When was the last time you called a restaurant to make a dinner reservation?
If you’re having a hard time remembering, OpenTable is probably to blame (or to thank, depending on your perspective). In the last several years, OpenTable has felt ubiquitous and inescapable – because it is: OpenTable contracts with 32,000 restaurants across 6 countries, and as over 2014 had seated over 665 million diners. OpenTable’s 29,000 U.S. restaurents represent 50% of all reservation-taking restaurants in the country, and the 12 million people who make reservations monthly on the site represent 99% of all online reservations in North America.
Not too shabby.
OpenTable is a classic network-effect success story: a virtuous cycle of consumer use causing restaurants to sign up, causing more consumer use causing restaurants to sign up… By streamlining a previously clunky and decentralized process, OpenTable has positioned itself perfectly as the platform between restaurants and diners, and has managed to capture handsome profit as a result.
But why were restaurants (which work on razor-thin margins) willing to give up any profit to begin with?
OpenTable was founded in 1998 by Chuck Templeton after watching his wife spend 3 hours trying to get a dinner reservation in San Francisco. Building the platform was not easy, and it was definitely not cheap. Most restaurants at the time didn’t have Internet or even electricity at their host stands – OpenTable would offer to run cables through walls and basements to install their Electronic Reservation Book (ERB) for a fee of $500 (often at a cost of $5,000 to OpenTable). Confident in the company’s value proposition, OpenTable was burning through $1.5 million per month in order to attract restaurants to its platform. Luckily the gamble paid off in diners…
Value to Consumers
With an increasing number of reservations made online, OpenTable’s value to consumers became obvious very quickly: a convenient, easily accessible, aggregated list of restaurants displaying available reservation times. The direct network effects were self-reinforcing – diners could leave comments and reviews, attracting new users to the platform. In 2003, 1,600 restaurants attracted only 2 million diners; by 2007, 7,400 restaurants brought in 25 million diners.
Value to Restaurants
A mushrooming diner base created strong indirect network effects in appealing to more restaurants. The $500 fee for the ERB felt like a low cost to play, but allowed OpenTable to capture value by locking restaurants into a monthly fee ($199), and created strong barrier to entry for competitors. OpenTable also captured value by charging restaurants $1 for reservations made directly on OT, and $0.25 for reservations made through the restaurant’s site.
In addition to a large diner base creating value for restaurants, OpenTable also allows them to save and streamline operations (many restaurants estimate that up to 60% of reservations are made when the restaurant is closed – staffing someone to answer phones at those times could cost upward of $20,000 per year), as well as crowd-source reviews of new dishes and allow them to tweak their menus according to feedback.
But…how long can it last?
Many restaurant owners feel bullied into having to use OpenTable to be in the consideration set for diners, without any clear metrics on whether OpenTable is actually increasing the number of diners (especially for non-traditional meal times), or just cannibalizing reservations they would make anyway. So far, OpenTable has had a near-monopoly of online reservations, but there are signs that that might be starting to change…
New competitors such as Resy, Table8, FoodForAll are entering the scene on the pay-to-play dimension: allowing consumers to pay for a last-minute reservation that someone else has already made. These are essentially scalping sites where the restaurant sees none of the profit generated by the transaction made, but these apps are gaining traction, especially in cities such as New York.
OpenTable has been criticized for being slow to innovate, but is beginning to respond to these threats by adding a Premium Reservation feature – essentially the same concept, but giving the restaurants the profit on the fee for the tables.
OpenTable is in a very attractive position with the scale and network it has achieved. What remains to be seen is how they can best continue to monetize and grow the platform to capture even more value.