Revenue Management at Prego Italian Restaurant

Overview

Prego is a popular Italian restaurant in Singapore with a good location and serving a wide
variety of Italian cuisine. However, sales in recent months have been declining and the Prego
management is keen to improve the situation. After a major renovation, Prego has now
increased its seating capacity to 340, with four distinct sections in the restaurant.

Currently, Prego’s most important decision is how to apply revenue (yield) management
strategies and theories to allocate the available restaurant capacity to its customers. Prego
needs to examine efficient methods of handling customer reservations and arrivals. This
includes their duration of stay in the restaurant and how to accommodate customers and
maximize capacity usage. Prego also needs to consider the effects of implementing revenue
management strategies on both customers and staff, and manage any possible conflicts that
may arise.

Teaching Objectives

This case is suitable for a services marketing/ management course, particularly in the area of
revenue management in the restaurant industry, and sets to resolve some of the most
prevalent problems across all restaurants in the industry.

Specifically, the case can be used for the following teaching objectives:

To demonstrate the concept of revenue management in a restaurant setting, in both non-

peak and peak periods, and to evaluate appropriate revenue management strategies for
each situation.

To analyze the implementation process of revenue management strategies, and the

necessary adaptations required to implement such a change. For example, changes in the
operations script (queue and reservation systems) and staff roles (upselling) can be
discussed within the case.

To highlight the possible staff and customer conflicts arising from the implementation of
yield management strategies, and to discuss possible methods of resolution.•

© 2005 by Jochen Wirtz and Sheryl E. Kimes

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 Study Questions

1. Analyze the baseline data for Prego, prepare summary results, and make any
logical assumptions.

2. Consider the service blueprint that the consultant has presented what strategies
would you recommend for Prego in order to increase revenue and contribution?
Consider the revenue and profit impacts of the recommended measures.

3. Consider the potential customer and staff responses to the recommended

measures.

Analysis

1. Analyze the baseline data for Prego, prepare summary results, and make any
logical assumptions.

Prego's baseline data indicates distinctive peak periods during lunch and dinner hours, but
weak demand in the afternoons. According to the analysis conducted, the RevPASH was
close to zero during the slack hours. Despite not achieving full seat occupancy, customers
still have to wait in long queues for available tables during peak hours, and as much as one-
third of customers who wait will leave eventually. There was also a problem of late arrivals
and no-shows for reservations made during peak hours.

Before developing recommendations for Prego, the baseline performance must be studied in
detail. Baseline performance data include meal duration, seat occupancy, average check,
RevPASH, and course timing. Each will be discussed below.

Meal Duration: The average meal duration is one hour and twenty-five minutes with a
standard deviation of thirty-seven minutes. The mean dining duration is fairly high for this
type of restaurant and the standard deviation of thirty-seven minutes indicates an
unacceptable level of variation in the service delivery system. Also, since the mean and
standard deviation vary greatly by day of week and time (Exhibits 4 and 5 in the case), there
are indications that the service delivery system is not in control.

Seat Occupancy: Half-hourly seat occupancy levels can be developed (Exhibit 2) using the
data from Exhibit 3 of the case and by assuming one-and-a-half hour seat duration. The peak
seat occupancy of 81% is achieved on Saturdays at 7:30, while seat occupancy is extremely
low between 2 and 5 pm. To calculate seat occupancy, the customers staying over from the
previous two half-hour periods must be added to those arriving during the next half-hour
period. For example, to calculate the seat occupancy at 7 pm for the first Monday, you must
add the stayovers from 6 and 6:30 pm (3 and 59 respectively) to the number of customers
arriving between 7 and 7:30 (88). The seat occupancy is then calculated by dividing the total
number of seats occupied (194) by the number of seats in the restaurant (340).

The relatively low seat occupancy figures are surprising given that Prego is turning customers
away each night. This may be an indication that the table mix of the restaurant does not
match the mix of customer party sizes.

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Students often have problems calculating seat occupancy and often divide the total number of
customers served by the number of seats. Alternatively, many will just calculate the overall
seat occupancy of the restaurant (10%), which is not particularly useful, since it does not
show how seat occupancy varies by day of week and time of day.

Average Check: The average check ($33.00) can be calculated by dividing the daily dinner
revenue by the number of customers served.

RevPASH: A daily dinner RevPASH can be calculated by dividing the daily dinner revenue
(given in Exhibit 3 of the case), by the number of seats (340) and the number of hours at
dinner (4). RevPASH by day and hour can be calculated by multiplying the average check
by the seat occupancy (Exhibit 3).

Course Timing: Exhibit 6 of the case gives time study results for the various parts of the
meal process. Particular attention should be paid to areas with a large mean (i.e. entrée to
dessert or dessert to check request) or those with a large coefficient of variation (standard
deviation divided by the mean) (i.e. processes at the beginning and end of the meal).

EXHIBIT 6: Course Timing – Mean and Standard Deviation

Day of Week
Course Timing Wednesday Thursday Friday Saturday
Duration Duration Duration Duration
(STD) (STD) (STD) (STD)
Arrival
to 0.03 (0.01) 0.04 (0.02) 0.03 (0.02) 0.03 (0.01)
Seating
Seating
to 0.05 (0.02) 0.04 (0.01) 0.04 (0.02) 0.04 (0.03)
Order
Order
to 0.09 (0.02) 0.10 (0.04) 0.11 (0.03) 0.09 (0.03)
Appetizer
Appetizer
to 0.15 (0.05) 0.14 (0.08) 0.16 (0.04) 0.14 (0.04)
Entrée
Entrée
to 0.30 (0.10) 0.31 (0.08) 0.28 (0.05) 0.32 (0.07)
Dessert
Dessert
to 0.14 (0.04) 0.15 (0.03) 0.18 (0.08) 0.16 (0.03)
Check Request
Check Request
to 0.03 (0.02) 0.03 (0.02) 0.03 (0.01) 0.04 (0.02)
Check Clearance
Check Clearance
to 0.02 (0.01) 0.03 (0.02) 0.04 (0.03) 0.03 (0.01)
Departure

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 Arrival
to 1.21 (0.124) 1.24 (0.129) 1.27 (0.115) 1.25 (0.090)
Departure

How could Prego make use of revenue management theories and implications to manage
demand more effectively and at the same time bring in increased revenues and higher
satisfaction level for the guests? How can capacity be better utilized during the periods of low
demand? Can the reservation system be improved to alleviate the problem of late customer
arrivals and no-shows? These and more issues will be discussed in the following sections.

2. Consider the service blueprint that the consultant has presented, what
strategies would you recommend for Prego in order to increase and maximize
revenue? Consider the revenue and profit impacts of the recommended
measures.

Revenue management is a sophisticated form of supply and demand management that

balances both pricing strategies and inventory management. Its primary purpose is managing
customer demand through the use of variable pricing, capacity management, and information
systems to maximize profitability. It is the process of allocating the right type of capacity to
the right customer at the right time and at the right price. The determination of “right” entails
achieving both the most contribution possible for the restaurant while also delivering the
greatest value or utility to the customer. The application of revenue management has been
most effective when it is applied to operations that have relatively fixed capacity, demand
that is variable and uncertain, perishable inventory, appropriate cost and pricing structure,
and varying customer price sensitivity. These attributes are found in the restaurant industry.

A “4-C” Strategy for Revenue Management at Prego

Calendar Controls:

The crux of a revenue-management strategy is forecasting demand and having a reasonably

firm idea of when customers will arrive (and depart) so that demand can be managed.

1. Advance Reservations

At present, reservations accounted for about 50 to 60% of all arrivals, with an even higher
proportion on peak days. With regard to customer reservations, Prego can impose two
different rules; the first is allowing customer reservations only at non-peak hours to
alleviate the problem of no-shows and turning customers away during periods of high
demand. In this case, customers who wish to dine in Prego will have to “walk-in” and
wait in the queue. Secondly, Prego can also choose to allow customer reservations during
the peak-hour time slots; in this case, however, the following strategies will have to be
implemented:

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 Strategy: Have Guarantees for Busiest Time

During dinner hours each day and especially on special occasions such as Christmas
Eve, New Year’s Eve, or Valentines’ Day, the problem of customers making
reservations and not turning up is most acute. To counter customer no-shows during
these times, Prego can get customers involved in the reservation process and be
obligated to turn up by taking credit card guarantees. The guarantee has to be clearly
communicated to the customer when the reservation is made, and the amount charged
should be deemed fair to the customer for causing inconvenience and possible loss of
sales to Prego by not honoring the reservation. This can fall within the range of $10-
$15.

Strategy: Allow Overbooking to Compensate for No-Shows and Cancellations

When there is a chance that customers may not turn up at the stipulated times for their
reservations, Prego can allow overbooking of its tables based on historical rates of no-
shows. While overbooking reduces capacity wastage to bring higher revenue, it also
increases the incidence of Prego not being able to honor the reservations, and
customers with reservations may have to wait for a long time to get a table. The
optimal overbooking level balances lost revenue due to empty tables and seats and
penalties and loss of customer goodwill.

If, by chance, an unusually large proportion of customers turn up, then Prego will be
forced to make some customers wait beyond their reservation times for an available
table. Service recovery steps such as offering affected customers free desserts or 10%
discounts on their next visit during an off-peak period can then be implemented.

2. Customer Arrivals

Prego’s period of peak demands falls between 11.30am-1.30pm on weekdays for lunch
and 6.30pm- 9.00pm for dinner, particularly on Friday and Saturday nights.

EXHIBIT 1: Guest Arrival Pattern at Prego

110

100
Mon

90 Tue
80 Wed
Guest Arrivals

70
Thu
60
Fri
50

40
Sat

30 Sun
20

10

0
11:00
11:30
12:00
12:30
13:00
13:30
14:00
14:30
15:00
15:30
16:00
16:30
17:00
17:30
18:00
18:30
19:00
19:30
20:00
20:30
21:00
21:30
22:00
22:30
23:00
23:30
0:00

Operation Hours

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 However, the scenario change dramatically and there is under-utilization of capacity
from 1.30pm to 6.00pm daily. This is illustrated in the guest arrival patterns at Prego in
Exhibit 1. To shift demand from the two peak periods to the off-peak noon hours, Prego
can use differential pricing and other promotional activities to induce customer arrivals
in the slack periods of operation and better manage the demand and arrival pattern at
Prego.

Cost (Pricing) Controls:

Managing price strategies may be the most challenging aspect of revenue management, and
the emphasis is on charging customers the highest price they feel is equitable for the service
they are receiving, based on a criteria they can understand easily.

In practice, revenue management means setting prices according to predicted demand levels
so that price-sensitive customers who are willing to purchase at off-peak times can do so at
favorable prices, while non price-sensitive customers who want to purchase at peak times will
be able to do so.

1. Differential Pricing

Strategy: Charge Less During Off-Peak Periods

Instead of raising prices, during the peak demand periods of dinner and lunch, a wiser
choice is to offer discounts to customers during the slack periods. This will shift
demand away from the peak hours to time when there is excess capacity. Currently,
approximately fifteen to thirty customers could not be accommodated immediately for
dinners from Tuesdays to Saturdays. Of those who were asked to wait, approximately
33% did not and left for other restaurants. With the better-managed demand, more
customers can be served during the peak hours, leading to overall increased sales and
revenue. Cannibalization of sales will also have a minimal impact on Prego.

Strategy: Hold Special Promotions During Off-Peak Periods

Prego can organize special promotions of Italian cuisine that are made available only
for customers who dine in during off-peak hours. One way to achieve this is to
provide the full-fledged menu for customers during off-peak periods but changing to a
revised and shorter menu during the peak lunch and dinner periods. Additional
promotions of Italian cuisine can also be organized, such as the Italian Wine Month in
which special wines not available in Prego otherwise are offered. However, discounts
for the promotion are made available only during off-peak hours, during the peak
periods, the full-price of these wines will be charged.

To achieve the desired results of shifting demand from the two current peak periods to
off-peak hours, these promotional activities have to be made known to the target
customers through various advertising and promotion channels.

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 2. Bundle the Items

Various items on the menu can be bundled and sold at a discounted rate during off-peak
hours. For example, appetizers/ salad can be sold as a set with customers’ choice of a
soup, main course, and dessert for a cheaper price than if these items were ordered
separately. Slight variation can also be employed, such as offering more expensive main
courses or desserts for an additional few dollars above the discounted rate. This will make
Prego more appealing during the off-peak hours and increase the amount of customers
during the off-peak hours.

Clock (Duration) Controls:

Once customers arrive, it is important to standardize the length of the meal, right until the
time when they leave Prego after payment.

1. Customer Greeting/ Seating

Strategy: Start a Table Management System

Prego should consider implementing a table management system, which is a

computerized system that shows the status of each table. This will allow the host to
know the availability of tables in real time and help save efforts in coordinating
customer seating. To implement such a system requires a considerable amount of
monetary and time investments for training and installation. However, this initial cost
of approximately $15,000 is worthwhile to bring in the benefits of improved table
management and timesavings, which is especially crucial during the peak demand
hours.

Strategy: Improve Communication Between Host and Seaters

A more immediate alternative is to improve the communication between hosts.

Instead of the present practice of positioning all three hosts at the entrance, Prego can
arrange for two of them to be stationed within the restaurant as seaters and only one to
remain as the host.

This grouping can be achieved by fitting the employee with the highest propensity to
interact and socialize effectively with customers to remain in the position of a host
and stay at the entrance to greet customers and coordinate customer sizes and arrivals.
The seaters inside the restaurant will then inform the host of any vacancies by
communicating and tracking table status via walkie-talkies or even specially
formulated hand-signals.

In this way, servers can focus fully on serving and attending to customers’ requests, as
they no longer need to inform the hosts of available tables, and the process of seating
customers will then become more efficient. In addition to creating a favorable
impression for the guests, long-term cost savings from improved communications and
efficient coordination will offset the initial cost of approximately $200 for the walkie-
talkies.

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2. Customer Order

During the peak hours at Prego, an average of 5 minutes are spent at each table as the
customers look through the menu and decide on what items to order. To shorten the time
needed for customers to decide on their orders, Prego can have a specially designed and
simplified menu for customers during peak hours that may include the more popular
items or the chef’s recommended dishes. This will tie in with the strategy of promoting
special dishes and making them available only during off-peak periods. Shortening the
Italian names of the dishes to make it appear less cluttered with words can also modify
the menu. However, if customers specifically request for a dish, dessert, or beverage that
is available only on the regular menu, Prego would still follow the customer’s wish and
prepare the item for him.

Strategy: Present Menu In Advance

During the peak hours, even before customers are seated (i.e. when they are still in the
queue), Prego’s menu can be presented to them to let them think through what they
would like to have. This has the following advantages:

1. Less Time Spent At Table

Even if they have not made up their minds, guests who have looked through
the menu will spend less time in ordering at the table. Much of their decision-
making process would now occur while they are in the queue. Instead of the
original average of 5 minutes required for customers to decide on their order
after being seated, a much shorter time is now needed.

2. Less Likely To Complain or Leave

When customers have their attention focused on the menu, they will be less
aware of how long they have been waiting in the queue. Moreover, by
involving them in the process of ordering, they will be less likely to leave
Prego for another restaurant due to a long queue.

3. Faster Preparation of Food and Drinks

If customers are able to decide on their order before being seated, the order
can be first sent over to the drinks counter or kitchen and be prepared as soon
as they enter Prego, further saving on time. The host can then give customers a
verbal assurance that their order is now in the process of preparation. This will
make the customers feel as if they are already being served and will further
eliminate the chances of them leaving before they enter the restaurant.

3. Appetizer and Entrée Delivery

Currently, with three separate kitchen sections, it is difficult for the two front and two
back runners to coordinate the deployment of food to the serving stations. As a result, a
substantial amount of time is spent on coordinating the serving of prepared items, and on
redoing food that has turned cold. Servers have to perform the duties of taking orders,

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serving, occasional food running, check clearance and bussing, which much for them to
handle well and efficiently.

Strategy: Provide a Self-Explanatory Menu and Train Servers

The provision of a self-explanatory menu with descriptions of the food preparation

procedure etc. will empower the customers to better make their ordering decisions.
The current menu layout used in Prego has fulfilled the use of general dish
categorization (i.e. meat, fish and salad) and descriptions. However, the menu uses
Italian names for all its dishes followed by detailed explanations in English in small
prints which makes menu reading a chore and thus possibly extending the ordering
time. By simply highlighting main word of the dishes’ English equivalent will make
the menu more user-friendly and could speed up the ordering process. It would also
reduce the need to ask the servers for clarifications. However, if there are still queries,
the servers must also be well trained to respond and provide suitable
recommendations. Both of these initiatives will help improve the process time and
improve quality of the service delivery.

Strategy: Have One Runner For Each Prepared Food Outlet and Serving Station

This will ensure that runners will not miss prepared items and will be able to hand
them over to the servers more efficiently so that servers can take the food from the
serving stations directly and serve the customers with the newly-prepared items. It
also minimizes the confusion that arises with every runner handling all kitchen
sections and the separate serving stations. Instead of using four runners for this task
currently, only three runners will need to be employed in this revised strategy. Prego
can then save on the labor cost of the runner’s wages.

Strategy: Allow Servers to Concentrate on Serving Customers

Servers have to handle customer orders, serve the food items, check clearance, and
attend to customers’ additional requests. By leaving food running fully to the runners,
there will be better coordination of the duties and each area will be performed more
effectively and efficiently. Focusing efforts on serving customers will also raise their
level of satisfaction, as they will be able to catch the servers’ attention more easily.

4. Dessert and Coffee

Strategy: Have Guarantees for Busiest Times

Although suggesting desserts to the customers will increase the average check, this
should be done only when there is no long queue at the entrance. Desserts cost
between $7.50- $10.00 and takes on average 15 minutes for the customer to finish his
consumption while main courses range from $17.50- $45.00 and take customers an
average of 30 minutes each. More revenue can be fetched in an equal amount of time
from selling main courses rather than desserts. Therefore, unless the customers would
like to order desserts/ coffee at their own initiative, servers need not prompt them into
the order. This will ultimately result in an increase of RevPASH from the current
value of $3.00 and $4.20 during the lunch and dinner peak hours respectively.

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 5. Payment and Departure

Strategy: Provide Ample Training for Staff

Currently, it takes an average of 6 minutes to process the payment from the check
request to departure and it takes a further 9 minutes on average (with a standard
deviation of 6 minutes), after departure, before the table is bussed. An additional 5
minutes is also needed before the table is ready for reseating.

To make the process of payment and departure more efficient, Prego can train its
staff, especially servers, to be more alert and to process payments in the shortest
possible time. To prevent errors from occurring during the processing of payment,
Prego can assign more experienced servers or even managers to be stationed at the
cashier counter instead of letting all servers have this responsibility. This will ensure
that customer’ requests, including check payment, can be attended to an accurate and
efficient manner.

New, advanced technology in billing and the processing of checks can also be used to
handle the payment procedure. This will minimize the time and effort required from
servers or managers and ensures a more error-free process.

An average of 14 minutes is needed currently from the departure of the previous guest
to the reseating of the new guest. This signifies an unacceptably long duration that
does not add value to the process. Staff responsible for bussing and reseating must be
adequately trained to reduce the time taken from departure to reseating.

Capacity Controls:

Since service cannot be stored as inventory, wasted capacity is lost forever, and an under-
utilized capacity will lead to a substantial loss of revenue.

1. Seat Occupancy vs. Table Occupancy

Although the number of customers arriving at Prego does not exceed the 340 seats
available, many customers are still turned away at the entrance due to full table
occupancy. All tables are large enough for four customers and above. However, many
customers arrive in groups of three or less. This leaves many tables only half-occupied,
which poses a major problem of unused seat capacity and rejected customers.

Seat occupancy can be increased in three ways: increasing demand, decreasing the meal
duration, or providing a better table mix. Increasing demand is appropriate during low
demand periods, decreasing meal duration is best done during high demand periods, and
providing an optimal table mix is most beneficial during high demand periods.

If Prego can ensure that its table-mix closely matches the party size composition of its
customers, it will achieve higher seat occupancy. With Prego’s shifting mix of party sizes
from a lone customer to groups comprising as many as ten guests, tables that can be
easily combined to seat any party size can prove especially valuable. Consider the
banquette tables found in many fine dining restaurants in which tables for two are

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 positioned along a long seating bench with chairs on the opposite side. If a party of two
comes in, the table can be left as is, but if a party of four arrives, two of the tables can be
combined.

Exhibit 2 shows the current number of occupied seats and occupancy rate during
dinnertime at Prego, assuming an average duration of stay of 1.5 hours. Seat
occupancies are constrained by the table mix and the highest seat occupancies were on
Fridays and Saturdays from 7 to 8 pm. Very low seat occupancies occurred before 6.30
pm. Exhibit 3 shows the current revenue per available seat hour (RevPASH) in Prego
during dinnertime.

Strategy: Decrease Table Size

Prego can consider allocating part of the restaurant’s dining area to tables made for only
two customers. Another option will be to change all tables to small sizes that seat only
two customers. The tables can be arranged singly and in pairs to accommodate customers
who come alone or in pairs, and for three- or foursomes. For groups comprising five or
more customers, the tables can then be combined and shifted accordingly. While the
number of seats available remains unchanged, there will now be more tables to
accommodate more customer groups or lone customers.

Exhibit 4 presents a summary of the problems and recommendations for Prego.

EXHIBIT 2: Current Seat Occupancy in Prego During Dinnertime

Number of Occupied Seats (Occupancy Rate)

Day Of Week 18:00 18:30 19:00 19:30 20:00 20:30 21:00 21:30
Monday 3 (1%) 63 (18%) 151 (44%) 185 (54%) 161 (47%) 97 (28%) 70 (20%) 41 (12%)
Tuesday 15 (4%) 66 (19%) 119 (35%) 155 (45%) 146 (43%) 124 (36%) 109 (32%) 80 (23%)
Wednesday 14 (4%) 104 (30%) 177 (52%) 205 (60%) 155 (45%) 155 (45%) 138 (40%) 117 (34%)
Thursday 24 (7%) 83 (24%) 144 (42%) 173 (51%) 156 (46%) 112 (33%) 68 (20%) 41 (12%)
Friday 10 (3%) 49 (14%) 105 (31%) 170 (50%) 158 (46%) 129 (38%) 100 (29%) 98 (29%)
Saturday 15 (4%) 132 (39%) 146 (43%) 200 (59%) 134 (39%) 153 (45%) 115 (34%) 78 (23%)
Sunday 31 (9%) 88 (26%) 141 (41%) 126 (37%) 104 (30%) 70 (20%) 71 (21%) 44 (13%)
Monday 0 (0%) 17 (5%) 73 (21%) 131 (38%) 138 (40%) 105 (31%) 48 (14%) 24 (7%)
Tuesday 5 (1%) 53 (15%) 88 (26%) 139 (41%) 168 (49%) 160 (47%) 107 (31%) 42 (12%)
Wednesday 25 (7%) 117 (34%) 187 (55%) 212 (62%) 149 (44%) 110 (32%) 85 (25%) 59 (17%)
Thursday 3 (1%) 48 (14%) 110 (32%) 148 (43%) 141 (41%) 110 (32%) 102 (30%) 68 (20%)
Friday 22 (6%) 98 (29%) 143 (42%) 221 (65%) 197 (58%) 168 (49%) 92 (27%) 46 (13%)
Saturday 39 (11%) 132 (39%) 222 (65%) 277 (81%) 243 (71%) 195 (57%) 132 (39%) 82 (24%)
Sunday 14 (4%) 109 (32%) 139 (41%) 178 (52%) 110 (32%) 115 (34%) 63 (18%) 56 (16%)

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 EXHIBIT 3: Current Revenue Per Available Seat Hour (RevPASH) in Prego During
Dinnertime

RevPASH
Day Of Week 18:00 18:30 19:00 19:30 20:00 20:30 21:00 21:30
Monday $0.26 $4.79 $11.52 $14.11 $12.30 $7.38 $5.31 $3.11
Tuesday $1.18 $5.10 $9.15 $11.90 $11.25 $9.55 $8.37 $6.15
Wednesday $1.04 $7.93 $13.53 $15.74 $11.84 $11.84 $10.53 $8.97
Thursday $1.91 $6.69 $11.61 $13.93 $12.57 $9.01 $5.46 $3.28
Friday $0.69 $3.32 $7.09 $11.44 $10.64 $8.69 $6.75 $6.63
Saturday $1.18 $10.20 $11.25 $15.44 $10.33 $11.77 $8.90 $6.02
Sunday $2.04 $5.91 $9.43 $8.41 $6.93 $4.66 $4.77 $2.95
Monday $0.00 $1.21 $5.19 $9.29 $9.78 $7.48 $3.38 $1.69
Tuesday $0.50 $5.13 $8.61 $13.57 $16.39 $15.56 $10.43 $4.14
Wednesday $1.89 $8.69 $13.85 $15.74 $11.08 $8.18 $6.30 $4.41
Thursday $0.29 $4.04 $9.39 $12.56 $11.99 $9.39 $8.67 $5.78
Friday $1.61 $7.19 $10.41 $16.11 $14.37 $12.27 $6.69 $3.35
Saturday $2.41 $8.19 $13.75 $17.11 $15.01 $12.07 $8.19 $5.04
Sunday $0.99 $7.92 $10.15 $13.00 $8.05 $8.42 $4.58 $4.09

EXHIBIT 4: Summary of Problems and Recommendations for Prego

Revenue Step in the

Management Prego Service Problem Recommendations
Strategy Blueprint
Clash of reservation Do not allow reservations but only
time and busiest hour walk-ins during peak-hours
Calendar Advance Take credit card guarantees
Control Reservation No-shows on peak Overbooking to compensate for no-
periods and special shows and cancellations
occasions

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 Tables held up by no- Call customers to remind them of
show for reservations their reservations
During peak periods, smoothen the
seating process by suggesting to
guests alternative arrival time. E.g.,
instead of agreeing to accept
Customer multiple reservations at 8pm (when
Arrival its peak period starts), staff can
spread out the arrivals by trying to
shift some guest to an earlier arrival
of perhaps 7:15 or 7:30 pm, and
others a bit later, e.g., at 8:30 or 8;45
pm and thereby increasing capacity
utilization at that period.
Inefficient work Divide work clearly between the
arrangement for hosts hosts, with one stationed at the
Customer
Servers usually delay entrance and the second in Prego
Greeting
notification of available Allow servers to concentrate on
tables serving customers
Time lag between Implement a table management
Customer readied table and seated system
Seating customers Improve communication between
host and seaters
Time wasted as Present menus before seating
Customer
customers order at least
Order
twice
Servers responsible for Allow servers to concentrate on
too many duties serving customers
Have one runner for each prepared
Appetizer and
Clock Poor coordination in the food outlet and serving station
Entrée
(Duration) serving of prepared food
Delivery
Control
Time wasted in redoing
food items
Substantial time spent Do not suggest dessert and coffee
on eating dessert/ during peak hours
drinking coffee However, if one party at a table asks
Dessert and for coffee or dessert, ask all the
Coffee remaining parties as well as the
table/capacity will be occupied and
potential additional revenue can be
generated from the other parties.
Time wasted during Provide ample training for staff,
check payment allocate check clearance to the more
Payment and
experienced servers
Departure
Customers unable to Train servers to be alert
attract servers’ attention

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Cost (Pricing) Control
Capacity Control
Excessive demand Use differential pricing, bundle
during peak periods and items, and introduce special
insufficient demand promotions so that lower prices are
during off-peak periods offered during low demand periods
to shift demand patterns
Unutilized capacity as Decrease table size to allow more
tables are fully occupied customer parties to be seated.
but there are many
empty seats

3. Consider the potential customer and staff responses to the recommended measures.

Conflicts may arise when revenue management strategies are implemented (Wirtz et al.,
2001) Customers may perceive duration, inventory, and pricing controls negatively and
employees may experience role conflicts in balancing profit maximization and customer
satisfaction objectives.

Managing Customer Conflicts Arising from Overbooking

Strategy: Implement Well-Designed Service Recovery Program

Although overbooking can result in perceptions of poor service delivery, practice by

many service firms have shown that well-designed customer recovery programs to handle
overcommitments can offset negative feelings, and even result in higher customer
satisfaction. Customers may be offered a discounted rate for the meal or free coffee or
dessert to compensate for any time or psychological losses suffered.

Effective service recovery procedures are particularly important. This involves Prego
demonstrating to affected customers a sense of procedural fairness in terms of the policies
and rules for dealing with the problem, interactional fairness in terms of how they are
treated by the employees during service recovery, and perceived fairness of outcomes in
terms of compensation, apologies, and other remedies.

Managing Customer Conflicts Arising from Change in the Nature of the Service

By offering discounts during off-peak periods to attract incremental business and fill unused
capacity, Prego may attract inappropriate segments of customers that change the nature of the
service core customers have come to expect (Wirtz et al., 2001). For example, business
clients in Prego may be disturbed by large, noisy groups of customers such as tourists or
students who have been attracted by the off-peak discounts or special promotions. During
periods of excessively high demands, servers may not offer a consistently high service
standard, which may lead customers into feeling rushed through their meals and being
dissatisfied with their service experience at Prego.

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 Strategy: Spatially Segregate Customers and./or Differentiate Service Benefits

The interior of Prego is already divided into the Restaurante, Pizzeria, AntiPasto, and
Alfresco Dining sections. Prego can further allocate dining areas to the different groups of
customers, such as by seating large groups in the Restaurante section while assigning
smaller groups to the Pizzeria. Otherwise it may have to rely on managers or servers to
keep the noise level of customers down.
Strategy: Determine and Set Optimal Capacity Utilization

Lovelock (2001) differentiates between maximum capacity and optimal capacity. The
former is the physical limitation of the number of customers that can be accommodated at
any one time. The latter is the ideal level of capacity utilization in which demand and
supply are well balanced and customers receive the promised service level and
experience.

Prego must first determine its optimal capacity level that balances revenue-making and
the delivery of high service quality, and then set this level as a guideline for revenue
management practices. Therefore, off-peak promotional programs should be designed
such that it will attract an optimal level of customers and will not be deemed overly
worthwhile for customers. This will ensure that the level of demand generated is high
enough to bring in higher revenue, but at the same time allow staff members to deliver a
delightful service experience to the guests.

Managing Employee Conflicts Arising from a Lack of Understanding of Revenue

Management

Revenue management, with its myriad techniques and concepts can be very complex, and its
implementation can often lead to misconceptions and misunderstandings, resulting in
employee confusion and job dissatisfaction. Many elements have to be in place to minimize
the occurrence of any such conflicts.

Strategy: Top Management Commitment

The first key element is Prego’s top management commitment to demonstrate that they
believe revenue management and customer satisfaction can work in tandem and to give
both a balanced focus.

Strategy: Develop a Prego Revenue Management Culture

To integrate revenue management into Prego, all employees must understand that they
have a role to play, including servers, kitchen staff, hosts, runners, and managers. Data
from revenue management should be shared and communicated. Constant feedback and
open, regular forums will ensure there is constant learning and alignment of revenue
management concepts among all Prego employees.

Strategy: Employee Training

This is essential for the smooth coordination of work between all Prego staff, such as
between hosts and servers, servers and runners, and runners and kitchen staff.

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 Strategy: Well-designed Service Recovery Programs

As revenue management involves forecasting future demand, the lack of certainty may
result in customers not receiving satisfactory service occasionally. Therefore, it is
important to anticipate and back up the revenue management program with well-designed
service recovery procedures, a standardized response to customers, and staff
empowerment polices to ease the burden on frontline staff.

Strategy: Implement Incentive System for all Employees

With the revenue management system in place, employees will receive two forms of
incentives.

Firstly, the increased efficiency, especially during peak hours, will boost employee
morale as communication between different positions is improved. Role conflict and
confusion is minimized as the host, seaters, runners, and servers have clear and distinct
job scope. Customers are better served and satisfaction levels will increase, therefore
employees will also be motivated to discard the original way of working and fully
embrace the revenue management system of functioning.

Secondly, Prego can also give employees extrinsic rewards in the form of occasional
monthly bonuses or slightly increased pay. However, it has to be communicated to all
employees that the company is sharing its increased profits due to the implementation of
the revenue management system, and the amount of bonuses receive will depend on the
company’s sales and performance for a particular month.

This allows Prego staff to understand more clearly the benefits brought forth by the new
system and to see for themselves both the motivational and the functional aspects of
revenue management at Prego.

EXHIBIT 5: Summary of Possible Conflicts and Ways to Reduce the Conflicts

Type of
Reason for the Conflict Ways to Reduce the Conflicts
Conflict
Implement well-designed service recovery
Overbooking
programs
Spatially Segregate Customers and./or
Customer
Perceived change in nature of Differentiate Service Benefits
service Determine and Set Optimal Capacity
Utilization
Emphasize top management commitment
Develop a Revenue management culture
Lack of Understanding of
Focus on employee training
Employee Revenue Management
Implement good service recovery programs
Devise an incentive and reward program for all
employees

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SUMMARY OF KEY CONCEPTUAL AREAS

In order to implement revenue management successfully, Prego can adopt calendar control,
by monitoring advance reservations made and customers arrivals; pricing controls by using
differential pricing and bundling of items; duration control by reducing the idle time during
the whole dining process; and capacity control by decreasing table sizes so as to increase
occupancy rate.

However, customers and employees responses have to be taken into account. This is because
of the potential conflicts that will arise with the implementation of the measures.
FURTHER READINGS ON REVENUE MANAGEMENT FOR RESTAURANTS

This teaching note was based on the following recent research papers:

Sheryl E. Kimes and Gary M. Thompson 2001. “Restaurant Revenue Management at

Chevy’s: Determining the Best Table Mix”, Cornell University School of Hotel
Administration Working Paper # 07-05-02.

Sheryl E. Kimes and Richard B. Chase 1998. “The Strategic Levers of Yield Management”,
Journal of Service Research, 1 (2): 156-166.

Kimes, Sheryl E., and Jochen Wirtz. 2003. “Has Revenue Management Become Acceptable?
Findings from an International Study on the Perceived Fairness of Rate Fences”, Journal of
Service Research. 6 (3).

Warren H. Lieberman. 1993. “Debunking the Myths of Yield Management,” Cornell Hotel
and Restaurant Administration Quarterly, 34 (1): 34 – 41.

Jochen Wirtz, Sheryl E. Kimes, Jeannette Ho Pheng Theng and Paul Patterson (2003,
forthcoming), “Revenue Management: Resolving Potential Customer Conflicts,” Journal of
Revenue and Pricing Management, Vol. 2, No. 3.

GLOSSARY ON REVENUE MANAGEMENT IN RESTAURANTS

Average Check

Average check can either mean the average amount spent per person or the average
amount spent per party.

Casuals

Part-time, temporary workers.

Credit Card Guarantee

When a customer gives a credit card to guarantee a reservation. If the reservation is

not cancelled by a certain time and is not honored, the customer is generally charged a
pre-determined no-show fee.

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Guest
A customer of the restaurant or hotel.

Meal Duration

The time from when a customer enters the restaurant and when he or she exits.
Meal duration depends in part on the efficiency of the restaurant's service
cycle, as well as on the idiosyncrasies of a customer arrival pattern and diners
deciding to linger (or not) after the meal.

Party

Customers usually go to restaurants with other people. The group of people is

referred to as a party.

RevPASH

To calculate hourly RevPASH, first calculate the revenue from all the
transactions that begin during that hour and divide it by the number of
available seats.

Restaurant Revenue Management

Restaurant Revenue Management is selling the right seat to the right customer
at the right price and for the right duration. The determination of "right"
entails achieving both the most revenue possible for the restaurant and also
delivering the greatest value or utility to the customer.

Runners

Restaurants often use runners to deliver food from the kitchen to the table.

Service Blueprint

Service blueprints can be used to graphically illustrate a service process. The

steps in the process are mapped and the connections between steps are
identified. One of the key strengths of the service blueprint is the identification
of potential delays and failure points.

Standard Deviation

A statistic that tells you how tightly all the various examples in a set of data
are clustered around the mean. In the time-study examples in this course, total
standard deviation is calculated by squaring each of the component standard
deviations, summing them, and then calculating the square root of the sum.

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Suggestive Selling

A technique for increasing the average check by suggesting appetizers,

desserts, and additional drinks.

Table Management System

A computerized system that allows a restaurant manager to see which seats are
occupied, what courses occupied tables are on, and which tables are vacant. It is
useful for better managing the capacity of the restaurant.

Table Mix

The number of tables that are available for customers, such as 25 four tops
(settings) and 10 two tops.

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