Opinion

Felix Salmon

The value of OpenTable

By Felix Salmon
November 15, 2010

I’m a big fan of OpenTable as a service. I’ve made 60 OpenTable reservations in total, using both the website and their iPhone app, and I haven’t had a single bad experience: the resy has never been lost, I’ve never had an inordinate wait for a table, and it’s extremely easy to share the reservation information with my fellow diners. There’s a few things I’d like to see added, like reservations I’ve been invited to showing up on my upcoming-reservations page, but in general OpenTable does one thing from the diner’s perspective and it does it extremely well.

If Mark Pastore is to be believed, however, restaurants hate OpenTable nearly as much as diners like me love it:

A few months ago I took an informal survey of several other restaurateurs here in San Francisco and in New York, all of whom offer seats through OpenTable, asking them about the value of OpenTable from the restaurateur’s perspective.

Only one of the dozen or so I spoke with said he felt that OpenTable increased the value of his restaurant and that he wouldn’t imagine opening a new project without it. The rest were less than happy. The recurring themes were the opinion that OpenTable took home a disproportionate (relative to other vendors) chunk of the restaurants’ revenues each month and the feeling of being trapped in the service… The GM of one very well known New York restaurant group, which spends thousands of dollars on OpenTable each month, put it to me this way, “OpenTable is out for itself, the worst business partner I have ever worked with in all my years in restaurants. If I could find a way to eliminate it from my restaurants I would.”

Pastore says that the economics of OpenTable can be devastating for the notoriously difficult restaurant business:

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).

At this point it’s worth digging out that famous short thesis on OpenTable. In the second quarter, OpenTable seated 15.6 million diners across 14,128 restaurants, and made total revenue of $22.45 million, including revenue from installing its software in new restaurants. That’s $1.44 per seated diner, or $5.76 per 4-top, all included. (The actual marginal revenue that OpenTable gets from reservation revenue rather than fixed subscription revenue is 69 cents per seated diner, or $2.76 per 4-top.)

In order to get to a cost of $10.40 per “incremental” 4-top, you have to think that OpenTable has value only insofar as it drives diners to a restaurant who would otherwise not have dined there; that’s certainly the mindset that Pastore seems to have. But OpenTable can, should, and does have much more value than that. For one thing, it improves the quality of the diner’s experience: we diners no longer have to worry whether the reservation we thought we made will be honored when we get to the restaurant. On top of that, it’s reasonable to expect that a decent restaurant will remember if we’re vegetarian, or we’re allergic to garlic, or something like that, in a way that’s much harder when we’re just another name.

Much more importantly, however, the OpenTable software can be hugely valuable to restaurants’ own bottom line, even if they would be sold out every night without it. Dan Simons of Founding Farmers Fathers, a restaurant which spends $6,000 per month on OpenTable, says in response to Pastore that once he started taking advantage of its software capabilities, he managed to increase sales by 15%.

Simons is talking his book: he’s a principal of a company which advises restaurants on how to best use OpenTable’s software. But it makes intuitive sense that armed with the abundance of rich and restaurant-specific data that OpenTable’s software provides, a quantitavely-minded restaurant manager would be able to find all manner of opportunities to improve diners’ experience and maximize the restaurant’s sales. (These two things are much more likely to work with each other than against each other.)

On the other hand, it also makes intuitive sense that most restaurants lack quantitavely-minded managers who are willing and able to take advantage of OpenTable’s rich data. For them, OpenTable really is little more than a way of getting extra marginal diners in the door: after that, they do what they’ve always done, and they’re not going to change their ways any time soon. For those people, it’s easy to see why they might be disgruntled at paying large subscription fees for services they never use.

The best-case scenario here is that, armed with OpenTable software they pretty much have to pay for anyway, restaurateurs will increasingly find themselves making full use of it, becoming more efficient and more lucrative businesses as a result, running more enjoyable places to dine. Alternatively, as the short thesis puts it, OpenTable will find that its business “has absolutely no barriers to entry,” and copy-cats will do to it what they did to Tivo, destroying it with an inferior but cheaper product.

But the main lesson for OpenTable from both Pastore and Simons is that their software is, right now, far too difficult to use to its full potential. Now that the company is valued at over $1.5 billion, it should have no problem paying some very smart developers to improve the user-friendliness of its offering, not only for diners but also for restaurateurs. With luck, that will help to reduce the amount of resentment the company faces in the industry, by making OpenTable service something which more than pays for itself, rather than something which is an expensive necessity. After all, I’m sure that while on one level OpenTable would love to become the Ticketmaster of the restaurant world, it would love to do so without becoming nearly as hated.

Update: As proof that restaurateurs tend not to be the most web-savvy of businesspeople, one reader offers this, via email:

One thing I’ve noticed – restaurants never take advantage of the feedback features in open table.  I’ve probably submitted feedback on about 7 or 8 restaurants, writing specific notes about something I particularly liked or didn’t like, using their system that says that the info and my email address will be shared with the restaurant.  I’ve never gotten an email back – either to apologize for bad service or to thank me for the kind words.  That’s just nuts, a huge opportunity missed by the restaurants.  At the very least they should be asking me to join an email list if I said good things.

Maybe it’s the open table technology itself that’s bad, but I think it’s probably just as much that the restaurant business just doesn’t get the new online world we’re living in.  If I was a restaurant I’d be checking blogs and twitter and open table feedback every day, offering my fans invites to special dinners (with bigger mark ups) and offering the haters a discount if they come back and give it another try.  My guess is that restaurants are still living in a world where the local restaurant critic’s review matters 100 times more than anything else – just look at their awful flash-based websites that you can’t even access on an iPhone.  If I’m on foot, it’s easier to find a restaurant’s address on OpenTable than it is on their own sites.

Update 2: OpenTable itself weighs in, saying exactly what its fees are: $199 a month, and then $1 per seated diner if you book through OpenTable’s website, or $0.25 per seated diner if you book through the restaurant’s own website. And there’s also “a web-based product that caters to restaurants that don’t require all of the operational benefits of our Electronic Reservation Book”. But in any case, if you want to book a table at a restaurant, it’s better for the restaurant if you do it through their own website rather than through OpenTable.com.

Comments
5 comments so far | RSS Comments RSS

I don’t get it. If you like the restaurant, why not make reservations directly with them and allow them to keep the profit?

It may make the difference of their being able to stay in business.

Posted by MarkWolfinger | Report as abusive
 

I don’t live in an area served by OpenTable, but I’ve used it when visiting cities such as Boston and SF on business. When you don’t know the city well, OpenTable is one stop shopping for getting together a diverse group of people, choosing a cuisine and restaurant, and ensuring that reservations (almost always same day) are available when you need them.

Not using OpenTable under such a scenario is simply inefficient.

Posted by Curmudgeon | Report as abusive
 

The irony is that Incanto now uses OpenTable!

(You can see for yourself: with FireFox, go to Incanto’s website, click “Book Online;” right-click on the shaded area that asks “Select Desired Date, Time and Party Size;” then click on This Frame -> View Frame Info. You will see the following link: http://res.guestbridge.com/r.asp?SiteID= 497. Guess who owns guestbridge.com?)

Restaurants *love to hate* OpenTable very much like corporate IT buyers love to hate Microsoft.

Posted by FAH | Report as abusive
 

“consider that the average profit margin, before taxes, for a U.S. restaurant is roughly 5%.” Mark Pastor is crazy to use that 5% figure when discussing open table because open table sales should in theory be mostly incremental. Like Captian Kirk says… unwise to let a perishable good (the table) go unsold.

Food is the only variable cost at a resturant… that gererally makes up a shockingly low 20% of total cost. On a filled table that was going to go unused the pre-tax Margin is 80%. Now that only holds true for tables that would otherwise been wasted… if they would have been sold to non-res diners who walk in and check the wait time then you have a problem.

That 5% profit figure is bogus to start with considering that privately held resturants (as a group) are among the biggest book cookers out there… it’s unfair to paint a vast industry with that brush… I’m sure there is a huge population of honest operators… but I can tell you from direct knowlage that there are pleanty that “pretty much break even” every year.

Posted by y2kurtus | Report as abusive
 

That 5% figure probably averages in thousands of small diners and burger joints from coast to coast. I would bet my last dollar that more upscale urban restaurants (the sort that OpenTable serves) have considerably larger margins.

On a separate note, the software does need a lot of refining: log on and pick a restaurant, and then try to find the reviews!

Posted by jpdemers | Report as abusive
 

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