Thursday, August 21, 2014

REPOST: America's top chef uses marginal analysis

America's top chef uses marginal analysis

Alinea, which opened in 2005, was named the best restaurant in America by Gourmet Magazine in 2006. The restaurant's co-founder and head chef, Grant Achatz, said his 23-course meal is motivated by what any econ student would recognize as marginal analysis:

So there's something that we call the law of diminishing returns in our cooking. That's why the steak is only two ounces, because by your fifth bite you're really, you're done. You're done with that steak. You know what it's going to taste like. The actual flavor starts to deaden on the palate.

If we were to make you take 10 more bites, by the time you got to bite 15, the steak's just not that compelling anymore. So if we have a series of 23 small courses, where it's a burst of flavor on the palate, and then you move on to something completely different and then completely different, that helps us set up a more exciting meal, and it's something that is easier to kind of be compelled to go through a 23-course menu.

7 comments:

  1. When I took microeconomics as a freshman in college our professor taught us about diminishing returns through the use of cherry cordials. There were very few students that liked them in the first place and one less after very lucky student who volunteered finished the demonstration. He was told to “buy” the candy from the professor one piece at a time at what he thought he wanted to pay for them starting at $1, as one box was completed and the next started the student said the professor couldn’t pay him to eat anymore. Yet I tend to disagree with diminishing returns in a lot of categories. While I dislike cherry cordials and would quickly be rid of them there are some foods I can’t get enough of. I have sat many times studying or watching TV and quickly finishing a whole package of Oreos and still wanted more. My question would be what else doesn’t follow the rule of diminishing returns, not necessarily in food but in other ways. For some people it might be children, look at the TLC show 19 Kids and Counting for others it might be homes, there is no diminishing return for having another vacation home in an exotic locale.

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  2. It’s true that we do find economic principles, such as marginal analyses, in places where we don’t expect them. My occupation is as a fundraiser in higher education where I don’t consciously think about marginal costs. However, after reading Froeb’s book on Managerial Economics, I realize that our entire Major Gifts department is based on this principle. This department focuses on securing large gifts from the wealthiest donor prospects. Securing each gift of $100,000 or more usually requires seven to nine visits with the donor over a two-year period, at a minimum (Cook, 1997). Without explicitly realizing it, we fundraisers are using marginal analyses to determine how much investment is worth the payoff. If we generally accept that a contribution of $100,000 exceeds the resources required to make seven to nine visits over two years, with significant personalized follow-up in between, we must understand when the benefits do not exceed the costs. This is why we “qualify” major gift prospects with two to three visits. If we determine that they do not have the capacity or inclination to make a large gift, we do not continue to invest resources in cultivating them.

    Cook, W.B. (1997) Surveying the Major Gifts Literature: Observations and Reflections. Nonprofit Management& Leadership, 7(3), pg. 333-347.

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  3. Chef Achatz brings up a great point, after all if you had a choice of one piece of your favorite cake or a viennese table of high quality pastries (all else being equal, cost, calories…), what would you pick? Or this perspective, if you were all paying the same price for a culinary class – hands on, how to make the confections on a Viennese table how many students would you want in the class? At some point the chef instructor would be inundated with so many questions that they could not answer them efficiently. This would have an effect on the quality of education that each student would receive.
    There is another side to this as well – the cost would not be equal. One chef can cook and send out several steak dinners a night. It takes a team to put out a 23 course meal - a blog post on poachedjobs.com in 2012 states “For serving less than a hundred covers, there were a TON of people in that kitchen. Seven on my side of the line, more on the other. Plus the Chef and his junior sous. I haven’t seen that many people on a line since I worked in a kitchen putting out 2,000 covers a night.” So there is the question of value and affordability as well
    http://poachedjobs.com/2012/03/one-day-at-alinea/#sthash.GGNLexhm.dpuf

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  4. I think this article is right on the money. To quote our text with regard to marginal analysis, “…we break down the decision into small steps and then compute the costs and benefits of taking another step.” Grant Achatz is using this in the literal sense and creating a new experience for restaurant patrons that they will not soon forget.

    While the thought of a 23 course meal sounds excessive, if they are small bites, maybe not so much. Maybe he’s on to something here. I’m sure the charge for such a meal is exorbitant, but if everyone walks away satisfied they will be telling their friends about the experience. But the key here is that if all you are giving people is a few bites of each item, they are going to want more. And if you leave them wanting more, hopefully they will return and bring some of their friends.

    Froeb, L., McCann, B., Shor, M., & Ward, M. (2014). Managerial economics: A problem solving approach (3rd ed.). Australia: South-Western Cengage Learning.

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  5. In my opinion, Chef Grant Achatz has employed several economic concepts to create a “unique” dining experience with his renowned restaurant, Alinea. By utilizing the concept of diminishing returns, Chef Achatz has justified a marketing message to brand his limited menu. Chef Achatz is selling a 23 course experience at Alinea based upon the impact of small tastings being more satisfying than full portions. This method allows him to mass produce consistent high-quality courses without variations that are typical in a regular restaurant setting. He has also created a stable demand forecast model by preselling tickets for each table for certain times every day. These two factors allow him to minimize food costs and have a consistent margin.

    A January 2014 article posted in the Chicago Tribune suggested that Chef Achatz could increase his revenue by auctioning off the tickets at his newest restaurant, Next, versus preselling tickets at set prices. The author argues that there is a “monopoly power” that would allow Chef Achatz up to four times the revenue. While an auction might increase revenue in the short term, I concur with Chef Achatz that a premium value proposition would not support those types of higher prices in the long term. The reason being at four times the current price, the perceived value could be lower than the actual price, and therefore, could reduce overall demand.

    Further, the author was concerned that scalpers were taking marginal revenue dollars. While the scalpers could make a possible profit on the sale of the tickets, they could also lose money with unsold tickets. In either case, the restaurant is “guaranteed” revenue. And, I surmise that scalpers who sell at higher prices are just another form of advertisement for the restaurant, because they often generate the perception of scarcity, thereby, reinforcing the perceived value of the dining experience.

    From my viewpoint, Chef Achatz has indeed differentiated his dining experience from other restaurateurs with his 23 course menu selection and pricing strategy.

    Regards,
    Karen Whelpley

    Work Cited:
    Harris, M. (January 5, 2014). “Economists share strategy to make more money from ticket sales.” Web. February 13, 2014. Retrieved from: http://articles.chicagotribune.com/2014-01-05/business/ct-biz-0105-confidential-tickets-20...

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  6. Chef Achatz has a well thought out strategic approach to dining. His idea implies that the average person that is out dining orders a certain meal and by the third of fourth bite the meal just taste ordinary. By creating a meal with 23 courses Chef Achatz is introducing different flavors to his customers in one dining experience. Obviously this Chef is gifted or his restaurant wouldn’t have been named “best Restaurant in America” by Gourmet Magazine in 2006. The economic advantage to this is that he offers something that his competitors don’t. His approach to satisfy without the customer getting bored of the typical main course such as steak is brilliant. However, what are the economic disadvantages? What are the costs involved? Are costs higher than that of a typical meal? How many staff members does it take to prepare such a meal? He could be at a disadvantage when it comes to competition.

    Reference:
    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial Economics; A problem solving approach (3rd edition). Mason, OH: South-Western Cengage Learning.

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  7. I have to agree with Chef Grant Achatz, half way through the meal you are done. You already have a complete flavor of the dish on your palate, which is why I always box/wrap up whatever is left over. While a 23 course meal is quite extravagant, I imagine each course to be only a couple bites, thus leaving the customer wanting more. Here Chef Achatz exhibits a great marketing technique and utilizing theory of diminishing returns.

    As selling tickets to this restaurant provides a surety of business (how many customers and when), it allows the Chef and his team to prepare accordingly. But is this mechanism hurting him in the long run? With his inability to taste for a long period of time, he needs someone to taste test for him, a couple others to create certain courses, and of course the wait staff. It could go either way, by attracting foodies from all over to try this experience or limiting the number of customers they serve on a regular basis, there is a cost with this decision. However I will say that it seems like it’s paying off for him (right now). What happens when demand runs out? That will be the true test for Alinea.

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