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OpenTable Reconsidered

Is what's convenient for diners a bad deal for restaurants?



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While OpenTable might initially appear to be mutually beneficial proposition, Pastore argues that the company's fees are more prohibitive than you might imagine. In his essay, Pastore estimates that, once you factor in all the different fees, a party of four that's booked through OpenTable will cost the restaurant $10.40 on average — a number that, on the face of things, doesn't appear too unreasonable. But, as Pastore notes, the industry-wide average profit margin for restaurants is only 5 percent. Assuming that those four diners spent a total of $200 in food and drinks, before tax and tip, then the restaurant's actual profit on that table would only be $10 — an amount that's entirely eaten up by the OpenTable fees. It's worth noting, too, that there's no distinction made between breakfast, lunch, or dinner, nor is the per-diner cover charge any lower for restaurants that aren't quite so high-end. So if the total bill for four is only $80 or $100 dollars, then it's easy to see how a restaurant might end up losing money on that transaction.

Pastore's original estimate was based on a calculation that Jonathan Wegener, a New York-based technology and marketing blogger, made by analyzing the data that OpenTable released when the company went public early last year. Using the company's 2008 figures, Wegener simply divided the average amount of money a restaurant pays OpenTable each month ($515) by the average number of "new" customers who are seated via OpenTable on a monthly basis (197, which doesn't include customers who book through the restaurant's own web site, since those would have ended up eating at the restaurant with or without OpenTable). Based on that calculation, Wegener determined that it costs a restaurant $2.61 for each new customer that OpenTable sends its way — Pastore simply multiplied this by four to arrive at his $10.40 figure.

Part of the difficulty, though, lies in determining what exactly makes a customer "new," since so many diners in OpenTable-saturated markets like San Francisco routinely use the site to make the vast majority of their restaurant reservations, even for places where they may be regular customers. OpenTable estimates, conservatively, that in order for a restaurant to break even on its investment, only 10 to 15 percent of the diners who book through OpenTable need to be truly "incremental," meaning these are diners who would not have eaten at the restaurant if they didn't see its listing on OpenTable. But if you even change Wegener's calculation using that lower percentage, then all of a sudden the restaurant is paying between $17 and $26 for each diner that's truly "new" — an amount that seems outrageous by any standard.

Coi's Daniel Patterson sums up the challenge presented by OpenTable's fee structure another way: "If you're getting extra customers whom you would not otherwise, you can't really apply the same economics as you can for money towards the rent or this or that. You have to look at the raw costs."

In other words, applying that same 5 percent profit margin, if a restaurant pays OpenTable roughly $600 a month, or $7,200 a year — as Patterson does at Coi — then OpenTable would need to generate not $7,200 but rather $144,000 in additional revenue annually in order to just break even, and earn no profits ($7,200 is 5 percent of $144,000). Plus, Patterson adds, 5 percent is actually generous in this economy: "If you're making 5 percent, you're like a hero."

Then again, one could argue that a restaurant might lose business if it wasn't listed on OpenTable. But Patterson isn't so sure. "I don't know," he said. "I do know I wouldn't lose $140,000 a year in business."

However, Patterson concedes that, because of the reputation he's built up over the years, he has the luxury of a built-in customer base. Chances are that restaurants like Coi and Plum will have little trouble filling tables regardless of what system they use — after all, The French Laundry famously keeps one table available via OpenTable each day, but it's not as though chef Thomas Keller is going to be hurting for business if he decides to go in another direction.

But a less popular restaurant, or one that has less to distinguish it from its competitors, might rightly fear that a departure from OpenTable would lose them enough customers that it would be a devastating blow. It's for this reason that Mark Pastore argues that restaurant owners feel as though they're "held hostage" by OpenTable.

According to Mike Dodson, OpenTable's senior vice president, the key to the whole thing is the incremental — or "new" — diners who are being delivered. He likens a restaurant with empty tables to an airplane that has empty seats: "At some point, they're going to take whatever they can take ... because they've got the fixed expense of that plane taking off."

Dodson says that Patterson's and Wegener's calculations don't consider the fact that many of a restaurant's costs are fixed — the lights are already on, the food has already been purchased (and in some cases might even get thrown out if it isn't used up quickly enough): "All of those things are going to happen anyway, so if OpenTable can help deliver a few extra diners a night that are incremental, it'll pay for the balance of that thing," he said.