OpenTable and the Economics of Intermediation

By Deane Barker on November 17, 2010

Is OpenTable Worth it?: Incanto, a restaurant in San Francisco, refuses to sign up for OpenTable, the restaurant reservation service.  They maintain they can’t make money off it, and, in a larger sense, they say OpenTable is really dragging their industry down.  In this really honest blog post, they explain the economics of it.

The access fees can be substantial, particularly for restaurants operating on thin margins. One independent study estimates that OpenTable’s fees (comprised of startup fees, fixed monthly fees, and per-person reservation fees) translate to a cost of approximately $10.40 for each “incremental” 4-top booked through OpenTable.com. To put that in perspective, consider that the average profit margin, before taxes, for a U.S. restaurant is roughly 5%. This means that a table of 4 spending $200 on dinner would generate a $10 profit. In this example, all of that profit would then go to OpenTable fees for having delivered the reservation, leaving the restaurant with nothing other than the hope that that customer would come back (and hopefully book by telephone the next time).

They did an informal survey of 12 restaurants.  They found one that loved OpenTable.  As for the rest –

The rest were less than happy. The recurring themes were the opinion that OpenTable took home a disproportionate (relative to other vendors) chunk of the restaurants’ revenues each month and the feeling of being trapped in the service, it was too expensive to keep, but letting it go could be harmful.

The GM of one very well known New York restaurant group, which spends thousands of dollars on OpenTable each month, put it to me this way, “OpenTable is out for itself, the worst business partner I have ever worked with in all my years in restaurants. If I could find a way to eliminate it from my restaurants I would.”

Another high-profile, 3.5-star San Francisco restaurateur told me he feels held hostage by OpenTable. For the past several years, his payments to them have been substantially more than he has himself earned from 80-hour workweeks at his restaurant. But he believes that if he stops offering it, his customers will revolt and many would stop coming to his restaurant. So he keeps paying, but carries a grudge and wishes for something better.

We tend to look at the Web as enabling “disintermediation,” which means getting rid of the middle man.  Remember travel agents?  They were the ultimate middle man, and the Web allowed the consumer to cut them out and do business straight with the airlines.  They were “disintermediated.”

However, in a lot of instances, the Web is allowing “intermediation” – it allows people to insert themselves into a transaction.  The OpenTable situation is a perfect example.  OpenTable has inserted themselves between the consumer and the restaurant.

Now, OpenTable claims it’s providing a good service for the consumer.  That may be so (I’ve never used it, and I was amazed to find out that any restaurants in South Dakota have accounts – we’re hardly a region of gourmands), but it still means that there’s another mouth to feed now. OpenTable has to be paid.

So, who pays them?  In the end, the consumer does.  The blog post from Incanto talks about how they lose their profit, but you have to think that some restaurants just raise prices, or would start charging an “OpenTable fee” for reservations made with that service to cover the cost.

Beyond OpenTable, I see intermediation a lot in with search engine marketers.  If you search for something, oftentimes you end up at a page made by a search engine marketer that just gives you links to the thing you really wanted in the first place.  You click these links, and the marketer gets some affiliate payment from the company.

So, the marketer has inserted himself between the buyer and seller, and is taking a cut.  in their defense, they might say that they helped the buyer find what they were looking for, and there’s value in that.  But in a lot of cases, you would have the found the seller just as easily (perhaps easier) without the marketer cluttering up the results.  They purchased the top sponsored result, which you clicked on, but the seller was the top organic result, which you would have clicked otherwise.

But, in the end, you got where you wanted to go, so no harm, no foul, right?  Well, not really.  The marketer now gets paid, and where does that come from?  They intermediated themselves into a transaction, and put their hand out.  Someone has to pay them, and it’s likely to be you.

I suspect that, in the end, the Web has allowed just as much intermediation as disintermediation.

Gadgetopia

Comments

  1. The night before you wrote this, you used OpenTable indirectly. That’s how I made the reservations at the place we ate, using Yelp’s integration with them.

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