Marcin- Revenue Management Praca

8/3/2019 Marcin- Revenue Management Praca

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Introduction

At the present moment the hotel industry widely uses a revenue management. The

RM was adopted by both individual hotels and the major hotel chains, but the practices

used differ. Some hotels make use of sophisticated revenue management systems, while

the others use simple models. As regards people responsible for RM in particular hotels



and hotel chains, there are managers at the property level employed, as well as, regional

revenue managers and even a revenue management departments or groups at the

corporate level.

When the definition of the revenue management is taken into consideration, we may

highlight that its main aim is to determine which reservation requests from customers

are to be accepted to maximize revenue. Furthermore, revenue managers match room

supply with customer demand using price and duration controls. As regards price

controls, they permit charging different rates on the basis of guests’ desire to have more

reservation flexibility and lower prices. The main outgrowth of revenue management is

analysing the actual rate for each room-night. In fact, hotel guests may be charged with

the individual price for each room-night of a multiple-night stay, which means the best

available rate. On the other hand, duration controls allow managing customer arrivals

and lengths of their stay by closing dates to arrivals and both requiring minimum stays

and setting maximum stays. According to the fact that hotel chains’ internet sites have

improved recently, customers may pay various prices for each night of their multi-night

stay as the best-rate guarantees are the most attractive marketing tool used by revenue

managers. What is more, many modern hotels use best-rate-average price for each night

of a longer stay. The application of BAR pricing is successful only if the appropriate

balance between maximizing revenue and preserving quest satisfaction is found.

The main aim of this work is to analyze strategies and tactics which revenue

managers may use to manage revenue in the best way possible in the current

environment.

How does the Revenue Management work?

Revenue management has been defined as an economic discipline suitable for

various service industries in which market segment pricing is shared with statistical

analysis for greater expansion of the market for particular service and increase of the

revenue per unit of available capacity. If the top line revenue and bottom line

profitability in any service industry is to be increased, the following factors must befulfilled:

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1. Division of the demand for the service into clear market segments and varied

sensitivity to prices among the market segments.

2. A relatively fixed capacity of a particular firm.

3. Time dimension to the provision of the service. It means that when the time

passes, the inventory loses its value.

4. The relatively low cost of selling an additional unit of the existing capacity.

5. Flexibility to adjust prices to reflect variations in the balance of demand and

supply.

6. Predictions of the possible peaks and valleys in demand.

Revenue management is not a dark, mysterious art as it is portrayed to be, but it is

an application of a number of principles, both economic and statistical, that is logical

and anyone may understand them (Table 1.).

Nowadays, revenue management systems are widely used throughout the travel

industry, for example in hotels, car rental agencies, cruise lines, passenger railroad

firms, airlines, freight transportation and other industries, such as health care, ticketing

or restaurants.

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Table 1. Criteria for application of revenue management.

Revenue Management Criterion Industry: Hotels

Market Segmentation Market is segmented between business and leisure travel using

Discount Fare Restrictions

Unit of Fixed Capacity Hotel

Unit of Perishable Inventory Room Night

Low Marginal Costs for

Incremental Sales

Bookings Taken in Advance

Order Processing,

Room Cleaning

Yes

Demand Forecasting Cycles:

Seasonal

Day-of-Week

Time-of-Day

Yes

Yes

Not- usually

The revenue management program consists of various steps, such as:

1. Market Segment Pricing,

2. Peak/Off-Peak Pricing,

3. Forecasting Demand,

4. Inventory Allocation Basics.

The first step of the program is to define the variety of segments of the market for a

particular service. Only then can the ways of charging different prices to the different

market segments be designed. The main aim of such practice is to increase revenue and

expand the market. Furthermore, a time element is very often added to the pricing of a

service. It is generally known that demand for a particular service is managed by raising

prices during peaks and discounting them during periods of slack demand. After

segmenting the market and creating the initial rate structure, the demand forecasting

process comes into play. The demand for the product most often exhibits regular

patterns, for example, cyclic in nature or trends. The former ones may be of different

kinds, such as time of the day, day of the week, season of the year, while the latter ones

relate to the growth in demand in accordance with the growth in the economy at large.

Such forecasts may not be precise and that is what makes the revenue management a

challenge. It may be said that such an uncertainty is the essence of the revenue

management and is managed by:

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- minimizing the uncertainty by creating the best prediction of the demand

that may show the most possible situation of the market in the future,

- acknowledging the uncertainty and imitating it in the decision analysis

process, that means making decisions about pricing a particular service

as if with certainty.

The last but not least step of the revenue management process relates to allocating

inventory among market segments and price levels so that it may lead to the increase in

an expected revenue in the face of uncertain demands for a particular service. For

instance, if a hotel reserves a unit of capacity, namely a hotel room, for the exclusive

use of a potential guest who is in 70 percent likely to want it and is in a market segment

with a price about £100 per unit, then the expected revenue for such a unit will be £70.

In fact, if a hotel faces such a situation 10 times, the expectations would be that the

customer appears 7 times paying £100 and he fails 3 times and the hotel gets nothing. A

total amount of money collected would be £700 for 10 units of capacity (10 hotel

rooms). But what should a hotel do if another customer appears and offers £60 for the

room in cash- accept it or not? No, because the bottom line is that the lowest price to be

accepted from the customer standing in front of us is £70. This is one of the main

concepts of the revenue management. However, if someone offers us £80 we should

accept it as it is more than expected from the potential customer. ‘We should never sell

a unit of capacity for less than we expect to receive for it from another customer, but if

we can get more for it, the extra revenue goes right to the bottom line.’

There are various activities associated with customer-value based revenue

management (Figure 1.). The strategic management level includes an environmental

analysis and the formulation of strategies and aims. As regards the tactical layer with a

medium-term horizon, not only tactical planning but also booking classes and pricing

are required. Furthermore, the operational level relates to a specific booking period and

covers such issues as forecasting, optimization, transaction control and adaptation of the

control to the real state of supply and demand. What is more, this level deals with

calculation and analysis of performance indicators, the development of models for

optimization and forecasting.

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Figure 1. Conceptual model of customer-value-based revenue management.

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Estimation of the Expected Revenue.

The key of effective revenue management is the precise estimation of the expected

revenue of each unit of capacity for available sale dates. When talking about hotels, this

number is calculated in the following way. First of all, if the level of available capacity

boosts, the marginal revenue that is expected from each of additional unit declines. For

example, when the hotel offers only one additional room for sale it is almost 100

percent probable that it will be sold without having to offer any kind of discount and as

a result, the expected revenue will be very high, but if the hotel offers too much

additional capacity, the probability of selling it goes down and in consequence, the

expected revenue estimate is close to zero for the last additional unit. According to

economists, such a phenomenon is called the Expected Marginal Revenue Curve (Graph

1.).

Graph 1. Expected Marginal Revenue Curve.

If the Expected Marginal Revenue curve has been calculated for all available units

of capacity that are for sale together, for instance, all hotel rooms for rent for one night,

the information presented by the curve may be used in two ways.

Firstly, the curve may be used to ration these units of capacity between marketsegments which means that one hotel room is reserved for customers in the highest rate

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class at a time, until the Expected Marginal Revenue for the next unit equals the next

lower rate. In brief, when using the first approach a hotel starts on the left of the curve

and moves down to the right, reserving rooms until the point of indifference is reached.

The second way to apply the Expected Marginal Revenue principles is referred to as

the Bid Price approach and is a more preferable one. The EMR cost of the marginal unit

of capacity (the last hotel room) is directly applied to identify the lowest price that may

be accepted for selling the next unit. This lowest acceptable price is called the Bid Price

and as long as the requested rate is above it, the sale is possible. In fact, when a hotel

room is rented, the amount of available units of capacity is lower and at the same time

the Expected Marginal Revenue increases. In brief, when using the Bid Price approach a

hotel starts at the right of the EMR curve and moves up to the left, selling units at

discount until the point of indifference is reached. In reality, the hotel stops selling

additional units of capacity at the discount rate.

As regards the pricing, the realization of the revenue management program must

prevent the sale of hotel rooms at the uneconomic rates. Price reductions resulting in

increased revenue are successful only if limited to truly price sensitive market segments.

Revenues may be maximized only where high price sensitivity is combined with the

flexibility to follow peak/off-peak pricing techniques and strategies with several

variations in prices by time period. What is more, the EMR values are seen as an

important part in the evaluation of corporate contracts and marketing promotions.

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How will the Revenue Management look like in the future?

Sheryl E. Kimes, the professor of Cornell University School of Hotel

Administration in New York, has conducted a research with the aim of finding out how

may the revenue management look like in the future. 487 professionals were asked

various questions and the survey found that the future may be more strategic in nature

and strongly driven by technology. Furthermore, respondents think that the Revenue

Management function organization is going to be centralized, and the future revenue

managers will be required to possess a combination of analytical and communication

abilities. As a result, performance measurement may move to total revenue rather than

by revenue per each available room. (Figure 1.)

Figure 1. The Revenue management in the nearest 5 years.

After that the respondents were asked to evaluate 12 potential challenges to revenue

management adoption on a 1-5 scale. Surprisingly, all scores were below 4 that means

the respondents do not view any of the given challenges as very likely to occur. (Figure

2.)

Figure 2. Challenges that Revenue Management may face in the future.

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Another step in the survey was to indicate the likelihood of occurrence of eight RM

functions in the future. The results were that pricing and forecasting are in the group of

the most likely functions, while room assignment and property design- in the second

group. (Figure 3.)

Figure 3. The likelihood of particular RM functions in the future.

Furthermore, respondents were asked about possible application of the revenue

management in other hotel departments and due to them the most likely departments the

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RM would be applied to are function space, restaurants and spa, followed by retail, golf

and parking.

Figure 4. Hotel departments where the RM may be applied.

Another set of questions related to the hotel distribution and respondents had to

evaluate the likelihood of nine approaches. According to the respondents, the most

likely to occur in the nearest future are hotel websites, smart phone technology and

social networking, while the least likely are call centres and reservation offices. It

should be highlighted that in the respondents view the distribution may be integrated

with RM systems and reservations. (Figure 5.)

Figure 5. Hotel distribution in the future.

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One interesting result of the survey was that only 18.6 percent of those who took

part in it answered that in their point of view revenue per available room may be the

performance measurement of the future. The most common response was GOPPAR

(Gross Operating Profit) per available hotel room. (Figure 6.)

Figure 6. Performance measurement in the future.

The survey included many more questions, but in my opinion the above selection is

enough to depict some trends that are felt to occur in the nearest future. Respondents of

the survey think that the revenue management will become strategic and more

technologically driven. Furthermore, the change from a tactical emphasis on rooms

revenue to a strategic one on total hotel revenue may require different organizational

structure. What is more, the RM will move to a separate department and the managers

responsible for revenue will have to think in a more analytical way and be capable of

working across departments. In addition, some functions of the revenue management

will be centralized. Moreover, modern technologies will play a crucial role in hotel

distribution and as a result, the revenue management will be a more complex process,

requiring more effort from managers and if successfully applied- improving hotels’

prosperity.

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How to survive in the downturn – pricing optimization.

It is generally known that over the past years, the hotel industry entered a phase of

slowdown in consequence of the financial crisis and falling consumer confidence

worldwide. One of the effects of the downturn on hotels is a drought in investment. As

regards the attractiveness of hotels, private investors are rarely interested in them when

they are touched by an economic downturn themselves. There is, however, a way of

making profit in the hotel industry- acting on prices and costs.

The first step is to act on rates to generate profit improvement immediately. Rate

decreases are to be targeted and differentiated in every possible way. For instance, hotel

must use smartly their public rate portfolio, by opening early bird rate at an aggressive

level, but long in advance, to secure bookings and use only last-minute promotions if

necessary. The optimization of revenue per available room should be done by managing

the average room rate in an appropriate way. Although the hotels have various rates,

these rates are hardly ever fully exploited.

A range of hotels uses complex and well-engineered revenue management models

which main aim is to optimize pricing. It should be highlighted that such systems should

be only an implementation tool of a customer-oriented pricing strategy providing

boundaries and strategies for the system. One more thing that counts is undoubtedly rate

differentiation and fencing involving measures which aim at leading customers with

specific requirements to particular rate conditions and types. Such so-called fences exist

but are not implemented often enough. For instance, hotels offer discounts on bookings

made in advance, but only until the arrival date. One more example is giving discounts

for booking consecutive nights, but when a customer cancels part of the stay, many

chains still apply the discount. It seems that a careful monitoring of pricing

implementation is needed in some hotels and hotel chains. As regards hotel chains,

inconsistency in the brand’s pricing policy may lead to distorted customer perception

and dissatisfaction. In brief, every hotel that is a part of a particular chain must

implement a centrally defined brand pricing policy as it does not work on its own. In

fact, monitoring systems must be developed so that the brand’s identity is applied and

the pricing promise is delivered to the customer of each of the hotels in the chain.

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The last but not least thing that may contribute to the revenue is a loyalty programs,

especially in the times of economic crisis when customers may want to try different

brands and look for the best price offers.

In the times of downturn, success is determined by the ability of hotels to identify

short-term pricing improvements. Some of the key ingredients of successful crisis

management are rate differentiation, adaptation of loyalty programs and fencing. As a

result of such activities, hotel chains will be able to keep their profit margins up during

economical crisis and they will attract new customers due to their intelligent loyalty

schemes and discounts.

Conclusion

This work shows various aspects of the revenue management that are essential for

hoteliers who want to be successful. The first chapter gives a detailed definition of the

revenue management, the second one shows how to estimate expected revenue, the third

one presents the possible usage of the revenue management in the future, while the last

one focuses on some strategies of the revenue management that may be used in thetimes of downturn.

As the revenue management is now more complex and rewarding than ever, it must

be implemented carefully if not only revenues but also profits are to be created. Every

hotel manager or owner has one fundamental obligation- the optimization of the long-

term profitability of the assets overseen. Fulfilling such an obligation may be seen as

increasing rates during busy periods and dropping them during slower times with the

aim of maintaining occupancy or incurring expenses like renovation or investment in

technology.

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References

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growth through pricing optimisation. Journal of Revenue and Pricing Management Vol.

8, 5. Macmillan Publishers Ltd. 2011.

Enz, C. A., Canina L., Lomanno M. Competitive Hotel Pricing in Uncertain Times.

Cornell Hospitality Report Vol. 9, 10. The Center for Hospitality Research 2009.

Haley, M., Inge, J. Revenue Management: It Really Should Be Called Profit

Management . Hospitality Upgrade 2004.

Kimes, S.E. Hotel Revenue Management in an Economic Downturn: Results from an

International Study. 2009.

Kimes, S. E. Hotel Revenue Management: Today and Tomorrow. Cornell HospitalityReport Vol. 8, 14. The Center for Hospitality Research 2008.

Kimes, S. E. The future of hotel revenue management . Journal of Revenue and Pricing

Management Vol. 10, 1. Macmillan Publishers Ltd. 2011.

Milla, S. Three decades of revenue management: What's next? Journal of Revenue and

Pricing Management Vol. 7, 1. Macmillan Publishers Ltd. 2011.

The Basics of Revenue Management. Integrated Decisions and Systems, Inc.

2005.

von Martens T., Hilbert A. Customer-value-based revenue management . Journal of

Revenue and Pricing Management Vol. 10, 1. Macmillan Publishers Ltd. 2011.

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