Copyright Deloitte Consulting © 2001 - Proprietary and Confidential Revenue Management Revenue...

Copyright Deloitte Consulting © 2001 - Proprietary and Confidential

Revenue Management

Revenue management in the Hotel and Leisure Industry

Martin Hermsen January, 2001Senior ManagerStrategy Practice, Deloitte ConsultingTelephone: 31-629-068.604

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Table Of Content

Introduction Industry Background Customer Relationship Management and the Internet Yield Management Definition Implementing a Yield Management System



The eight core concepts of revenue management

1. Focus on price rather than costs when balancing supply and demand

2. Replace cost based pricing with market based pricing

3. Sell to segmented micro markets, not to mass markets

4. Save your products for your most valuable customers

5. Make decisions based on knowledge

6. Exploit each products value cycle

7. Continually reevaluate your revenue opportunities

8. Revenue management should be integrated into the strategy, process, systems and mind-set from an organization



The Leisure value chain is changing: vertical integration, everybody wants to dominate

Marketing

Retail

Reservation

Payment

To-site Transport

Overnight stay

Entertainment

At-site Transport

Facilities (conferences etc.)

Marketing

Retail

Reservation

Payment

To-site Transport

Overnight stay

Entertainment

At-site Transport

Facilities (conferences etc.)

Hotels/Clubs Tour operator Credit card co. Airlines Others...

Core BusinessCore Business

InternetInternet

InternetInternet

Call Centres Call Centres

In Hotel or via alliances

In Hotel or via alliances

Hotel busesvia alliances

Hotel busesvia alliances

Present in HotelPresent in Hotel

Via alliancespackage deals

Via alliancespackage deals

Via alliancesVia alliances

Shops / DM / InternetShops / DM / Internet

Core businessShops / DM / Internet

Core businessShops / DM / Internet

Volume buyingVolume buying

Clubs / HotelClubs / Hotel

PackagesPackages

Core businessCore business

DM / InternetDM / Internet

DM / InternetDM / Internet

Package offerings

Package offerings


InternetInternet

InternetInternet

Call CentresCall Centres


Package offerings

Package offerings


PackagesPackages

Moderate presence

Strongpresence

Core BusinessCore Business

CountriesCountries

CRS CompaniesCRS Companies

BanksBanks

Theme parcsTheme parcs

Theme parcs Theme parcs

Car rental co.’sCar rental co.’s

Conferencecentres

Conferencecentres

Bus, TrainBus, Train

Core business

Source: Deloitte Research 1Q2000.

Industry Background

Via AlliancesVia Alliances

Via AlliancesVia Alliances



The Revenue drivers for the hotel businesses based on both the room revenues AND various related revenue sources

REVENUESREVENUES

Competitive Intensity

Market Conditions

Number of owned/ leased hotels

% in 5* brand

% in 4* brand

% in 3* brand

Macro-economicfactors

Number of rooms sold

CRS Revenue

Total Room Revenue

In-House F&B Revenue

In-House Services Revenue

Out-House F&B Revenue

# of Hotels with special facilities

Usage rate of facilities

Average spendper event

Limited Intervention

Effective Scope For Intervention

Socio-Politicalfactors

Ave. room rate

Number of rooms available

Occupancy rate

# of special Events

Average spendper event

Average spend Per person

Average # ofPersons per event

Number of In-houseguests

Ave F&B Spend In-house guest

Ave. SpendOther Services

Number of Outhouse customers

Ave F&B Spend Out-house cust.

Ave. feeper room

Ave. no. of personsper room

Industry Background



Internet gives the consumer multiple entry points, leading to different economics per reservation

Global DistributionGlobal DistributionSystemSystem

Travel AgencyTravel Agency

Central ReservationCentral ReservationSystemSystem

Switch CompanySwitch Company

Hotel PropertiesHotel Properties

http://www.travelocity.comhttp://www.travelocity.com

http://www.thomascook.comhttp://www.thomascook.com

http://hilton.comhttp://hilton.com

http://www.travelwiz.comhttp://www.travelwiz.com

http://holidayinn.comhttp://holidayinn.com

GU

ES

TS

GU

ES

TS

Call to Property

Call to CRS

Call to Travel Agent

$2 to $3

$3 to $5

$6 to $8

Booking a hotel room via traditional reservation structure

Booking a hotel room through the internet

Source: Deloitte Research

Travel agent Travel agent (Package)(Package) 22%22%

Travel agentTravel agent 12%+$4.3612%+$4.36

3 rd party site3 rd party site 5%+$4.365%+$4.36

Hotelgroup.comHotelgroup.com 00

Hotel Group

Entry point Margin paid

Market

Industry Background



Industry Trends

The travel industry is consolidating rapidly in Mature Markets (Europe, US) Consumers increasingly buy their travel on the Internet. Consumers become more “Trip Oriented” The most important revenue driver for Hotel Companies is RevPar

– REVPAR, revenue per room = occupancy * average room rate

Hotel chain’s will sell directly to end-consumers on the Internet or via call centers to:

– Save the cost of distribution;

– Create an opportunity to enhance revenue by selling the exact right product for the best price, at the best moment in a specific market segment as a function from the demand.

Industry Background



Table Of Content




Customer Segments

Value Proposition

Life Time Value

Targeted Segments

Required CRM Capabilities

Investments Priorities

ExpandExpandRetainRetainAcquireAcquireTargetTarget

Customer Segments

Cu

sto

me

r In

tera

cti

on

T

ou

ch

Po

ints

CRM Strategy sets direction for how the organization invests in customer relationships…

Customer Life Cycle

Customer Relationship Management and the Internet

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Customers today have a choice of a variety of interaction channels

Back Office Processes and SystemsBack Office Processes and Systems

Cu

sto

mer

In

tera

ctio

n

Ch

ann

els

InternetInternet

RetailRetail

Call CenterCall Center

Agents/DistributorsAgents/Distributors

Field PersonnelField Personnel

MailMail

Broadcast MediaBroadcast Media

MarketingMarketing SellingSelling ServicingServicing

Customer Management Processes


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Today’s technology enables companies to be true consumer centric (stage 2), however most companies have a long way to go…

Macro Factors

Revenue-based

Generalized

Reactive

“One Size Fits All”

Isolated Touch Points

Point Solutions

Policies & Procedures

Limited Capture

Customer-aware

Task-oriented

Product/Cost-centered

Observable Qualities

Profit-based

Mass-customized

Proactive

Targeted

Functional Integration

Tactical

Flexible

Data Silos

Customer-intimate

Team-oriented

Mixed Message

Actionable Behaviors

Life Time Value-based

Unique

Predictive

Adaptive

Seamless Enterprise

Strategic

Enabling

Centralized

Customer-collaborative

Relationship-oriented

Loyalty-centered

Stage 0: Fragmented

Stage 1: Optimized Silos

Stage 2:Integrated Enterprise

Majority of current companies

Customer Customer SegmentationSegmentation

Customer WorthCustomer Worth

Competition and Competition and Market DynamicsMarket Dynamics

Value PropositionValue Proposition

Integration StructureIntegration Structure

Touch Point /Channel Touch Point /Channel StructureStructure

Systems/TechnologySystems/Technology

OrganizationOrganization

PeoplePeople

LeadershipLeadership

ProcessesProcesses

Information/DataInformation/Data

Str

ate

gy

Str

ate

gy

Min

dM

ind

ss etet

Op

era

tio

ns

Op

era

tio

ns

Our clients are typically in one of these three general evolutionary stages


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The ORGANIZATION

responds faster to changing

conditions and reinvents itself to

meet new customer needs in

zero time

CUSTOMER behavior changes

over time as a relationship with the enterprise is

developedThe organization LEARNS from every interaction with each customer and

captures information from marketing campaigns/customer touch points.

The organization SEGMENTS its customers and TARGETS its offerings (product, service,

distribution, message) efficiently and effectively to meet changing customer needs.

TECHNOLOGY allows data to be recorded, stored, and

mined for insights

Ultimately, the results of achieving this vision will be real time consumer demand tracking, dynamic pricing, increased wallet share, increased return on campaign

spending, greater profitability per customer and greater shareholder value.

Ultimately, the results of achieving this vision will be real time consumer demand tracking, dynamic pricing, increased wallet share, increased return on campaign

spending, greater profitability per customer and greater shareholder value.

…ultimately enabling real time reaction to dynamic customer behavior, market forces and demand fluctuation


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Table Of Content


Appendix– Example of an Approach to Analyze and Design a Yield Management System

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A definition of Yield Management

Yield management is the practice of maximising profits from the sale of perishable assets, such as hotel rooms / airline seats, by controlling price and inventory and differentiating product and service.

Yield management is based on:– The differentiation of tariffs/rates/margin– Segmentation of consumers, understanding of consumer lifetime value and

understanding specific consumer needs– Differentiation of products and services– Statistical modelling and forecasting demand

By seizing control of the sold volume at each price level, Yield Management permits a significant augmentation of revenue.

Yield Management Definition

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Yield Management, The Concept

Leadtime 60 45 30 15 0(days)

Actual

Forecast of occupancy:With increasing accuracy when time comes closer

Moment in time where occupancy is low:•What does the forecast say?•What is the total revenue, actual sold, of the hotel for that day?•What should be the price of the room?•Who is the customer that calls during the time of the red arrow?

Moment in time where occupancy is low:•What does the forecast say?•What is the total revenue, actual sold, of the hotel for that day?•What should be the price of the room?•Who is the customer that calls during the time of the red arrow?

Occu

pa

ncy

Forecast

Budget

100

90

80

70

60

50

40

30

20

10

0


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Yield Management Drivers

The Time Focus, (A hotel room that is not sold for a certain night is lost forever). – The closer the moment on the timescale when a hotel room is still empty the larger the

probability that it stays empty and will not create revenue.– A Hotel chain will lower it’s selling price of a room when at a certain moment it’s forecast

will tell him that, with a certain probability, it will stay empty.

The Customer Focus– How does Yield management interact with Customer Loyalty?– Loyalty programs are designed to lock-in consumers to the product. The frequent

customer therefore, could based on his profile, deserve a different treatment and price then a less frequent customer.

– Loyal customers expect a consistent discounted price all year long. Yield management policies should therefore have special long-term strategies for loyal customers enforcing repeat visits.


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Example of yield optimization decisions analysis

Leadtime (days) 45 30 15 0

ReservationProfile

OccupancyRate %

70

Reservations

Optimization DecisionAreas

1

2 3

4

1. Actual reservations are below the reservation profile, 60 days before room-night. In this case the Hotel might accept bookings with some discounts, however we are still relatively far from due date, alternative marketing strategies could be pursued.

2. The actual sales resulted in an occupancy rate above the reservation profile. The hotel will sell rooms only at full rates, to maximise profits, assuming that the demand curve will continue.

3. The demand curve went down, apparently there where some cancellations and the due date comes closer. The hotel will use aggressive marketing strategies and discount rooms to reach target occupancy.

4. The demand curve really picks up. The 70% target occupancy is passed 8 days before due date. The hotel goes back to full rates.


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Revenue gains as a result from yield management increase when we cluster destination area’s and enable consolidation of demand

4%

8%

Overbooking

Group quote

Discount allocation

Length of staycontrol

Property levers Cluster levers

Optimal groupplacement

Capacity transfer

Up-sell

Shift of specialcontracts

Marginimprovement


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The results of yield management are

A larger margin of price variation

Product differentiation in order to justify the price to the customer – A high priced product should be presented differently in terms of packaging, conditions

of the sale, and accompanying privileges than it’s reduced-priced counterparts.

Dynamic control in “real time” of the volume sold at each price level

Definition of these different prices and volumes requires numerous recurrent and complex calculations

– Which makes the implementation of a decision-making tool necessary.


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The impact or the internet and the rise of dynamic pricing

At the technical level, there is a distinction between traditional revenue management and dynamic pricing

– Traditional revenue management models avoid developing an explicit relationship for demand as a function of price

– Demand is lumped into product buckets, and forecasts may or may not use price as an input

– Dynamic pricing models might be categorized as those models that assume a functional relationship between demand and price

The internet makes it possible to design web sites that experiment with the market in an attempt to elicit information for demand curve estimation

Dynamic pricing may become synonymous with managing and tracking demand in response to posted prices interactively

The internet provides the opportunity to gain more data on the customer at the point of sale: buying behavior: loyalty profile, price elasticity

Dynamic pricing may eventually become synonymous with increasingly refined methods of market segmentation and the ability to capture transaction information that will allow for more detailed pricing


Source: E. Andrew Boyd, PROS.

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Table Of Content


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Market Segmentation

Demand Forecasting

Offer Management

Availability Management

Booking Management

The classification and targeting of distinct categories of demand based on customer values, behaviors, usage patterns, price and service sensitivity, cost/profitability to serve, etc.

The creation of products, the definition of target price and service levels, and the negotiation of contracts with suppliers to provide those products at a certain price.

The projection of future demand based on historical trends, cycles, seasonal patterns, and current market conditions or events.

The forecasting and allocation of available capacity to various customers or customer/product segments based on their revenue contributions relative to the “opportunity cost” of selling that capacity.

The “scripting” and execution of the day-to-day booking process through which bookings are either accepted or rejected, routed, and specific price/service commitments are made to customers.

Functional Scope of Revenue Management : from market segmentation through booking management

Yield Management process scope covers different functions

Implementing a Yield Management System

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Strategic Tactical Operational Real-time

1 year plus 1 to 12 months 3 to 30 days 0 to 3 days

These processes also span different time horizons

Market Segmentation

Demand Forecasting

Offer Management

Availability Management

Booking Management

* These timeframes are typical of the travel and leisure industry.

Example Revenue Management Time Horizons*


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The combination of these two dimensions provides a basis for defining a high-level business process map for Yield Management

• Develop reservations scripts and protocols

• Plan long-term park/ hotel development

• Select key TO partners• Determine oversale cost

• Develop macro-economic forecasts of demand

• Define market positioning and overall pricing policy

• Create global advertising plan

• Analyse & define strategic market segments

• Define and analyse customer segments

• Track costs by segment

• Revise reservation agent scripts and up-sell/cross-sell approaches

• Negotiate TO and other dedicated allocations

• Arrange for transport. capacity

• Revise and maintain forecasting models and parameters

• Develop initial time-series forecasts

• Create seasonal pricing calendars by country

• Define price tiers• Determine segment

“strategic values”

• Negotiate group and convention sales

• Monitor TO realization• Determine individual

availabilities

• Project impact of promotions

• Track booking/cancellation curves

• Adjust forecasts

• Establish targeted promotional pricing programs

• Sell/Up-sell/Cross-sell• Monitor conversion rate

• Determine individual availabilities

• Proactively manage overbooking

• Walk-in response

• Revise reservation agent scripts





MarketSegmentation

DemandForecasting

OfferManagement

Capacity / AvailabilityManagement

Booking Management

High-Level Process Map Hospitality


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• Develop reservations scripts and protocols

• Plan long-term park/ hotel development

• Select key TO partners• Determine oversale cost

• Develop macro-economic forecasts of demand

• Define market positioning and overall pricing policy

• Create global advertising plan

• Analyze & define strategic market segments

• Track costs by segment

• Revise reservation agent scripts and up-sell/cross-sell approaches

• Negotiate TO and other dedicated allocations

• Arrange for transport. capacity

• Revise and maintain forecasting models and parameters

• Develop initial time-series forecasts

• Create seasonal pricing calendars by country

• Define price tiers• Determine segment

“strategic values”

• Negotiate group and convention sales

• Monitor TO realization• Determine individual

availabilities

• Project impact of promotions



• Establish targeted promotional pricing programs


• Determine individual availabilities

• Proactively manage overbooking

• Walk-in response

• Revise reservation agent scripts




Strategic Strategic Value Value AuditAuditToolTool

Up-sell /Cross-sellUp-sell /Cross-sell

Scripting ToolsScripting Tools

TO TO Allocation Allocation

ToolTool

Price Price Elasticity ModelElasticity Model

Group/Conv.Group/Conv.Acceptance Acceptance

ToolTool

Forecasting Forecasting SystemSystem

AvailabilityAvailabilityOptimizerOptimizer


To define the Decision Support Requirements we need to understand the opportunity for analytic tools to support these processes

High-Level Hospitality RM Tool-Process Overlay

MarketSegmentation

DemandForecasting

OfferManagement

CapacityManagement

Booking Management


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YM Operational Framework for Continuous revenue optimization

Implementing YM is not a one time event. It is a process of continuous learning and refinement

1. Data Collection. Identify and collect required data on demand on hotel level1. Data Collection. Identify and collect required data on demand on hotel level

2. Analyse Demand. Identify competitors and sources of demand, hotel’s strengths and weaknesses, predict demand and booking patterns

2. Analyse Demand. Identify competitors and sources of demand, hotel’s strengths and weaknesses, predict demand and booking patterns

3. Market Segmentation. Identify markets, segment market (demographic, psychographic, geographic)

3. Market Segmentation. Identify markets, segment market (demographic, psychographic, geographic)

4. Determine optimal guest mix. Define booking classes4. Determine optimal guest mix. Define booking classes

5. Analyse trade-offs. Extensive calculations of monetary leakages, avoid displacing higher spending guests

5. Analyse trade-offs. Extensive calculations of monetary leakages, avoid displacing higher spending guests

6. Establish capacity levels (Capacity to meet demand of market segments)6. Establish capacity levels (Capacity to meet demand of market segments)

7. Yield management pilot/change (City, Regions, Destinations)7. Yield management pilot/change (City, Regions, Destinations)

8. Evaluate pilot/change. (Customer reorientation, operational evaluation)8. Evaluate pilot/change. (Customer reorientation, operational evaluation)

9. Improve Yield Management based on latest learning's9. Improve Yield Management based on latest learning's

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Copyright Deloitte Consulting © 2001 - Proprietary and Confidential Revenue Management Revenue...

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Transcript of Copyright Deloitte Consulting © 2001 - Proprietary and Confidential Revenue Management Revenue...