OpenTable and its discontents

By Felix Salmon
December 11, 2010
isn't a fan of OpenTable:

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There’s a very swanky restaurant in San Francisco called Coi (pronounced kwa). Its owner isn’t a fan of OpenTable:

Daniel Patterson uses OpenTable at Coi, a restaurant he owns in San Francisco, and RezBook at Plum, his newer restaurant in Oakland. He regards OpenTable’s fees as excessive. “It’s just not where I want to spend the money,” Mr. Patterson said. His opinion is of particular interest because Coi is a two-Michelin-star restaurant where diners spend $150 to $160 a person. Mr. Patterson says the $8,000 that he spends annually on OpenTable is “a big chunk of what we make.”

In fact, diners spend a lot more than $150 to $160 per person at Coi. According to the restaurant’s OpenTable page, OpenTable reservations are taken only for the main dining room, where there’s a compulsory 11-course tasting menu. The price is $135, plus 9.5% tax (welcome to San Francisco) plus an automatic 18% service charge. Before having a drop to drink, that’s $172 per person as a bare minimum. If you’re ordering the $95 wine pairing, that gets you up to $293. (I’m assuming here that the tip is calculated on the pre-tax total, which some restaurants don’t do.) And if you fancy cocktails or coffee or cult California cabernets or 1907 madeira at $122 per glass, then of course they sky’s the limit.

Coi’s dining room has 28 seats, which means that the restaurant’s OpenTable bill works out to roughly 80 cents per seat per day. Compared to the $300+ that those seats are generating, not to mention the money going in to all that molecular gastronomy, I find it hard to characterize those 80 cents as “a big chunk” of anything much.

It’s worth doing the math, here: OpenTable charges $199 per month plus $1 per seated diner.* (It’s only 25 cents per diner if you book through the restaurant’s website, but Coi’s flash-based website, which can’t be viewed on the iPads or iPhones of San Francisco’s techy elite, makes that as difficult as possible.) If Coi is paying $667 a month to OpenTable, that means that OpenTable is seating 468 of its diners every month — in a restaurant which would be completely sold out every night at 850 diners per month. Clearly, OpenTable is popular among Coi’s patrons. But Patterson doesn’t get it:

Coi is a busy establishment, so Mr. Patterson does not look to OpenTable to bring in customers. He is concerned only with making the customer’s experience as enjoyable as possible. “Customers can tell the attention to food and to service — that’s palpable,” he says. “But the way you make a reservation?” He doubts that is a selling point.

This is ludicrous: of course it’s a selling point. If I’m out with friends and we decide we’d love to go to Coi next month, it takes no more than a minute to make a reservation using the OpenTable iPhone app: it’s incredibly easy to see what dates and times are available, and to select something convenient for all of us. Without OpenTable, we have to do an enormous amount of coordination — waiting until the restaurant is open, phoning them up to see what’s available, checking with our friends to make sure they can all do that date, phoning back the restaurant to confirm, sending round the details via email, etc. If Patterson wants to make his customers’ experience as enjoyable as possible, why on earth would he force them to go through that rigmarole?

On top of that, OpenTable makes it much easier for diners to provide feedback to the restaurant; that alone should be worth something to Patterson. (Not to mention all the time that his staff doesn’t have to spend answering phones.) So how come he’s so adamant about his opinion that OpenTable is worth very little and is overpriced? Patterson, more than most restaurateurs, is in the business of providing excellent service and charging commensurately. It’s weird that he fails to recognize and appreciate that model in OpenTable.

*The NYT says that OpenTable charges “an average of $270 a month for the terminals and table-management software”, not $199 a month; I’m not entirely sure where the discrepancy comes from.

Update: Some fantastic comments on this post. A few points worth adding:

Firstly, OpenTable helps, at the margin, newer restaurants as opposed to more established ones; emptier restaurants as opposed to fuller ones; and restaurants on side streets as opposed to those in high-rent locations. (Thanks to rjackson for that insight.)

Secondly, the psychology here is worth looking into. Restaurant owners dislike OpenTable for two main reasons. They get a big bill every month, which can be hard to pay; and they look at the astronomical market capitalization of the company and think it’s all coming out of their own pocket. In fact, it isn’t: a lot of the OpenTable bubble is due to the value of its email list, both in terms of advertising revenue in emails and in terms of Groupon-like offers. But restaurateurs often don’t understand that, or understand that OpenTable might simply be massively overvalued.

And thirdly, @mvaughan says that OpenTable has to be much better at communicating helpful analyses to restaurants. OpenTable’s software can be extremely powerful, but at the same time many restaurants use it for  nothing but reservations, with all that potential added value being neglected. OpenTable should be more proactive in communicating the other data that the service collects, and encouraging restaurants to leverage it as much as possible.

Update 2: OpenTable clears up the $199 vs $270 discrepancy:

The $199 monthly subscription fee includes our Electronic Reservation Book software, unlimited upgrades, the touch-screen computer system, and 24×7 IT help desk support. The average monthly fee per restaurant is higher ($270) because many elect to subscribe to add-on products such as software licenses for their own computers, additional Electronic Reservation Book systems, and POS integration.

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Comments
14 comments so far

I bet they view it as expensive relative to web hosting costs not cheap relative to staff. If all they are getting is good software what they are buying seems quite expensive relative to what other web hosting software costs. After all, a new version of windows costs like a billion dollars to develop but they charge a lot less than open table does for their software. Ditto for Oracle databases.

Presumably there are some advantages to being hosted on open table that are separate from the quality of the web experience there because of the traffic of hungry people with disposable income they can send a restaurants way.

Posted by OneEyedMan | Report as abusive

Flash-based websites are an utter abomination. It amazes me that Steve Jobs is the only guy in the industry who has figured this out.

Posted by maynardGkeynes | Report as abusive

maynardGkeynes, amen brother

Posted by Danny_Black | Report as abusive

There are less expensive dining options at Coi besides the 12-course dinner in the dining room. There is an a la carte menu in the lounge that allows for a more moderately priced meal (if $160 could be considered moderately priced). So I don’t think your calculations are accurate.

That being said, I have to laugh at the owner’s complaint about $8K per year being a big chunk of what they make. I have to guess that their annual revenue is in the millions, which makes the cost of OpenTable less than 1% of their revenue, and probably just a small fraction of that 1%.

In the owner’s defense, though (I am all over the place on this issue), I think the service is overpriced. It shouldnt’ cost that much, but since there’s not a lot of competition for OpenTable, they can charge what they want, especially in SF, where lots of restaurants use it – I use it when I visit, and don’t like having to call for a reservation, so it does impact where I eat. However, I never use it to select a restaurant, I almost always go there from the restaurant’s website, which directs me to OT to make an on-line reservation (btw, speaking of restaurant websites, Coi’s is horrible, it wastes my time. I hate waiting for useless pages to load so I can get to where I want to go, static pages are great for restaurants).

$8,000 per year seems very high for the amount of software required and the service provided. If a company were to develop a similar web-based reservation system, the software might cost $5,000 to buy, with $500 annual upgrades (I think that would be very profitable for the developer). There is no restaurant that would need more than a virtualized server that would cost $30 a month (at most), so this could be provided for a lot less than OT. The problem lies with venture capitalists, who have completely distorted the software industry in the US. They don’t like investing in companies that sell software, they like investing in companies that rent software. At high prices. They have come up with this absurd idea that software development is more valuable than any other kind of engineering, and deserves a recurring revenue stream. So they only fund companies that will sell services instead of software. At some point, OT might have real competition, and their prices will drop, but for now, it’s pay their price or hope customers will call.

Posted by OnTheTimes | Report as abusive

I guess this is just the season to complain about OT. Mark Pastore of Incanto wrote an essay about why his restaurant doesn’t use OpenTable. I disagree with his take: OpenTable has led me to a number of places I might not otherwise have tried, including some where I became a repeat customer and recommender via word-of-mouth. For a restaurant that is not already a local institution, this kind of publicity is priceless. Sure, you can get some of that from Yelp or Google Local, but the ratings and reviews on those aren’t terribly trustworthy, and they frequently point you to places that no longer exist. OpenTable, like Zagat, is curated. Which makes a big difference. So, I get why an owner at an ultra-high-end place may not think OT is a good fit, and chafe at their pricing; but I think OT is a good thing for places like, say, Indigo and Triptych, that aim to provide good food and service, but not for Michelin star territory; places where the tab is maybe $35-50 per person, not $100+. These are both places I’ve dined at over a dozen times each in the past five years, made recommendations to others, and in the case of Triptych, taken a huge birthday party group. Both are places I tried originally because they popped up on OT when I was looking for a place to eat near some event I was going to.

Posted by Auros | Report as abusive

Oh, and BTW, regarding competition for OpenTable, I just booked my first reservation through VillageVines, a new service that appears to be trying to combine some Groupon-like features, with a restaurant reservation system. Rather than simply buying a coupon that can be used any time, you book a reservation, and the reservation comes with a discount.

Posted by Auros | Report as abusive

Unfortunately, many restaurant operators have a hard time distinguishing fixed and variable costs so the ROI for OpenTable is hard for them to figure out. OpenTable is an absolute bonanza for restaurants, here is why. First, fine dining restaurants pay large rents for high traffic locations because they depend in part on walk-in traffic and they need the visibility. With OpenTable mobile apps, diners can still locate restaurants just as easily using GPS technology and OpenTable and while the restaurant can still be in the same neighborhood, they can obtain much cheaper rent by being a block away from the highest priced location. For an example of this, search for “Ludo Bites” for a dining idea that incurs no fixed costs for rent and leverages OpenTable. Secondly, for the first time, restaurants can save on expensive local media which did little more than provide some branding and make the operator feel good. Even the editorial pieces in the newspaper or lifestyle magazine were of little help since the number of subscribers to those publications has dwindled to nearly nothing, hence the demise of print. If you want to bring in people with OpenTable, operators can offer 1,000 pt tables or run a Spotlight offer and be guaranteed to increase traffic, all for a variable cost. On balance, OpenTable is very inexpensive while at the same time giving restaurants an IT solution to managing their table turnover which makes the restaurant run much more efficiently and offers guest the convenience of making a reservation on their own terms, and not on the whims of restaurants who do a very poor job of answering the phone in the first place.

Posted by rjackson4 | Report as abusive

What is ludicrous is paying that much money for a dinner. It is the worst form of over-consumption, both literally and financially.

Who needs either the restaurant or the reservation service?

Posted by Lilguy | Report as abusive

What is the difference between not wanting to pay for Open Table and not wanting to pay for FT.com?

Posted by BigBadBank | Report as abusive

What you don’t point out is the psychological impact OpenTable has on restaurant owners who hadn’t previously paid those charges. Margins for restaurants are already bad, and so there’s a case to be made that certain restaurants don’t think they can afford OpenTable, but feel trapped using their service (in order to stay current and compete for business). After resto owners have paid the rent, the staff and basic bills, that monthly OpenTable payment is another giant fee they must pay (ever looked at a bank statement which has Amex/Visa/Mastercard merchant fees deducted from the account? One can become extremely resentful of the high percentage Amex takes – which is why a lot of establishments do not accept Amex). Amex is awesome to cardholders, but slams merchants. Restaurant owners want to extend services to their clients, they want their business to thrive. But the $200 monthly charge plus $1 per client could add up to something significant on a monthly basis, and it grates on owners who did not need to pay those fees a few years ago. It may be worth it, but I think OpenTable may need to do a better job serving the restaurants by giving them monthly analysis on how this is improving their business, not just setting up software and then grabbing a percentage of their profit for the foreseeable.

For the customer, it’s extremely user-friendly. I like using OpenTable. Last weekend we were able to search/find a restaurant with an 8:30pm reservation in a specific neighborhood (the East Village). Location and time were our priorities, there’s plenty of good places to eat – it was a matter of booking something for a Saturday night during that afternoon. This would have been next to impossible (and so time consuming) otherwise. OpenTable found the perfect reservation.

So although the customer experience is extremely good, I really think OpenTable should provide restos with helpful analysis and reports so the owners feel like they’re getting their money’s worth.

And, EARTH TO RESTAURANTS: quit using stupid Flash & music for your homepage. Your customers can’t navigate your site on different devices, and besides that – it’s SO annoying.

Posted by mvaughan | Report as abusive

Wow people really pay this sort of money for food? This is why it’s hard to take America’s financial woes seriously – $300 meals, 3 million iPads sold, etc. Cry me a river USA.

Posted by Mike.Gayner | Report as abusive

The restauranteur should regard Open Table’s fees as advertising expense. Whether or not it’s reasonable depends on how many diners it brings in, and that’s easily judged by the numbers.

I’d point out that the restaurant is paying a whole lot more in merchant credit card fees. On the other hand, as a diner I don’t see any need for Open Table. I used them a couple times, and quickly realized that it’s easier to just look up the number on the Internet and give the place a call. Besides, you can tell a lot about a place by the demeanor of the person who takes your call, so from my diner’s perspective Open Table removes information from the transaction.

Also, let’s not kid ourselves: One way or another, whatever the restaurant pays Open Table is going to be at least partly reflected in what I pay for the dinner. As a diner, I don’t think Open Table adds a single thing other than cost.

Posted by notfan | Report as abusive

By the way, these days you just do a Google search for the name of the restaurant, and the name and phone number will pop up. I very rarely look at the place’s website.

Posted by notfan | Report as abusive

There is very little chance that the owner of Coi knows or gives two hoots about the OPEN market cap.
I am pretty sure he sees the bottom line impact of OPEN and is gutted.
Since he is sold out and still employs someone to answer the phone, OPEN saves him no money and makes him no money.
Pre-OPEN he was making plenty of money and now with OPEN he is making $8k less.

But this is the genius of OPEN – customers expect it now (particularly in SF) so you HAVE to have it.
Welcome to the world of monopoly pricing. It hurts.

Frankly if he wants to save some $$ he should bin the flash and makes his website super iphone-friendly so he is only paying OPEN 25c not $1 for seated diners. Moron.

Posted by TinyTim1 | Report as abusive
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