By October 10, 2006 0 Comments Read More →

Limiting Customer Options = Bigger Profit?

The Prix Fixe Is In – WSJ.com:

Interesting article about the fine dining industry in the WSJ last week. A few ideas reminded me of lean concepts — resourcefulness, making use of “scraps,” and doing so in a way that’s priced at what the market values. Instead of throwing away fish scraps, the chefs manage to turn it into “value” by rethinking how they create meals. Instead of ordering ala carte from a menu, more restaurants are offering “prix fixe” menus, where you, the customer, have limited or no options.

The most expensive option for diners at Dallas’s critically acclaimed Abacus Restaurant is a nine-course tasting menu that goes for a fixed price of $90. One of the menu’s main ingredients: fish scraps.

The scraps are leftovers after Abacus cuts up fish into larger a la carte portions. They could be thrown away. Instead, chef Tre Wilcox turns them into culinary gold: minute portions for his tasting menu. The menu, which changes frequently and recently included Kobe beef carpaccio and Alaskan king crab ravioli, yields about a 75% gross profit margin, the difference between his menu price and ingredient costs, says Mr. Wilcox. That’s compared with a 66% margin on his a la carte menu.

It’s somewhat uninutive — limiting choices for customers can sometimes be appealing given that you put some thought into “packages” of what those choices should be. Conventional wisdom is that more options are good — offer any permutation of options that the customer might want, but that adds cost. Simplifying the menu reduces cost for the restaurant:

Chefs can buy fewer ingredients for the more limited menus and save money ordering them in bulk. In the kitchen, it can mean fewer staff, fewer stations — and the chance to use food that might otherwise be thrown out. At the table, revenue becomes plentiful and predictable as customers spend a substantial amount each time they dine.

Instead of offering millions of options (ala Dell), can you offer a more limited number of options that represent your “expert” judgment about what customers might want? Some PC manufacturers do just that, offering a limited number of options — a basic PC, a business PC, a gaming PC. Do all customers really need to specify their product to the n-th degree? Maybe not. That’s the challenge of business — you can’t always apply conventional wisdom or copy what others do.

Any thoughts on whether limiting options for customers can be justified as a “lean” practice or the right thing for the business? The restaurants with prix fixe menus are making better profit margins. Do customers suffer as result? Not if you’re in the right market for it.

At Boston’s newly acclaimed French spot, the Craigie Street Bistrot, for example, a three-course prix-fixe meal is priced at about $70, while ordering an appetizer, entrée and dessert separately adds up to $55. And diners who request the six-course tasting menu at New York’s famed Davidburke & Donatella will pay $85, or 27% more than ordering a three-course meal a la carte. The gap becomes much wider for people who typically skip dessert and order only a salad and entrée.

It’s a nice business to be in when something that costs you less as a business is valued higher by the customer.

A close look at the economics of more than a dozen restaurants’ fixed-price offerings, as well as interviews with consultants, economists and leading chefs, suggests that contrary to what some diners might think, going for the prix fixe isn’t always a bargain. Indeed, these menus can cost 20% or more than ordering a la carte.

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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