Why only looking at RevPASH doesn’t allow you to see the big picture? Because RevPASH is the result of the optimal balance between Average Check and Occupancy.
The goal of restaurant revenue management (RRM) is to maximize revenue per available seat hour
(RevPASH) by manipulating the price and meal duration.*
*(Sheryl E. Kimes, Richard B. Chase, Sunmee Choi, Philip Y. Lee, and Elizabeth N. Ngonzi,
"Restaurant Revenue Management: Applying Yield Management to the Restaurant Industry,
" Cornell Hotel and Restaurant Administration Quarterly, Vol. 39, No. 3 (June 1998), pp. 32-39.)
The meal duration tells us how long a meal takes to be consumed, it is calculated as the time between the moment when the guests left the table – the time when the guests placed the first order for their meal.
Several strategies can be put in place to control the meal duration for the best revenue return:
the first step is to understand the level of demand by day of the week, and by the hour, with the scope to determine the hot (high demand) or cold (low demand) periods. (for further insights please refer to part 1 of the series here).
During the cold periods of demand, we have more time to spend with the customer and our focus should be on increasing the average check using techniques like upselling (e.g. offering wine pairing) or suggestive selling (sales techniques to persuade the customer to consume more e.g. storytelling of the dish).
During the hot periods of demand, our need is to increase the table-turning, hence the time spent with the customer at the table must be limited. Consequently, we usually avoid any suggestive selling and we implement a shorter menu with a different dish selection and pricing.
For instance, a restaurant that is usually busy at lunchtime might want to increase the turnover and accommodate more guests. So it will offer a limited or “daily menu” that allows to speed the service and decrease the meal duration. At dinner on the other hand (cold period), the restaurant will offer a full menu, a la carte options, and the restaurant team will engage more with the customer to increase the average check and improve the overall dining experience.
Maintaining experience and service quality is paramount in both cases (high and low demand).
How to make sure you don’t compromise on service quality:
- Train the kitchen staff to deliver the food promptly
- Be clear with your customer if the table is booked for a second turn
- Deliver the check promptly at the time when the meal is done
- Serve the coffee at the Bar or in a dedicated area if necessary, to free the table without compromising on the customer experience
- Work on your menu items
Manipulating the meal duration helps to improve the revenue, however, profitability is the most important KPI to be kept into consideration when measuring the restaurant’s productivity.
A high RevPASH does NOT necessarily mean a high Profit.
To balance Revenue and Profit, restaurants can apply some Yield Management techniques and focus on the Menu Engineering for better profitability.
Yield Management includes all the strategies that can help to optimize demand based on customers’ behavior and therefore: inventory management, table-turning, meal duration, meal time, pricing, cost.
We already covered the inventory management on part1 of the series and the meal duration in the current one.
How do the meal time, pricing, and cost come into play then?
Meal time: as anticipated, restaurants experience periods of high and low demand during the service times. To attract demand over usually cold periods, some tactical activities can be implemented such as:
- Special promotions (e.g. 10% off if you have breakfast before 8 am) or add-ons over off-peak times (e.g. book your dinner at 7:00 pm and get a complimentary welcome drink)
- Events at off-peak times or off-peak nights (e.g. Happy hour between 5 and 6 pm, Special Tuesday dinner at 20% off..)
- Theme events (Mondays have become burger night and Tuesdays are taco night, and Wednesdays are 1/2-price)
It’s just a matter of creative thinking because an empty restaurant table is just like an empty airline seat, it is perishable inventory. If you don’t sell the table tonight, you cannot sell it tomorrow, for tonight.
Costs and staffing must always be considered though, so the rule remains: sell for profit, not for volumes.
Engineer Your Menu for More Revenue and Profits
Working on the menu items is the way to improve your restaurant’s profitability.
Menu engineering is the study of the profitability and popularity of menu items. By calculating these two factors, you can determine the better placement of the dishes in the menu for better profitability, revise the selling price, or the food cost. The goal is simple: to increase the profitability per guest.
To build a Menu Engineering, you need to gather the following information for each menu item:
- the selling price
- the food cost
- quantity sold
These three elements are essential to determine the contribution margin (the selling price minus the food cost) and the sales volume of each menu item by menu category (starter, entrée, dessert…).
Eg. assuming you are selling the Ravioli at the selling price of euro 16,00 and the food cost of the plate is euro 6,00
Contribution Margin = euro 10,00 (16,00 -6,00)
Food cost %= 37,5% (Item food cost/Item sell price -> 6,00/16,00)
Profitability%= 62,5% (Contribution margin/Item price)
What are other commonly used KPIs?
All Items Sold = The Sum of Number Sold items.
Overall Food Cost = The Sum of Total Food Cost. (Items sold x food cost per item)
Overall Contribution Margin = The Sum of Contribution Margin. (items sold x contribution margin per item)
Average Profit Per Item = Overall Contribution Margin / All Items Sold.
Based on the popularity (number of sales) and profitability of each item, your menu items will be ranked based on the average sales and average profits of the menu items as:
- Stars: High popularity and high profitability
- Workhorses or plow-horses: High popularity and low profitability
- Puzzles: Low popularity and high profitability
- Dogs: Low popularity and profitability
For each menu category, the classic approach assigns items to one of four quadrants, BCG Matrix:
Managers then use these classifications to determine possible actions to take with each menu item for better sales and profitability. For example, with Star menu items, recommendations might involve highlighting them on the menu, featuring them as a signature dish, or perhaps raising the price. On the other hand, possible courses of action for Dogs might be to bundle them with other menu items, drop them from the menu, or even raise the menu item’s price (to gain more contribution margin from the relatively scant sales). You can also work on the food cost to make eg. Cash Cows more profitable.
The menu engineering process is effective and easy. In its simplest form, it just involves meeting every month or two (or whenever the menu is about to change) to review the menu items and work on the necessary changes. The resulting sales volume and contribution changes will help determine whether the changes were effective or whether further revisions are required.
Menu engineering can be an excel model, but now there are also many P.O.S Program which has integrated a menu optimization tool. Want to learn more about Menu Engineering? Get in touch now!
Would you like to know more, contact us!