August 21, 2014

Small Business Advice

Restaurants raise topic of charging for no-shows

Jerry Osteryoung | 5/20/2013
“Customers don't expect you to be perfect. They do expect you to fix things when they go wrong.” ~ Donald Porter, V.P. British Airways

Not long ago I met a client for lunch. We had agreed to sit in the restaurant’s private room so we could talk without anyone overhearing us.

When we arrived, we noticed all the tables in the private area had “Reserved” signs on them. When we asked the waiter where we could sit, he said anywhere was fine since the party of 16 that had reserved the room had canceled one hour before the luncheon was scheduled to begin.

Because of the cancellation, the restaurant incurred some pretty steep costs. It had to bring in additional staff and extra food to be sure it could feed and serve this large group, plus the other customers who would come in for lunch that day.

By canceling so late, the group made it impossible for the restaurant to redeploy its assets in a more efficient manner.

Now, emergencies happen and this is understandable. But when people cancel at a moment’s notice or with no notice at all, a restaurant incurs substantial costs it is unable to recover.

With other service providers — airlines, for instance — the customer forfeits the amount paid for the service when they are a no-show. This practice has not been widely adopted by restaurants, but there are many in New York and other big cities that charge their customers when they do not show up for their reservation.

In some of these cases, cancellations within three days of the reservation are considered no-shows, and customers are charged as much as $150.

A recent edition of The Economist addressed the issue of no-shows and reported how one New York restaurant is dealing with it:

“In January, Eleven Madison in New York began charging anyone who didn’t show up or cancel a reservation 48 hours beforehand $75 a head. Owner Will Guidara says the restaurant was losing eight to 10 people per night. He adds, ‘With the length of our wait list and how many people we’re turning away, it just became really difficult to say ‘No, no, no’ to so many people and then have people who were supposed to be joining us just not showing up.”

Since the policy has been in place, Guidara says he’s had to charge only a couple of cards a week.

While I do not disagree with the reasoning behind the policy, I’d suggest a better idea might be to impose a fee of $25 if a reservation is canceled within a 24-hour period except in the event of an emergency (e.g., death in the family).

Also, be sure patrons understand the terms of the reservation when they are accepted. Clearly, a restaurant would never want to charge for a no-show if the rules were not explained up front and the customer had not indicated they understood.

At the heart of this issue is the point I really want to make — while customer service is critical, it cannot be given away if the costs become prohibitive.

Now go out and make sure that, while you continue to provide outstanding customer service, you make sure the cost of doing so is not unreasonably high.

You can do this!

Other small business advice columns from Dr. Osteryoung are here. Note: Articles older than 30 days require registration (it's quick and free).

Jerry Osteryoung is a consultant to businesses - he has directly assisted over 3,000 firms. He is the Jim Moran Professor of Entrepreneurship (Emeritus) and Professor of Finance (Emeritus) at Florida State University. He was the founding Executive Director of The Jim Moran Institute and served in that position from 1995 through 2008. His newest book co-authored with Tim O'Brien, "If You Have Employees, You Really Need This Book," is an Amazon.com bestseller. He can be reached by e-mail at jerry.osteryoung@gmail.com.

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