Restaurant Operators Ignoring RevPASH are missing a trick: Real revenues

5% Revenue Increase from just 7 letters?

Hotels, airlines and other industries have seen great success from revenue management systems (RMS). They have determined that the best way to measure revenue is based on the available inventory or asset in question. For the hotel industry, RevPAR is based on an available room night, for the airline industry RPSM is based on the available seat-mile and the metric for shopping centers is Sales per SqFt.

Companies in many sectors have become more efficient in analyzing and monitoring their revenue capacity to give a true determination of productivity. The dine-in restaurant industry, however, consistently fails to embrace a scientific technique (RMS) that can reap significant rewards which is an error, notably as restaurant owners are trading in a challenging economy.

Understanding how restaurant revenue management (RRM) applies to the restaurant is about understanding what it is you are tracking and why. RRM, simply stated, is selling the right seat to the right customer at the right price. Generic mistakes often made by operators are looking at number of customers, average check or many of the other statistics that simple restaurant data generates. This is the equivalent, unfortunately, of looking at the average amount you sold your rooms for in a hotel without first looking at how many rooms you sold. An hotelier aims to fill all rooms for the best rate – or some rooms at a better rate – and that data allows that hotelier to assess how to do better. How to improve revenue and ultimately profit.

It is understandable that looking at a “meal” as an inventory item can be considered more of a challenge. Unlike the airline industry or hotels who sell their specific product based on a fixed period of time, restaurants do not have this luxury. When you are selling a meal, you may have an idea of the average meal duration but that information is somewhat less relevant because the meal time is not fixed and you are certainly not selling time (unfortunately).

The food and beverage industry as a whole is guilty of failing to use simple KPI’s (key performance indicators) to address revenue modifications in their restaurant. How can one accurately determine what and how changes need to be made without having a “correct” metric that accurately represents your current performance?

If you have 25 customers in your 100 person restaurant spending on average $50 dollars you may be happy with this average check but when you look at it per seat it represents only $12.50. Are we sure average check is the correct metric still? In the same light when you are at 100% capacity, at what point is it more beneficial to focus just on average check and not time, when you have customers waiting to be seated?

Taking a scientific approach to your restaurant and its operations not only creates efficiencies and assists in revenue maximization but it also passes a better service and consistent experience to the customer which typically has them returning more frequently.

Operators who are starting the process of understanding restaurant economics are at a significant advantage to those operators who monitor performance with gut, basic statistics and an onsite presence only i.e. those who have chosen not to recognize that RRM and success as a restaurant operator is about one thing only:

Maximizing revenue per available seat hour by creating a perfect mix of price and duration

As table turns increase and the length of time per customer at the table decreases, the “revenue per available hour” increases. RRM strategy roll out has seen, in field studies, a 3-5% increase in revenues. Moving a restaurant operation to a scientific process whilst maintaining its ‘personality’ and  specifically the draw has serious advantages that cannot be ignored.

RevPASH is one key component to Restaurant Revenue Management and has its application across all hours (day parts) a restaurant is open, irrespective of demand. It is also an ideal method to track comparable sites rather than using gross revenues or check averages. More importantly, it can also highlight specific times when new strategies need to be implemented by highlighting flaws or ‘room for improvement’. For franchisees comparing units and needing a like to like comparison, RevPASH can be used on a local and national level and provide surprising insight and results.

Why is this so important to a restaurant operator?

Quite simply, for new restaurateurs the answer is weekends: We all know that the restaurant busy period for most is the weekend. All too often, operators focus their strategies to boost sales volume during off peak days or hours which may have the perception of making their venue ‘work harder’ but given the discounts or promotions this traffic cause a similar net result but with a higher workload. RevPASH is an ideal calculator to determine if you are achieving value from such happy hour promotions and has its benefit across all hours, driving changes to attract customers and increase revenues. But for operators taking a first plunge into restaurant economics and RRM they must refocus on their busy period to ensure they are maximizing the “rush” rather than taking it for granted and then applying its application during the remaining off peak hours.

It is two factors, price and duration, hand in hand with the key components that create a strong RRM strategy, that can lead to an increase in RevPASH.

Right seat to the right customer at the right price.

What is the right seat, customer, price and how can one determine what, at first glance, seems to be impossible to control? What is so critical is the balance between “good value” and “taking advantage of” your customer. It is of upmost importance that your value creation and the perception of that value by your customer is aligned. Ensuring you engineer your venue to create profits is entirely reasonably – you are a business not a charity – however it is critical that a venue remembers that any analysis is futile if you do not have customers so keep them in mind at all times.

How are you judging success?

To the front of house managers, using average check value as his or her benchmark to the back office owner using labor cost or cost of goods as their metric to determine performance, this system offers no correlation to your revenue performance or maximization.  In fact, many locations have maintained strong food/labor margins yet the unit is still unprofitable. This focus on using food cost as a KPI shifts the focus unnecessarily to minimizing costs which in many instances can also minimize revenue: This is clearly not the intention. Neither food nor labor costs have any bearing on the profitable use of your seat capacity (critical mass) and therefore cannot be a metric for performance measurement.

Alternatively, the metric many may otherwise choose is “busy restaurant”: Many would argue that a restaurant with seats filled at high capacity is surely a profitable restaurant. This is simply not the case because if the menu items are not well priced to ensure profitability, the number of customers is irrelevant.

Each KPI has its place as part of an overall restaurant revenue management system but none so focus on profit and maximization of your capacity and how effectively a restaurant is using its inventory (seats) to generate revenue as RevPASH.

We must therefore find a metric that combines the price with the occupancy and the costs which is exactly what RevPASH seeks to do, to clearly demonstrate the revenue cycle of the restaurant. Given the two indicators one must now focus on what strategies can be implemented to “price” and “time” to provide the operator with the largest benefit. It is a huge tradeoff, a customer’s time spent in a seat and the amount they are spending, when in perfect balance, can increase PROFITABILITY even when there is a lower check average but higher occupancy.

Reducing meal times is not hurrying your customers (unless you have unreasonable expectations): It merely a tool for becoming more efficient. A simple example is in a 100 seat restaurant, a reduction in meal time from 60 minutes to 59 minutes over a four hour “dinner period” would allow for an additional 6.8 customers.

That 1.7 percent increase now affords you, as an operator, either greater profit or a new carved out budget to re-invest into new off peak promotions or a lower average check to offer value to your customer but still receive a higher margin – and that is from shaving ONE MINUTE off your service cycle – surely you can find a way to clean the table, drop the check, set up the table, deliver the food combined one minute quicker? Of course this example applies to a busy venue where there is a high footfall of customers.

With an understanding of RevPASH it is now essential to identify how you can best implement it to your specific operation. There are many ways to reduce meal times range from the first few minutes which are always easy to find (the speed at which you ‘greet & seat’ your customers, drop the check or altering the flow or sequence of service). The battle is when to achieve greater RevPASH investment needs to be made either with greater staffing or additional equipment and for each case; a unique ROI needs to be formulated.

Implementing a strategy to maximize RevPASH is a restaurant wide project from the host to the server to the kitchen to the manager. Everyone has a role to play in streamlining your guest visit and getting the correct items ordered dependent on day part. Some newer Point Of Sale systems can even provide this information to your servers directly, recommending items with quick cook times in an effort to bring a new customer into that seat. The direct margin on the food being recommended is based solely on RevPASH, where it may make sense to move a lower priced item just to shorten meal duration. This focus on customer turns is why for new operators focusing strategy on the “busy” period is the best place to start. With customers waiting for tables how much quicker could you get them into a seat if your staff pushed fish instead of steak, or offering your first few turns wines by the glass and your final turn by the bottle?

For pricing, almost all operators already have some form of system in place, be it specials or promotions. More sophisticated manipulations of price include day-part pricing, day-of-week pricing and price premiums or discounts for different types of party size, tables and customers.

The general rule of thumb for RevPASH is as follows: During low periods, either attract more customers or rely on suggestive selling to drive average check. During high periods, reduce meal duration to increase the turn or increase price.

How you choose to use RevPASH in your environment is based on the unique factors which attract customers to your restaurant. It may be hourly or even half hourly and the decision you make off you RevPASH may also be used for a variety of purposes. The critical component is understanding how to apply these principles – and subsequently applying them and teaching your managers how to understand and modify them. This leads to a leaner, more efficient business model with economics working in tandem with restaurant operations – something every operator and owner should aspire to.

Many thanks to Sheryl Kimes of Cornell University who developed RevPASH.