Paying for restaurant reservations, a new surge pricing twist

Premium reservations for a "small fee" at Cosme Source: Ryan Sutton

Premium reservations for a “small fee” at Cosme
Source: Ryan Sutton

Maybe it’s because we’re in a bubble. Maybe life is really good right now for a lot of people. Or maybe I’m underestimating the need to eat at the hot spot right now. Yet, evidently, many of Open Table’s users are willing to pay a hefty price just to be seated at popular restaurants tonight. Open Table claims that  their “research revealed that many OpenTable diners are willing to pay for last-minute, prime-time reservations at popular restaurants.” How much? Ryan Sutton reports that a spot for tonight at Cosme, a “Contemporary Mexican” restaurant in New York City, is $100 for a table for 2 and $200 for a table for 4. And that’s just for making the reservation. “Premium booking fees are not applied to [the] cost of dinner,” the Cosme receptionist told Mr Sutton.

Last year I looked at the new ticket based reservation system developed for Alinea and Next in Chicago and now also used by Lazy Bear here in San Francisco as an alternative to reservations by Open Table. The ticketing system was created because Open Table didn’t work well for popular, high-demand restaurants due to a combination of factors. First, having to pay for the booking even though prime spots are not only easy to fill but in demand. Second, no-shows, empty tables when customers don’t show that could have been give to other diners. Third, wasted time answering phones when no spots were available. Fourth, the lack of transparency for potential diners, which ended up causing frustration. By switching to a ticket model, restaurants were able to charge different prices for different dining times, days of the week and menus. By prepaying for tickets, diners were committing to the meal, reducing no-shows, and the transparency made the process seem fairer to users.

But not all restaurants, even the popular ones, wanted to switch to a ticket model. Some, I am assuming, because they don’t like the concept and some because the implementation may be too much to take on. That’s when a San Francisco startup received much ire for making reservations at popular spots and selling them via an app, offering no benefit to the restaurant. Yet, the startup, Restaurant Hop, did raise one important point: diners are willing to pay for reservations at certain restaurants.

Open Table realized that it wasn’t offering popular restaurants a good option for prime time reservations, causing them to take those spots off the system, and saw that diners were willing to pay. Also, with lots of data on popular locations, dates and times, Open Table is able to determine what spots are in high demand. Similar to Uber’s surge pricing model, the new feature’s goal is to spread out demand. But, as restaurants cannot add more tables to meet demand like Uber adds drivers, charging for a prime reservation will reduce demand for that time slot. Right now “100% of proceeds will be go to our participating restaurant” and only Cosme is participating. Open Table says that depending on how diners respond, and “looking at what price points work best for them,” will determine how this feature will work in the future and whether it will be rolled out to more restaurants.

Economists have long salivated over price discrimination: charging different people different prices by what they can afford. One example is the recent report that Princeton Review charges Asians more for SAT test prep by asking for their zip code before quoting a price. The travel industry, especially airlines, discriminate by day and time of search, popularity of dates and times of flights and even the devices used for the search (searching on a Mac? Pay more!) Restaurants, hindered by the concept of handing out a paper menu and not always knowing who their customers are, are new to the price discrimination game. Tickets were the first shot. Will paying for reservations be the second or will there be a backlash remains to be seen.

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