Log in

Sat, Jan. 12th, 2008, 10:19 am
Restaurant Reservations

Restaurants which generally sell out have an interesting dilemma. In principle they could make more money with higher prices, but then they'd risk not selling out, and empty seats would quickly wipe out any revenue gains from raised prices, not to mention harming that elusive 'buzz'. In practice such restaurants generally wind up leaving some money on the table, no pun intended, and take the stability of always selling out over the potential of higher revenues.

I've come up with a variant on dutch auctions which solves this problem quite beautifully. The restaurant continues to charge the same amounts it does currently, with the same menu, but there's a 'seating fee' for sitting down which might be charged if the restaurant sells out in advance. The amount of the seating fee is determined by when the restaurant becomes completely booked, with the fee going down the later the selling out happens, possibly going down to zero at the end. By making a reservation when the potential seating fee is a certain amount, a customer is declaring that they're willing to pay the seating fee for that time period if it is necessary, but they aren't penalized for making an early reservation unless it would have been necessary to do an early reservation to get a seat. By waiting to make a reservation until later, a customer is declaring that they are unwilling to pay a higher price, but also allowing for the possibility that the restaurant will become fully booked and they won't get a seat. One of the nice features of this system is that the reservation system is essentially unchanged, allowing for trivial support of reserving particular time slots and tables.

This system also works for concerts and other events which have the potential to sell out.

A decent dot com business model would be to make a web site which performs this service for restaurants, and does fulfillment of seating fees and keeps a fraction of the seating fees for itself as a way of getting paid by restaurants. Restaurants would probably be quite agreeable to that, since seating fees are essentially found money for them, and they'd be happy to let someone else have a fraction of it.
(Deleted comment)

Sat, Jan. 12th, 2008 08:31 pm (UTC)

Yeah, it's first disclosure, I just got the idea yesterday. I'm posting it because I think it's a good idea but am unlikely to do it myself. I suffer from no lack of business plans.

Sat, Jan. 12th, 2008 08:31 pm (UTC)

As a consumer, I'm not sure that I'd enjoy living in your efficient-markets world. :-)

Sat, Jan. 12th, 2008 08:55 pm (UTC)

Do you say that as someone who makes reservations casually or as someone who's good at finagling a seat? :-)

This technique would in the very short term result in just higher prices, but in the longer term result in more restaurants with more seating, and possibly even result in lower prices. It's the whole 'local optimization is good' mantra of modern macroeconomic theory.
(Deleted comment)

Sat, Jan. 12th, 2008 09:57 pm (UTC)

Restaurants do their best to make efficient pricing, but when a restaurant sells out within a few hours of making reservations available for any given day, it's pretty clear that there's room for improvement.

Sun, Jan. 13th, 2008 03:59 am (UTC)

As a business owner, you want to maximise profits regardless. And the "market" as it is, is as how you define it. Restaurant, hotel, concert operators etc generally do want to maximise capacity but not at the expense of price and vice versa. A luxe/high end restaurant will have a different pricing strategy from your MacDonald's franchise but it is a bad comparison because you're not comparing apple to apple. An empty restaurant with higher average prices may be losing business not because of "the market" but due to factors like location, quality of food/service/ambience, poor marketing, mispricing, bad reputation etc. A neighbouring restaurant may be doing better business not because of lower average prices but because it may be in a strategically better location (that's why rental for certain streets even within the same district commands a higher price), the food may be fresher/better and it has built up a significant reputation. There are so many factors to better sales apart from pricing.

Sat, Jan. 12th, 2008 11:14 pm (UTC)

Biggest thing that the maitre d'hotel would have would be explaining the charge to every single person both when they reserve a table and when they come to pay the bill.

Interesting idea, and it might fly in places where people are willing to pay insane amounts of money to eat in a pitch black room...
(Deleted comment)

Sun, Jan. 13th, 2008 05:29 am (UTC)
bramcohen: Re: Tangential: Consumer Fads

You're mixing together the questions of 'is it a sustainable business model?' and 'is it a good investment?' The criteria you mention are reasonable ones for whether it's a good investment, although they focus a bit too much on the long term (making god money for just a few years can get perfectly reasonable ROI) and doesn't take into account that the 'investor' might be some engineer who's spending free time on it, which makes the amount of investment for that person rather reasonable, although for a VC to try to put together such a thing as a business might not be such a hot idea.

With regards to 'is it a sustainable business model?' the two criteria are: can it achieve any success at all, and will the price go so low it's hardly a business afterwards. Price dropping precipitously isn't as much of an issue as one might think. As long as there's much of a business at all, *someone* will be fulfilling it, and in that case of dot coms that someone can be a single individual. Regardless of the shape of the industry, it's likely to be very high margin, due to the very low margin cost of running a web site, so that isn't so much of an issue.

'Can it achieve any success at all?' is the more substantive issue, having a lot to do with the restaurant business and marketing and usability of the product. Whether doing an outsource restaurant reservation system is a reasonable business by itself, and whether someone has already made a good product which dominates that market is an interesting question. It wouldn't take much research to find the answer, but I haven't done it.

Sun, Jan. 13th, 2008 04:24 am (UTC)
mongoltrophies: Meh

I think a lot of people would feel pathetic to say they're willing to pay such a high price just for the assurance they'll be seated at a restaurant. It wouldn't essentially be different from the way they behave already, but so much more overt that a lot of people would be turned off, even though I guess the bids are secret. Probably better to leave it the unspokenly polite elitist system that it is, better suited to the tradition of restaurants and the experiences people expect from them.
I think anyway the costs of entry would inevitably rise and the costs of menu items would drop, if we're talking about a la carte menus at all. For some of the upper-tier restaurants that don't operate a la carte, the system you're suggesting wouldn't be much different from the way they operate anyway, since they know pretty well what to charge and will charge quite a bit at certain times of year, like hotels.
Hotels could of course be improved all kinds of ways, too, but if there's any industry that's geared against consumer efficiency for higher profits, it's that one.
Not so for concerts, though. I think people's expectations of concert-going are a lot better suited to this, but there would still be an outcry. Metallica would be all over it, but Fugazi would lead a protest, like already with their $5 shows.
Of course, I'm overestimating people. They'd pay. People following the big-name musicians on the casino circuit, who'd also go for the concept in restaurants, and who believe that auto-gratuity on cruise ships makes everything wonderfully simple.

Sun, Jan. 13th, 2008 04:56 am (UTC)
brad_templeton: Too much infrastructure

At least right now there is no infrastructure to reservations beyond a piece of paper or a simple computer system. Now you need a contract and a way to enforce it.

Otherwise I can make a reservation at the high price, and change my mind later based on where the price goes. That may leave a lot of no-shows.

It's not clear to me how the seating fee is set, though. Is it based by when in the day I make my reservation? Is it also based on when I make the reservation for? I want to make the reservation when I think about it, I don't want to watch a price meter until I like the price. Or do you intend I can make the reservation now and set the top price through some escrow system that will actually make the reservation when the seating fee drops to my price? I don't want to disclose my top price to the restaurant of course, much as they would like it.

Why not an ordinary second price dutch auction, where you name your price, and everybody pays the price just below the N+1th bidder, where N is the size of the restaurant in the period being reserved for. If they don't fill the restaurant the fee is zero. If they fill it exactly it is also zero. If they get one extra person the fee is that lowest bid, presumably small.

This system generally needs restaurant reservations to become much more internet and computer oriented. They are at some places.

Sun, Jan. 13th, 2008 05:11 am (UTC)
brad_templeton: Re: Too much infrastructure

Oh yeah, one other thought: Instead of making it a seating fee, alter the minimum bill to be quite high. "Two drink minimum." This will encourage people to order the most expensive dishes and feel they are getting something more for their extra money. Or insist they order some high margin deserts or drinks or whatever. Don't just make them pay cash for the seat.

Sun, Jan. 13th, 2008 10:43 am (UTC)
deobserver: Re: Too much infrastructure [off-topic]

Instead of making it a seating fee, alter the minimum bill to be quite high. "Two drink minimum." This will encourage people to order the most expensive dishes and feel they are getting something more for their extra money. Or insist they order some high margin deserts or drinks or whatever.

Entirely off topic I know, but I just couldn't resist commenting on this. :-) Some nightclubs have a variation of this, where they charge an entrance fee (price depending on your gender, time of entry or some other arbitrary criterion) but give you 2 free (and crappy) standard drinks. Bars and pubs are especially good with setting higher prices and then giving special concessions during off peak periods to encourage more patrons/orders. People will generally feel like they're getting a good deal when they get a concession from a higher price. Or if they get a discount on one item if they spend $X more on another item.

What some restaurateurs have done, is create a separate bar/waiting area so that people can place reservations in person and wait for their turn in a place where they'd feel somewhat obliged to buy a drink. It's a good way to deal with temporary surplus demand and generate more revenue for popular restaurants.

Sun, Jan. 13th, 2008 05:38 am (UTC)
bramcohen: Re: Too much infrastructure

Enforcement could be done by having people leave a credit card number when making reservations. It's an imperfect approach, but a serviceable one.

The price is set by when the restaurant sells out. Say that the seating fee periods are one day each, and that they go for $100, $50, $25, and $0. If two people make reservations on the $100 day, then three people make reservations on the $50 day, and then five more people make reservations on the $25 day, thus booking all ten seats, then all ten people have to pay $25. This is very similar to a 'second price' dutch auction, in that the price is set by the marginal bidder.

This model doesn't really require the use of the internet, it could be done over the phone as well. For a web site which did it, it would probably be best to allow reservations to be entered by restaurant employees as well as the general public.

Sun, Jan. 13th, 2008 09:08 am (UTC)

The biggest issue with this, in my mind at least, is simply that added complexity has a cost - people don't want to think that much and they don't want to worry about schemes like this one. Mental effort is the same reason micropayments failed, and I think they might make this fail badly as well.

It's definitely an interesting idea though.

Sun, Jan. 13th, 2008 02:42 pm (UTC)

What's the point of having to "bid" a particular amount at a particular time? (i.e. call exactly 14 days before when the seat fee is $20 to see if you can get a seat for that price.) Is it to avoid the problems of: (a) not being able to confirm your reservation at the time you call the restaurant, and (b) the restaurant needing to keep track of all "bidders", and not just customers who will get seats?

Since it's kinda annoying to have to call at a particular time to get a particular price, someone would probably develop a bid-placing system that attempts to make the reservations for you at the appropriate time, but once this is in place, the system becomes very similar to the simpler "accept the $n$ highest bids" system. (With almost all of its disadvantages, including both (a) and--if the bid-placing system is run the restaurant itself--(b).)

Mon, Jan. 14th, 2008 12:29 am (UTC)

Of course, you've just solved the ticket touting problem as well.

"Spice Girls tickets - $1000 in the first hour, $500 in the second hour, $1 when the arena doors open."

Tue, Jan. 22nd, 2008 09:04 pm (UTC)

Yes, this approach is quite applicable to concert tickets as well. The thing which is novel is that in my system an early reservation doesn't force you to pay a higher price if there aren't other people willing to pay as much, so the traditional dutch auction disincentive to being the first bidder is removed.

Wed, Jan. 16th, 2008 05:46 pm (UTC)

And, as if on cue, the market is already seizing the inefficiencies you point out.

Tue, Jan. 22nd, 2008 09:02 pm (UTC)

Scalping tickets is an interesting approach, although it's highly inefficient. The method I propose would create much more efficiency, and bring most of the profit from the new efficiency to the restaurant, rather than to scalpers.

A friend of mine suggested that people might be willing to pay a premium for list minute seats, and a few of those should be held in reserve. I'm not sure that's true, especially if there are more than a handful of last-minute reservation opportunities available, but it's an interesting idea.

Mon, Feb. 25th, 2008 12:44 am (UTC)

It also looks like IBM is experimenting with a similar idea. I wonder if they're reading your blog for business direction.

Sat, Jul. 5th, 2008 05:29 am (UTC)
restaurantcoach: People don't like being nickeled and dimed

Great idea. It may actually work for some high-end uber-popular restauratn where celebrity hang out and where you have to book your seats months in a advance.

Suspect it won't work for a typical restaurant though. Guests don't like being nickeled and dimed.

A lot of sit down places use a reservation system called OpenTable. It seem integrating your idea with their product would give you a killer combination.

Restaurant Marketing