Variable Pricing in Restaurant Revenue Management: A Priority Mixed Bundle Strategy

Abstract

The restaurant industry has historically been limited in its ability to adopt traditional revenue management pricing practices (e.g., variable pricing across tables and times) because of three specific challenges: (a) inability to segment customers by willingness to pay prior to seating, (b) limited ability to price discriminate (i.e., prioritize limited seating for the highest paying customers), and (c) inability to communicate menu price variances in advance. This article reviews common restaurant pricing strategies and discusses how each strategy cannot sufficiently address these three challenges. This work proposes a new strategy, the Priority Mixed Bundle (PMB) Strategy, which addresses all three of these challenges. The PMB states that customers can make reservations if they are willing to commit to dining from a prix-fixe menu while walk-ins can dine a la carte. The article argues for why PMB is theoretically viable and could be superior to existing menu pricing strategies. A field study shows that the PMB generates more revenue than a la carte strategies. Survey results suggest that customers perceive PMB as fair. Overall, this research advances theory in restaurant revenue management and proposes a pricing strategy for restaurants.