Playing with prices

Revenue management – the structuring of prices to maximise profit – has become an integral part of hotel sales. The hotel industry adopted the system from the airline sector, and now restaurateurs are imitating hotels. Here's what the latter can learn.

text: Jürgen Baltes

Nobelhart & Schmutzig is a fashionable restaurant in Berlin near the former inner German border crossing Checkpoint Charlie. It's an upmarket eatery that has made a name with its "unrefined local" cuisine, putting it in 88th place on the list of "The World’s 50 Best Restaurants".

Yet while it is often booked up weeks in advance at the weekends, even such a hip restaurant regularly has a few empty spaces left during the week. Owner Billy Wagner has used this opportunity to introduce price differentiation for the first time – "a first in the German restaurant trade," he says. Instead of the usual EUR 95, a ten-course menu has since May cost EUR 120 on Thursdays, Fridays and Saturdays and before public holidays. This hefty premium is bringing in around EUR 3,000 in additional income for Nobelhart & Schmutzig each week, as the restaurant remains full at weekends.

Price expert Mark Friesen from the strategy consultancy Quinta Consulting believes it's a legitimate measure. In cases like this it's not just about increasing sales through the price, but also through the occupancy rate, he says. "Pressure eases off at the weekends, some people decide they'd rather eat out on Wednesdays instead." The technical term for this is "price elasticity of demand". Friesen himself has tried to dine at Nobelhart & Schmutzig before, but was unable to get a table. "Naturally I was disappointed." Price differentiation may therefore help not only to increase sales, but potentially also to improve the satisfaction of guests, he points out.

Paying for reservations: revenue management taken to extremes

However, Friesen highlights that this kind of revenue management is nothing new. "Some New York restaurants manage demand by making guests pay for a reservation." Sometimes the reservation fee even varies depending on the day of the week, he adds. "That's revenue management taken to extremes." This won't transfer to every culture.

Friesen believes it's better to "turn" the tables, which is also an element of revenue management. "If I book a table at a popular restaurant for 7.00 pm and I'm informed that it's available until 9.00 pm, that's absolutely fine," he says. In Italy or Spain, where guests like to sit around for longer, "they can't do that" – and they certainly can't bring the bill without being asked, as is normal in the USA, which is effectively asking guests to leave.

The objective: to exploit the maximum amount guests are willing to pay

But how exactly does revenue or yield management (the two terms are generally used synonymously) actually work? What is feasible under which circumstances? Put simply, the aim is to take advantage of the maximum amount that guests are willing to pay, through optimum management of prices and capacity, in order to maximise one's own profit. To do this, the right product must be sold to the right guest at the right time. There are various conditions that must firstly be met in order for this to be possible (see box): capacity must be limited, the product must be "perishable" and able to be booked in advance, and demand has to fluctuate. And marginal costs, i.e. the additional costs when an additional unit is sold, should be low.

All of this is perfectly true of plane seats and hotel rooms. If the latter are not sold by the evening, they will have no value the next morning. On the other hand, the sale of an additional room entails very few additional costs. Another important point is that a hotel only has x rooms; it cannot create more in the short term, and can do so in the long term only with significant investment.

"In principle, it's possible to maximise the yield on any product or service"

However, these conditions also apply to many other services, including restaurants, but also conference rooms, locations, use of spas, rental cars, golf courses or car parks. "In principle, it's possible to maximise the yield on any product or service that meets the criteria," says Friesen, "particularly in the digitalisation age."

The hotel industry can learn from this in turn. Quinta Consulting advises car park operators, among other companies. It aims to break up their traditional, linear price models and bring tariffs more into line with demand. "It doesn't always have to be hourly intervals, and every hour doesn't have to cost the same." Hotels, meanwhile, tend to use prohibitive prices to protect their car parks against use by non-guests. "That's smarter," Friesen says. If you analyse use of parking spaces in hotel garages, he explains, you can significantly increase the yield with external customers and clever pricing. The same applies to hotel catering, Friesen adds. If you know who is looking for what and when, you can target hotel guests in order to convert them into restaurant guests while simultaneously attracting external guests. He points out that a huge amount of data is available in point-of-sale systems. The hotel industry just needs to have the courage to work a bit more with prices above and beyond rooms.

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