Revenue Management was born from the interest and awareness of controlling the benefits and costs in the airline and hotel overbooking world.
Revenue Management is the “application moved from average daily rate (ADR, the standard rate according to the period of the year and the availability of the service) to maximizing revenue” (Improving hospitality industry sales, Chris K. Anderson and Xiaoqing Xie).
There were two important pioneering researchers that started investigating that field, Littlewood (1952) and Rothstein (1959-1960). The American Airlines had a very important success after the Work of Balboa, and it is, when Revenue Management starts to taking off and the world starts to change around this new phenomenon. Companies were starting to invest in that field because the impact in their operations was enormous. (e.g., Smith et al. 1972).
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The maturity over the last 20 years in this subject has been progressed very fast, but is not after the Airline Deregulation Act in 1978 was introduced, that gained major importance in the whole world. This success was reported in other transportation sectors and other service areas like hotels, restaurants, car rentals, airlines etcetera. If we focus our attention in the Hospitality Industry, hotels apply this Revenue Management in order to manage effectively their room inventory and gain more benefits.
Revenue Management in the Hotel Industry.
The firsts who were applying Revenue Management were the airline sector, but also the Hospitality Industry started to use it. According to (Inge, 1998: Smith, 1999 in Revenue Management in Hotels Erhan Atilla Avinal) Revenue Management is the science of using past and current levels of booking activities to forecast demand as accurately as possible to maximize revenue which are, for example, predicting customer behaviour, optimizing product availability and price.
If we are talking about Revenue Management, we have to distinguish two different paths; Duration control and Demand-based pricing. A hotel has to deal with both because it can control the time and pricing of the rooms, using pricing as a more variable technique and also know customer preferences in order to predict and be more effective doing business.
When we are talking about periods of high occupancy, room prices in hotels tend to go up and are available only for customers that are able to pay those prices. Is normal that Hotels don’t sell all rooms in a higher season because there are lots of walk-ins and hotels can say that the hotel is fully-booked but they are going to take the chance of selling a reserved room in a higher price. When low season appears, the prices goes down and promotion and discounts gain importance in order to stimulate the demand an reach the normal percentage of occupation (Revenue Management in Hotels Erhan Atilla Avinal).
Hotels have to distinguish two different types of guests, business travellers and leisure travellers. When we are talking about business travellers which are regularly visiting and the stay is normally covered by the company where extra charges have to be paid by the guests. Normally this type of guest is coming from Mondays and tends to leave Thursdays and they regularly receive different benefits like for example “tag of regular guest or VIP”.
On the other hand, we have the leisure traveller which are normally more “price sensitive” and makes their breaks in hotel’s reputation. Those ones are coming when business travellers leave (From Thursday, Friday to Sunday or Mondays). Promotions and discounts have to be done in this market segment in order to gain higher level of occupancy which is more difficult to take in weekends.
Also is important to have a look in the length of the stay. Guest who stays in a hotel on busy days is charged with higher prices than those who combine busy with slow days. For example, a guest is going to pay more staying in the hotel from Friday to Sunday that a guest which is going to stay from Saturday to Monday. The availability in those days is changing very rapidly in a very few period of time, it is better to sell a combination of busy days at higher rates and slow days at lower rates. This is a very good technique in order to maximize revenue. There is a very good example with the IHG hotel Chain (Intercontinental Hotel Group) that uses this technique.
The rate of a room changes with the availability. The hotel adapts their rates with the occupancy of each moment. Is a good way to maximize revenue for the entire period and not only for high demand period? In an hour, the price of a standard room, for example, can change depending on the demand. (Revenue Management in Hotels Erhan Atilla Avinal).
Also is important to take into consideration the reservation’s date in order to gain revenue and also is a good way to distinguish the business from the leisure travellers. The first ones make the reservations in fewer advances than the leisure ones which are planning everything with more time of reaction. But it can be, that different guests have different prices of a room in the same day, but this is because of how the reservation has been done in advance, promotions, number of nights staying in the hotel, etc. (Revenue Management in HotelsErhan Atilla Avinal).
Components of the Revenue Management.
Revenue Management is divided in three main key components:
The goal of pricing is “solving the question of how to determine the price for different groups of customers and how to vary prices over to increase revenues and gain more profits” (W-C. Chiang, J.C.H. Chen and X. Xu)
An important aspect in which revenue management has to be taken into account is the way in order to segment customer which can be based on their needs, business constraints, customer characteristics and willingness to pay different price. Also is important to mention the price elasticity which is a measure of the change in sales as a result of the change in price. So is important to see which the price elasticity of the company is in order to differentiate those prices. For example. Leisure guests normally are prices quite elastic, because whenever there is a small change in the rate the leisure guests can shift their demand significantly. Business guests, in the other hand, use to tend to more inelastic prices, because small rate changes normally causes a small demand shift. ( Unlocking the value of revenue management in the hotel industry, Ben Vinod).
Hotels profit from revenue management because it increases revenue and profitability by combining demand to the availability of rooms to accommodate the best profitable mix of customers. As I explained above, revenue management increases the profits of an organization.
Those changes can be determined by the number of factors such as the sophistication of the inventory controls that are used, the occupancy level, and business versus leisure and transient versus groups. This sophistication of the revenue management process of a hotel is reflected on the level of detail with what the inventories can be controls.
(Unlocking the value of revenue management in the hotel industry, Ben Vinod).
Hotels have to improve occupancy levels and profitability. The largest distribution systems (GDS) are Amadeus, Galileo, Sabre and WorldSpan. Is important to notice that hotels can gain more profit by receiving reservations from the GDS’s, because it enable to make an instant hotel reservation and confirming it in almost any world country.
Hotels normally block a certain number of rooms for GDS reservations. For example, if we are talking about the Amadeus system they know that curtains hotels have more than 50 rooms that can be booked every day. In order to do that, hotels need to list its products specifying room toes, rates, policies and special packages, facilities, amenities and services to give to the GDS, because all this information is then available to a large number of travel agents around the world as well as individuals like us. (Unlocking the value of revenue management in the hotel industry, Ben Vinod.)
Internet has had a very important impact on hotels profitability thanks to the new online travel agencies emerged (like Expedia, Hotels.com, Orbitz, Booking.com and Travelocity). This process makes the reservations being faster and more effective. These negotiations also make several discounts which they mark-up and sell. A very important player in the opaque channel is Priceline.com, with over 10.000 participants in its Name Your Own Price hotel service. This last one is more important than the other named. (Unlocking the value of revenue management in the hotel industry, Ben Vinod.)
Revenue Magement application
In revenue management, the major functional components for its application are: (1) market segmentation, (2) inventory pooling, (3) demand forecasting and supply forecasting, (4) overbooking’s control, (5) revenue mix controls, (6) exception processing and (7) performance measurement. But from the seven components I will explain market segmentation, demand forecasting and supply forecasting, overbooking’s control and performance measurement.
Hotel customers can be classified as qualified and non-qualifies customers.
Segmenting customers based on attributes is important to guarantee that the appropriate mix of customers and rates are sold to maximize revenues.
The most expensive rate in a hotel is the Rack rate; these rates are unrestricted and have the highest availability. Qualified customers are normally associated with a program or package and qualify for a specific rate. An example of qualified rate programs is GOV (Government). Corporate customers have negotiated rates with last unit availability. An example of this is General Electric, Hewlett Packard, IBM, Shell, among others. Corporate customers may request and receive the last room available for sale.
Demand forecast has an extremely impact on hotels revenue. High forecast mistakes will result in conservative inventory controls and low forecast error will result in aggressive inventory controls
The most important forecast in a hotel is the rooms forecast to predict customer occupancy for future dates. It has to be taken into account that is one of the most difficult calculations in which hotels have to face in. A room forecast is used for basic rate class controls that do not consider the length of stay.
To control by length of stay, revenue management should forecast the arrival demand by rate and length of stay. If we are talking about the walk-in demand (guest that come without a reservation) must be apart of the other forecast. Forecast are generated based on the day of the week, time of the year and seasonality, holidays and special events such as an important convention that is going to happen in the city. (Unlocking the value of revenue management in the hotel industry, Ben Vinod)
Is important to hotels also the need to forecast early and late checkouts to speculate the number of rooms that can be sold without previous reservation for future dates. This supply forecasting can determine effectively the passing rooms available for the RM controls. (Unlocking the value of revenue management in the hotel industry, Ben Vinod).
If we are talking about the process of the overbooking, we are specifying the process in which the hotel is selling more reservations above their total capacity. But this process only can be effective when lots of cancellations are made. The scope of this process is to find or to reach the most encouraging overbooking level to maximize the revenue and minimize the risk of refused service. (W-C. Chiang, J.C.H. Chen and X. Xu)
In order to determine the quality of the data, accuracy of models and payback on investment the performance of measurement has to be done. Guest checkout statics are monitored to measure the effectiveness of revenue management are spoilage (represents the number of empty rooms on closed out dates), over sales (represents walked customers), turndowns, closing rate, groups, ADR (average daily rate), revenue per available room and contribution margin per available room. Expected (future dates) statistics frequently supervised are the advance bookings, group bookings, expected occupancy, average daily rate and revenue per available room. (Unlocking the value of revenue management in the hotel industry, Ben Vinod).
Model performance monitoring is necessary to make sure that the forecasting models will produce reliable and precise results. Errors in demand forecast, cancellations forecast, no show forecast, must be monitored to be corrected if needed.
Other issues related to revenue management are the knowledge of economics terms; the development and implementation of revenue management systems; understand how the customer behaviour and perception influences the performance of revenue management; the performance evaluation of the business decisions that are necessary to measure the performance to evaluate effectiveness.
Revenue management in non-traditional industries
Cargo and freight
The cargo industry provides a door to door delivery service for parcels of all shapes and sizes. Most of the revenue management research in this area is on air cargo.
This has many similarities with the airline industry, but differently from the revenue management applied in the airline industry, in the air cargo the revenue management concept is new. Cargo is different from passenger transportation. Cargo capacity is measured in weight and volume, it is dependent on the number of passengers, the amount of baggage, and the amount of fuel on the plane; cargo has different routing and booking behaviour; and is a business-to-business market. . (An overview of research on revenue management, W-C. Chiang, J.C.H. Chen and X. Xu).
IT service and internet service
Revenue management in internet service is about on-demand information technology service. Internet service providers have infinite capacity for users to log on, a fixed number of units, and the chance of segmenting price-sensitive customers. These characteristics just mentioned are common with the revenue management that is applied in the traditional industries. The difference is that internet service is continuous in state and time, the request and service happens at the same time, and overbooking is impossible for internet service providers. . (An overview of research on revenue management, W-C. Chiang, J.C.H. Chen and X. Xu).
Revenue management can be applied to industries like supermarkets, groceries and seasonal retailers. Retailing is an industry that is not necessarily perishable but the value of the capacity may decline significantly after the selling season. Revenue management in this industry is about investigating how to use discount pricing to maximize the revenue gained from selling a seasonal product, performing a quantitative analysis on how to apply dynamic pricing to sell fashion-like goods for seasonal retailer, focusing on issues such as pricing strategy and market share preservation and customer loyalty. . (An overview of research on revenue management, W-C. Chiang, J.C.H. Chen and X. Xu).
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Human resources are one of the biggest issues faced by revenue management nowadays. Sheryl E. Kimes (2008) in her report she mentioned career path in one of the six criteria’s of human resources that need special attention, because there is no clear career path for people working in revenue management in the hospitality industry. This happens because the activity is new in the industry and therefore there are no clear guidelines of how to apply revenue management in hotels. Consequence of this is that revenue management employees need more knowledge in order to develop successfully in this area. (Kimes. S.E. 2008. Hotel Revenue Management: Today and Tomorrow. Cornell University. pp.4-15.)
Nowadays the power that customer behaviour and perception and competitors have on the performance of an industry, say a hotel has increase. Technology is moving so rapidly and hotels are suffering this development. Since websites offered a wide choice of hotel prices, customers can check and compare them with other hotels. For this reason hotels need to become more competitive when setting a price and offering a product online. Revenue management requires a wide variety of skills in order to optimize benefits and gain as much revenue as it’s possible by supervising all movements that are done by the staff of the hotel, and take actions whenever there is an error. To be able to face the competition, hotels need to implement new tools and give a better training to employees in order to teach them and help them to develop the skills that will reduce errors leading to better results. Hotels are having difficulties I finding a suitable revenue manager. Normally revenue managers are employees who worked on another department like the reservations or sales department and have enough knowledge of the processes, competitions and functioning of the hotel and therefore are being raised to the position of revenue manager. This happens because there are no clear career paths for revenue management specialist, there is an incorrect judgment played by revenue managers that anybody who has enough experience can do revenue management, not giving the profession the importance it should have. In order to attract revenue managers, hotels need to set a clear role for the job, implement a proper training about the hotel and how it functions and take in consideration the salary offer. By enhancing the development of training and of path careers will motivate revenue managers to improve performance ensuing in an increment of profits gained in the hotel as result of a good application of revenue management. (Kimes. S.E. 2008. Hotel Revenue Management: Today and Tomorrow. Cornell University. pp.4-15.)
In order to conclude, Revenue Management can be defined as a management approach to optimize revenue, sometimes based on managing revenues around capacity and timing. As I explained in the beginning of the work, Revenue management has started first in the airline industry, but later on, other industries also begin to use the principles of it in order to optimize their results. The hotel industry have recently started to using this method in order to deal with room inventory more effectively and gain more revenue implementing methods that can predict customer behaviour, optimize product availability and price. Revenue Management has three main pillars which I have been explaining before with more details which are: pricing, revenue management and product distribution. And also is important to differentiate ways of applying this method, but the most common ones if we are talking about hotels, they do mostly market segmentation, forecasting, and overbooking control and performance measurement. In other industries called non-traditional ones apply revenue management such as cargo and freight, IT and internet service and retailing. There are different ways to manage the profitability but every industry applies it as the most convenient for them.
This measurement enable the hotels to ensure the best occupancy from each product like rooms and meeting rooms and forecasting demand and supply by applying market segmentation that will determine the type of customer they have, like business or leisure, length of stay and rate of each type of customer is willing to pay. Other sectors like restaurants normally, in order to maximize their revenue potential during high demand periods, also in low seasons is important to notice it in order to develop the most suitable pricing strategies.
Revenue Management is a very important issue in which hotels have to face in, but the most difficult thing is to know how to manage it. Therefore, this has to be taken into account and enhance the development of training and paths careers in order to be constantly motivating managers to gain revenue as much as they can.
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