Tuesday, November 16, 2010

The Economics of OpenTable, Cont.

Relative to this post from the summer, I see via Matt Yglesias that we have some more concrete information, from the Bay area restaurant Incanto, on how expensive the service really is:
The access fees can be substantial, particularly for restaurants operating on thin margins. One independent study estimates that OpenTable’s fees (comprised of startup fees, fixed monthly fees, and per-person reservation fees) translate to a cost of roughly $10.40 for each “incremental” 4-top booked through OpenTable.com. To put that in perspective, consider that the average profit margin, before taxes, for a U.S. restaurant is roughly 5%. This means that a table of 4 spending $200 on dinner would generate a $10 profit. In this example, all of that profit would then go to OpenTable fees for having delivered the reservation, leaving the restaurant with nothing other than the hope that that customer would come back (and hopefully book by telephone the next time).

In truth, the actual fees incurred for an “incremental” table may be higher than the $10.40 figure, which assumes that every reservation booked via OpenTable.com is an incremental reservation, i.e. composed of guests who would not have otherwise visited the restaurant and were seated on a table that would otherwise have sat empty for the evening. It’s easy to imagine that, had a restaurant not been listed there, at least some of those booking on OpenTable.com would have otherwise gone to the trouble to find that restaurant some other way.

OpenTable’s pitch to restaurateurs is that the 5% average restaurant profit margin applies only to schmucks who don’t offer reservations through their service. If you sign on with OpenTable, goes the pitch, you will fill more of those empty tables and see an increase in business, the marginal profits of which will more than justify OpenTable’s fees. Your restaurant will be more profitable than the measly 5% to which you have grown accustomed. This pitch is perfectly tuned to the psyche of the independent restaurateur; we always believe we can find a competitive advantage that will enable us to do it a just a little bit better than the guy across the street.

However, once everyone’s restaurant is listed on OpenTable.com, does it still provide that leg up over the guy across the street? Under the old conventional wisdom, restaurateurs considered OpenTable a competitive advantage, in which OpenTable would pay for itself by tapping into a new source of business. Under the new conventional wisdom, however, OpenTable is now considered a gateway to a desirable set of customers (you savvy online diners know who you are). Anyone wanting access to these customers must now pay this new per-customer tax, or risk failure. This is the hard-edged reality of the role OpenTable now plays within fine dining. By controlling access to a growing population of diners, it’s increasingly rare when an ambitious new restaurant decides it can forgo being a part of the service.
I admit this makes me feel a little guilty about using OpenTable all the time, but I'm sorry... it's just too damn convenient. Being able to find out which restaurants have available tables while I'm walking around the city is a feature I just can't abandon: I don't have an interest in hour long waits or walking by every restaurant in a 5 block radius to see how busy they are. I have to admit, I still don't understand how, if OpenTable is gouging restaurants so heavily, a competitor hasn't emerged to do it for less? I know nothing about programming web based reservation software, but being that Incanto runs its own independent service...  it doesn't really seem to be an insurmountable barrier to entry. It can't be that hard can it? Why don't the more powerful restaurant groups band together and create a competing service that is more fair to restaurants?

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