Happy Hour is Dead, Long Live Yield Management🎉

Yield Management is a practice that originated in the 1980s, starting in the airline industry in the United States before expanding to the hospitality and entertainment sectors.

The fundamental idea is straightforward: in industries with high fixed costs, during periods of low demand, it is better to sell an additional product at a discounted rate rather than not selling it at all.

For example, in aviation, where the main costs of a flight include the aircraft, fuel, and staff, selling an extra ticket at a 30% discount is preferable to leaving the seat empty.

With the advent of technology and data, the concept has evolved to encompass a broader range of parameters: real-time demand, the cost of an additional sale, production capacity, brand image, and competitor practices. The ultimate goal is to determine the optimal selling price at any given moment to maximise profitability.

In essence, it involves implementing a dynamic pricing strategy that adapts in real-time to numerous factors, with the primary aim of optimising the merchant's profitability.

For Yield Management to benefit a sector, three essential ingredients must be present.

1. The importance of fixed costs

Much like aviation and hospitality, the restaurant business is a service-oriented industry. Service industries typically have high fixed costs. A closer look at the sector's expenses reveals that "operating costs" (rent, utilities, staff, suppliers, etc.) account for a significant portion of a restaurant's expenses, and the only way to offset these costs is through revenue.

2. A low marginal production cost

This means that selling an additional unit should incur a relatively low additional cost for the merchant.

In the case of a restaurant, when it is open and has spare capacity (available staff and stock), producing one extra unit usually only involves the cost of ingredients and packaging-averaging around 30% of total costs.

3. The demand variation

Some restaurant owners see more customers at lunchtime, while others thrive during dinner service. Similarly, some may perform better during the week, while others attract more guests on weekends.

A restaurant's peak and off-peak times can vary not only from week to week but also within a single day or service. Each restaurant has its unique characteristics, often linked to factors such as the type of cuisine, geographical location, and local events.

Although several versions diverge regarding the exact origin of the concept, one of them traces it back to the early 20th-century American bars and speakeasies to describe the illegal act of grabbing an alcoholic beverage between work and home during the Prohibition era. By the end of the Prohibition in 1933, restaurants and bars, who wanted to turn the practice into a socially acceptable form of post-work entertainment, cleverly implemented targeted discounts during low-traffic periods (before dinner) to attract customers leaving work as bait. This was the inception of the well-known Happy Hour.

Although Happy Hour quickly gained popularity, expanding globally and becoming widely recognised, its implementation has often been hampered by significant logistical constraints.

For a long time, restaurant menus were static (in print or on display boards), making it difficult for restaurant owners to adjust their prices constantly, unlike hotel operators who easily adapt prices across online booking platforms.

However, the industry is evolving and digitalising, particularly following the COVID-19 pandemic, which has accelerated the development of the restaurant sector by approximately five years, according to multiple studies. 

• Delivery, once limited to restaurants with their own fleets, is now accessible to all via platforms like Deliveroo and UberEats. 

• Takeaway has transformed with the rise of Click & Collect, as consumers have started to anticipate their consumption.

• In-person dining is also undergoing a digital overhaul: reservation websites, ordering kiosks, and Order & Pay apps are becoming commonplace.

These new modes of consumption offer numerous advantages: they streamline order processes, encourage upselling, and save significant time for both restaurant owners and customers. Most importantly, they present an incredible opportunity for restaurants to gain flexibility in their pricing strategies, allowing them to roll out promotional offers with just a few clicks, opening up new possibilities...

Here are four key reasons why any restaurant should implement Yield Management strategies:

• Increased visibility

With competition intensifying on online ordering platforms, strategically timed promotional offers can significantly enhance visibility.

Platforms like Deliveroo, Uber Eats, and Just Eat aim to continually attract new customers, and promotional offers from their restaurant partners provide a strong incentive for customers to visit their sites. Their algorithms prioritize restaurants employing such discounts.

• Acquiring new customers

Approximately 70% of delivery orders are placed through online platforms, which together boast nearly 10 million app downloads in the UK. This means restaurant owners have a "near-infinite" pool of new customers just a click away.

On average, our customers at Flynt double their new customer acquisition after just a few weeks of utilising our services.

• Optimising profitability

The ability to adjust pricing strategies based on different times of day or week allows restaurant owners to consider multiple potential strategies.

The equation is simple:

- The stronger my promotional offer, the higher my visibility/conversion rate, and thus my order volume.
- Conversely, a weaker promotional offer results in lower visibility/conversion rates and diminished demand.‍

💡 The key is to apply the right strategy at the right time to maximise production capacity and mitigate fixed costs.

Here are some potential strategies:

- Boosting services during off-peak times with more substantial promotional offers (e.g., midweek dinners).
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- Increasing orders during transitional service periods if staff is available (afternoon snack breaks).
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- Offering promotions during service edges (11am-12:30pm / 2pm-3:30pm or 6:30pm-8pm / 9:30pm-11pm) to smooth out orders and prevent congestion.
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- Implementing tiered promotional offers based on order peaks and troughs throughout the day.
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- Reducing waste and losses by promoting products nearing their use-by dates.

• Preserving brand image

Nothing is more detrimental for a restaurateur than to think that all the effort invested in their brand image could be undermined by constant generous offers that imply they are unable to sell or, worse, that their product quality is lacking.

One way to avoid this is to create unpredictability in promotional offers. By frequently varying the amount or the items included in a promotion, customers are less likely to view these offers as the new "norm."

It's not surprising to see a 5-star hotel occasionally offering a 50% discount, is it? However, if that same hotel were to maintain such offers year-round, it would be a different story...

As a restaurateur, here are some questions to consider that can serve as a starting point for your reflection:

• What are my low-traffic service times?

• Conversely, which services am I operating at full capacity?

• Are there times, before or after service, when my staff are available but orders are sparse?

• Do I have outlets that struggle with visibility on the platforms?

• What promotional offer yields the best visibility/margin ratio for my restaurant?

• What is the optimal promotional offer at any given moment to maximise sales without sacrificing margin?

• What practices are my nearby competitors employing?

It's crucial to take a data-driven approach to develop the most effective strategy.

In general, we recommend consulting an expert, whether internally or externally, who can assist in analysing your data and creating a strategy tailored to your specific challenges.

At Flynt, we support over 2,000 restaurants, developing unique expertise that enables them to achieve up to 30% increased profitability on online sales channels. Visit our website, to learn more about how Flynt can assist you.