Yield and Revenue Optimization (Notes) PDF

Yield and Revenue Optimization ( Notes ) 2.2 Final Written Examination The final exam will take place in week 18. Prepare to the exam by revising/reviewing all the sessions’ content, from the first to the last session. Examination time will be 75 minutes, with a mix of short essay (open-ended ques...

Yield and Revenue Optimization ( Notes ) 2.2 Final Written Examination The final exam will take place in week 18. Prepare to the exam by revising/reviewing all the sessions’ content, from the first to the last session. Examination time will be 75 minutes, with a mix of short essay (open-ended questions), computations, multiple choice and true/false questions. The exact split of points per question type will be given by the lecturer the previous session and will also be available during the examination. Week #1: The history of the topic A relatively recent topic coming from the industry practice Let’s start at the end of the 1970’s in the airline industry: - Deregulation - Low-cost model (yes the first low-cost companies…) - Competition - Loss of Market Share for Traditional airline companies American Airlines & the “super fares” How yield management came to the hotel industry: Marriott group & Bill Marriott By years 2000, the successes… Starwood new tool and acquisition by Marriott… A new corporate position: Chief Revenue Officer The 4 conditions to apply yield management 1. Fixed capacity environment (limited inventory) 2. Perishable resource 3. Varied but predictable demand 4. High fixed costs and low variable costs Note: These conditions are not mandatory but RM is just more efficient with them Yield versus Revenue YM = RM Yield Management = Revenue Management As history shows, it is not exactly true, but let’s keep things simple The 2 legs of RM ( revenue management ) Sales / Marketing Other important additions: Accounting Micro- economics FD operations Definitions Yield management is to sell the right product, to the right client, at the right time… Yield management allows to offer the most appropriate rates and inventory controls as regards the anticipated demand. Importance of RM today “Revenue maximisation is the logical way to address profitability challenges (…) and achieve sustainable financial success (...) in the hotel business. Hotel needs to drive top-line revenue to cover expenses and allow for profit. Cutting costs is seldom as effective, not only because it tends to harm the quality of service (…) The bottom line will be favourable only if the top line is strong and steady enough to meet financial objectives. Revenue management is critically important in meeting this challenge.” History and hotel groups success stories it is essential to work on revenue optimisation today, whatever the size and nature of the business: branded or independent business, city hotel or resort, single property or multi-units group… A must have in hotel management Importance of finance today Owner wants return on investment and management team wants bonuses! The goal of Revenue Management To improve the “top line” REVENUE - (ALL) COSTS = (NET) INCOME The mechanisms of yield & revenue Inventory What is inventory? Accounting vs. RM definition. - Accounting refers to the process of recording, classifying, and summarizing financial transactions to provide accurate financial information. - Revenue Management involves using data and analytics to optimize a company's income by adjusting prices and availability based on demand, often in industries like hospitality and airlines. Fixed capacity vs. Variable production - Fixed Capacity: Businesses with unchangeable resources, like hotel rooms or restaurant seating, focus on maximizing use. - Variable Production: Industries with scalable production adjust inventory based on demand, needing accurate forecasts to prevent surplus or shortages. Inventory controls in hotels: maintenance & closing of rooms, optimising occupancy, overbooking… And in a restaurant, can you guess what inventory is ? In a restaurant, inventory refers to the stock of food, beverages, and other supplies necessary to run daily operations. Managing this inventory is critical, as restaurant items are often perishable and have a limited shelf life. Inventory management in restaurants typically includes: Food and Beverage Stock / Menu Planning / Tracking Usage and Loss. Pricing Pricing is on top of the drawing! Why is pricing key and rst in RM? The core part of RM The difference between strategy and tactics. fi  Marketing “Know your market”… De ne the “market”? Is there a seasonality? What is the hotel market? What environment for your hotel ? Know your customer. Who is s/he? Channels What are the channels? When are we using the word channel in sales & marketing? Any idea? What is the purpose? How should I sell my hotel today? Should I go to the customer or the customer will come to me? The Revenue Manager today - Watches the competition and the calendar closely - Adjusts the rates - Opens/closes the rates according to the seasonality and the customers - Monitors every success, failure, opportunity and threat - Notes down every major event for the record A job with responsibilities and usually a decent salary (such as financial positions) fi Week #2: Why using metrics ? To assess the performance of a business for a shift, a night, a day, a week, a month, a semester, a year… To compare this performance with the previous day, week, month, … To compare your performance with the competitors’ performance = To know where you stand ! An information useful to the owner/investors, as the KPI ( Key performance indicator ) will assess the revenue creation. Essential KPI’s The ones that are widely used in the industry, that you “need to know” and which will be used during sessions and final examination. Occupancy Rate - Expressed in percentage (%) - Determines the level of sales from the past night, on a daily basis: how many rooms were sold. - Can also be computed for a week, a month, a year… - Generally, the first thing a GM asks when arriving in hotel. ( Number of rooms sold / number of available rooms ) x 100 = Occupancy Rate Rooms Available is the total number of rooms a hotel has that are available for booking. Rooms Sold is the number of rooms that have actually been booked by guests. Room Availability Mapping Vocabulary: RATE: 3 possible meanings - Speed at which an event is happening - Percentage of occurrence (eg. booking rate) - Cost charged for a good or service (eg. room rate) Sometimes, “rate” means percentage, sometimes it means an amount Average Daily Rate (ADR) - The average rental rate per paid occupied room, on a daily basis - Can also be computed for a week, a month, a year… - Sometimes also called Average Room Rate but widely known as the ADR Rooms revenue / number of rooms sold = Average Daily Rate ( ADR) Revenue Per Available Room (RevPAR) - Expressed in local currency (CHF, €, $, etc…) - By balancing the rooms revenue with the occupancy, RevPAR enables you to understand the money being made in relation to the potential, across any given time period (day, week, etc.) - RevPAR is the gold standard performance metric used by hotel industry stakeholders to measure the health of a property, set of hotels, market, state, country, world region, etc. Rooms revenue / number of available rooms = Revenue per available room (RevPAR) Average Daily Rate ( ADR ) x Occupancy rate = Revenue per available room (RevPAR) Inconvenient of RevPAR RevPAR does not take into account the costs related to the revenue generated. - If you earn +30% revenue but had +40% expenses, is it interesting? Rev.PAR is a mix and does not get deep into the analysis. - Do you prefer to sell 100 rooms at CHF 66.- or 66 rooms at CHF 100.- ? Total Revenue Per Available Room (TRevPAR) - Also expressed in local currency - Here, the use of the word “total” is fully justified - Total Revenue = Rooms Revenue + F&B Revenue + Spa Revenue… Total revenue / number of available rooms = Total Revenue per available room (TRevPAR) Usefulness of Trev.PAR? - F&B contribution to overall revenue - Example of a casino in the USA. Gross Operating Profit Per Available Room (GOPPAR) - Expressed in local currency - GOP = Total Revenue - Departmental Expenses - Undistributed Operated Expenses. - The GOPPAR takes into account the expenses, better reflects the business activity and more interesting to the management eyes. - The performance of the hotel management by computing the GOP on a long period (semester, year…) and dividing it by the number of available rooms for the period. GOP / number of available rooms for the period = GOPPAR Revenue Per Available Seat Per Hour (RevPASH) - The financial performance of a restaurant by balancing the sales made with the seats used - Can also be calculated on different periods: hourly, daily, monthly… Restaurant revenue on period / (number of seats * number of hours opened) = (RevPASH) A trend: - Some KPI are now not expressed with the number of available rooms but by the property surface, expressed in square meters (M). Introducing the “PAM” = per available square meters. - REVPAM, TREVPAM, GOPPAM… - Who is interested by such a measure? What kind of property? Resort? City hotel? - Also allows “hotel owners to compare their hotel’s performance with other real estate classes, such as office, residential or retail, to assess value creation of the building Other KPI Interesting to know them but not mandatory, not used in following exercises, won’t be questioned in end of semester exam. Total Revenue Per Customer - Usually calculated on a long period to get a significant number (season, year…) - Is a starting point for developing Upselling Total Revenue / Number of Guests = Total Revenue Per Customer Food & Beverage Sales Per Guest - Expressed in local currency - Can be calculated for a day, a week, a month… - The sales per guest and per period indicates how efficiently inventory is moving. Total F&B sales (or food only or beverage only) / total occupied seats = Food & Beverage Sales Per Guest Average Length Of Stay - A higher score is better than a lower score, as an indicator of a higher overall spending. - An advantage to ALOS is that you can use the data to make pricing decisions. For example, if you have a low ALOS, you could increase your room rate for short stays or offer better deals for longer stays. Number of occupied rooms / number of bookings = Average Length Of Stay Customer Satisfaction Rate - An essential part of reputation management. - Note: my preference on this topic goes to the Number of Very Positive Reviews (price of excellence!) Number of Positive Reviews / Total number of Reviews = Customer Satisfaction Rate Session take-away - Remember that KPI’s are just snapshots at a given time - They are so many of them… Just select the useful ones saying something about your business! (numbers “talk”!!!) - KPI’s are showing something but the changes brought should be made on a deeper level. Don’t look for the short term, have the “big picture” in mind instead! Example 1: your property receives bad comments for a bad service in the restaurant. Do you want to punish the waiter or offer a better training to your team?  Example 2: your occupancy rate was very low for one night. Do you want to blame the front-desk team in place or do you want to better advertise your hotel ? Computations on Revenue Management KPI 1. Hotel A has 50 rooms and last night 35 rooms were occupied. What was the occupancy rate? ( Number of rooms sold / number of available rooms ) x 100 = Occupancy Rate Rooms Sold = 35 Rooms Available = 50 Occupancy Rate = ( 35 /50 ) × 100 Occupancy Rate = 70 % Answer: 70% 2. Hotel B has 25 rooms and 5 were sold last night. What was the occupancy rate? ( Number of rooms sold / number of available rooms ) x 100 = Occupancy Rate Rooms Sold = 5 Rooms Available = 25 Occupancy Rate = ( 5 / 25 ) × 100 Occupancy Rate = 20 % Answer: 20% 3. Hotel C has made revenue of CHF 7’500 last night and has 25 rooms. What was the ADR for last night? Rooms revenue / number of rooms sold = Average Daily Rate ( ADR ) Revenue = CHF 7,500 Rooms Sold = 25 ADR = 7,500/ 25 ADR = 300 Answer: CHF 300 4. Hotel D has made revenue of CHF 15’500 last night and 50 rooms were occupied. What was the ADR? Rooms revenue / number of rooms sold = Average Daily Rate ( ADR ) Revenue = CHF 15,500 Rooms Sold = 50 ADR = 15,500/ 50 ADR = CHF 310 Answer: CHF 310 5. Hotel E has made revenue of CHF 2’500 and 67 rooms were sold. What was the REVPAR for last night? Rooms revenue / number of available rooms = Revenue per available room (RevPAR) Revenue = CHF 2,500 Rooms Sold = 67 Rooms Available = Rooms Sold + Unsold Rooms (we assume all available rooms were sold, so 67 rooms are available) RevPAR = 2,500 / 67 RevPAR = CHF 37.31 Answer: CHF 37.31 6. Hotel F has made revenue of CHF 25’000 last night and has 125 rooms. What was the REVPAR? Rooms revenue / number of available rooms = Revenue per available room (RevPAR) Revenue = CHF 25,000 Rooms Available = 125 RevPAR = 25,000 / 125 RevPAR = CHF 200 Answer: CHF 200 7. Hotel G has made revenue of CHF 12’000 last night and has 120 rooms. Among these rooms, 20 were under renovation and another 10 were not sold. What was the REVPAR? Rooms revenue / number of available rooms = Revenue per available room (RevPAR) Revenue = CHF 12,000 Total Rooms = 120 Rooms Under Renovation = 20 Rooms Not Sold = 10 Rooms Available = Total Rooms - Renovation Rooms - Unsold Rooms Rooms Available = 120 - 20 - 10 Rooms Available = 90 RevPAR= 12,000 / 90 RevPAR = CHF 133.33 Answer: CHF 133.33 8. Hotel H has made revenue of CHF 65’000 last night and has 265 rooms. Among these rooms, 3 rooms were under renovation, 5 rooms were under maintenance and 7 were out of order. 10 rooms were sold to some walk-in guests and 2 rooms were sold between midnight and 1am. What was the REVPAR for last night? Rooms revenue / number of available rooms = Revenue per available room (RevPAR) Revenue = CHF 65,000 Total Rooms = 265  Rooms Under Renovation = 3 Rooms Under Maintenance = 5 Rooms Out of Order = 7 Rooms Sold = 10 (walk-in) + 2 (sold after midnight) = 12 Rooms Available = Total Rooms - Rooms Out of Order - Rooms Under Renovation - Rooms Under Maintenance Rooms Available = 265 - 3 - 5 - 7 Rooms Available= 250 RevPAR = 65,000 / 250 RevPAR = CHF 260 Answer: CHF 260 9. Hotel I made revenue of CHF 650’000 for the first semester. Total expenses for the period are CHF 475’000. What was the GOPPAR for the period? GOP / number of available rooms for the period = GOPPAR GOP = Total Revenue - Departmental Expenses - Undistributed Operated Expenses. Revenue = CHF 650,000 Expenses = CHF 475,000 Rooms Available (assuming standard number of rooms) = not provided, but we can assume a typical number like 100 rooms. GOPPAR= ( 650,000 − 475,000 ) / 100 GOPPAR = 175,000 / 100 GOPPAR = CHF 1,750 Answer: CHF 1,750 10. Hotel J has 250 rooms. It made revenue of CHF 1’750’000 for the first semester. Total expenses for the period are CHF 1’275’000. What was the GOPPAR for the period? GOP / number of available rooms for the period = GOPPAR GOP = Total Revenue - Departmental Expenses - Undistributed Operated Expenses. Revenue = CHF 1,750,000 Expenses = CHF 1,275,000 Rooms Available = 250 GOPPAR = ( 1,750,000 − 1,275,000 ) / 250 GOPPAR = 475,000 / 250 GOPPAR = CHF 1,900 Answer: CHF 1,900 Second computations on revenue management tools. You are the lucky owner of a full-service property in Neuchatel, Switzerland. The hotel has 125 rooms in total. Last night, 2 rooms were occupied by the family of the General Manager, at his discretion, 1 room had no water as the maintenance could not find the problem, and 2 rooms were under refurbishment. 27 rooms were sold at CHF 158, 56 rooms were sold at CHF 146 and 28 rooms were sold at CHF 142. The restaurant had 23 customers for lunch for an average check of CHF 24 per person, and 35 persons for dinner at an average check of 46 per person. The restaurant in this property has 38 seats total and was opened 3.5 hours for lunch and 4.5 hours for dinner. The bar made a revenue of CHF 567. The spa was closed. - Please indicate for last day and night what were: Room revenue 27 rooms sold at CHF 158 27 × 158 = 4,266 CHF 56 rooms sold at CHF 146 56 × 146 = 8,176 CHF 28 rooms sold at CHF 142 28 × 142 = 3,976 CHF Total Room Revenue = 4,266 + 8,176 + 3,976 = 16,418 CHF Restaurant revenue Lunch Revenue (23 customers, average check of CHF 24): 23 × 24= 552 CHF Dinner Revenue (35 customers, average check of CHF 46): 35 × 46 = 1,610 CHF Total Restaurant Revenue = 552 + 1,160 = 2,162 CHF Total revenue ( TRevPAR ) To calculate Total Revenue, we sum up the room revenue, restaurant revenue, and bar revenue: Bar Revenue: CHF 567 (as given) Total Revenue= 16,418 + 2,162 + 567 =19,147CHF  Occupancy rate ( Number of rooms sold / number of available rooms ) x 100 = Occupancy Rate Rooms Available = Total Rooms - (Rooms under refurbishment + Rooms with no water + Rooms occupied by General Manager's family) = 125 − ( 2 + 1 + 2 ) = 120 rooms Rooms Sold = 27 + 56 + 28 = 111 rooms sold Occupancy Rate = ( 111 / 120 ) × 100 = 92.5% ADR Rooms Revenue / Rooms Sold = ADR ADR = 16,418 / 111 ADR = 147.72 CHF RevPAR Rooms Revenue / Rooms Available = RevPAR RevPAR = 16, 418 / 120 RevPAR = 136.82 CHF TRevPAR Total Revenue / Rooms Available = TRevPAR TRevPAR = 19,147 / 10 TRevPAR = 159.56 CHF RevPASH Restaurant Revenue / total available seat hours = RevPASH - Available Seat Hours = (Number of seats) × (Hours open for lunch + Hours open for dinner) Available seat hours = 38 × ( 3.5 + 4.5 ) = 38 × 8 = 304 hours RevPASH = 2,162 / 304 RevPASH = 7.12 CHF Week #3: Hotels classification 5 star : Luxury 4 star: Upscale 3 star: Midscale 2 star: Economy 1 star: Budget Some hotel chains Market: What is a “market” in the original meaning? - A physical place where buyers and sellers meet to trade goods. What do we understand as “market” today? - A system or environment where goods, services, or information are exchanged, including digital and global contexts. The various markets and the various customers: the Swiss market - how to define? - Refers to the consumer base, preferences, and economic characteristics specific to Switzerland, influenced by its culture, regulations, and economic landscape. What is the market of a hotel? - The specific segment or group of customers a hotel targets, including tourists, business travelers, or locals, depending on location, amenities, and pricing. Target market: The specific group of customers a business aims to attract and serve. Tools for market analysis What do SWOT and PESTEL stand for? - SWOT : strengths, weakness, opportunities, threats - PESTEL: Political, Economic, Social, Technological, Environmental and legal factors. What is the difference between them? SWOT: the “local” market - your competitors & you PESTEL: the “macro” elements of the national/regional level Competition - Simple definition of competition: businesses with which you are sharing the same customers. - Direct competitor: a business selling the same quality of service (or products) than yours. - To assess “who” is your competition, answer the following criteria: 1. Location: location is prime, location is key! ( Put yourselves in the customers’ shoes! What are customers expecting? ) 2. Pricing 3. Star ranking 4. Hotels features , including service Assessing a hotel market The “comp-set” table What is the hotel category? Franchise or independent? Friend or Foe? City center, suburb or airport hotel? Assessing competition with numbers Exercise 1 Hotel Number of Capacity share Rooms Sold Rooms sold rooms share ( number of rooms / total number of ( rooms sold / total rooms) x 100 number of rooms sold ) x 100 A 150 7.32% 90 5.82% B 225 10.98% 153 9.90% C 400 19.51% 260 16.82% D 525 25.61% 420 27.17% E 750 36.59% 623 40.30% Total 2050 100.00% 1546 100.00% Assessing competition with numbers This said, several comments as we need to be critical with numbers: 1) You don’t get this data easily (actually it’s very difficult), even from specialised companies Those of you who worked front-office, do you remember getting data from competition? 2) Is it really useful to know, compared to what you already know (your overall property performance) ? Look at hotel D in the previous exercise, don’t you think you already know you performed well when you are fully booked? 3) The more time you spend watching the competition, the less time you spend improving yours!!! Week #4: High vs. Low contributors - Not all customers are of value to your hotel. - Some customers are individuals with high value outside the hotel but do not bring any value inside… - It is therefore necessary to define them and create categories, that is to say to establish a customers’ SEGMENTATION. Customers segmentation Segmentation categories The basic segmentation Leisure / Business = Purpose of the visit to the hotel Individual / Group = Contribution to the occupancy rate (and to the revenue!!!) Another segmentation? Is there a need for another segmentation? Do we have difficulties to segment customers now? - The “contribution to the revenue” is progressively taking over the “purpose of visit” as main criteria, an effect of revenue management’s growing importance in hotel management, - Booking habits have changed a lot, Working habits have changed a lot, Traveling habits have changed a lot… - It is more and more difficult to identify a business customer from a leisure customer From Segmentation to Hotel Rates Because hotels guests are varied, they have varied expectations as regards: - The service - The room bookings - The room rate In marketing, we call them the “needs and wants”. The customers’ sheet - - Please open the customers’ behaviours sheet in the “extra resources” 10/15 minutes to fill-in the main characteristics of the different segments - - - Customer loyalty You probably heard of “loyalty programs”. - Can you name some? How does it work? Why developing loyalty? Because it’s convenient… :) Because it’s less expensive: some say 7 times less… Customer Acquisition & Retention About “getting customers” The prospects: the 3-tier of non-customers Customers + loyalty = Revenue !!! The ways to develop loyalty among customers: Front-office and loyalty (visual) recognition The GM too Discounts, gifts, etc... = attentions!!! CARDEX: the hotel clients’ file for recording purposes, beware of the content in some countries! Newsletters: what about them? Customer Relation Management ( CRM ) Ever heard of Customer Relationship Management, better known as “CRM”? ‣ Analysing guest behavior ‣ Giving rewards ‣ Using loyalty programs: Platinum, Gold, Silver, … The more customers spend, the more you want them to come back, the bigger the discount and the offers !!! Week #5: Supply & Demand: “Supply and demand, in economics, is the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. It is the main model of price determination used in economic theory.” Supply: What is “supply” in the hospitality industry? Consequences of an increase of supply ? - Lower Occupancy Rates - Price Pressure - Higher Marketing Costs - Enhanced Customer Choices - Potential Decrease in Profit Margins Consequences of a decrease of supply ? - Higher Occupancy Rates - Increased Pricing Power - Less Competitive Pressure - Improved Profit Margins - Possible Impact on Customer Experience Demand: Could you define “demand” in the hospitality industry? Consequences of an increase of demand ? - Higher Room Rates (ADR) - Higher Occupancy Rates - Increased Revenue (RevPAR and TRevPAR) - Strain on Staff and Resources - Reduced Availability - Enhanced Revenue Opportunities in Ancillary Services Consequences of a decrease of demand ? - Lower Room Rates (ADR) - Lower Occupancy Rates - Revenue Decline (RevPAR and TRevPAR) - Cost-Cutting Measures - Increased Competition and Promotions - Potential Service Reductions Supply & Demand Demand is the driving force In hotel management, supply is a “constant”. Remember the “fixed” capacity/inventory? Therefore, we will be looking at how demand evolves A few recalls Number of customers Number of sales x Price sold = REVENUE !!! Linking demand to hotel revenue If it all depends on the expected demand level, then the main question is: How are we going to assess this level? This is why the precise estimation of future demand is essential to revenue generation and optimisation of RM process. Forecasting! Forecasting! Forecasting! What is forecasted on regular basis? Which forecasts do we look at ? A bit different here though… methods used are not the same. - Where history helps you to seize & understand future business activity - Qualitative and quantitative methods - Tools to create and monitor Forecasting Methods - Qualitative Qualitative is searching for the trends and the patterns Qualitative Methods: Market Research: Gathering information from potential customers regarding a “new” product or service. Juries of Executive Opinion: Top executives jointly prepare forecasts. Sales Force Estimates: A bottom-up approach to aggregating unit managers’ forecasts. Delphi Method: A formal process conducted with a group of experts to achieve consensus on future events as they affect the company’s markets. Forecasting Methods - Quantitative Quantitative Methods Causal Regression Analysis: Independent variables are related to the dependent variable using least squares: y = A + Bx1 + Cx2. Approaches include similar linear regression, multiple linear regression, and nonlinear regression. Econometrics: A system of interdependent regression equations describing one or more economic sectors. Time Series Naïve: Simple rules such as forecast equals last period’s actual activity. Smoothing: Based on average past values of a time series (moving average) or weighting more recent past values of a time series (exponential smoothing). Decomposition: A time series that is broken down into trend, cyclical, seasonality, and randomness. Example for the Smoothing method Here are the figures for my restaurant activity for the past Mondays of the month: How much should I expect for Monday October 23rd ? Exercise 1) How is “Remaining Demand” assessed? 2) What day of the week is the hotel OVER and UNDER performing? 3) When would you increase the rates? 4) What kind of hotel is it? Week #6: Prices in the industry Prices in hotels and restaurants, what is the main difference ? Price and revenue management Pricing Theory Now, let’s get a little bit theoretical and tackle price theories… And let’s start with a previously discussed concept: supply and demand Pricing Theory - 1 Let’s look at supply and demand separately, and assess how both work. The market price is the current price at which a (…) service can be bought or sold. The market price of (…) a service is determined by the forces of supply and demand. The price at which quantity supplied equals quantity demanded is the “market price” (or “price equilibrium”) Pricing Theory - 2 Variations happening in a given market Demand elasticity The price elasticity of demand refers to the degree to which demand responds to a change in price. Inelasticity of demand is evident when demand for a good or service is static when its price changes. PEd = % Change in quantity / % Change in price Veblen Goods Veblen Goods: a different approach to pricing How would you apply this to the hotel industry? What does it tell you about customers? An interesting thought for a Revenue Manager: can you guess how Veblen is helping revenue management? Price building strategy The 3 C’s of pricing 1. Competitor - based 2. Customer - based 3. Cost - based The Pricing Structure Price should be determined taking into account these factors and in this order First: The Costs Why taking the costs into account? Remember the income statement: what happens when expenses > revenue? Mark-up method: “buy for a nickel, sell for a dime” Which value using? 40% or 50% cost of sales? What are the countries specifics (taxes, wages…) Second: The Competition - Are you competitive? Is your product/service matching the competition = offering at least an equivalent value for the price asked? - Do you have a USP? - The limits of monitoring competition. Why does your pricing cannot be entirely based on competition? Third: The Customer - The customer has a budget - The customer also has expectations: level of service, booking policies, … - The customer “willingness to pay” = price a customer is ready to give for a defined service. Amount can be increased with a USP… An example from a luxury hotel Hotel Casadelmar ***** (Corsica, France) Compute rate increase per year. How do you explain this increase? Is it linked to inflation? EXCEL TIP Compound annual growth rate = (ending value / starting value) ^ (1 / nb years) - 1 1. Verify the cell can reflect a percentage rate. 2. Type a "=" sign to start the formula. 3. Enter the compound growth rate formula. “Ending value”, “starting value” and “nb years” can be a cell number (eg. B7) OR a value 4. Press “enter". Week #7: A case study Your 4-star hotel has 100 rooms, with tonight occupancy rate = 50%, room rate = 275.- Only one STD room type Usual range of rates starts from CHF 155 to 275 Direct competitor n°1 is a 100 rooms 3-star hotel, with tonight occupancy rate = 90%, and sells its STD room for CHF 235.- Direct competitor n°2 is a 100 rooms 4-star hotel, with tonight occupancy rate = 95%, and sells its STD room at CHF 255.- 1. How do you analyse the situation? 2. What are you going to do? Will room rate change? The reservations booking cycle An overview of dynamic pricing A quick recap: Bear in mind the practical issues! What are the consequences? Legal Customer satisfaction Selling policy consistency Dynamic Pricing Starting with the lower possible rates, using forecasts and demand calendar. Usually this rate would be the “Guaranteed” rate. Increasing booking prices with occupancy rates, opening more expensive rates with less conditions (refundable, cancellable, modifiable…). Checking the progression of booking levels for the DOA day after day, week after week. The more bookings, the higher the rates. Hence, the other name of dynamic pricing = demand pricing. Softwares and applications monitor your rates through patterns and models. Week #8: In hotels: For revenue management, what do we need to know? When will customers come? In the week? In the month? In the year? How many of them should I expect for tonight? And for all dates of arrivals (DOA) ? (in order to sell at the right rate) For this purpose, we use a simple but efficient tool ! Overview of the Demand Calendar Demand Calendar in a nutshell The demand calendar is a past year calendar but very useful to forecast future occupancy. Your PMS should propose you this function. A very simple principle: based on previously accounted demand, I can reasonably assume that the same number will be coming back + adjustments for the coming year (TBC next hour) Thus, I just have to keep record of the demand every day If this tool is not in your hotel, build it! And it will start “bearing fruits” one year later. Managing rates As you know, hotel have many different rates including: Rates to differentiate the rooms : Standard, Executive, Suites, etc. Rates to differentiate the services used during the stay: Room only, Breakfast included, Packages  Rates to differentiate the booking conditions: Guaranteed, BAR, Also sometimes: Single occupancy / Double occupancy Individual vs. Group Rates Rates diversity Booking conditions & revenue Customers should always have the possibility to cancel a booking (legal aspect). So the important question is: what are the conditions linked to the cancellation ? The revenue is secured when the booking is confirmed or guaranteed, that is to say: - When the customer does not have the possibility to get a refund - When the customer does not have the possibility to modify the booking The revenue is uncertain when the booking is not confirmed or not guaranteed, that is to say: - When the customer has the possibility to get a refund (usually 100% of the rate) - When the customer has the possibility to modify the booking. Low or no condition: (modifiable, refundable…) High rate High conditions: (non modifiable, non refundable…) Low rate The rates architecture Cancellation policy For individuals: depending on the booking rate (as specified previously) For groups: 100% of booking amount refunded if cancellation done at least 1 month before check in date 50% of booking amount refunded if cancellation done between 1 month and 1 week before check-in date 0% of booking amount refunded starting from a week before check-in These conditions may change according to the chances to rent again the space/rooms, after cancellation Packages If room = 200 + dinner for 2 = 100 + spa for 2 = 50, then package is usually 350.- Package does not mean discount… Could you tell why? Package is in reality the assurance for the customer to get all the desired services and for the hotel to plan their offering. Don’t forget we are doing revenue management… discounts are NOT our “best friends”… Week #11: A typical business week FYI: Business week = Monday to Thursday night (included) On the whiteboard Let’s take the example of a business city hotel and make an assumption for the week occupancy: 1- night stay, 2-nights stay, 3-nights stay & 4-nights stay. As a result… A 50% increase of booking likelihood for both nights The weekly business demand  In order to maximise overall occupancy, what should we do to get occupancy rate = 100% on the Mondays and the Thursdays? Among the guests who are booking for these 2 nights, we have several kind of requests with different Lengths Of Stay (LOS)… Remember the exercise we did? Which ones do you think we want to “select and hold”? Our goal: We want 20% of our Tuesdays’ guests to book as well for a Monday and 20% of our Wednesdays’ guests to book as well for a Thursday. If doing nothing, these guests might book before or after the hotel is 100% occ. So, we will enter a minimum stay requirement of 2-nights (ideally 3 or 4) for all booking requests including a Tuesday or a Wednesday. This is a specific/particular situation where the hotel is not demanding but selecting… The rewards of the previous efforts made on attracting guests!!! “A whole new bargain…” Topics raised by the issue 1. Inventory control & minimum stay 2. Practically, what’s the process? 3. Discounting (some of you thought this might be useful) 4. Legality Let’s discuss them one by one Inventory controls Guests selection practically The process: how to do it? Electronically: Easy with the CRS - Just enter the parameters + the guest mix Over the phone: A bit more touchy… - Need to ask check-in + check-out dates (or nb nights) - And then accept/reject booking request Discounts and revenue creation This is a “high demand level” period, ideal for revenue optimisation. Optimising revenue is contradictory with applying discounts. It is essential to differentiate the use of discounts: - in low-demand situations, where they can help to create demand, - in upselling and cross-selling, where they help to increase revenue directly. - in high-demand situations, where their use is counterproductive. Keep in mind that on many occasions, discounts are counterproductive Legality Minimum-Stay requirements brings us to the legality of client selection, which topic was already foreseen in the practical aspects (telephone conversation) The most common inquiry on the topic is about whether a hotel that refuses to sell an available unit to one customer and then sells it to another customer is guilty of illegal discrimination. The answer is simple: no illegal discrimination takes place… - if reasonable MS criteria are used to determine whether to accept a booking - and the hotel accepts the business of any potential customer who qualifies, regardless of his/her status The hotel is theoretically free to determine its own business practices provided they are not hurting a particular category of population. This statement if obviously subject to each country’s regulations. One last question on the topic How will you deal with guests who book 2 or 3 nights because “they have to” to get a room in your hotel, but cancel the night(s) they are not interested in right after ? Will you ask for proof (or documented emergency cancellation), if the guest cancels ? Leisure guests How to make the guest stay one more night on Sunday? Option1: Discounted rate 2 nights at 80.- 80 80 Revenue = 160 Option 2: Premium rate 2 nights at 100.- per night + 1 free night 100 100 0 Revenue = 200 Option 2 is an additional 40 in revenue Guests save 40 compared to Option 1 (80x3 = 240) As a starter… Kimes (1989) analyzes several managerial concerns essential for an effective overbooking practice and states that “top management cannot assume that Revenue Management will just happen, it requires careful planning and training”. Thus employees have to be intensively trained in order to clearly understand the aim and characteristics of overbooking. Moreover, employees who are directly dealing with overbooking decisions have to be periodically trained how to behave in possible customer conflicts and “to take their own decisions in an unfamiliar situation” This is why we are going to focus on the best practices Hotel overbooking definition The practice of overbooking can be defined as confirming more reservations than the hotel’s available physical capacity to provide the service. What is overbooking? A method largely used and spread in businesses using yield management… Originated in airline industry, just like RM in general. Transportation industry (airlines, cruises, rentals), Hospitality (hotels, …) & events among others. OB is a game: win or loose… do you like to loose? Overbooking double objective: increasing revenue AND client not dissatisfied. Well-managed overbooking: Increasing hotel long-term revenue & maximising profit. Badly-managed overbooking: Loss of room revenue, decreased customer loyalty & decrease in hotel reputation Assumptions for OB It is commonly admitted that a business hotel experiences booking cancellations or no- shows in a range of 2% to 5% of the total rooms. Imagine a hotel has 100 rooms and 30 fully booked business weeks per year. Let’s make the calculation! Remember that our focus is to get 100% occupancy as it is the main driver for the hotel revenue. Overbooking starts from the same assumption : If 3 rooms are “lost” then let’s sell 103 rooms to sell to get 100% occupancy! Same for 1 room or 5 rooms lost… - OB is a game You can lose or win… Suppose you allowed 102 bookings for your 100 rooms hotel… You get 2 cancellations: Everything is OK, you win! You get 0 cancellation: 102 guests ask for a room, you lost and that’s where the fun begins!!! Over Booking - Who? Criteria for transferring/relocating a guest: - No OTA - Guest physical condition - Business or Leisure - Man or Woman - Loyal or First timer? Front-Office guts and feelings here! Over Booking - How? Phone in the evening 19.00/20.00 (max. 21.00), after the big rush of check-ins is done, to the guests who have not checked-in yet. Get final number of confirmed guests. Plan transfer/relocation accordingly DON’T wait until the very last guest (the most tired) checks-in… He is the angry one !!! The guest who will leave a terrible review and ruin your hotel reputation… Relocating process Customers meticulously selected. Speech prepared: reason? No reason bye “Sine qua non”: Hotel close-by with equal or superior level… prior arrangements ie. preferred rate, availability… Taxi? Other? Over Booking objective 2 Objective 2: customer is NOT dissatisfied - The customer CANNOT be satisfied since there is breach in a the contract made with him from the beginning. And it comes from our side… - It means the whole transfer/relocation process MUST be done having in mind the customer’s satisfaction within the dissatisfaction. - There has to be a solid compensation from the customer point of view Financially - The trade-off must be interesting for the hotel - Transfer/Relocation has a cost: you cannot redirect to lower categories… - There is no point spending a lot in other hotels’ bookings and in taxi or other compensation, - Lowering the number of guests to relocate means good forecast of the number of OB for each night and handling well the confirmation process. In the end You might not want to practice OB for reasons belonging to the country’s customs in hospitality or for personal reasons. Truly, there are differences between countries and customers’ habits. But if you want to practice OB or even if you have to do it… The important point is to do it well and to follow the recommended processes or why not to create your own process based on the given recommendations. This is also something you might bargain to an owner: Overbooking SOP set up vs. Salary increase !!! Week #12: Displacement analysis A displacement analysis is the process of analysing the value of a group booking, that is to say to evaluate the financial interest of a group versus individual (transient) bookings. If the group combines very well with the individual bookings and fill-in the empty rooms (total rooms booked is < 100% occupancy), there is no calculation to make. What we will analyse is the difference between the revenue generated by the group and the cost of the individual bookings not accepted. This analysis will tell us if we should allow the group booking. Example: 100 rooms hotel Group vs. Individuals You might be wondering why allowing a group, knowing that usually rooms for group bookings are sold at a lower rate. So, it’s all about the quantity of rooms sold and the date ! The lifetime value of a customer may also have a certain importance. If hotels would like to benefit from group revenue when overall demand is soft, hotels need to accommodate groups also when demand for individual rooms is strong. How to perform the analysis Using a spreadsheet (Excel, Google sheet…) It needs to be detailed: At first glance, the room rates are higher for transient customers and room revenue is higher than anything else in a hotel, BUT there are other sources of revenue to be taken into account ! We will calculate the revenue generated: 1. By the group rooms sold, according to the specifications of the RFQ (request for quotation) * 2. By the displaced rooms not sold and including the forecasted and related F&B sales (with a percentage and an average check)  We will then subtract the second from the first to calculate the net revenue differential. If the result is negative (displaced cost > group revenue): “NO GO!” If it is positive (group revenue > displaced cost): “GO!” The displacement analysis is a four-step process: 1. Establish net room revenue differential 2. Establish net F&B revenue differential 3. Establish other revenue differential 4. Summarise and conclude Week #13: The RM triangle Distribution vs. Reservation Definition of distribution A distribution channel is a chain of business intermediaries through which a good or service passes until it reaches the final buyer or the end consumer. Distribution channels include wholesalers, retailers, distributors, and the Internet. Direct and indirect distribution In a direct distribution channel, the manufacturer sells directly to the consumer. Indirect channels involve multiple intermediaries before the product ends up in the hands of the consumer. DIRECT: Manufacturer -> Consumer INDIRECT: Manufacturer -> Intermediary -> Consumer The essential questions around distribution How will I sell more rooms? Which channels will allow me to sell more? What will be the revenue for the channels used? AND a new one ! In the end, what will be the profit made? ( A new concept in revenue management ) Evolution of booking & distribution Week #14: Online Travel Agency OTAs are online companies whose websites allow consumers to book various travel related services directly via Internet. They are 3rd party agents reselling trips, hotels, cars, flights, vacation packages etc. provided / organised by others. Today consumers are on-the-go and the advantage of a booking engine and the reservation solutions provided by the OTAs is that it offers instant payment and booking confirmation. The THIRD player Consequence 10%, 20%, 30%, 50%, … 95% ???? As a result of the OTA domination, hotels realised that : their hands were progressively tied and that they were under the control of these OTA for the distribution it was time to counter attack and change their distribution strategy = the way they were selling rooms What is Rate Parity? Rate parity is a legal agreement between hotels and online travel agencies (OTAs) in which the hotel guarantees to use the same rate and terms for a specific room type, regardless of the distribution channel. Broad vs. Narrow Rate Parity Broad Rate Parity : A hotel has to sell its rooms at the same rate to all the distribution channels, direct or indirect. Narrow Rate Parity: A hotel has to sell its rooms at the same rate only to online channels. Contracts signed with this clause authorise hotels to sell at lower rates by phone, emails or even to some travel agents. Week #16: HOTEL REPORT All amounts in Swiss Francs (CHF) For the day of : November 11th 2019 November 11th 2018 Day Month Year Month Year Key Performance Indicators Built Rooms 80 880 25'200 880 25'200 inc. Out of Order 26 234 1'456 2 19 inc. Comps 1 8 80 0 4 Available Rooms 53 638 23'664 878 25'177 Paid Rooms 50 450 16'250 456 16'416 Occupancy Rate 94.3% 70.5% 68.7% 51.9% 65.2% Accomodation Revenue 13'265 119'280 2'730'461 116'894 2'675'852 inc. Rooms Revenue 13'250 119'250 2'729'621 116'865 2'675'029 Average Rate 265.00 265.00 167.98 259.70 164.62 REVPAR 250.00 186.91 115.35 133.10 106.25 RACH Double Room 235.00 235.00 235.00 215.00 215.00 Number of Guests 55 540 20'313 547 21'341 inc. Children 0 23 138 18 124 APR (Average Guest/Room) 1.10 1.20 1.25 1.20 1.30 No Show 38 1 42 Breakfasts Sold 20 173 5'688 170 6'509 Breakfast Capture Rate 35.5% 32.0% 28.0% 31.0% 30.5% Revenue Quantity Average Rate Month Year Analysis of daily sales Accomodation Rooms DBL - Std Double 5'405.00 23 235.00 48'645 1'113'479 TWI - Std Twin 2'115.00 9 235.00 19'035 435'709 EXE - Executive 3'480.00 12 290.00 31'320 716'912 JSU - Junior Suites 2'250.00 6 375.00 20'250 463'521 Total Rooms 13'250.00 50 1'135.00 119'250 2'729'621 Other Revenue Misc. Products 15.00 1.00 15.00 30 315 Animal Fee 0.00 0.00 25.00 0 525 Total Other Revenue 15.00 30 840 Total Accomodation 13'265.00 119'280 2'730'461 Food&Beverage Breakfasts BKF - Breakfasts Sold 240.00 20 12.00 2'076.00 68'256.00 Total breakfasts 240.00 2'076.00 68'256.00 Total Hotel Revenue 13'505.00 121'356.00 2'798'716.94  Hotel Report - Exercise Sheet To best analyze the report, answer the following questions/topics – - Occupancy Rate How does the occupancy rate change from one year to another ? How do you explain this change? Hint: What are the 2 elements used in the calculation of the occupancy rate and how do these 2 change ? Change in Occupancy Rate: For the day of November 11, the occupancy rate rose dramatically from 51.9% in 2018 to 94.3% in 2019. For the month, the occupancy rate improved from 65.2% in 2018 to 70.5% in 2019. For the year-to-date, it increased from 68.7% in 2018 to 70.5% in 2019. Explanation: Occupancy rate depends on the ratio of paid rooms to available rooms. In 2019, the available rooms decreased significantly (from 878 to 53 for the day), while the number of paid rooms remained high (456 in 2018 vs. 50 in 2019 for the day). This could indicate maintenance work, renovations, or intentional reduction of available inventory to drive demand. The high rate in 2019 may also reflect stronger marketing or events during that time. - Revenue Is the revenue going up ? Down ? How do you explain this change ? Hint: Remember the 2 elements to calculate the revenue, which one do you think has the biggest impact in this change ? Trend in Revenue: Daily Revenue (Accommodation): Increased slightly from 116,894 CHF (2018) to 119,280 CHF (2019). Year-to-Date Revenue: Increased from 2,675,852 CHF (2018) to 2,730,461 CHF (2019). Explanation of Revenue Change: Revenue depends on two key factors: Average Rate per Room (ADR): Increased slightly from 259.70 CHF in 2018 to 265 CHF in 2019. Paid Rooms: Slightly decreased for the day (456 in 2018 vs. 450 in 2019 for the month), though the higher average rate compensated for this drop. The increase in ADR likely contributed most to the revenue increase. Higher rates might reflect better guest experiences, a more premium offering, or adjustments to market demand. - Guests’ characterises Who are the guests coming to the hotel? How many of them occupy a room, on average? What does it tell you about the types of guests? Are there differences between the days of the week, between months? What does the number of children tell you? Guest Profile: Most guests are likely business professionals or couples, as the majority of sold rooms were doubles (DBL - Standard Double) and premium options (EXE - Executive). The APR (average guests per room) is 1.10 in 2019, down from 1.20 in 2018. This suggests single travelers or couples dominate the guest profile, rather than families or groups. Differences by Time: November typically reflects lower activity (shoulder season for tourism) compared to summer or December. Weekend bookings are likely higher than weekdays, as weekday bookings reflect more business clientele. Number of Children: Children accounted for a negligible portion of guests (0 for November 11, 2019, vs. 23 for the month). This supports the view that the hotel is not family-focused and caters more to professionals. - Breakfast What is the price for a breakfast? How much a breakfast should be charged, as regards the room rate? How much does the hotel spend on average for one customer (with a cost control look)? What does it say about the quality? Is the breakfast adapted to the hotel category? Justify your answer? Price per Breakfast: The price for breakfast is 12 CHF per person. Relation to Room Rate: Breakfast is relatively inexpensive compared to the average daily room rate of 265 CHF. This indicates it is a supplementary service rather than a significant revenue driver. Revenue Analysis: For the day, 35.5% of guests purchased breakfast. Total breakfast revenue was 240 CHF for the day, which aligns with a mid-range breakfast service. Quality and Hotel Category: The breakfast price and capture rate suggest basic but sufficient quality, typical for a 3- star or 4-star hotel. The focus on affordable breakfasts aligns with the hotel’s target market of business travelers and solo guests. - Hotel profile Looking at the room rates, the type of guests and other informa7on, what can you say about this hotel ? What kind of hotel is it ? Room Rates: Rates range from 235 CHF (Standard Double) to 375 CHF (Junior Suite). These rates are typical for a mid-range to upper mid-range hotel. Type of Hotel: The guest profile (mostly solo travelers or couples), high ADR, and minimal children point to the hotel being a business hotel or boutique property. The limited focus on families and emphasis on breakfast capture suggest a streamlined operation catering to professional travelers. Target Market: Likely focuses on business professionals, couples, or solo travelers, potentially traveling for work, conferences, or short leisure stays. The mix of room types (executive rooms and suites) and breakfast capture suggests a quality-conscious market without being overly premium. Week #16: Revenue management in the restaurant It is said that RM applied in the restaurant can increase revenue by 3-5 % (Sinclair, 2010) In restaurants, prices are not varying from one day to another like in hotels! Can you guess why? Several actions are in place:“2 for 1”, happy hour, early birds, … They remain limited though. Does the restaurant, as an activity, meet the four criteria of RM? Perishable product? Yes. By the way, what is the perishable product here? Fixed capacity? Yes. Varied and predictable demand? Yes but… High fixed costs? What do you think ? The tools and levers are limited: Can a restaurant sell advanced bookings for a specific amount? No… Can a restaurant do some overbooking? I don’t think so although I have read yes… Can a restaurant define table types and segment customers? Not really. It is difficult to forecast the time occupation of the seat by the guest (= length of meal). However, it is also about maximising the inventory = seats occupancy ! Several types of restaurants Depending on the restaurant, the source of revenue maximisations will vary: Fine dining: No seat rotation. Profit margin comes from high price per dish, since tasting experience is prime. The dish says uniqueness: “Amazing food!” High capacity restaurant: it comes from volume of meals served, seats occupation, low costs ratio dishes: ”Eating quickly and good!” Most used KPI Average check : whatever is your restaurant you need it to track the progress of your sales. Dining duration, Daily seat occupancy & RevPASH for some restaurants (not fine dining) Weekly and monthly seat occupancy for all restaurants. Projected number of services during the meal hours (lunch and dinner time) Are 2 hours corresponding to one service or 2 services ? (check restaurant type) Impact of capacity utilisation in a restaurant Restaurant booking periods In some restaurants, reservations are only accepted earlier or later after “peak time”, so that guests who wish to book for guarantee of sitting will be filling the “shoulder” periods. In blue, periods without reservation In brown, periods with possible reservation Restaurant strategy to apply One price vs. Multiple prices Questions: 1) How do you explain the 3 different zones in the right graph? 2) Which option is the best for this restaurant? Explain your answer. RM in spas Presence of a spa is often a criteria of hotel selection in the guests’ mind. Hoteliers have understood that having a spa was a real competitive advantage. Although the presence of a spa means quality of the property, only a15% of hotel guests on average go to the spa. The well-being concept, spread in society, is not matched in spa frequentation. Seasonality in spa management Warm vs. cold seasons Defining the right rate is a difficult task Attracting inside and outside guests Matching the revenue estimations Reflecting the “experience” of the visit Close to competitors. Cruise lines vs. Hotels Cruise lines have in many regards the same characteristics as the hotel industry: - Seasonality - Several room types - Upselling possibilities (services on board) - Limited capacity Prices are changing a lot throughout the year! Zero tolerance for a lost cabin (loss of cabin revenue + on board revenue) They also have differences: very long stays on board, almost no business customers, very long “sales cycle” starting sometimes one year and a half in advance. Total Revenue Management based on 3 pillars: 1. Applying full concepts of revenue management in all the operated departments (as seen previously) 2. Increasing average guest spending. 3. Focusing on the profit by making sure the costs don’t increase, and not loosing the benefits of revenue increase. The Deming Wheel - PDCA The Deming Wheel in practice Adjusted to revenue management Revenue Management is excellent for… the profit! FINAL EXAM: Bring iPad fully charged + pen with Lockdown Browser. Will provide calculator + paper. Review sessions 1 to 17 included + material on Moodle used in class. 75 minutes examination: 1 question “computations” 10 points 1 question “analysis” 10 points 2 “short essay” questions: 10 points each 20 points 11 multiple-choice question: 3 pts. each 33 points 3 multiple-choice w/ computations: 5 pts. each 15 points 6 true/false questions: 2 pts. each 12 points TOTAL 100 points