CASE STUDY REVENUE MANAGEMENT AT PREGO ITALIAN RESTAURANT

If Prego hired you as a consultant to help them develop and implement a strategy to increase revenue and contribution, using financial data given, asses potential revenue an d profit impact of potential revenue management measures Prego should consider and make assumptions for the same: Meal Duration: The mean dining duration is fairly high for this type of restaura nt and the standard deviation of more than half an hour indicates an unacceptable level of variation in the service delivery system. Since the mean and standard deviation vary greatly by d ay of week and time, there are indications that the service delivery system is not in contr ol.

Seat Occupancy: Half-hourly seat occupancy levels can be developed using the dat a of the case and by assuming approximately one-and-a-half hour seat duration. The peak seat o ccupancy of 81% is achieved on Saturdays at 7:30, while seat occupancy is extremely low betw een 2 and 5 pm. The seat occupancy is then calculated by dividing the total number of seats occupied by the number of seats in the restaurant. The relatively low seat occupancy figures are surprising given that Prego is tur ning 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.

Average Check: The average check 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 r evenue, by the number of seats and the number of hours at dinner. RevPASH by day and hour c an be calculated by multiplying the average check by the seat occupancy.

Course Timing: Time study results for the various parts of the meal process are given in the case. Particular attention should be paid to areas with a large mean (i.e. entre to dessert or dessert to check request) or those with a large coefficient of variation (standa rd deviation divided by the mean) (i.e. processes at the beginning and end of the meal). In restaurant services, a 4-C Service strategy can be implemented for Revenue

management: 1. Calendar Controls: A revenue-management strategy is about forecasting demand and having a reasonabl y firm idea of when customers will arrive and leave so that demand can be managed.

a. Advance Reservations

Currently, reservations account for 50 to 60% of all arrivals, with a high propo rtion 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 proble m of noshows and turning customers away during periods of high demand. In this case, cu stomers who wish to dine in Prego will have to walk-in and wait in the queue. Secondly, Pr ego can also choose to allow customer reservations during the peak-hour time slots; in t his case, however, the following strategies will have to be implemented:

During dinner hours each day and especially on occasions important to the mix of consumers in Singapore, the problem of customers making reservations and not tur ning 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 tak ing credit card guarantees. The guarantee has to be clearly communicated to the cust omer when the reservation is made, and the amount charged should be deemed fair to th e customer for causing inconvenience and possible loss of sales to Prego by not ho noring 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 fo r their reservations, Prego can allow overbooking of its tables based on historical rate s of noshows. While overbooking reduces capacity wastage to bring higher revenue, it al so 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 penalt ies and loss of customer goodwill. If however a large proportion of customers turn up, then Prego will be forced to make some customers wait beyond their reservation times for an available table. Servi ce recovery steps such as offering affected customers free desserts or 10% discount s on their next visit during an off-peak period can then be implemented.

b. 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. However, the scenario change dramatically and there is under-utilization of capa city from 1.30pm to 6.00pm daily. This can be seen in the guest arrival patterns at Prego. To shift demand from the two peak periods to the off-peak noon hours, Prego can use diffe rential pricing and other promotional activities to induce customer arrivals in the slac k periods of

operation and better manage the demand and arrival pattern at Prego.

2. Cost (Pricing) Controls: Managing price strategies is the most challenging aspect of revenue management, and the emphasis is on charging customers the highest price they feel is equitable for t he service they are receiving, based on criteria they can understand easily. Revenue management means setting prices according to predicted demand levels so that pricesensitive customers who are willing to purchase at off-peak times can do so at f avorable prices, while non price-sensitive customers who want to purchase at peak times will be a ble to do so.

a. Differential Pricing Strategy: Charge Less during Non-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 sh ift demand away from the peak hours to time when there is excess capacity. With the bettermanaged demand, more customers can be served during the peak hours, leading to overall increased sales and revenue. Cannibalization of sales will also have a m inimal impact on Prego.

Strategy: Hold Special Promotions during Non-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 provi de the full-fledged menu for customers during off-peak periods but changing to a revise d 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 s pecial wines not available in Prego otherwise are offered. But the same discounts won t be available in the peak hours. Communicating these strategies to the consumer is essential for successful implementation and therefore advertising and promotions for the same are require d.

b. Bundle the Items Various items on the menu can be bundled and sold at a discounted rate during of f-peak hours. Like 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 separat ely. Slight variation can also be employed, such as offering more expensive main cour ses or desserts for an additional few dollars above the discounted rate. This can make it more appealing and increase customers during the non-peak hours .

3. Clock (Duration) Controls:

Standardization of the length of the meal, right until the time when customers l eave Prego after payment is essential.

a. Customer Greeting/ Seating

Strategy: Start a Table Management System A table management system, which is a computerized system to show the status of

each table needs to be implemented. This will allow the host to know the availability of tables in real time and help save efforts in coordinating customer seating. Implementation will have certain initial investment and training costs that will eventually however be negligible compared to the benefits of improved table management and time saving, which are crucial during the peak demand hours.

Strategy: Improve Communication Between Host and Seaters A more immediate alternative is to improve the communication between hosts. Inst ead of the present practice of positioning all three hosts at the entrance, Prego ca n 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 propensit y 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 arriva ls. 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 for mulated hand-signals.

Thus, 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.

b. Customer Order To reduce 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 th e more popular items or the chef s recommended dishes. Shortening the Italian names of th e dishes to make it appear less cluttered with words can also modify the menu. However, i f customers specifically request for a dish, dessert, or beverage that is availabl e only on the regular menu, Prego should furnish the same. Strategy: Present Menu In Advance During the peak hours, even before customers are seated, Prego s menu can be presented to them to let them think through what they would like to have. This h as the following advantages: i. Less Time Spent ii. Less Likely To Complain or Leave iii. Faster Preparation of Food and Drinks c. Delivery:

Strategy: Provide a Self-Explanatory Menu and Train Servers The provision of a self-explanatory menu with descriptions of the food preparati on procedure etc. will empower the customers to better make their ordering decision s. 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 wou ld also reduce the need to ask the servers for clarifications. However, if there ar e 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 an d improve quality of the service delivery. Strategy: Allow Servers to Concentrate on Serving Customers

Servers have to handle customer orders, serve the food items, check clearance, a nd attend to customers additional requests. By leaving food running fully to the run ners, 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 rai se their level of satisfaction, as they will be able to catch the servers attention more e asily.

d. Payment and Departure

Strategy: Provide Ample Training for Staff

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 pos sible time. To prevent errors from occurring during the processing of payment, Prego c an assign more experienced servers or even managers to be stationed at the cashier counter instead of letting all servers have this responsibility. This will ensur e 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 use d to handle the payment procedure. This will minimize the time and effort required fr om servers or managers and ensures a more error-free process.

4. Capacity Controls:

a. Seat Occupancy vs. Table Occupancy

Many customers are 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 gro ups of three or less. This leaves many tables only half-occupied, which poses a major p roblem 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 duri ng 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 compositio n of its customers, it will achieve higher seat occupancy. With Prego s shifting mix of par ty 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 banq uette tables found in many fine dining restaurants in which tables for two are positio ned 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 . 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 t hat seat only two customers. The tables can be arranged singly and in pairs to accommodat e 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 n ow be more tables to accommodate more customer groups or lone customers.

Potential customer and staff reactions to above measures: 1. Customer Conflicts due to overbooking 2. Customer conflicts due to change in nature of service 3. Employee conflicts due to a Lack of Understanding of Revenue Management

Given the potential profit impact, and customer and staff responses, what revenu e management measures would you recommend that Prego implement, and what should Prego do to minimize potential customer and employee conflicts arising fr om these measures: a. Managing Customer Conflicts Arising from Overbooking

Strategy: Implement Well-Designed Service Recovery Program Overbooking can result in perceptions of poor service delivery; a well-designed customer recovery program can handle over commitments and can offset negative feelings, a nd even result in higher customer satisfaction. Customers may be offered a discounted ra te for the meal or free coffee or dessert to compensate for any time or psychological losse s suffered. Effective service recovery procedures are particularly important. This involves Prego demonstrating to affected customers a sense of procedural fairness in terms of t he policies and rules for dealing with the problem, interactional fairness in terms of how t hey are treated by the employees during service recovery, and perceived fairness of outc omes in terms of compensation, apologies, and other remedies.

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

Strategy: Spatially Segregate Customers and./or Differentiate Service Benefits The interior of Prego is already divided into the Restaurante, Pizzeria, AntiPas to, and Alfresco Dining sections. Prego can further allocate dining areas to the differe nt groups of customers, such as by seating large groups in the Restaurante section while assi gning smaller groups to the Pizzeria. Otherwise it may have to rely on managers or ser

vers to keep the noise level of customers down. Strategy: Determine and Set Optimal Capacity Utilization Maximum capacity is the physical limitation of the number of customers that can be accommodated at any one time. Optimal capacity is the ideal level of capacity ut ilization in which demand and supply are well balanced and customers receive the promised ser vice level and experience. Prego must first determine its optimal capacity level that balances revenue-maki ng and the delivery of high service quality, and then set this level as a guideline for rev enue management practices. Therefore, off-peak promotional programs should be designe d 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 enoug h to bring in higher revenue, but at the same time allow staff members to deliver a delight ful service experience to the guests.

c. Managing Employee Conflicts Arising from a Lack of Understanding of Revenue Management Strategy: Top Management Commitment The first key element is Prego s top management commitment to demonstrate that the y believe revenue management and customer satisfaction can work in tandem and to g ive both a balanced focus. Strategy: Develop a Prego Revenue Management Culture To integrate revenue management into Prego, all employees must understand that t hey have a role to play, including servers, kitchen staff, hosts, runners, and manag ers. 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, s uch as between hosts and servers, servers and runners, and runners and kitchen staff. 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-des igned 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 empl oyee morale as communication between different positions is improved. Role conflict and conf usion 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 emp loyees will also be motivated to discard the original way of working and fully embrace the r evenue management system of functioning. Secondly, Prego can also give employees extrinsic rewards in the form of occasio

nal 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 implement ation 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 aspect s of revenue management at Prego.