Restaurant Economics 101
Before Covid, there was a general thought that restaurateurs were wealthy. Although some are, many of those made their money before becoming restaurateurs. Most restaurants are actually owned by individuals who worked their way up through the industry and scraped together enough money to start their own place.
Oddly, despite this long and well deserved road to ownership, most newly minted owners are very afraid to talk about the financial goals of their business. Their success is always framed in terms of how many meals they can cook for a local charity or the suppliers they support. This is a beautiful collective attribute and one that has personally kept me in admiration of my peers. Restaurants, however, should not be afraid to make hay while the sun shines and be proud of it! As we all know, there are many days that the sun is just not shining.
“Profit maximization does not mean overcharging or trying to rip off your customer, it’s about ensuring that marginal cost does not exceed marginal revenue.”
The goal of any business is to maximize profit. Profit maximization does not mean overcharging or trying to rip off your customer, it’s about ensuring that marginal cost does not exceed marginal revenue. For restaurants, determining this equilibrium can be tricky. On a busy Friday and Saturday night, a restaurant’s marginal revenues certainly exceed the marginal costs. But what about that lunch seating on a Monday? You still have to bring in staff, keep the lights on, and pay the rent. So how can a restaurant maximize its profits on a weekend and minimize its losses any other day of the week? By matching the price of a product or service to the utility of your customer, an opportunity presents itself.
Utility refers to the value or usefulness that a consumer perceives a product or service has. Simply put, how happy does it make your customer? Everyone has a different utility curve, meaning that everyone places a different value on a product and thus, are willing to pay different prices for the same product or service. When a business is able to properly determine and leverage the utility curves of its customers, both benefit: the customer receives and pays exactly what they want and the business earns an accurate profit.
“Not all diners are created equal; some love to flaunt their status and would gladly pay $100 for the best table in the house, while others are extremely price sensitive.”
For restaurants, this once again supports the need to differentiate table real estate and to better match the utility of their customers. Not all diners are created equal; some love to flaunt their status and would gladly pay $100 for the best table in the house, while others are extremely price sensitive and would simply move up their reservation time to take advantage of a discount, enabling a restaurant to flip the table again.
When we are in the business of pleasing our guests and creating the best possible guest experience, why are we not truly putting that into practice?
Covid has presented the restaurant industry with an opportunity to make significant and major changes to how a dining room can generate profit. Every major industry that is faced with the limitations of fixed capacity, has applied some form of dynamic pricing as a means to adjust supply and demand across different utility curves, allowing customers to determine what value they are willing to assign to a product or service, and in turn, pay for it. For the first time, a collective understanding of the challenges restaurants face, in addition to new technological solutions that can help restaurants assign dynamic pricing to their coveted real estate, restaurants should not squander this opportunity to make some profit. Our communities will surely benefit from it.
An expert in dining room economics and the guest experience, Frazer Nagy is an entrepreneur and the co-founder of Tablz, a Transparent Kitchen company, committed to a vision of changing the way the story of your dish is communicated and helping restaurants finally become profitable businesses.