could lead to a negative response from your customers.
Another approach might be to let your regular pricing float upwards over time and then implement opportunities for “preferred pricing” opportunities during off-peak periods (notice we didn’t say “discount”). One method of preferred pricing is to consider multi-course packages such as “tasting menus” or prix fixe pricing. These strategies have been a fixture of fine dining forever, but can be translated into other segments and offered during slower nights to boost receipts. The idea here is not to discount, but rather to offer a packaged experience that helps to boost the check and deliver an enhanced value proposition for the customer.
Other options might be to offer a special wine pour or choice of beverage with every entree on weeknights. Or, how about a dessert? Again, ways to demonstrate a positive value proposition without discounting the product or reducing receipts.
Still another tactic might be to look at the type and price of your “specials” during various demands, making sure that you focus on options with higher price points and profits during the higher demand periods while letting it become known that the specials during the week truly are “special.”
All of the above are various forms of what the airlines refer to as yield management, or YM. It’s something the airlines are adept at: leaving as few empty seats as possible. One of the easiest ways restaurants can improve yield management practices is to have a flexible seating system. That means being able to create a deuce, a three top, whatever you need, so you’re not losing a seat, or, more precisely, floor space on a four-top when there are only two or three guests. You may have a fixed number of seats, but if they are inefficiently used, you have room to optimize by adjusting your table mix.
There is a lot we can learn from the airline industry, but to be fair, there’s a lot the airline industry can learn from us. Just try one of their dinners the next time you fly.