The Pasta Shack is an Italian Restaurant in Orlando, Florida, near the major tourist attractions that has noticed a recent decline in sales. The owner and his managers decided to have a meeting to come up with some strategies to reverse this trend. One of the managers used to work for an independent restaurant in a suburban neighborhood in Chicago and suggested a strategy used successfully by his former restaurant: offering an early-bird menu to customers who order before 6:00 PM. The idea is to provide a limited number of entrees at a discounted price.
The original price of the entrees placed on the early-bird menu was $10.95 and included a salad. The new price for the specials would be $8.95. After the first two weeks of offering the specials, the daily average number of covers increased from 50 to 58 during the 4 to 6PM time period. However, the daily average number of covers after 6 PM decreased from 75 to 70, due to some cannibalization of current customers. Assume that $8.95 is the average price per person from 4 to 6PM and $10.95 is the average price per person after 6 PM when answering the questions.
1. What was the effect of the price change on total revenues during the early-bird time period?
2. Using the concepts presented in the chapter, how would you explain the change?
3. Is the new strategy successful? Explain.
4. What could be the cause for the initial decline in sales?
5. Are there any additional costs associated with the new strategy?
6. How could you increase the profitability associated with the early-bird strategy?
