Did you know how much it costs if you don't show up for your booking?

Customers assume restaurants are just in the business of selling food. However, they're also in the business of renting chairs to people who eat food. Ideally, they want all seats occupied from the beginning to the end of service with hungry and thirsty guests.

Many restaurants accept reservations. However, their revenue can be limited by having empty seats outside the most popular bookings times, usually around 7pm-8pm.

They may try to work around this with two sitting times, such as 6.30pm and 8.30pm. But this puts pressure on service with the restaurant potentially being filled twice, stressing out the front of house service team and kitchen crew.

MAARTEN HOLL/FAIRFAX NZ Mike Egan gives us an insight in to the hospitality business.

Other strategies to maximise occupancy are 'meal deals' only available off peak. This dynamic pricing is how airlines and hotels work, however they have complex algorithms that constantly update pricing. A restaurant usually just comes up with a simple early dining offer.

The major issue with reservations is no-shows, which have a major impact on the profitability of the hospitality industry. Third party restaurant reservation websites like Dimmi in Australia and Open Table in the US claim no-shows account for 4 to 20 per cent of all bookings made on their sites.

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This is unacceptable, and they're now banning users who don't show up frequently. (Though they're only identified if the restaurant can be bothered reporting them.) Banning also doesn't make up for the lost revenue, and it seems easy to re-register with a new username.

And article on the Sydney Morning Herald recently reported Dimmi banned 3000 users who had been consistent no-shows.

Restaurants constantly try to mitigate loss of revenue with re-confirmation phone calls or emails, taking up significant resources and it's not an actual guarantee diners will turn up at the agreed time with the same number of guests they booked for.

There can be of course genuine reasons for not honouring a booking, but with such small profit margins any loss of revenue can have a major impact.

However, restaurants are more commonly adapting their business model to cope.

TICKETING

The same way you would buy a ticket for a show or movie, you prepay to dine at a certain time and with a minimum spend. If you don't turn up they don't care - you've already been charged and have agreed to a no refund policy.

This works well for high demand restaurants where the number of potential patrons that may balk at this are more than covered by large numbers of customers who are happy with this system as they have every intention of honouring a reservation.

Nick Kokonas, co-owner of the famed Chicago restaurants Alenia, Next and Aviary has developed a booking system called Tock, which also features dynamic pricing. So for instance, booking a table at 5pm on a Tuesday costs less than a sittng at 7.30pm on Saturday.

Before this he was losing $260,000 a year on no-shows, while paying $140,000 in wages for reservation staff. Tock seems to be working very well for them and they're selling the software to other restaurants. Over 1000 have signed up and unlike third party booking systems they don't charge the restaurant any fees.

NO RESERVATIONS

The other option, of course, is to say no to reservations, a move becoming much more common.

This policy fits well with the busy lives of the modern Kiwi as often they don't want to be tied to an exact day and time to dine. They may not even be planning to eat out until dinner time arrives. If you make last minute plans you will always get a meal, but you may have to wait and have a drink and snack in their bar.

No reservations also means less pressure on prices - revenue is maximised and the cost of no-shows and running a reservation system is removed.

MIX IT UP

There is a third model, a hybrid of reservations for a portion of the restaurant while saving some seats for walk-in guests. Two MBA students at Wharton School recently found this model the best in a paper called Pricing Restaurant Reservations: dealing with No-Shows.

However, for it to work well, it requires a no-show penalty in return for what they called the "no-wait guarantee". They also concluded that when the restaurant faced a larger potential market, it should allocate less capacity for reservations and then when it exceeded a certain threshold of customer demand it is better to stop reservations.

Whilst in an ideal world every reservation would be honoured and restaurants would all be full from open to close this is not the reality and they need to use systems and policies that give them the best opportunity to collect as much rent as they can from their chairs.

* Wellington restaurateur Mike Egan is the President of the Restaurant Association of New Zealand.