Electronic Reservation Book for Restaurants
Ecosystem Strategy Project
Shaun Mehtani | Kelly Shimizu | Ian Teh
October 10, 2010
Company Background
In October 1998, Chuck Templeton, a former US Army ranger and veteran of the restaurant
industry, put his plans for an MBA on hold to start OpenTable.com in San Francisco, California.1
After raising $750,000 initial funding from family and friends, Templeton was able to obtain $36
million in funding from venture capitalists interested in tech start-ups during the dot-com boom.2
OpenTable is an on-line real time restaurant reservation service that manages a proprietary
Electronic Reservation Book (ERB) for restaurants. It allows users (restaurant diners) to search
for reservations at specific restaurants or in a geographical region based on parameters including
date, time, party size, cuisine, and price range. Restaurants pay a one-time installation fee (on
average: $600) for onsite installation and training, a monthly subscription fee for the use of the
software and hardware (on average: $300) and a fee for each guest seated through the website or
mobile application ($1 per person for reservations made on the OpenTable and $0.25 per person
for reservations made on the restaurant’s website integrated with OpenTable software).
Reservations made by the restaurants are made at no-charge.3 The Electronic Reservation Book
streamlines many business-critical functions and processes for restaurants, including reservation
management, table management, guest recognition and email marketing. This enables restaurants
to manage all of their reservations—those booked by phone or online as well as walk-in diners—
in one unified system.4
Diners appreciate the convenience of being able to secure a reservation at any time, even when
the restaurant is closed, and the time savings of being able to instantly find and reserve available
tables. Diners sign-up online for free by entering their information, which is then provided to
restaurants. A reward system has been created so customers receive points for dining at an
OpenTable establishment. The approximate cost of the reward system is $1 per reservation, thus
OpenTable makes a higher margin on larger parties. Diners only receive these points when they
1
http://restaurant-hospitality.com/top_chefs/rh_imp_12464/
http://www.kellogg.northwestern.edu/news_articles/2009/chuck_templeton.aspx
3
http://files.shareholder.com/downloads/ABEA-2TKK09/1033732504x0x371218/36e08b31-bcec-481d-88b1c08d0a73ce05/OpenTable_Annual_Report_Posting_PDF.pdf
4
Ibid
2
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check-in at the restaurant, and diners that frequently no-show (make a reservation that they do
not fulfill) are suspended from the site.5
Because the foundation of the OpenTable network is building a critical mass of computerized
reservation books, the company enhances its offering to diners by adding new restaurant
customers. In turn, as more diners use OpenTable to make their dining decisions and book their
reservations, the company delivers more value to the restaurant customers by helping them fill
more of their seats. In this process, OpenTable grows the value of its business.6
As wonderful as the platform has proven to be, the company did not have immediate success.
The restaurant industry proved to be a difficult to break into. First and foremost, Templeton had
to deal with the fact that restaurateurs tended to be technophobic, with a majority of restaurants
at the time not even having a computer. “At first the company tried to grow as a consumer
dotcom, paying online restaurant reviewers for links to its site and targeting national chains for
fast expansion. By 2001 it was in 50 cities but wasn't making money; it was spending $1 million
a month to bring in $100,000 in revenue.”7
At this point, Templeton brought in angel investor and board member Thomas Layton, founder
of CitySearch.com, as Chief Executive Officer. Layton slashed the staff, shut down spending on
5
Ibid
Ibid
7
http://tech.fortune.cnn.com/2009/08/14/opentable-the-hottest-spot-in-town/
6
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consumer outreach, and pulled the company out of all but four markets. The company fine-tuned
its terminals and software to make them easy for staff to use (restaurants have a lot of employee
turnover) and deployed a door-to-door sales force to woo high-end restaurants. Layton’s focus on
forging relationships with restaurateurs proved to be crucial to the company's success, although it
was a much slower expansion process than the company was use to. Five years later, Layton
announced his intention to step down. In June 2007 the Board hired Jeffrey Jordan, who brought
public company experience from his days as president of PayPal.8 Jordan's pushed ahead with
the IPO despite the collapse of the economy and the unfriendly financial markets.
Over the last five years, the company has been quick to respond to market changes. OpenTable
allows restaurants to offer more points to potential diners to entice them to dine at less desirable
times. Furthermore with the popularity of Yelp.com and other review websites, diners can
provide valuable feedback to the restaurant as well as other OpenTable customers. The company
has also launched multiple mobile versions of the software for smart phones (e.g. Apple iPhone
app).9
Currently, Open Table has $55.8 million in annual revenue and $1.44 billion market
capitalization. The restaurant has approximately 12,000 restaurant customers throughout the
Unites States and select International regions. The company states that its seats more than 4
million diners per month. OpenTable is listed on the NASDAQ as OPEN, and its stock is up
136% year-to-date (data as of October 10, 2010).10
Restaurant Reservations
As previously mentioned, the restaurant industry is difficult to break into. There are two main
problems. First and foremost, restaurants are known for being “technophobic” and secondly, the
restaurant industry is highly fragmented, with independent restaurants and small, local restaurant
groups comprising a significant majority of restaurant locations. Unlike other industries in which
companies can cater to customers around the world, the restaurant industry is very local. “These
conditions make it time-consuming and costly to aggregate the breadth of local restaurant table
8
Ibid
http://www.bizjournals.com/sanfrancisco/othercities/sanjose/stories/2008/11/17/daily2.html?s=smc:3
10
http://www.wikinvest.com/wiki/OpenTable_(OPEN)
9
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inventory required to attract a critical mass of diners to make reservations online and to create an
online restaurant reservation network.”11
Traditionally, reservations for restaurants have been made by using the telephone. A potential
diner would call a restaurant during the restaurant’s business hours to make a reservation. In the
instance that a reservation was not available, the diner had to start the process again, calling a
new restaurant. If a diner wanted to make a reservation while the restaurant was closed, they
would often have to leave a voicemail message and wait for the restaurant to call back. Early
restaurant review sites (e.g., zagat.com) allowed customers to make online reservations;
however, the reservation was not confirmed. The website would simply send an automated fax of
the form the diner had filled out to the restaurant. The restaurant maitre-de would have to check
the restaurant’s availability during regular business hours and call the customer back to accept or
deny the reservation based on availability. OpenTable.com allows customer to take the human
interaction out of the reservation process. Within seconds a customer can see which restaurants
have availability and at what time slots.
The Electronic Reservations Book is also useful in solving another major problem that
restaurants have: “no-shows.” Because OpenTable protects restaurants by suspending accounts
of users with more than three “no-shows” during a certain period of time, OpenTable users tend
to complete their reservation more often; thus, there are less tables being held for groups that do
not intend to show up to the restaurant. Profitability in the restaurant industry is dependent on
filing seats, and anything that makes it either easier to fill seats or allows a restaurant to increase
the number of filled seats contributes to the restaurant’s bottom line.
The overall value vision that OpenTable seeks to deliver is to bring diners to meet the capacity
provided by restaurants. This would involve directing diners to the right restaurants and
streamlining the reservation process between diners and restaurants.
11
http://files.shareholder.com/downloads/ABEA-2TKK09/1033732504x0x371218/36e08b31-bcec-481d-88b1c08d0a73ce05/OpenTable_Annual_Report_Posting_PDF.pdf
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OpenTable Ecosystem
OpenTable Ecosystem
Media
Tech Providers
Electronic
Reservation
Booking
Restaurants
Diners
Payment System
CRM Data &
Inventory
Infrastructure
Reservations
Recommendations
Network Security,
Firewall, Anti-Virus,
Backup Systems
Infrastructure
Management
Rewards
Staff
Engagement
Widespread internet and home PC enhancements and adoption
Co-Innovation Risk – Technology Providers
As a web-enabled reservation system, OpenTable’s infrastructure is supported by several
technology partners. In order for the website to function, back end systems had to be in place,
including:



Payment System
Customer Relationship Management
Network Security



Firewall
Anti-Virus
Data Backup
In 1998, all of these systems were fully functional, therefore diminishing the co-innovation risk.
Nevertheless, OpenTable’s co-innovation challenges diminished overtime as the performance of
its infrastructural ecosystem improved. For example, the internet became faster, PCs got faster
and cheaper, payment and security systems became more secured and computer performance
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improved and fell in price. However, the main challenge for OpenTable was to get the right
contracts and to ensure technical integration between these systems and the OpenTable platform.
As web technology improved, it only helped OpenTable, allowing them to further improve their
web interfaces to restaurants and customers.
Initiative Risk – OpenTable Electronic Reservation Book
In the case of OpenTable, the initiative risk was also low. In terms of functionality and
technology, OpenTable is little different from the many online systems that pervade the internet
today. The website was built proprietarily with the risks mitigated by established links to the
support systems, such as the database providers (co-innovators). The most risky aspect for Chuck
Templeton was funding – ensuring they had enough investment and venture funds to support the
development and launch of the site. Fortunately, Templeton was able to secure funding to sustain
OpenTable’s launch and initial growth, therefore reducing this risk as well.
Adoption Risk – Restaurants
The adoption risk of the restaurants presented one of the most important challenges for
OpenTable. In order for the system to be viable for both diners using OpenTable and restaurant
clients, it required a critical mass of restaurants to adopt and use the system. When OpenTable
first launched in the late 1998, the majority of restaurants did not have computers or internet
access, as they mostly operated on manual reservation systems. The up-front installation costs
and monthly subscription fee presented an additional and significant fixed cost without
reasonable indications that the investment would pay-off over the long run. Additionally, the cost
of internet access represented an additional expense, all of which were not core to the business of
delivering a good food and dining experience to diners.
Moreover, restaurants faced the challenges of process change and organizational inertia that
generally accompanies such change. Hostesses and wait staff needed to learn to use the online
system – many of who had limited experience with computer systems – requiring significant
training. It was important that these staff members bought into and understood the new system,
as they would be the ones managing diners’ reservations and managing seating flows.
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OpenTable needed to ensure that these additional costs would be outweighed by the benefit of
increased marginal diners at the restaurants on the OpenTable system. However, in order to
convince restaurants that OpenTable could provide new visitors to them, it was important for
OpenTable to have a critical mass of online visitors. In order to have a critical mass of online
visitors, it was important for OpenTable to attract the marquee names to its system. As such,
OpenTable made an initial concerted effort to ensure they got a core group of popular restaurants
onboard prior to their launch. Although information is not available about the means by which
these partnerships were made, we hypothesize that special deals and incentives were in place for
this initial group.
OpenTable provided incentives by reducing costs and providing reservation guarantees. In one
instance, OpenTable signed a contract stating that they would not bill for the monthly
subscription cost until the restaurant received 50 diners from the website. With sufficient
investor funding, OpenTable had flexibility to offer promotions to entice restaurants to join,
lowering the risk to restaurants new to or nervous about the ERB. Getting this original group on
board was critical, as buy-in from marquee restaurants was imperative to building the critical
mass in order to develop the momentum OpenTable needed. OpenTable still uses this tactic
today through seating / reservation guarantees for new restaurants.
Another way OpenTable mitigate the prospect of increased costs or lost reservation opportunities
is through OpenTable’s strategy of maintaining high levels of customer service to the restaurants
– ensuring they can provide training, technical support, hardware replacements and upgrades,
and a 24-hour issues hotline. These restaurant support mechanisms lower the adoption barriers to
the restaurants by removing management anxiety and operational risk.
Adoption Risk – Diners
Making reservations online was a new experience that customers were not familiar with when
OpenTable first launched. Travel sites (e.g., Priceline.com), which helped lead the online
reservation movement, were simultaneously being introduced.12 A significant source of adoption
risk stemmed from that fact that that many homes did not have personal computers or stable
internet connections. Going “online” at all, let alone to do personal tasks, was still a relatively
12
http://phx.corporate-ir.net/phoenix.zhtml?c=72780&p=irol-faq
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unfamiliar venture for the masses. However, the late 1990s marked the rapid rise of PC
purchases and internet penetration.13 Internet channels such as America Online (AOL) and
Amazon.com14 that were gaining traction in the late 1990s conditioned consumers to internet
retailing and to look to the internet for information and e-commerce. With such participants
distributing offerings of larger scale suppliers, opportunities emerged to serve niche,
independently-owned businesses (like many restaurants).15
Templeton was able to take
advantage of this trend as he had secured sufficient funding to exploit this opportunity. This
reflected Templeton’s informed expectations and his good planning as a result.
OpenTable launch
OpenTable targeted “foodies” to begin with. These eople seek out higher-end dining
opportunities and make fine dining and exploring new eateries a priority. Gaining this audience’s
attention was important for OpenTable, as these were the customers who would be most
interested in the targeted group of initial restaurants, thus fulfilling their role as an intermediary
between the two groups.
To increase the probability of adoption, OpenTable collected customer information upon account
creation. This allowed them to gain insights on their diners, which led to improved intelligence
and opportunities for further promotions and marketing, keeping OpenTable’s site relevant to the
minds of diners.
13
http://www.sociosite.org/demography.php
http://en.wikipedia.org/wiki/Amazon.com
15
http://tech.fortune.cnn.com/2010/09/23/behind-opentable%E2%80%99s-success/
14
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As the internet became a key channel for restaurant marketing, sites like Yelp.com began
launching in the early part of the new millennium.16 OpenTable took the opportunity to expand
the company’s offerings to integrate recommendations based on location, price, type of food, and
personal OpenTable dining history. Furthermore, it implemented a rewards system to incentivize
diners to continue making reservations through OpenTable by earning points redeemable for free
meals. This helped OpenTable become a “one-stop shop” for many diners, relying on OpenTable
to give and receive recommendation, make reservations, and earn free meals for site loyalty. This
allowed OpenTable to combine momentum and all encompassing functionality secure its
competitive advantage against recommendation sites looking to enter the reservations category.
Ecosystem Relationships Strategy
The initiation
OpenTable’s story is to a large extent one that has been supported by increasing development
and adoption of home PCs and internet technologies. While this trend was widely predicted, the
exact timing was largely unknown. OpenTable demonstrated foresight in this regard in that it set
informed expectations both amongst management and amongst investors. As a result, the
company had sufficient capital to wait.
The other main challenge faced by OpenTable was the adoption risk posed by the restaurants and
diners. The whole concept relied on the right restaurants adopting the system, interested diners
joining, leading a virtuous cycle of increased restaurants and diners. To begin this virtuous cycle,
OpenTable knew that they had to target the opinion leaders – that is the “foodie” diners. In order
to attract these diners, it was critical that OpenTable could attract the marquee restaurants to its
platform. Again, OpenTable demonstrated foresight in this regard as it had secured enough
capital to reduce the adoption costs and risks for these restaurants.
Maintaining the momentum
With the virtuous cycle now in motion, OpenTable has looked to include other members in the
ecosystem for added momentum. The media has played a role in this regard. Local media,
especially city “lifestyle” websites (e.g., Chicago’s Metromix),17 began collaborating with
16
17
http://en.wikipedia.org/wiki/Yelp,_Inc.
http://www.opentable.com/info/partners.aspx
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OpenTable as “third-party marketers”. This allowed OpenTable to serve customers beyond just
the opinion leaders and expand its reach to the mass diners and restaurants. Furthermore,
OpenTable is pursuing new innovations that work for the mass market. The most recent example
is OpenTable’s website extension Spotlight, which mimics the fast-hit Groupon (deal of the day
coupon site).18 This initiative capitalizes on the emerging coupon-craze, allowing OpenTable to
provide the one-stop shop to more diners and thus more restaurants.
Going forward
OpenTable’s strategy to align the actors of the ecosystem is validated by its positive cash flows
from operating activities. Indeed, it generated $17.7M in 2009 and has generated $12.9M in the
first half of 2010. The difficulty of assessing OpenTable’s ecosystem strategy going forward is
that it is hard to assert that the ecosystem will not change, particularly in the dynamic field of
online technologies. However, OpenTable has developed an asset as serving as the meeting place
for both restaurant owners and diners. The momentum it has developed is self perpetuating.
Overtime, OpenTable will be able to relax the subsidies it provides to restaurant owners, since
the risks associated with adoption will diminish and the benefits of subscribing to OpenTable
becomes increasing evident. This will allow OpenTable to fully capitalize on the innovation and
value that it has delivered to the ecosystem.
18
http://www.businessweek.com/magazine/content/10_41/b4198037763659_page_2.htm
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