Abstract
The restaurant business is a big business. In 2010 there were 945,000 restaurants in the United States employing 12.7 million people and with a total revenue of $580 billion. The restaurant business is also a risky business. Although the percentage varies from year to year, about a quarter of new restaurants fail in their first year and between 40–60 percent fail within the first three years of operation. It is a highly competitive business—diners in urban areas such as New York, Paris, and Tokyo have thousands of restaurant options to choose from. Setting the right price can be critical to success—if prices are perceived as too high, customers will not patronize the restaurant, but if they are too low, the restaurant will go out of business.
This chapter discusses some of the challenges of restaurant pricing and reviews methods that restaurants use to set prices. We begin with a brief history of restaurants and present how restaurants are currently classified. In section 6.3, we discuss the different approaches that restaurants use to set prices today. Next, we discuss the psychology of restaurant prices and how it influences menu design and give an overview of how revenue management is applied in the restaurant industry. We conclude with a short discussion of opportunities for the future.