Invest Like the Best with Patrick O'Shaughnessy
· Nick Kokonas
Now you multiply that out over the course of the year and we were losing over a million dollars of revenue through those two things happening. One of the basic things that people don't do in the restaurant industry, and it drives me nuts even with our own staff, is no one multiplies it out by seven days a week, 52 weeks a year. So if you have something that's costing you even $20 a day, add it up. It's a low margin business because you're not looking at these chunks of revenue. I was just going why in the world if we have a wait list of 200 people can we not just limit it to the people who actually are willing to come in and take a little bit of a deposit first? And what's fascinating about that is that when I said that to people I was like, "Look, baseball games, concerts, theater, every other form of entertainment does some sort of ticketing." And I was told that it was a terrible idea because restaurants are not entertainment. And I was like, "What are they?" What's really fascinating about restaurants and food in general is that because we are biological creatures that need to eat, people have all sorts of emotional and cultural and ethical baggage on top of what a restaurant is. And you're seeing that now during the pandemic. And at the heart though you don't need to eat out. Eating out is a social endeavor. It's entertainment. It might be art. And it definitely is sustenance as well. At the core of it, we could charge ahead. I was told by everybody I talked to that it was a terrible idea. Literally everybody except for my wife. Grant thought it was a terrible idea. Our general manger at the time thought it was a terrible idea. Notice I say at the time. It was very, very, very frustrating because I kept having this notion in my head where I'd wake up every day going, "We really should just take a $50 deposit and then the problem is solved." I honestly knew nothing about behavioral economics at the time. I didn't know if these were things that were tested. I just knew that as a derivatives trader if everything went to zero at the end of a day that's like an expiring option. And that option value changes the closer you get to expiration. And yet we kept all of our values constant. In other parts of the world that wasn't the case. I sat down one day in 2014 and wrote this long essay. But before then I skipped ahead.
· Nick Kokonas
When we were building Next, I just decided this is like a theater like restaurant. It changes three times a year to an entirely new menu. I'm going to sell tickets to this. And again, everyone in my own company thought I was an idiot. So I had to hire an outside programmer, had to not get a phone on purpose. We barely built it in time and it broke right away because it was a home brew software. But then the first day we sold $562,000 in tickets to a restaurant for the first time ever. And I remember that as one of the happiest days of my life. Because I turned on this thing and people did it five or six or seven years of me kind of looking at this going like, I'm pretty sure this'll work. I'm pretty sure this'll work. And everybody in the industry telling me no and all of my employees rolling their eyes at me. I remember I called Grant up and we were opening night for Next. And I said, "You've got to come to my house." And he was like, "Dude, we're opening a restaurant tonight. I can't. Things are falling apart here." And I was like, "Just come. Just for 10 minutes." And he showed up literally in his chef whites and clogs. And I must have looked like hell because I had spent like 10 straight days like a bad movie eating pizza and drinking wine and trying to get this thing set up. So I hadn't shaved, I hadn't showered. I looked like a The Big Lebowski. And I took him up to my little third floor office and I showed him. I'm like, "Click on that button, that table will become available and then it will instantly sell." And he did it and he was like, "What happened?" And I was like, "We just got $625 in our bank account and that person's not going to dine for two months. And any one that you open will instantaneously sell." And he was like, "That's amazing." And I was like, "Yeah, it's fucking amazing." And then he just laughed and was like, "Okay I'm going to go cook." And that was like one of those moments where you go like, I have a time machine. When I was a trader, there was, exchange traded funds were just starting and the natural hedge for them was the futures at the mercantile exchange. I was the guy who said we need to connect these two exchanges via closed in cellular network so that people can talk to each other instead of using all these hand signals and phone calls.
· Nick Kokonas
The moment that I got that turned on after over a year of work getting the regulatory approvals for it and everything, I had a five second time machine on the market. Now people are down to like picoseconds now with high frequency trading. But at the time literally five second time machine. I could see what was going on in New York five seconds before it arrived in Chicago. This felt like the same thing. I can run my restaurant in a way that no one else in the world can and it worked. I mean we sold every single seat for a year. We made over 30% margins in the first year. We blew out all of our goals while providing people with an incredible value. That opening menu was $85 for a 12 course menu. It was incredibly satisfying and then incredibly frustrating as well because even after I did it people would say, "Oh, well that works for that one." In any business you're kind of constantly having to prove that it works outside of your own niche. Even if you look back at the articles they would say, "Oh yeah, this is a really unique restaurant. This one's different than all the others so it works for them but it won't work for pick your casual pizza place." And I was kind of going like no, no. That's why the variable word is in there. You could charge $5 and still affect people's behavior. It took four years but four years later I just couldn't take it anymore and so I started Tock.
· Patrick O'Shaughnessy, Nick Kokonas
[00:00:00] S0: Do you think, before we get into some of the Tock origin stories and spend a bunch of time there, do you think that this concept of ticketing, pre-payment and even dynamic pricing can and should be extended to all sorts of other business verticals? I'm thinking about like salons or spas, anything like that. [00:00:00] S1: My original thought, and if you look back at the old blog post and you google ticketing for restaurants Alinea, it's still somewhere out there. I called it dynamic and variable pricing for time slotted businesses. Any business that's time slotted should be dynamically and variably priced right down to your lawyer frankly. Your dentist. If everyone wants a 10 a.m. Saturday appointment because of work hours, why doesn't it cost more to go to the dentist or a salon or anything else for that matter? Personal trainers at 10 a.m. on a Tuesday do not have as many clients at 6 a.m. on a Tuesday. To me, all of those things should be and will be dynamically priced. The tools to do so are not yet widely available. But you look at something like Amazon and Shopify for hard goods, they're doing that already. It's accepted for hard goods. It's less accepted for services. Inevitably it's going to happen. If I was going to open a dry cleaner or something like that, I would immediately have dynamic pricing.
· Nick Kokonas, Patrick O'Shaughnessy
[00:00:00] S1: My original thought, and if you look back at the old blog post and you google ticketing for restaurants Alinea, it's still somewhere out there. I called it dynamic and variable pricing for time slotted businesses. Any business that's time slotted should be dynamically and variably priced right down to your lawyer frankly. Your dentist. If everyone wants a 10 a.m. Saturday appointment because of work hours, why doesn't it cost more to go to the dentist or a salon or anything else for that matter? Personal trainers at 10 a.m. on a Tuesday do not have as many clients at 6 a.m. on a Tuesday. To me, all of those things should be and will be dynamically priced. The tools to do so are not yet widely available. But you look at something like Amazon and Shopify for hard goods, they're doing that already. It's accepted for hard goods. It's less accepted for services. Inevitably it's going to happen. If I was going to open a dry cleaner or something like that, I would immediately have dynamic pricing. [00:00:00] S0: Can you discuss the origin or Tock itself? I think now we can talk about software business that potentially is rolling out the innovative thinking that you have and making it a service for a whole bunch of restaurants to begin all over the country. Why did Tock begin? And we'll kind of talk through each stage including an incredible story through COVID.
· Nick Kokonas
[00:00:00] S1: I came to the restaurant business as an outsider with this weird background. I was a philosophy major in college. Studied logic and philosophy of language and applied it to derivatives and then ended up in the restaurant business. Inevitably you start going like well, I need to know my customers, I need to start looking at some data here. All of the software available to restaurants at the time ... And this is still true. Their business model intermediates the relationship between the business and the consumer. OpenTable wants to own that relationship because that's how they monetize it. They get paid a dollar for every diner that books at a restaurant up until $7 if you enter their promotional plans as the restaurant. So they claim to the restaurant, we deliver the diners, not you. Not your great ideas. Not the table plate we were talking about and all that. And I was like, they're not delivering any diners for us. We're doing that. We're making a great experience and yet I don't know which Patrick O’Shaughnessy's coming in tonight. So I don't know that your wife is left handed and likes tea. I don't know that you've been to my other five restaurants 22 times because each restaurant is siloed as its own server. And the more I dug into the why of all of that ... How are these companies monetizing it? What do their pricing plans look like? Who owns the data? Who owns the customer relationship? I started more and more going this is rife for innovation and it's just frustrating as hell as a business owner. I didn't build the predecessor to Tock to commercialize it. I just built it for my own restaurants because I was dissatisfied with the existing system. And it ended up being a much bigger problem than I thought in terms of solving it, programming it, building out the system because there's just so many components to it. And that's why no one had started it before. There are whole companies built around a wait list for a restaurant and that's a feature, not an application. But they turned it into an app and they just built a little better wait list thing and they sold it to Yelp for like $40 million bucks. So I would look at this and go, how is that a thing? That's a weekend project and it's not even executed well. More power to them mind you. But I would just get incredibly frustrated that there were these little peaks and pokes at it.