Is prix fixe the path for restaurant revenue optimization?

No restaurants are more laid back than those remote non-touristy ones in Italy. You get a table, it is yours until they close for the night. I remember pleading with the waiter at 1130PM for the check.

Me: Signore, il conto por fovore (delivered really badly)

Waiter: il conto domani!

Sure enough I did not get the check until 00:15. To me this screamed of the need for revenue optimization.For a restaurant, revenue optimization is all about maximizing the spend per table. It can come from two sources
  1. Increase the number of times the table turns over
  2. Increase the spend per table
From the moment the customers are seated to the time they leave the goal for any restaurant should be to ensure that the table is generating revenue.When you look at the tables at a restaurant, different tables generate different revenue even for same amount of occupied time. Since different customers have different willingness to pay, each choose to spend different amounts during their stay. Providing a menu of options at different price points achieves this price discrimination but also means difference in revenue generated per table.Wouldn’t it be great if a restaurant can get same high revenue from all its tables? What if it let in only those with the same high willingness to pay? In addition what if the restaurant took away the temptation to spend less by taking away the menu?

One restaurant in New York is trying to do just that with prix fixe menu.

Is that the path for  revenue optimization?

It is not for two reasons. One it leaves out those customers who can still be profitably served and two it leaves out up-sell opportunity. Not only do different customers have different willingness to pay, even the same customer has different willingness to pay based on purchasing occasion.

We will never know how many potential diners avoided us because of the prix fixe, or how many were displeased but too civilized or bashful to say something. All in all, check averages increased and traffic remained steady.

It is better for a restaurant to settle for lower revenue from a table as long as it is higher than the opportunity cost. For example, it is profitable to serve a customer who spends $30 if there is a 50% chance the table will remain unoccupied and 50% chance of seating a $55 customer.

So should a restaurant ever do prix fixe menu?
  1. It can if it is offered alongside a la carte option so it is not the only option and customers self-select.
  2. On specific occasions when they are capacity limited and want only those with high willingness to pay to visit (e.g., Valentine Day dinner and New Year Dinner at special high prices).

Otherwise I do not recommend prix fixe menu because even for restaurants, if one price is good, two are better.

Pricing At Buffet – Again

I am going for seconds on buffet pricing.

If you take the buffet itself, some people go for seconds, thirds etc, some load up on desserts, some on meat, some on salad etc. If the restaurant can offer a wide variety of food (10 types of soups, 25 types of desserts ….) it stands to attract a large number of people, each however attracted by a few that are important to them. Larger the variety higher is their fixed cost, but once they have scale there is no marginal cost per customer.

Buffet restaurants chose their pricing strategy as one fixed price for their offering. The buffet offers all these foods  at one fixed price as a bundle. Bundled pricing delivers higher profit than a la carte pricing only if different customers value the components differently. There is only one major lever they have to control – price. There are many fine tuning knobs like drinks that are usually not included in the price and special occasion pricing. Ignoring those – there is only one price.

Previously I have written about multi version pricing and how the need for designing a version that different segments can self select themselves. Buffets allow customers to put together their own version (potentially infinite version) but at one price. Customers who prefer some of the variety and usually eat less and have lower willingness to pay will not be able to put together a version that they like because of the fixed price. Buffet pricing is hence “pure bundling”.

One way to serve these low WTP customers is to have mixed bundling, offer buffet and a la carte menu. But there are ways the buffet restaurant can serve these customers without straying from their  “pure bundling” strategy. Can you think of one?

A Curious Case of Buffet Pricing

The simple explanation behind buffet pricing is capture value upfront (with a fixed price) and then sell food at marginal cost. For buffet restaurant, the marginal cost to serve one additional customer is $0. A moment’s reflection will convince you that once the raw materials are purchased and cooked into different  menu items the cost is sunk and hence the marginal cost is $0.

Choosing a fixed price model like the buffet is a pricing strategy.  The restaurant is committed to it and cannot change easily change. But does this commitment  limit the total revenue and hence the total profit? No. There are pricing tactics the restaurant can employ to take advantage of short term opportunities.

Diwali is the Indian festival of lights (and more depending on who you ask). It is celebrated today. One of the Indian restaurants that usually offers buffet lunch and dinners at a flat price of $12.95, is promoting a special Diwali dinner for $15.95.   I think this is a great pricing tactic, that fits with the strategy and is designed to increase profit.

It is arguable that the $3 is pure profit even though the restaurant is promoting an expanded menu with increased variety. The marginal cost is not going to increase from $0 and  their total cost is not going to change significantly. Despite the increase in variety the average consumption per customer is not going to increase (limited stomach volume) and the restaurant can reduce amount of food produced for each menu item.  In addition the special occasion and the attraction of increased variety in menu will also bring in more customers than usual generating additional revenue.

The net is an increase in short term profit from a pricing tactic that fits very well with the strategy. Committing to a strategy does not preclude you from capitalizing on short term opportunities and failure to do so is  “the slowest route to victory”.

How do you manage your pricing strategy and tactics?