27 November 2012

Academic Research: Dealing with No-shows

A recently published piece of academic research by two PhD candidates at Wharton School aims at offering restaurants a recommendation on how to deal with problem of no-shows.

"The average no-show rate for restaurants in big cities is around 20%, and for an industry with margins as low as 3% to 5%, no-shows can lead to significant losses especially when restaurants are turning away customers waiting outside." (Reddy, 2012)

Two possible remedies were considered in this paper: to punish no-shows by charging fees and to encourage show ups by giving discounts.

As a result of their paper the researchers make three main suggestions to restaurants.

  1. "First, we suggest that restaurants should charge no-show customers a penalty equal to the price they charge customers who show up". There are already high-end restaurants such as the Chef's Table in Brooklyn Fare that currently charges a no-show penalty equal to the price of the meal.
  2. "Second, we advise that incentives should be given to reservation customers to encourage them to show up. In other words it is optimal for restaurants to give discounts to customers who commit to pay the now show penalty by making a reservation [...]."
  3. "In particular, when the market size becomes greater than a certain threshold, it is optimal for the restaurant to operate as a pure walk-in restaurant."

Implementing these three recommendations will result in an economic benefit for restaurants.

"In numerical examples, we found that a combination of the no-show penalty and price discrimination strategies brings about a 20% profit increase for a realistic range of parameter values."
Download the research

Posted by Wlad