Examining Revenue Management In The Hospitality Industry Tourism Essay
Revenue is dependent on capacity, market segment, duration, supply and demand. To manage revenue means to manage the source of income, by doing which can maximize the profit. Furthermore, the purpose of revenue management is to provide right products to right customers at right time at right price. The illustration below showed the concept of revenue manager:
In this article there will be four areas of revenue management being discussed: restaurant, function room, hotel room and golf course. After reading this article, you will understand how revenue management can be applied to these areas, and what it will affect.
Restaurant is a perfect candidate for applying Revenue Management because of its five elements: fixed capacity, demand inventory, time-variable demand, appropriate cost structure and segmentable customers. There are two traditional ways to manage revenue in restaurants: duration control and pricing strategy.
Duration control helps to maximize the revenue, it consists uncertainty of meal durations and arrivals. In order to analyze and forecast meal durations, history data should be collected from reservations and POS system. Observing the guests during different meal periods will help to have more accurate information. After analyzing and forecasting meal duration, some strategies can be applied to control it. Those strategies include menu design, service process, staffing, improving communication, external approaches and reduce change over time. In addition, arrivals also needed to be controlled because of inconstant customer behavior. Some arrival-related problems may occur for example no shows, short shows and late shows. These can be prevented or avoided by overbooking, applying maximum hold time, taking deposits and forecasting. Reservation strategies and seating methods can help controlling duration. For example, no reservations available for peak hours can prevent having empty tables; call-ahead seating during busy times can avoid having empty seats.
Pricing strategy could be based on different elements. Common strategies include cost based pricing, competitive pricing and demand based pricing. Cost based pricing is setting the sale price based on cost, for instance sale price equals three times of cost. Competitive pricing is considering the prices of competitors’ products when setting a price. Demand based pricing means when demand goes up, the price goes up as well, for example higher dinner prices for weekends. Rate Fences are always being used when a restaurant apply demand pricing strategy. A rate fence simply means a certain price provides to a certain people. There are many ways to introduce rate fences to a restaurant for instance buy one get one free, happy hour, coupon, higher price for window seats and so on. While setting a price of a product, business ethics should always be considered. A fair price makes customers happy. Here is a way to make sure the price is fair: compare the price with competitors but not fixing it with them or go much higher than their price.
The best way to practice Revenue Management in restaurants is RevPASH, which stands for Revenue per Available Seat-Hour. It gives a clear picture of revenue made by the covers, and combines with the two methods mentioned above. Simply three ways to increase RevPASH: sell more covers, increase average check and increase seat occupancy.
There are five steps to develop Revenue Management in restaurants: establish baseline, understand the causes, develop strategy, implement strategy and monitor results. To establish a baseline means to collect information on arrival patterns, RevPASH patterns, unconstrained demand, meal duration, customer preferences, seat occupancy, table occupancy, and so on. Some tools can help to understand the causes of those data, like fishbone diagram and bottleneck analysis. Strategies that have been mentioned above could be applied to a restaurant according to its specific problems or needs. When implementing the strategies, it is important to communicate with employees, to let everyone understand the strategies in order to enhance the productivity, efficiency and as well as ensuring the outcome. After implementing the strategies, the outcome should be monitored consistently. It helps to determine whether the strategies are useful or not and if there is anything that can be improved, monitoring RevPash performance, dining time, and compare to baseline performance help to measure the results.
Revenue management in room:
In hotels, the goal of Revenue Management is to sell the right room (types of rooms such as standard, luxury or sea-view, etc.) to the right customers (from a particular segment) at the right time (depending on demand) and for the right price (when customer wants room).
The necessary attributes of hotel revenue management include segmented market which hotel bases on to manage the tradeoffs between a higher room rate for business customers, and a lower room rate for leisure customers. Business customers are willing to pay a higher price holding a flexible room which can be book at last minute and leisure customers are willing to give up in exchange for a cheaper room. Fixed capacity means the number of rooms in hotels is impossible to increase or decrease. The appropriate cost structure means the fixed cost is higher than the variable cost. Perishable inventory means rooms can’t be stored, and can lose its value forever for that night if it is unoccupied. Demand fluctuation which accords with seasons and day of the week, which affect the room pricing process, for example, in peak season, the hotel can increase its room rate to maximize revenue, while during valley season, reducing rate is the best way to increase utilization. (Admin, 2010)
Revenue management is introduced in room as RevPar, which stands for revenue per available room. It is a measure of how the how the hotel has been able to fill room during low season and high season with appropriate for rates to maximize the profit. To achieve the most effectivity of RevPar, revenue manager need collect historical data from hotel and consider another hotels to implement it.
There are two factors that need to be controlled carefully, including duration control and demand based pricing. For duration control, revenue manager can reduce arrival uncertainty by credit card guarantee, calling customers the day before to confirm the guest reservation and arrival time; overbook rooms to maximize occupancy in order to fill up the no shows, and if there is no show, the revenue manager will have penalties for guest like charging the first night room rate; call the night before to in-house guests to verify their departure time. Besides, there is a money penalty to the guest if they depart earlier. Otherwise, to minimize the duration uncertainty, revenue manager should forecast demand accurately based on historical data. For the pricing, most hotels have the categories of pricing which determine how much customer are going to be charged and who are willing to pay that price. Price are determined by the following three ways: Competitive pricing which the price is establish based on comparing with competitors; reference pricing which the price is lower than the hotel’s main competing brand; and demand based pricing, which price is set up depending on season, or guest’s demand such as view of room, length of stay.
Those prices which decided who are willing to pay are introduced in revenue management as rate fences. Actually, rate fence is a condition somebody has to meet to get a particular price; on the other hand, it’s also a tool to maximize revenue for hotel, because the hotel takes the ultimate advantage of the rooms’ condition. In general, revenue manager classify rate fences into physical and logical fences correlating the different market segment, and the condition as well, as shown in the table below:
Nowadays, customers consider that hotels set the room rate based on market segment is unfair, such as charging different prices for the same room with different types of customer. “Mindshare” is one of the biggest challenges for revenue manager and mindshare means that customers are more knowledgeable in the way that hotel set the room rate. Therefore, they examine rate fences as logical, transparent, clear communicated and fixed to generate short-term profits, and create long-term customer loyalty.
Revenue management in Golf course:
In the golf industry, it is also suitable for practicing revenue management because the condition of fixed capacity, predictable demand and perishable inventory. The land, equipment and facility are fixed capacity; the investment on land, facility and maintenance are incredibly high. The demand can be segment by different season and time. It could be forecast by using historical data, customer profile and arrival pattern. The tee times are perishable inventory. Once the product is not sold, we cannot recall the losses that made from that period. The main sources of revenue come from club membership fees, golf lessons, golf clubs, cart fees and green fees. To practice revenue management in their business, they would need to have different strategies to increase revenue. For example, Duration and arrival control, Discount allocation, Marshalls, Peer pressuring by posting playing time and Different pricing.
To restrict the arrival, the company can set up arrival policies to minimize the risks of no show, late show and short show. To control duration, they can use Marshalls and Posting Playing time as strategies to pressure or remind the guest how long they have been playing.
The other strategy is having different prices in different times and course. The company can provide Time of the day based pricing according to the Hot and Cold time during a day and provide Membership fees and senior prices to the customer. Discounts can offer to big party, ages and the time of reservation. The discount rate can apply based on reservation time and location.
Disney Golf in Orlando applied revenue management to its golf club. First, they have segmented the market to manage the availability of tee times by the party size, business people, and different group for example, locals, foreign. They provide discount and packages to the groups, members of the club and employees. They even provide discount to beginning level golfer.
When they forecast the high-demand day comes, they will close lower revenue buckets for all or part of that day and selected profitable course or customer to reach the highest profitable customers and use “up-selling” to motivate consumer to spend more money.
The company said it is so important to know 6W, who, what, where, when, why and how. They use a very attractive way to collect the customer data. The customers who give their personal data and opinion will receive discount where appropriate. By using this strategy, they increased the customer loyalty.
Since Disney Golf implemented revenue management in 2001, it is a great success to the company.
Lastly, when company set up a price, it has to be logical, transparent and fix. Consumers have an acceptable price to most products in their minds. Company should always communicate and maintain relationship with the consumer. It is an easy way to know their opinion.
Do not against the law by fixing the price with the competition and price gouging which setting up the price higher than the fair price.
Revenue management in function space:
Firstly, the function space can’t be extended so that the maximum capacity is fixed. However, the function space can be adjusted since hotels apply air wall which can separate a function room to be 2 or more meeting rooms. Secondly, same as rooms, restaurant, and golf course, if the function room doesn’t sell out it means the hotel loses the chance of making revenue- perishable product. Third, there is variable and uncertain demand. Even though customer pays the deposit, they might break the contract. Furthermore, the price sensitive varies from people to people. Lastly, function room pricing structure are setting higher than it should be in case customer demands to cut down the price or a special package. Thus, hotel will not lose money in business.
Hotel will send contract which includes time of duration, price, quantity of customers and related agreements after guests confirm with sales to ensure both parties’ right. There are 2 rights of decisions that hotel hold on hand- price and duration.
Pricing a function space need to consider the rooms sales and F&B sales. Same as rooms and restaurant revenue management, hotel apply rate fence by physical and non-physical reasons. Physical rate fence can work by facilities and equipment, location and ceiling height. For example, price will be set higher in the high technical function room compare with the others. Non-physical rate fences will determine by booking pace, transaction characteristics, frequency of reservation and timing. Hotels mostly offer special meeting package with two different prices in a day and different price between weekday and weekend since price based on demand. Generally, there is higher demand in the evening day part then afternoon section. However, customers might think it is unfair to get higher price because of different day part.
The second element that hotel doing good at control is duration. The duration can be predicted by customer history in Delphi. Hotel normally asks guests refundable deposit and prepayment in order to prevent no-show or cancellation since the duration uncertainty. Furthermore, if guests hold the function room longer then the agreement time, they might have to pay extra fees since hotel need more people to turn down the room.
In order to apply revenue management in function space, hotel need to set up the baseline and understand the drivers of performance which needs to consider customer profile, revenue contribution, seasonal demand history, ConPAST, current market environment, and demand behavior of segments. The next step is to develop strategy like pricing, special package and so on. Following the point mentioned above hotel need to implement the strategy properly and also monitor the outcome.
According to hotel’s forecasting, hotel will keep the function room for the most profitable customers for each function room in high demand period. However, hotel won’t say obviously that you need to pay higher amount of money in order to get this function room. Actually, people feel it is unethical to reject customers if you are waiting for higher contribution customers. Nowadays, hotel sets the minimum charge for each function room. As long as both party make agreement and sign the contract, hotel don’t have rights to sale the reserved function room to other people.
Conclusion
Revenue Management is a perfect tool to maximize profit in any organizations. Restaurant, Golf, Function Space and Hotel rooms, they all have the same condition of fixed capacity, predictable demand and perishable inventory, they all can implement revenue management to maximize profit in their way.
In order to achieve the goal and objective, the strategies have to be logical, circumspect with every single historical data and decision making from your experience.
