SHA512: Managing Revenue with Pricing

Transcription

1 SHA512: Managing Revenue with Pricing Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 1

2 This course includes Two self-check quizzes Multiple discussions; you must participate in two Three Ask the Expert interactives One final action plan assignment One video transcript file Completing all of the coursework should take about five to seven hours. What You'll Learn Develop detailed recommendations for improving revenue using variable-pricing approaches Decide which strategies will be most profitable, and provides guidance in how to implement those strategies Calculate baseline hot revenue, analyze costs, estimate a payback period, and consider issues related to staffing, management, and training Course Description This course teaches you how to increase revenue through strategic pricing. Explore concepts in revenue management and implement a strategy built on variable pricing, price discrimination, price elasticity, price customization, demand-based pricing, rate fences, and menu engineering. Learn how to calculate costs and estimate the payback period for potential investments associated with implementation. You also examine related staffing, management and training issues as they relate to pricing and revenue management. Sheryl Kimes Professor of Operations Management, School of Hotel Administration, Cornell Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 2

3 University Click Play to Listen Sheryl E. Kimes is a professor of operations management at the School of Hotel Administration. From , she served as interim dean of the School and from , she served as the school's director of graduate studies. Kimes teaches restaurant revenue management, yield management and food and beverage management. She has been named the school's graduate teacher of the year three times. Her research interests include revenue management and forecasting in the restaurant, hotel and golf industries. She has published over 50 articles in leading journals such as Interfaces, Journal of Operations Management, Journal of Service Research, Decision Sciences, and the Cornell Hospitality Quarterly. She has served as a consultant to many hospitality enterprises around the world, including Chevy's FreshMex Restaurants, Walt Disney World Resorts, Ruby's Diners, Starwood Asia-Pacific and Troon Golf. Kimes earned her doctorate in Operations Management in 1987 from the University of Texas at Austin. Start Your Course Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 3

4 Module Introduction: Developing a Pricing Strategy Intelligent pricing is key to maximizing revenue, whether you are following the revenue management approach or not! At this point in the RRM process you begin to develop strategies that will allow you (in your role as manager of Cactus Café) to increase revenue using pricing strategies. In this module, you'll explore variable pricing approaches and consider the pros and cons of using these as opposed to a one-price approach. After completing this module, you should be able to: Discuss why price matters Define reference price Discuss the concept of price discrimination Define price elasticity Describe scenarios where you can and cannot vary price Discuss strategies to make price more variable; list and describe pricing approaches, including the one-price approach and demand-based pricing Identify different types of rate fences Identify rules for rate fences that are clear and that customers will find acceptable Identify customization strategies that will avoid offering discounts to those willing to pay full price Identify mistakes in price customization Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 4

5 Watch: Cactus Café Sometimes the best way to learn something is to do it yourself. Even better is the opportunity to practice the process and learn from your mistakes before you have to do it "for real." Throughout this course, you will analyze a fictional restaurant -Cactus Café- to determine the best strategies for increasing revenue. An illustrated presentation with audio appears below. Use this resource to learn about the restaurant and the challenges it faces. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 5

6 Read: Does Price Matter? Business is steady at the Cactus Café, with weekend nights seeing more traffic than weeknights, and with a steady lunch crowd on weekdays. Despite the brisk business, your profits aren't as high as you'd like. You wonder if you should bring on more staff to handle the high volume and to keep the service level acceptable. But that would cut into revenue. Maybe you could cut costs somewhere else. You hesitate to try that: you've looked carefully at your costs, and worry that if you cut costs further, your quality would degrade. This makes you wonder: how can you raise your net income without compromising quality? Like most restaurateurs, you use a cost-plus approach to pricing, but you wonder if that's the best approach. You've read that by increasing meal prices by only 1%, you could potentially raise your net income by as much as 12%. That's intriguing! Can you raise prices a little, or will customers perceive increased menu prices as unfair and go elsewhere to dine out? If you do raise prices, how much should you raise them, and under what circumstances? Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 6

7 Activity: Displacement Lately, Cactus Café has received several requests to reserve entire dining areas for private parties. You welcome these requests, but you wonder how best to structure the food and service charges associated with these events. The key to making a good decision is to accurately estimate the business that is displaced when a room is reserved. This estimate will help you to set reservation prices accordingly. See how a typical calculation is done in Displacement. Read the example, calculate, and click to choose the best answer. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 7

8 Read: The Effect of Price Restaurant operators have two main strategic levers available to them for the management of revenue: price and meal duration. The relationship between meal duration and revenue is made clear when revenues are examined from the perspective of available seat-hours (RevPASH). Although the relationship between menu prices and restaurant revenue is more easily understood, managers are sometimes ill equipped to manipulate prices strategically. Most restaurateurs use a cost-plus approach to pricing-but this approach will not consider important characteristics of your various customer groups or ebbs and flows in your restaurant traffic. Pricing decisions are critical for a number of reasons, including the fact that small variations in price are meaningful: increasing meal prices by only 1% could potentially raise net income by as much as 12%. On the other hand, price increases must be considered carefully: if customers perceive increased menu prices as unfair, they'll go elsewhere to dine out. Here are some approaches to pricing, and their desired effect: Pricing Approach Effect Establish a different set of prices for your lunch and dinner menus. Dinner prices can be set slightly higher. No measurable decline in traffic; increased revenue at dinner. Present lower lunch prices as discounted. The effect might be an increase in traffic at lunch, as customers may react favorably to discounted prices. Introduce an early-bird special on busy nights to manage arrivals. The effect would be to divert heavy dinner traffic to off-peak hours, possibly improving your nightly RevPASH. Offer two-for-one coupons on certain weeknights. The effect would be to build demand during slow nights. Another effect: patrons who use these coupons are often more likely to order additional items, increasing the overall cost of the meal. (You could even train your staff to suggest appetizers, drinks, and desserts on off-peak nights and at lunch.) Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 8

9 Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 9

10 Watch: Price Discrimination Though the one-price approach is common, it is possible to charge different prices to different consumers for the same product or service. This is price discrimination. In price discrimination, the variability of price is not associated with differences in production costs. Techniques for creating different prices include personalized pricing, coupons and rebates, group pricing, and peak-load pricing. In the following presentation, find out how one price is not enough. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 10

11 Watch: Price Elasticity The relationship between the price of a product and the quantity that consumers will purchase of that product at that price is the demand for the product. If consumers are purchasing large amounts, demand is high; if they are purchasing small amounts, demand is low. Learn about how demand can change with changes in price in Price Elasticity. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 11

12 Read: Setting the Price Prices at the Cactus Café are competitive... or so you think. Of course you have your eye on the competition, and you're well aware of the average check at other southwestern-fare and casual restaurants in your area. And you keep on eye on costs, too. It seems that your current prices are not out of line. But then again, profits are not quite as high as you'd like them to be, and you wonder about raising meal prices. You suspect that the dinner crowd at 9 p.m. on a Saturday would not even notice an across-the-board increase, but you worry that the 6 p.m. crowd on Tuesday would not only notice, but they'd decide to go elsewhere. Similarly, your usual noontime crowd probably has one price in mind for lunch, whereas the dinner crowd has quite another price in mind. Can you be more profitable and still meet the expectations of these different groups? Costs, prices, decisions. And what about the menu? You've read that maybe you could adjust your menu to boost revenue. That approach sounds like it might have potential. There are many options to consider. This much is clear: it's time to take an in-depth look at how to set prices. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 12

13 Read: Variable Pricing Price is one of two main strategic levers restaurant managers have at their disposal in the management of revenue (the other being meal duration). But restaurants usually charge a fixed price for a relatively unpredictable duration of service. This is quite a different case from what is found in those industries traditionally associated with successful revenue management: for instance, hotels, airlines, and cruise lines. Those industries offer a product that has a specified or predictable duration and they apply variable pricing for that product. Industries successfully using revenue management appear in quadrant 2 of this graph. Restaurants that commonly employ fixed pricing appear in quadrant 3. To manage revenue effectively, restaurants must move toward quadrant 2 behavior, including the implementation of variable pricing. Consider the simple one-price approach to setting prices that is used in many restaurants. This approach is inherently risky: set the price too low, and you pass up profit; set the price too high, and reduced sales leave money on the table. Restaurants that would make their prices variable must first consider who should pay which rate, using rate fences to segment their markets, and then, within those markets, consider how to set prices that are appropriately variable. Price is an important strategic lever in revenue management. A variable-price approach allows the restaurant operator to manage revenue more effectively. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 13

14 Ask The Expert: Raising the Price In Raising the Price, Professor Sherri Kimes discusses how to raise prices effectively. Her topics include the variable pricing approach, the difference between menu engineering and a food-cost focus, and the pros and cons of competitive pricing. Dr. Sheryl E. Kimes Singapore Tourism Board Distinguished Professor in Asian Hospitality Management School of Hotel Administration, Cornell University Isn't the menu price just determined by food and labor costs? Traditionally, menu price is based on food and labor cost, but that's not the best approach. You want to consider demand as well; for example, if a menu item is very popular, you might want to consider raising its price. If weekend evenings are very busy, you might want to consider having special weekend prices. Click play to listen Won't my customers get upset if I charge different prices? Research shows that customers are quite willing to accept different prices for the same menu item as long as the rules are clear. For example, many restaurants offer lower prices at lunch than at dinner. Recent research in three countries found that customers are very open to different pricing by time of day and day of the week. Click play to listen What is menu engineering? Menu engineering is a way of determining the best price for individual menu items. To use menu engineering, you first determine the price and food cost of each menu item so you can determine its contribution margin. You then determine the number of those items that you sold. Finally, you compare the contribution margin to the amount sold. Click play to listen What is competitive pricing? Click Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 14

15 Competitive pricing is looking around at your competitors and seeing what they are charging, then adjusting your price to theirs. This can work well, but if your competitors don't know what they're doing with price, it could cause major problems for you. play to listen Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 15

16 Read: Demand-Based Pricing Revenue management consists of two strategic levers: duration control and pricing. It is specifically demand-based pricing, in which price is allowed to vary with demand, that enables growth of revenue. High demand results in high prices! Some restaurant managers have been reluctant to apply demand-based pricing for fear that customers might view it as an unfair practice (which could result in a loss of business). Managerial caution is understandable. What about the question of fairness in pricing? Consumers may perceive demand-based pricing as being unfair for at least two reasons. The higher price during high-demand times may be more than consumers' reference price. To complicate this issue, consumers might have derived their reference price from a lower price offered during low-demand periods, creating a low perceived value and potentially making a higher price seem even more unfair. The restaurant may not be seen as providing more value for the higher price, violating consumer beliefs about dual entitlement. Restaurants may proceed carefully in the area of demand-based pricing, but many have taken some first steps. For instance, many use promotions such as happy hours and early-bird specials. However, restaurants do not in general vary prices by time of day, day of week, or table location. Interestingly, there is research (click here for the pdf of the article) indicating that a wider selection of demand-based pricing strategies can be considered by customers to be fair. For instance, coupons (e.g., two for the price of one), time-of-day pricing, and lunch-versus-dinner pricing all can be perceived as fair. (In addition, note that prices framed as a discount will be considered more fair than prices framed as premium.) What is unfair? Variable weekdays-versus-weekend pricing can be perceived as neutral to slightly unfair, and Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 16

17 table-location pricing can be perceived as unfair. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 17

18 Read: Menu Engineering Menu engineering is an approach to menu analysis and design that focuses on two aspects of the menu items: contribution margin and popularity. With this focus, menu engineering provides a view of the revenue generated by each item. This is an alternative to looking only at food costs, which is a common approach to menu decisions. Menu engineering provides an excellent framework within which managers can make decisions regarding menu design and the selection of menu items, leading to increased revenue. In order to help managers make menu decisions, menu engineering uses a simple classification and decision-making system. In this system, every menu item is classified as one of the following types: Stars These items are the most profitable items on your menu. They have a high contribution margin and they sell well. These items should be in a highly visible position on the menu. You may be able to increase the price of these items without causing a drop in the number sold. Cash Cows These items are popular, but they do not yield a high contribution margin. Since these are so popular, you may consider raising the price of these items and moving them into the star category. Question Marks These items are low in popularity yet yield high contribution margins. You may have to consider whether these items should be on your menu at all. You should ask why each of these items is unpopular. Is it because of the name, because of the price, or for some other reason? Dogs These items are unpopular and they yield low contribution margins. They are candidates for removal from your menu, unless you can think of a way to make them more profitable. Menu items can be classified as dogs, stars, question marks, or cash cows using a chart like the one below, featuring four quadrants. The heavy horizontal and vertical lines forming the quadrants are the boundaries between the regions of high and low sales volume and contribution margin, respectively. In both cases, the boundary line is drawn at the average value. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 18

19 So, the regions to the right of the vertical line (star and cash cow) are characterized by high sales volumes, while the regions on the left (question mark and dog) are characterized by sales volumes below the restaurant's average. Likewise, the top of the chart (question mark and star) is characterized by high contribution margins, while the bottom of the chart (dog and cash cow) is characterized by contribution margins below the restaurant's average. If the sales volumes and contribution margins for menu items are known, those menu items can be plotted on the menu engineering chart, revealing whether the items are dogs, stars, question marks, or cash cows. Once the items are classified, menu engineering can be used to evaluate current and future menu decisions such as menu design, product elimination, product additions, repricing, and promotions. In the end, menu engineering can contribute to cost control and to increased profit per guest. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 19

20 Activity: Engineer This Menu! Menu engineering considers the contribution margin and popularity of menu items, providing a picture of the revenue generated by each. The menu engineering approach guides managerial decisions on menu design and the selection of menu items. The objective is to increase revenue. Engineer the menu at Cactus Café and learn about the specific strategies available to increase revenue -In Engineer This Menu. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 20

21 Activity: Fix the Customization Problem Recently, you have tested a three-part price-customization plan at your restaurant and found that each part was unsuccessful in increasing RevPASH. Adding a new menu item proved unsuccessful. Creating a special discount proved unsuccessful. Offering a special free item proved unsuccessful. Why did these strategies fail? Explore problems and solutions in Fix the Customization Problem. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 21

22 Watch: Rate Fences Restaurant managers may be reluctant to use demand-based pricing for fear that customers will view it as an unfair practice. Can demand-based pricing be employed without risk? Rate fences are an approach to demand-based pricing that addresses the issue of perceived fairness and provides a way for revenue management to be implemented with reduced risk. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 22

23 Ask The Expert: Mistakes A presentation with audio appears below. Use this resource to learn about some pricing challenges and some solutions. John Alexander Former Owner Coyote Loco, Ithaca, NY, USA Mr. Alexander is the founder and former chief executive officer of The CBORD Group Inc., a systems integration firm and the world's largest supplier of software for food and nutrition services management. In addition, John Alexander and his wife Elaine Alexander were the co-owners of Coyote Loco Restaurant and Cantina in Ithaca, NY. What are some examples of major market segments you serve at Coyote Loco? Click play to listen Have you discovered any misconceptions in your approaches to market segments? Click play to listen Do you use a one-price approach, or something more complicated? Click play to listen Have you had success creating effective rate fences? Click play to listen Do you offer specials? Click play to listen What challenges have you faced in implementing variable pricing? Click play to listen What are your reservation policies? Click play to listen Do you offer freebies? Click play to listen Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 23

24 Module Introduction: Implementing a Strategy What does it take to implement a strategy? Much like developing a strategy, implementing a strategy requires careful analysis and planning. Staffing considerations, availability of resources, and financial planning make implementation a multi-layered challenge. In this module you determine the next step in restaurant revenue management for Cactus Café. With an assortment of strategies at your disposal, you determine which ones might be most profitable, and how fast you might realize a return on your investment in RRM. Implementing a strategy or set of strategies requires careful analysis and planning. Before you recommend a strategy, you should have a clear idea of the financial impact it may have. In this module, learn the skills you'll need to assess the financial impact of RRM strategies. Go step-by-step through a return on investment calculation, and get to the bottom of revenue potential, too. After completing this module, you should be able to: Calculate baseline hot revenue Calculate the financial impact of revenue management Discuss the need to calculate the cost of various elements of an implementation strategy: remodeling, additional staffing, etc. Estimate the payback period (how long it will take to see a return on investment) Identify implementation issues related to staffing, management, and training See if your strategies worked Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 24

25 Activity: Determine Revenue Increases Every basic approach to increasing revenue, such as increasing hot hours or decreasing dining time, can be developed using one or more restaurant revenue management strategies. In this activity, you'll match five basic approaches with their appropriate restaurant revenue management strategies. Then, you'll calculate the potential increase in revenue for each basic approach. This revenue information will help you make an informed decision about which strategy (or strategies) to employ. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 25

26 Watch: Financial Analysis and Looking at Costs To perform a financial analysis, you need to be able to calculate changes in revenue based on changes in the total number of seats filled and the amount of the average check. Financial Analysis and Looking at Costs will show you how to perform a financial analysis and see the impact a particular restaurant revenue management strategy could have on your operation. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 26

27 Watch: Return on Investment A return on investment calculation will help you and your team see the revenue-generating potential of your restaurant revenue management plan alongside the expense of its implementation. This presentation on return on investment will show you how to perform the calculation so you can make a good financial decision regarding whether or not to implement. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 27

28 Watch: Monitor the Impact As you plan your implementation, remember that monitoring the impact of the strategy or strategies you introduce is an important part of your restaurant revenue management plan. In Monitor the Impact, consider the pre- and post-implementation steps necessary to provide a measurement of a strategy's impact. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 28

29 Watch: Staffing and Management Management and staff will play an important role in making any new strategy successful, so remember to include them in your restaurant revenue management plan. In Staffing and Management, read about the ways in which management and staff support the process. In addition, understand how you can support them in making it a success. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 29

30 Ask The Expert: Training and Incentives Janell Bozoian Former General Manager Chevy's Fresh Mex Glendale, AZ Did your staff adjust well to the changes introduced by revenue management? Click play to listen Did you develop job aids to help people adjust to the changes? Click play to listen Was change difficult for the staff? Click play to listen How did you justify the expense of implementing these changes? Click play to listen Are you anticipating any particular challenges as a result of implementing the changes? Click play to listen Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 30

31 Activity: Hot/Cold Strategies Assist your staff in learning and applying new restaurant revenue management strategies by providing two lists for their reference: a strategy list for hot hours, and a strategy list for cold hours. Build these lists in Hot/Cold Strategies. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 31

32 Read: Thank You and Farewell Sheryl Kimes Professor of Operations Management School of Hotel Administration Cornell University Hello! This is Sherri Kimes again. Congratulations on completing the last course in the Restaurant Revenue Management certificate series, Managing Revenue with Pricing. I hope you've enjoyed the course, and that you now have the tools and skills necessary to help establish the strategies that will be most profitable and to provide guidance to help implement those strategies. Whether you've taken this course as part of a series of courses in pursuit of a professional certificate, or as a stand-alone experience, I hope the material has met your needs and given you a firm foundation to build upon. From all of us here at the School of Hotel Administration and at ecornell, thank you for your participation in this course. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 32

33 Stay Connected Additional Resources The Center for Hospitality Research provides focused whitepapers and reports based on cutting-edge research. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 33

34 Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 34