What's your business model?


How does OpenTable make money?

OpenTable charges restaurants a fee per diner, as well as a monthly charge to use its terminals

Innovation series by Steven Loeb
January 4, 2014 | Comments
Short URL: http://vator.tv/n/3420

For self-described "foodies," the Internet has given them few nicer gifts than online real-time restaurant-reservation service OpenTable. That is especially when you live in a big city, where restaurants can fill up very, very quickly; having an easy way to make you sure you can get a seat can be a life saver.

With an installed restaurant base of nearly 31,000 around the world, and more than half of all the reservation-taking restaurants in the United States, the company basically has a monopoly on the online-reservation space, over companies like LiveBookings, SaveTable, Matradee.com, Restalo, and Eveve.

Since it was founded in 1998, OpenTable has seated over 385 million diners around the world, and 38.5 million diners were seated in the last quarter alone. 

But, as we like to ask around here, how does the company make money?

Two sources of revenue

OpenTable has two revenue streams: reservations and subscriptions.

Of the $46.7 million the company saw in revenue in the third quarter of 2013, $27.8 million, or 60%, came from reservation fees charged to restaurants. That represented a 27% increase from the same quarter a year prior. Reservations are increasing as a percentage of income; in the third quarter of 2012, they accounted for 55% of total revenue.

For the full year of 2012, reservation fees made up nearly $79 million of the company's $161.6 million total revenue, or 48%.

Here's how OpenTable's reservation fees work.

The company charges each restaurant $1 for every seated diner that books a reservation on OpenTable.com. It only charges 25 cents per seated diner who books through OpenTable via the restaurant’s website, though. That is why, even though 38.5 million were seated, it only made $27.8 million in revenue from this stream.

The second biggest source of revenue for the company is subscription fees, in which it charges restaurants for using its Electronic Reservation Book computer terminals.

OpenTable charges restaurants $199 a month for software that manages bookings and tracks customer data. That number goes up $249 to access the data from a home computer. OpenTable also charges a fee to install the ERB system and train the restaurant's employees on how to use it. This can cost up to $700.

Total revenue from subscriptions was $15.8 million, or 31% of revenue last quarter. That number went up 11% year to year. 

The company also makes money through OpenTable Connect, which targets smaller restaurants with lower monthly fees but higher diner fees. These restaurants pay $50 a month for use of the ERBS, but $2.50 per customer. The 25 cent charge for booking through the restaurant's website remains the same.

I should note that, despite some high costs, OpenTable is profitable. It spent $36.5 million on "marketing expense, headcount-related expense, professional services and amortization of intangibles and capitalized development," giving it a profit of $10.2 million for the quarter. 

Not everyone is too keen on OpenTable's revenue model. In the past, there has been some concern that increased pressure from competition, especially in the United States, could start cutting into OpenTable's revenue. Though it is expanding, the vast majority of OpenTable's revenue still comes from restaurants in the U.S.

Right now, only 7.7 million of its restaurants are located outside the United States; they accounted for $6.1 million, OR X%, of the company's quarterly revenue. Meanwhile, over 23 million restaurants, and $40.6 million, was generated from the United States. 

If other reservation services offer lower fees, some worried, then it could force OpenTable to do the same, which would cut into its profits. 

This, however, does not seem to have come to pass. Net revenue increased 18% year to year, and the company's stock is trading over $78, a 35% increase over the $51 it was trading at the beginning of 2013.

Analysts estimate that OpenTable will grow annual revenue to $189 million this year. At  $78 a share, the company is currently valued at $1.83 billion, which means that OpenTable is currently trading at a revenue multiple of 9.7.

(Image source: http://www.nydailynews.com)

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