OpenTable: A New Reservation Every Two Seconds
Open-Table was the first mover into the online and mobile restaurant reservation space and is still the industry leader. The space is strongly influenced by network effects, which OpenTable is hoping to leverage to capture even more value and cement its spot at the top.
Product description
OpenTable is a website and app that allows diners to make restaurant reservations for free. There are three ways to make a reservation: (1) the OpenTable website (www.opentable.com); (2) the OpenTable app; and (3) the OpenTable platform on the restaurant’s website. When Chuck Templeton founded OpenTable in the late 1990s, the service only included San Francisco restaurants. However, there are now over 32,000 restaurants listed across the globe. Each month, more than 17 million diners worldwide use it to make a restaurant reservation.
Basic revenue model
OpenTable brings in revenue through subscriptions and reservations. For subscriptions, it charges restaurants a monthly fee to use their software. The software does more than just manage reservations; it is a comprehensive platform that manages the front-of-house and collects comprehensive customer data. Monthly fees start at $199. For reservations, it charges each restaurant $1 per diner if the reservation was made on the OpenTable website or app, and $0.25 per diner if the reservation was made on the restaurant’s website.
Network effects
Direct network effects strongly influence OpenTable. The product’s value increases for diners when more restaurants use it, and increases for restaurants when more diners use it. When more restaurants list themselves on OpenTable, diners benefit in the following ways: (1) more choice, including price, neighborhood, and cuisine; and (2) greater likelihood of finding a specific restaurant. And when more diners use OpenTable, restaurants benefit in the following ways: (1) more diners in the restaurant; and (2) increased visibility online.
Because OpenTable is now very popular with restaurants and diners, it is now trying to capture more value and scale-up. One example is OpenTable points, which is similar to a frequent flier program. Diners with an OpenTable account earn points every time they make a reservation. One reservation is typically worth 100 points, and once diners accrue a certain amount of points they can redeem them for OpenTable Dining Rewards, like restaurant gift cards. This rewards systems continues just promotes more OpenTable usage, which increases reservation revenue. OpenTable also cleverly coordinates with restaurants to offers diners 1,000 points to make a reservation at an off-peak time. For example, a diner could earn 1,000 points to eat at 5:00 pm at a high-end restaurant. This system is a win for all parties: restaurants make money by filling seats that would otherwise be empty, OpenTable earns reservation fees, and diners earn extra OpenTable Points.
OpenTable is also trying to take advantage of indirect network effects to popularize its other products and services. For example, OpenTable produces a platform called Guest Center that manages the front of the house for restaurants. It allows restaurants to customize their floor plan, quickly assign tables, and track individual diner data. The Guest Center has been successful so far because it is an easy sell: restaurants already use OpenTable to manage reservations, so paying a little more for a similar product that integrates everything makes sense.
Competitors
OpenTable was the first mover into the online and mobile restaurant reservation space. The first mover advantage for OpenTable was huge and has allowed it to completely dominate the market. This combined with the importance of network effects means that it is very difficult for competitors to take on OpenTable. Consequently, most competitors instead try and carve out a smaller niche. For example, Resy allows users to pay money to secure a high-demand reservation. There is also Tock, a front of the house software developed by celebrity chef Nick Kokonas from Alinea in Chicago. To date, competitors like these are left to eat OpenTable’s crumbs. However, things could get interesting with the debut of Yelp’s SeatMe, which is essentially a cheaper version of OpenTable.
I honestly can’t imagine anyone competing with Open Table’s business, precisely because of the huge network of 32,000 restaurants you mention. It seems like a bullet-proof competitive advantage, as Open Table has become the standard for online reservation technology, and the cost to switch among restauranteurs is likely very high — you would have to redesign your website, change business operations, and retrain employees on a new platform if you ever tried to switch. Great post.
Great post! Interesting to read about OpenTable’s business model and pricing structure as this is something I don’t normally think about as a consumer/user. There is another blog post on OpenTable, which could be an interesting read for you: http://d3.harvard.edu/platform-digit/submission/open-but-not-free-opentables-monopoly-of-reservations/
I commented on the other post as well, also thought I’d share my thoughts here that I wonder OpenTable has a true monopoly on the reservation market or that it has already reached the peak of network effect. It does have pretty much the entire ONLINE reservation market today, but as a % of ALL restaurant reservations (including phone calls), my sense is that that is much lower. This leaves opportunities for new entrants to come in and capture untapped market. The other blog post mentions that there are new competitors offering better services for restaurants, which seem to be a serious threat for OpenTable.
Really interesting post! I never knew how OpenTable made money… I am actually surprised by how costly (to restaurants) it is to use OpenTable, especially given how difficult it is to succeed in the restaurant business, and how small margins in that industry can be. I would be curious to see if OpenTable provides analytics to it’s customers (restaurants) to prove that it is truly adding value. I.e., how many new parties are booking at a given restaurant because of the OpenTable app, website, etc.? There are surely ways they can prove their value both to potential and to existing customers.
You make a great point in this blog – they definitely have the first mover advantage, but I am interested – like you are – to see how strong the network effects truly are…. and whether Yelp’s service will significantly pull users away from the OpenTable platform.
Great post! Can’t wait to read your next one.