Revenue Management In Tourism And Hospitality PDF

REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY RMH 405 Faculty: Ms. Evangeline C. Tipan  SECTION I: The Basics of Revenue Management in Hospitality Industry Sub-section 1.1: Introduction to Revenue Management  To achieve profits The Purpose of Business...

REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY RMH 405 Faculty: Ms. Evangeline C. Tipan  SECTION I: The Basics of Revenue Management in Hospitality Industry Sub-section 1.1: Introduction to Revenue Management  To achieve profits The Purpose of Business To generate returns on investment for business’ owners Characteristics of Accommodation Business Normally fixed location, except for Perishable mobile hotels (Hotels- on-Wheels) High operating costs Fixed supply, varying Capital and Labor Intensive; High Fixed Costs and Low demand Variable Costs Seasonal Solutions to seasonality: extend season; seek new markets; opening branches; mixed use development Introduction to Revenue Management REVENUE – The total amount of sales achieved in a specified time period. Revenue = number of units sold x unit price Two Ways to Maximize Profit 1. Generate or increase revenue 2. Control costs Revenue Management It refers to selling perishable goods and services to the most profitable mix of customers producing maximum revenues (Cross, 1997). Hotel revenue management is the practice of changing the price of a room in response to an anticipated increase or decrease in demand (Matilla & Choi, 2005; Upchurch, et. Al, 2002) Practical Application of Revenue Management Right customers Right channel Right forecasting Right website Right team approach Essential Term The Law of Supply: The higher the demand for product, the more it will be produced by sellers The Law of Demand: The higher the price of a product, the less it will be wanted by buyers Supply, Demand and Costs in Pricing Supply and demand Costs should not be should not be a major allowed to be a major determinate of price. determinate of price.  Scenario: There is an increase in the demand of seats in an airline going to a specific destination Possible to happen: May result in higher ticket prices Increase number of seats for sale In effect, sellers are inclined to Illustration of the produce and sell more. Law of Supply and On the other hand, buyers’ decision to purchase is affected by desire, ability to Demand pay, and willingness to pay. Determinants of Demand Income Expectations about prices Taste and preferences Price of related goods The number of consumers in the market Determinants of Supply Technology Resource prices The number of producers in the market Expectation of future prices Essential Terms and Formula Average Daily Rate (ADR): The average (mean) selling price of guest rooms during a specific period, such as day, week, month or a year ADR= Total Room Revenue Total # of Rooms Sold Essential Terms and Formula Occupancy percentage: The number of rooms sold during a specific time period; expressed as a percentage of all rooms available to sell during that same period. Occupancy Percentage=______Total Rooms Sold________ Total # of Rooms Available for Sale Essential Terms and Formula RevPAR: Short for “revenue per available room.” It is the average revenue generated by each available guest room during a specific period of time. RevPAR = ADR x Occupancy percentage or RevPAR = _______Total Revenue_______ Total Rooms Available for Sale  Essential Terms Stayover - Continuing guest, as per booking Understay – Guest who leave earlier than expected Overstay - Guest who stays longer than booked No show - Guest with confirmed/guaranteed booking who does not arrive, but has not cancelled Cancellations - provides the opportunity to resell Early Arrivals - Guest who arrive day/s before booking Essential Terms Competitive set: A group of similar and directly competing lodging properties to which an individual hotel’s operating performance is compared. Market segment: A subset of a customer group that can be readily identified by one or more common but individual customer characteristics (for example, the customer’s income, gender, or purpose of travel). Value: In a buyer or seller transaction, the amount of perceived benefit gained minus the price paid. Value = Perceived benefit - Price Target Market: The potential customers to whom a business’s marketing activities and message are directed. Pace report: A summary report describing the amount of future demand for a lodging property’s rooms or other services and the rate at which that business is being captured; Also referred to as a booking place report. Rack room rates: The price of rooms when no discounts of any type are offered to guests purchasing the rooms. REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY  SECTION I: The Basics of Revenue Management in Hospitality Industry ECTIPAN Sub-section 1.2. The Revenue Manager ECTIPAN Essential Skills Necessary for Revenue Leader Quantitative skills Communication skills Leadership Team player Business professionalism Creators of strategy ECTIPAN Essential Task for the Revenue Leader 1. Analyze previous night performance 2. Market segment review 3. Distribution channel analysis 4. Pace report 5. Competitive analysis 6. Pricing analysis (price optimization) 7. Inventory analysis (capacity optimization) 8. Displacement analysis 9. Reservation inventory analysis ECTIPAN  What do you think are the ethical issues or concerns that might be faced by the revenue manager? ECTIPAN  The Revenue Management Process ESTABLISH FORECAST MANAGE MANAGE EVALUATE PRICES DEMAND INVENTORY DISTRIBUTION RESULTS ECTIPAN REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY Sub-section 1.3. Price and Value ECTIPAN  What should be the basis for pricing? ECTIPAN  Different Views on Pricing Seller’s view of sale: Organizational profit (tangible benefit)= Selling price – costs Buyer’s view of purchase: Personal profit = Perceived value (intangible benefit) – Selling price ECTIPAN Understanding Value Value proposition: A statement describing the good or service to be received and the price to be paid for it. Buyer Assessment of a Seller’s Value Propositions Buyer Assessment Purchase Decision Perceived benefit – Price = Negative value Do not buy Perceived benefit - Price = 0 Do not buy in most cases Perceived benefit – Price = Positive Value Buy ECTIPAN The Relationship Between Quality and Price If quality is constant and price increases, then value decreases. If quality is constant and price decreases, then value increases. If quality increases and price decreases, then value increases. If quality decreases and price increases, then value decreases. If service is constant and price increases, then value decreases. If service is constant and price decreases, then value increases. If service increases and price decreases, then value increases. If service decreases and price increases, then value decreases. ECTIPAN  Essential Terms Intangible (benefit): Lacking material qualities, not able to be touched or seen, but nonetheless received. Quality: The degree of excellence of something as measured against other similar things. Examples include the USDA grade assigned to a cut of meat or the thread count of bed sheets Service: Intangible activities or benefits provided to buyers either alone or in conjunction with the purchase of a product. An example is the concierge services that are provided to registered hotel guests. ECTIPAN Hotel Pricing Cost-based pricing: A pricing method based on adding a target margin to the cost of the product or service. Competition-based pricing: A pricing method that bases a company’s price by monitoring and following their competitors Value-based pricing: The practice of establishing prices for a firm’s products and services based primarily on the buyer’s perceived value of those products and services. ECTIPAN Selling Techniques UPGRADING free offers of more than the initially expected service or product to customers COMPLIMENTARY ROOMS free rooms granted to any guest for marketing purposes UPSELLING attempt to persuade customers to purchase a product or service at a higher level compared to the originally booked category. ECTIPAN Selling Techniques CROSS-SELLING sales technique that involves the sales of additional items from different good/service categories without altering the initial purchase DOWN-SELLING defined as a selling activity which guides customers to buy products in lower than originally booked categories ECTIPAN  The Art and Science of Strategic Pricing Strategic pricing involves both the application of data and insights to effectively match the prices with the buyer’s perceived value of the products. Data is important for a science- based and data-driven decision- making. Consequently, insights and creative way of pricing can enhance customer’s perspective of value. ECTIPAN Differential Pricing Fixed pricing: The practice of a seller charging the same price to all buyers. This is sometimes referred to as flat or single pricing. Differential pricing: The practice of a seller charging different prices to different buyers for the same product or slightly different versions of the same product. This is sometimes referred to as demand-based pricing, segmented pricing, price differentiation, or price discrimination. ECTIPAN  Factors Impacting Differential Pricing Customer characteristics Location Time Quantity Distribution channel Product versioning Bundling Payment terms ECTIPAN  Essential Terms Room types: A lodging term used to identify specific guest room configurations. For example, king bed versus queen bedrooms, suites versus standard rooms, and ocean view versus garden view or standard view rooms. Bundling: Combining individual products and/or services into groupings that are sold for a single price, usually lower than the sum of the prices charged if the same included items were purchased individually. Prix fixe: French for fixed price. A meal offered with several courses for sale at a single price. Also know as table d’hôte. Package: The lodging industry term for a group of bundled products and services offered at one price. ECTIPAN Price Discrimination The practice of charging different prices for the same product (good or service). In price discrimination, the company attempts to extract the consumer surplus, that is the gap between the price of the product and the customers’ willingness to pay for the product. Prices offered at different customers may be done by changing the price structure. ECTIPAN Segmented and Dynamic Pricing SEGMENTED PRICING -Pricing rooted on segmenting customers according to their willingness to pay and thus charging them differently. DYNAMIC PRICING - The practice of altering the price of a good or service based on the demand instead of having the same fixed price for all. This allows the seller to maximize revenues by charging more during peak demands or conversely maximize sales through discounted prices during lower demand times. ECTIPAN Segmented and Dynamic Pricing PRICE NON-SEGMENTED SEGMENTED STATIC Same price for all guest Different prices for each (fixed price) customer segment. Prices are stable DYNAMIC Prices change over time Prices change over time according to the moving according to the moving dynamics of the market dynamics of each demand. Prices are time- segment. Prices are based, but not customer- jointly time-based and based. customer based. ECTIPAN Discounting This can be a pricing strategy only if it serves an intended behavioral response. For example, stimulating immediate cash payment for buying large quantities in downtimes. ECTIPAN  Referring to the formula of value: The Link Value = Perceived benefit – Price Between Quality, Service and Price Factoring intangible benefit would result to: (T + I) – P = V T=Perceived tangible benefit I= Perceived intangible benefit P= Price V= Value (Profit) ECTIPAN REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY  SECTION 2 Revenue Management for Hoteliers Section 2.1. Forecasting  The Importance of Demand Forecasting Effective data analysis leads to an accurate assessment of demand; the number of buyers seeking to purchase what you are selling. Essentially, accurate forecast of room demands leads to: Accurate revenue forecasts allow hotel department leaders to more efficiently schedule the departmental staff needed to serve guests. Proper staffing is required to ensure that guests are provided with the service levels intended. Customer-centric RMs are just as concerned with ensuring guest satisfaction as they are with revenue optimization. Accurate revenue forecasts give those responsible for purchasing supplies the information required to buy needed items in the correct quantities. The impact on guest satisfaction of ensuring the presence of necessary products and supplies upon guest arrival is significant. The Importance of Demand Forecasting Accurate revenue forecasts allow managers and owners to estimate the future profitability of their properties. Doing so provides the information needed to make decisions about profitability and cash flow that directly affect decisions related to capital improvements and capital expenditures. Accurate demand forecasts allow RMs to make better decisions about how to modify and manage the prices of their products and services. Data Types Type of information Describes Historical Data Events that have already occurred Current Data Events occurring now or in the very near term Future Data Events that will occur in the future Four Components of Effective Demand Forecasts Insight Effective Future Historical Demand data data Forecast Current data Historical Data Normally being used to determine trends or patterns in sales. Useful in doing corrective action plans and strategies for the present and future revenue targets  Current Data Current data can be examined best when it is divided into its three main reporting areas: Occupancy and Availability Reports  The number of rooms available to sell  The number of rooms reserved  The number of rooms held or blocked  The estimated ADR resulting from currently reserved or blocked rooms Group Rooms Pace Reporting- A summary report describing the amount of future demand for a lodging property’s group rooms and the rate(s) at which that group business has been captured. Also referred to as a group rooms booking pace report. Non-rooms Revenue Pace Reporting—Example: bookings of banquet or conference halls Future Data The historical and current data help revenue managers estimate future demand both in the accommodation and food and beverage sectors Factors Affecting Future Demand 1. Demand generators: An entity or event that produces a significant increase in business. For example, in a college community, “spring graduation” would likely be a significant demand generator (i.e., the direct cause for an increase in the use of overnight rooms) 2. Demand drains: A circumstance that produces a significant decrease in business. For example, in a hotel catering to business persons, holidays typically represent demand drains (because few business travelers travel on the holidays). Factors Affecting Future Demand 3. The strength or weakness of the local and national economy 4. Any addition or elimination of specific product or service 5. Predictable factors such as planned road construction of seasonality 6. Unpredictable factors such as unplanned events, road construction or severe weather condition 7. The pricing decisions made by the property’s competitors 8. The pricing decisions made by the property. Types of Forecasts Forecast Type Characteristics/Purpose Occupancy forecast Unlikely to exceed 100% Improves employee scheduling Shows guest arrival and departure patterns Provides occupancy percentages estimates Demand forecast May exceed 100% Identifies high and low demand periods Helps establish room rate selling strategies Revenue forecast May exceed 100% Should not exceed the revenue that can be generated by selling 100 percent of available rooms Estimates RevPAR Matches revenue forecasts to preestablished budgets Advanced versions help estimate the hotel’s cash flows Average remaining demand and average booking rate computation Days to Average cumulative Average final Average remaining Average arrival (t) bookings (on-the-book) demand demand booking rate 0 300 300 0 1 1 250 300 300-250=50 250/300=0.83 2 220 300 300-220=80 220/300=0.73 3 200 300 300-200=100 200/300=0.63 4 190 300 300-190=110 190/300-0.63 5 180 300 300-180-120 180/300=0.60 … 365 0 300 300 0 Forecasting Using Additive Model Forecastt = on-the-bookt + average remaining demandt Forecasting Using Additive Model Forecastt = on-the-bookt________ average remaining demandt Additive and Multiplicative Forecasts Stay Date Forec Days to Bookings on hand Additive forecast Multiplicative asting Arrival (t) (on-the-book) forecast date Oct 10th 10/9 300 270 270+50=320 270/0.93 = 324 Oct 11th 10/9 300 220 220+80=300 220/0.73 = 300 Oct 12th 10/9 300 206 206+100=306 206/0/67 =309 Oct 13th 10/9 300 192 192+110=302 192/0.63=303 Oct 14th 10/9 300 177 177+120=297 177/0/60=295 … REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY  SECTION 2 Revenue Management for Hoteliers Section 2.2. Inventory and Price Management Inventory Management The process of allocating and modifying the number of products available for sale at various prices and through various distribution channels. Definition Characterizing Rooms for Optimum Inventory Management Variations in rooms may be best utilized using room codes. Room code: A property-specific, shortened description used to identify a specific room product in a hotel. For example, NSDD to identify a nonsmoking, double-double room, or SSP to identify a smoking permitted suite that faces the swimming pool, and created by using the first letters of the words smoking, suite, and pool. Characterizing Rooms May Result to Price Differentiation Factors that may result to room price differentiation Location of room Room size or type Bed configuration Package Definitions Third-party resellers: Intermediaries that purchase hotels rooms for resale to their own customers. Current examples include intermediaries such as hotels.com, expedia.com, and Travelocity.com. Real time (inventory update): The term used to identify rooms inventory availability that is designed to be updated in the CRS/PMS immediately upon the taking or canceling of a room reservation. Last room available: A contract stipulation that requires a hotel to apply its contractually agreed on rate to any room type (suites typically excluded) available at the time a contracted guest makes his or her reservation. Blackout date: Any date on which a hotel will not honor a contracted (negotiated) rate. Common blackout dates include New Year’s Eve, holidays, and special events dates.  Definitions Host hotel: The hotel that has been chosen as the headquarter hotel for a group that must utilize multiple properties to house all of its group members. Cut-off date: The last day on which rooms may be picked up from a group block. It is also the date after which any unreserved rooms remaining in the block are to be released for public sale. Classifying guests by market segment Transient Group Special contract and negotiated Transient Transient guests are best defined simply as those who are not part of a group or contract sale. Strategies for optimizing rooms revenue relative to transient rooms inventory management can best be understood by examining those tactics applied prior to arrival and those that are applied at the time of the guest’s arrival at the property.  If rooms are blocked for a group but not ultimately picked up by the group’s members, the rooms may go unsold. If this occurs, the hotel can lose significant Group rate revenue—especially on those dates when demand for rooms was high but potential buyers were denied reservations due to the hotel holding excessively large room blocks for excessive periods of time. Special contract and negotiated Contract rate (room): A long-term room rate whose availability is agreed to in advance and for the duration of the contract agreement. For example, the agreement by a hotel to house every night for one year an airline’s ten-person flight crew. Negotiated rate (room): An agreement to provide a select group of travelers, subject to availability, rooms at an agreed on and discounted rate. The discounted rate is in effect for the term of the negotiated rate agreement. For example, a special given to all travelers employed by the Ford Motor Company. Also referred to as a volume discount rate. Overbooking as an Inventory Management Strategy Walking a guest to an alternative property usually happens when there is overbooking Walk (ed) means to relocate a guest with a confirmed reservation at a hotel to an alternative property. Actions taken by the property when there is overbooking Securing for the guest a room at a comparable alternative hotel Paying in full for the guest’s first night stay at the selected alternate hotel After the first night, paying the per-night difference in rate if the alternative hotel is more costly than the originally reserved property Providing or paying for transportation to and from the alternative hotel Providing reimbursements for telephone tolls used to inform relatives/friends about the use of the alternative hotel Cases of Unintentional Overbooking Damaged rooms Staff errors Inventory availability errors Overstays of other guests  Members of their hotel or brand’s loyalty (frequent guest) programs Suggested Group meeting or event attendees groups that Contracted rooms such as airline crew rooms must “NOT” Couples celebrating special be walked occasions Families arriving late at night Concerns on Intentional Overbooking Ethical concerns Issues on legality---intentional overbooking is similar to entering a contract where one cannot fulfill its obligations. Note: Any time a hotel can be proved in court to have intentionally overbooked rooms and then denied a room to a guest with a guaranteed reservation, that hotel will indeed be held liable for breach of contract and will be ordered to pay appropriate damages. Intentional overbooking and resulting breech of contract are difficult to defend on a strictly legal basis. Effect on hotel’s reputation Price Management Price management: The strategies and tactics employed by revenue managers to best match rates or prices charged with prospective customers’ willingness to pay.  4 important price-related differences between pricing airline seats and hotel rooms: 1. An airline reservation is a confirmed sale with a substantial financial penalty for any subsequent change in the flyer’s reservation. In most cases, however, a hotel room may be reserved at one price and then that reservation cancelled (with no penalty) if subsequent prices are reduced. Airline tickets are purchased, hotel rooms are merely reserved. The difference is significant, as anyone who has ever tried to change an airline ticket after it was purchased can readily attest. 2. Airlines company executives are responsible for establishing prices; thus they can ensure logic and consistency in their product pricing. In the hotel industry, neither Wyndham, Starwood, Choice, IHG, Hilton nor Marriott, for example, establish room prices. In fact, it is illegal for them to do so except in the very small number of hotels they actually own or manage.  4 important price-related differences between pricing airline seats and hotel rooms: 3. Airlines facing changes in demand for flights routinely increase or decrease the size of their planes. If continued demand is very high or low, flights may be added or subtracted. Once its construction is complete, however, individual hotels cannot utilize this approach. 4. An airplane that takes off with empty seats incurs virtually identical costs to an airplane that leaves with no seats empty. Especially today, when free services such as meals and beverages are eliminated or minimal, allowing a plane to take off with an empty seat makes very little sense. Hotels, however, incur real costs when the decision is made to sell a room. These costs include cleaning the room, stocking it with guest room supplies and amenities, and wear and tear. REVENUE MANAGEMENT IN TOURISM AND HOSPITALITY  SECTION 2 Revenue Management for Hoteliers Section 2.3. Distribution Channel Management Distribution Channels These are chains of business entities that a product passes through on the way from the service provider to the consumer. Terms Direct channel distribution- does not involve any intermediaries Indirect channel distribution- includes or involves intermediaries Intermediary- middleman or a third-party company that assists the service provider in the distribution of its products and services. Example: travel agencies (and OTAs) Direct distribution channels walking in calling hotel directly Faxing/emailing the hotel reservation Call center of the hotel central reservation system (CRS) Official hotel website Hotel sales personnel Indirect distribution channels Global distribution systems (GDS) Online travel agencies (OTAs) Flash sale websites Meta-search Vacation rental companies Social media**