Link to podcast. 19th November 2020.
Sajith: One of the best podcast episodes I ‘read’ this year. It is not new, but after it was referred in a Colossus annual wrap as one of their best episodes, i decided to give it a go. Any one who is a restaurateur (esp offering mid to high priced food) or in strategy will enjoy and learn from this podcast. One of my big learnings from it was on how to figure out your revenue sources (essentially all of the experience touchpoints that customers may be willing to pay, or pay differential prices for) and make that visible to your org. Time-based pricing, and having the courage to go all-out on that, then using advance bookings, and leveraging the float to buy in advance at lower prices from your vendors, so as to price the menu lower, and be competitively advantaged, were other learnings as well.
Taking a booking deposit
Nick: One of the basic things that people don’t do in the restaurant industry, and it drives me nuts even with our own staff, is no one multiplies it (no shows) out by seven days a week, 52 weeks a year. So if you have something that’s costing you even $20 a day, add it up. It’s a low margin business because you’re not looking at these chunks of revenue. I was just going why in the world if we have a wait list of 200 people can we not just limit it to the people who actually are willing to come in and take a little bit of a deposit first? And what’s fascinating about that is that when I said that to people I was like, “Look, baseball games, concerts, theater, every other form of entertainment does some sort of ticketing.” And I was told that it was a terrible idea because restaurants are not entertainment. And I was like, “What are they?” What’s really fascinating about restaurants and food in general is that because we are biological creatures that need to eat, people have all sorts of emotional and cultural and ethical baggage on top of what a restaurant is.
At the core of it, we could charge ahead. I was told by everybody I talked to that it was a terrible idea. Literally everybody except for my wife. Grant thought it was a terrible idea. Our general manger at the time thought it was a terrible idea. Notice I say at the time. It was very, very, very frustrating because I kept having this notion in my head where I’d wake up every day going, “We really should just take a $50 deposit and then the problem is solved.” I honestly knew nothing about behavioral economics at the time. I didn’t know if these were things that were tested. I just knew that as a derivatives trader if everything went to zero at the end of a day that’s like an expiring option. And that option value changes the closer you get to expiration. And yet we kept all of our values constant. In other parts of the world that wasn’t the case. I sat down one day in 2014 and wrote this long essay. But before then I skipped ahead.
I’m like, “Click on that button, that table will become available and then it will instantly sell.” And he did it and he was like, “What happened?” And I was like, “We just got $625 in our bank account and that person’s not going to dine for two months. And any one that you open will instantaneously sell.” And he was like, “That’s amazing.” And I was like, “Yeah, it’s fucking amazing.” And then he just laughed and was like, “Okay I’m going to go cook.”
When we were building Next, I just decided this is like a theater like restaurant. It changes three times a year to an entirely new menu. I’m going to sell tickets to this. And again, everyone in my own company thought I was an idiot. So I had to hire an outside programmer, had to not get a phone on purpose. We barely built it in time and it broke right away because it was a home brew software. But then the first day we sold $562,000 in tickets to a restaurant for the first time ever. And I remember that as one of the happiest days of my life.
Dynamic (time-based) pricing for service businesses
Nick: If you look back at the old blog post and you google ticketing for restaurants Alinea, it’s still somewhere out there. I called it dynamic and variable pricing for time slotted businesses. Any business that’s time slotted should be dynamically and variably priced right down to your lawyer frankly. Your dentist. If everyone wants a 10 a.m. Saturday appointment because of work hours, why doesn’t it cost more to go to the dentist or a salon or anything else for that matter? Personal trainers at 10 a.m. on a Tuesday do not have as many clients at 6 a.m. on a Tuesday. To me, all of those things should be and will be dynamically priced. The tools to do so are not yet widely available.
But you look at something like Amazon and Shopify for hard goods, they’re doing that already. It’s accepted for hard goods. It’s less accepted for services. Inevitably it’s going to happen. If I was going to open a dry cleaner or something like that, I would immediately have dynamic pricing.
Building customer empathy / user research
Nick: As soon as we had all the feature set to provide a great ROI for really high end restaurants, we started going hard down market fast on purpose and building out all of those features and breaking them and then all of our engineers went and worked in restaurants as hosts. These are people who spent their time staring at a computer screen and they’re suddenly checking people in at a restaurant. So they suddenly had empathy for the end user. And we didn’t conduct focus groups. We didn’t bring the restaurants into our offices. We did the opposite. We took our people and we put them into the restaurant.
Every restaurant has a lot of hidden revenue sources; identify it and train your staff to sell it
Nick: Gramercy Tavern is one of, I think, the best restaurants in America. It’s a great place. It’s iconic. Let’s use Gramercy Tavern. When you arrive at the front door of Gramercy Tavern they have no idea what you’re going to do. And when I say that, I mean that very literally. They have no idea what you’re going to buy. They have a bar area there that’s casual. That serves more casual fare. They have a walk up bar that you can be at. So now we have two different things that they’re selling. Your casual restaurant and your bar. Then in the main dining room you sit down and they have an a la carte menu which is amazing.
Michael Anthony’s a great chef, great place. Then you have a tasting menu. They tell all the people sitting down, “If you want to do the tasting menu you all need to do the tasting menu. And then we have two kinds of tasting menus. We have the regular omnivore one and we have a vegetarian tasting menu.” And if you do the tasting menu you can add on wine parings or you can buy the wine list. And then they have private dining. So they have two private dining rooms there that are sold for special occasions, corporate events, all that sort of stuff. Plus they have a cookbook. So eight things that they are selling. The bar, the casual, the a la carte, two prix fixe menus, private dining and merchandise.
If I ask Gramercy Tavern what you’re selling they’d say food. And I’d go, “No. You’re actually selling seven different experiences plus some merchandise.” Meanwhile you haven’t categorized those experience until after someone comes in. You haven’t even informed the consumer that they exist. Do you want to be surprised? When you go to pick up your car that you bought, would it be really weird if the car had a different color and they tried to sell you on that one? Yeah, you’d walk out of the place. One of the talks I give to all of our new employees at Tock and to the industry is called Tuesday is not Saturday and seven other things you already know but are doing nothing about. It’s really obvious, you don’t need to be an expert in the restaurant business to know every restaurant in the world probably, or 99% with some anomaly, are busier on Saturday night than Tuesday night. Okay, so we have that. You’re not going to get an argument even from a diner. Yeah, more people eat out on Saturday night. What are you going to do about that? How are you going to get more people in on Tuesday? What levers are you going to pull to get them in?
When you go to book that the only thing you say is I’m showing up. It’s incredibly, incredibly inefficient. And what they’ll say is they’ll say, “Well yeah, but only 4% of the people buy the tasting menu.” But that’s because you’re relying on the server to surprise them with this as an option and then everyone at the table needs to agree to it at that moment. If one person doesn’t agree with it, it gets vetoed and everyone orders a la carte. If you put that up on a Saturday night when your demand is three times your supply … There’s 700 people that want to go there but you only have 250 seats. I’m making that number up. If you say, “Well, I’m going to put 100 of these up for sale as tasting menus only,” you will sell all 100 and you will know before people come in what they’re going to get. For those people, not the a la carte people. The people who want to do it at the bar, you have a separate button that says, I want the casual aspect.
I always went, what are the revenue sources? You mentioned the cost side as well and there is all of that. But restaurants never concentrated on their revenue side other than going like, “Whoever sells the most Mai Tai’s this month gets a bonus,” to their servers. Which essentially means that you get a terrible sales pitch at the beginning. So my whole thing is, we gave restaurants tools to actually sell. The other part of that is if you sell more efficiently your margins get better and better because the last dollars in are the dollars you keep. Your fixed costs are known. Rent, utilities, all that sort of stuff. Your cost of goods sold look better and better and better when you have less waste. So it’s actually good for the environment, it’s good for your food costs. It’s usually 30 to 35% labor, 30 to 35% food costs, 30% on your fixed costs and insurance and overhead and all that. What are you left with? 10%.
Well, if you can eliminate food costs, if you can run more efficiently, if you can have high demand on a Tuesday at 9:30 at night you will make 20 to 30% per restaurant. I’ve had dozens of restaurants I’ve talked to where they’ve said it’s completely impossible to make more than 20%. It’s just not possible. Over and over and over again I see that when they make these small changes, even the casual places on the revenue side, suddenly it unlocks money that they just were like wow. The denominator’s the same and the numerator got bigger. It’s just not that hard but no one does it. No one runs it efficiently and people are scared of change. People are like, “Well, what about our customers that want to call on the telephone or what about the great customer that doesn’t want the tasting menu?”
And I was like, “Great, hold back four tables. Click that button and hold back four tables.” I’m not telling you to change the entirety of your business for every person. I’m saying run some of those experiments we talked about at the beginning and see what the outcomes are. And I’ve been incredibly unimpressed in general with the industry and their willingness to do that.
For some reason the whole industry, with the exception of the early bird special in the ’70s and the blue plate special in the diners, the high-end industry just went like, “Yeah, no, we’re too good for that. We’re not going to pull the pricing lever because we might piss off the people on Saturday night.” Because that was the argument given to me by my own employees. “Well, won’t the people on Saturday be pissed if they’re paying more?” No. Do people sitting on
the 50-yard line on the 10th row, are they pissed off that they spent $500 on the football game instead of $80 to be in nosebleeds? No. That’s like a normal thing.
His publishing experiment
Nick: Same thing goes for publishing. We publish all of our own books. Last week sold $120,000 of books in a week for our restaurant with margins much better than the restaurant. But we actually sell them ourselves. I have mailing lists. I have websites. I have Instagram and Facebook. We’re running couple thousand dollars of ads per day. And we own the rights to the book. Done. Not that hard. That goes back to the original thing, own it. The publisher doesn’t own our books. We do. And sell it. This is not hard stuff.
I wrote up a long Medium for those who are interested. If you google my name and look on my Medium there’s Why We Are Self-Publishing the Aviary Book. If you ask questions of an industry and they won’t tell you the answer, that’s always a good sign that someone’s getting very wealthy. I posted up the contracts that we were offered. They’re all terrible. Certain kinds of books I think you’re much better off going with a publisher for it. Like if you’re going to write an academic book and you have no built in audience, chances are you’re not going to sell a ton of them on your own. But if you have an audience already in whatever business you’re doing, or a large social media following or any of that, doing a book and publishing it yourself is not hard. It takes a lot of effort. Allen Hemberger and Sarah Hemberger came from Pixar Industrial Light and Magic. We hired them both to do all of our media and books. We gave them equity in the thing so that they own part of it. Three years later we have six books out and they produce millions of dollars of revenue every year.
Weaponising working capital
Nick: And when we started to bring in money through deposits and prepaid reservations, tickets, I suddenly looked and had a bank account that had a couple million dollars in it of forward money. Like a lot of other businesses. Like the computer business. If you buy a computer then they ship it to you five days later kind of thing. So you have a float. So I started calling up some of our big vendors for big expensive items. Proteins,meat, fish. Luxury items like caviar, foie gras, that sort of stuff. And wine and liquor. And just said, “I don’t want net 120 anymore. I want to prepay you for the next three months.” And they had never had that phone call from a restaurant before. So basic economic theory would say well, how much should they discount it?
Let’s say we’re going to buy steaks and they were $34 a pound wholesale for dry aged ribeye. We’re going to pay $34 a pound wholesale, get net 120. And I called the guy and said, “I’m going to use 400 pounds of your beef a week for the next four months for our menu, which is about $300,000 of beef. What do we got if I prepay you?” And he was like, “What do you mean?” I’m like, “I want to write you a check tomorrow for all of it for four months.” And he was like, “Well, no one’s ever said that.” So he called me the next day. He said, “$18 a pop.” Half. Half price.
Patrick: Wow.
Nick: That’s what I said. I went, “I’ll pay you 20 if you tell me why.” And he said, “Well, it’s very simple. I have to slaughter the cows. Then I put the beef to dry. And for the first 35 days I can sell it. After 35 days there’s only a handful of places that sell it for more than 35 days. Dry aged. And at 60 days I sell it for a dollar a pound for dog food. Literally.” So his waste on the slaughter and these animals’ lives and the ethics of all of that are because of net 120. Seems like someone should have figured this out. As soon as he said that, everything clicked and I just went, “We need to call every one of our vendors every time and say we will prepay them.” Now, I know huge restaurant groups, huge restaurant groups that look at their float as more valuable to have that money in the bank and to pay their vendors net 90, net 120, whatever. What are you earning in interest these days? 1% a year or something like that? It makes no sense to do that. It makes sense to get ahead of that curve, estimate your next month’s sales, and prepay for the food.
Now, there’s risk involved in that, but you’ve mitigated that risk by much, much better food prices. At the Michelin three star level we’ve been able to take our food costs down to a level that honestly our chefs never thought was possible. But we’ve done that partly through the efficiency of not having no shows, but then the other flip side of it is that we’ve also worked on creating forwards contracts for all of our big vendors.
Know who your customers are, and target lookalikes
Nick: People can’t buy what you don’t sell. Stranger danger. You don’t know who your customers are. So, in the restaurant business anyone can walk in and you have no idea who they are. It’s really obvious that that’s the case. If you have a casual restaurant, people walk in. Who is this person? You have no way of knowing them. Almost any other business you are going to have some information about that customer so that you can re-market to them. You can take that customer and aggregate them into a pool of customers, upload them into Facebook and Instagram and say create a like customer list within three square miles of my restaurant.
So all of these tools exist. They’re largely free to use as well. And all you need to do is get your customer’s email address. Not their cellphone number, their email address. It’s the unique identifier. Other businesses and other booking systems don’t want you to have that. Just like the publisher saying, “Yeah, we won’t tell you how much that book costs to print or we don’t know.” Which is a weird thing to say. These other booking systems go, “Yeah, yeah. People don’t like giving their email address. It’s much better to have a cellphone number.” It’s like, “No. Actually it’s not.” And that’s why Amazon and Netflix and HBO and everyone else uses your email address as your unique identifier. I call that stranger danger. Your customers cannot be strangers. You need to know who they are. And what are you going to do about it? Very simple. When they arrive, you get their email address. It’s not that hard.
Customer connect
Nick: You have all the tools to know your consumer and interact directly with them. For the first 10 years of Alinea, every single day when I woke up I emailed two people that were either diners or posted on their blog about their dinner. Or on Yelp or wherever it may be. Because I figured over the course of a year I would email 700 customers and they would be like, holy cow.
That’s a very simple thing. It took me about five minutes a day to do. And as social media grew up around it, I just went, “Oh, that’s even more effective way of doing it.” I think that knowing your customer literally, who is it, and then having the ability to interact with them in an authentic way is the key to all business.
Writing from the pov of the customer (a variant of the PR/FAQ fm Amazon)
Nick: When I write a business plan, I don’t understand the business until I can write about it on a single page. I have chefs all the time email me with business plans. And I say, “Do me a favor. Write up one page of what it’s like as a diner to eat at your restaurant.” And then I don’t hear from them for two months, if ever. Because they don’t have a clear vision. They have a clear vision of what food they want to give to someone. They don’t have a clear vision of who that person is and what sort of emotionally resonant experience that you’re creating with them.