Grant Achatz is trying an innovative pricing system at his new restaurant Next. There is a set menu and instead of taking reservations and bringing a check at the end of the meal, Next is selling tickets. The ticket sales save on labor costs of employees taking reservations, distributing checks and running credit cards at the end of the meal. The restaurant sells tickets through its own website so it does not share revenue with opentable. The price of the ticket varies by day and time. This is classic profit-maximizing price-discrimination. At times where demand is high, charge a high price; when demand is low charge a low price and keep the restaurant busy when all the lights are on and chefs are in the kitchen. So far, so good.
All the excitement is coming from the explosion in the resale market for Next tickets. Resale is allowed by the restaurant. They seem to think that it is impossible to stop so why not make it above board and monitor it carefully so there is no sale of fake tickets? Also, if someone manages to get a ticket for a particular time or day and then finds they cannot make it, they have the opportunity to sell the tickets. It seems tickets for two with a face value of $170 are selling for $1000. If Achatz and his partner Kokonas thought they were going to give impecunious Alinea fans a better deal, they were mistaken, at least at the opening of Next. Plus all the revenue generated by resale is being handed over to people who were lucky enough to get into the start of the queue. These might be true Achatz fans now but at the next round they will morph into the kind of ticket scalpers we see at Cubs games. Achatz should redesign the ticket pricing to capture some of the revenue from the resale market. At the very least he can take home more money; at best he can make the restaurant bigger and increase capacity till ticket prices fall to reasonable levels.
There a solution that gets Achatz and Kokonas more revenue: an auction. The Cheap Talk team is clearly the obvious crew to consult on the auction. Roger Myerson won a Nobel Prize for his work on auctions, Jeff has dabbled and so have I. I know I’d be willing to work for a table for two at either Next or Alinea and I bet Jeff would too. Roger, I can’t speak for, but in my experience he is always willing to try new things and experiment. So, how about it? We are just up the road and can pop down anytime.
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April 11, 2011 at 11:08 am
Assorted links — Marginal Revolution
[…] times?3. Econometrics blog, by Dave Giles.4. How to read more after your new baby arrives.5. The new Grant Achatz restaurant pricing system.6. Let’s generalize the school nurse. Be The First to Comment Cancel replyLeave a CommentName […]
April 11, 2011 at 1:00 pm
brian
making tickets non-transferable is easy. take the patron’s name when the ticket is sold and ask for a driver’s license or cc when she shows up. what is less clear is if Next would want to do this. choking off the secondary market eliminates the option value of reselling if you find you can’t make your reservation. so willingness to pay will be lower. but they seem to be undercharging anyway, and everybody is in favor of making like harder for professional scalpers.
April 11, 2011 at 1:06 pm
Steve
I like the exchange idea for happy hour drinks. Set a few base prices, but allow everything to float on an exchange. The booms and busts should ensure you go through all types of alcohol, not just a single beer or mixed drink.
April 11, 2011 at 1:33 pm
k
why not randomize who gets to be first?
let’s say there are a hundred tickets, why not sell 500, and then randomize amongst these to select the top 100
?
April 11, 2011 at 3:25 pm
Nick Kokonas
Thanks for writing about Next on your blog… however, I thought I would clear up a few things.
1. We would far prefer that the tickets be non-transferable. However, if you make them non-refundable, then they must, by law, be transferable. One can easily understand the legal logic of that… and we honor the ability for ticket holders to transfer the tickets.
2. “At best he can make the restaurant bigger…” Well, that is absolutely not possible. We could have built a 300 or 500 or 1,000 seat restaurant — we were not short of start-up capital in choosing to build a restaurant that seats 64 and serves 100 per night. Quite simply, supply at this level is inelastic. You cannot do what we do in a kitchen and with service at a larger restaurant. If you look at the 100 best restaurants in the world on any list — or the Michelin 3-stars — you will find that the vast majority have seating in the range of 50 to 70. There is a reason for that. Quality is difficult to achieve on scale in this industry. So we cannot really increase supply.
3. Since we have universally high demand right now, the question is why don’t we flatten the pricing towards the top of what the market will pay? There are a few reasons for this, mostly having to do with customer service and the hospitality industry. Simply, we never want to invert the value proposition so that customers are paying a premium that is disproportionate to the amount of food / quality of service they receive. Right now we have it as a great bargain for those who can buy tickets. Ideally, we keep it a great value and stay full.
4. randomizing tickets or a ticket lottery is something we considered, but it never feels fair to those who don’t get a ticket — they always think the fix is in. This mirrors trying to make a normal reservation at a really top restaurant — you talk to someone only to feel that there is no way they are really booked 3 months out at 10 PM. At least now when customers get through to our calender they can see real availability in real time… totally fair.
April 11, 2011 at 5:20 pm
Sandeep Baliga
Nick: Thanks for your comment.
My main point is related to your point 3: Given the excess demand for the limited number of seats, many diners are not actually getting the value proposition you would like to give them if on average they are paying $1000 for a dinner for two. In that circumstance, no-one would blame you if you made the money instead of scalpers, particularly if you did something useful with it. That is why I suggested expanding the restaurant but I totally accept your point 2 that this is impossible while maintaining quality. If you want to give it to charity, to start a foundation to teach disadvantaged kids how to cook or whatever is close to your heart, that surely dominates just giving up the money to random lucky people who sign up and sell tickets for profit on Craigslist. And given you have software already, I bet it would be pretty easy to program a simple auction.
Alternatively, you might want to give a refund to the diners to eliminate the premium diners end up paying. This would require more complex auction rules and take some thinking through.
Sandeep
April 11, 2011 at 5:03 pm
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[…] How to Increase Revenue at Next Restaurant « Cheap Talk […]
April 12, 2011 at 5:46 pm
Next Restaurant: pricing and ticketing innovation redux « Knowledge Problem
[…] pricing, why don’t they set up a secondary market auction themselves? My Kellogg colleague Sandeep Baliga wondered the same thing yesterday at Cheap Talk, and then Jeff Ely picked it up and ran with it later in the day at Cheap Talk (note also that Nick […]
April 14, 2011 at 5:23 pm
Restaurant Sells Tickets. Scalpers Jump In. Economists Go Wild. | Bailout and Financial Crisis News
[…] likes the basic idea of selling tickets at different prices for different times. He writes: This is classic profit-maximizing price-discrimination. At times where demand is high, charge a […]
April 17, 2011 at 10:18 pm
Maximizing Consumer Surplus Part I: Complete Rationing « Cheap Talk
[…] week, in response to our proposal for how to run a ticket market, Nick Kokonas of Next Restaurant wrote something interesting. Simply, we never want to invert the value proposition so that customers are paying a premium that […]
April 18, 2011 at 11:25 pm
Maximizing Consumer Surplus Part II: Compromising « Cheap Talk
[…] or an auction. Neither of these mechanisms seem to fit what Nick Kokonas was looking for in his comment to us and so we have to go back to the drawing board […]
May 16, 2011 at 9:07 am
Next Restaurant Pricing Scheme Continues To Fascinate « Cheap Talk
[…] the Daily profiles Next Restaurant and their fixed-price online reservation system. As we blogged before, the tickets sell out in seconds and there is a huge resale market with $85 tickets selling […]
September 6, 2011 at 10:21 pm
lulu233
I agree with your CD Release Jun 17th @ Gowanus Ballroom | Verismo, good post.
February 17, 2012 at 11:54 am
Next Restaurant Adopts Auction Scheme « Cheap Talk
[…] turned out to be extremely successful with resale prices of the tickets running into thousands. Why not just auction off the seats – that is what very economist would say? It turns out that Nick Kekonas and Grant Achatz do not want to make too much money and want […]
June 14, 2012 at 11:12 am
Indransh Gupta
http://turnbussines.blogspot.in/2012/06/normal-0-false-false-false_13.html
February 11, 2013 at 10:39 pm
Big News « Cheap Talk
[…] to be a revolutionary way to sell tickets to sporting events (and someday theatre, concerts, and restaurants…). Starting today it is in effect for two upcoming Mens’ Basketball games: The February […]
March 28, 2013 at 9:18 am
Purple Pricing | Fifth Estate
[…] to be a revolutionary way to sell tickets to sporting events (and someday theatre, concerts, and restaurants…). Starting today it is in effect for two upcoming Mens’ Basketball games: The February 28 game […]
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