Revenue management for the hospitality industry part 1

This page intentionally left blank FMTOC.indd Page i 9/22/10 10:57:06 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 REVENUE MANAGEMENT FOR THE HOSPITALITY INDUSTRY D AV I D K H AY E S ALLISHA A MILLER John Wiley & Sons, Inc FMTOC.indd Page ii 9/22/10 10:57:11 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 Photos were taken by the author unless otherwise noted This book is printed on acid-free paper o Copyright © 2011 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel Outside of the United States, please contact your local representative For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www wiley.com Library of Congress Cataloging-in-Publication Data: Hayes, David K Revenue management for the hospitality industry/David K Hayes, Allisha Miller p cm Includes index ISBN 978-0-470-39308-6 (pbk.) Hospitality industry–Management Hospitality industry–Economic aspects I Miller, Allisha II Title TX911.3.M27H395 2010 647.94068’1–dc22 Printed in the United States of America 10 FMTOC.indd Page iii 9/28/10 10:42:46 AM user-f391 /Users/user-f391/Desktop/24_09_10/JWCL339/New File CONTENTS Preface vii Acknowledgment s xv PART I: REVENUE MANAGEMENT PRINCIPLES Chapter 1: Introduction to Revenue Management Introduction The Purpose of Business The Purpose of Revenue Management The Purpose and Design of This Book Chapter 2: Strategic Pricing 11 12 35 What Is a Price? 36 The Importance of Price in the Ps of the Marketing Mix 45 The Role of Supply and Demand in Pricing 49 The Role of Costs in Pricing 53 Implementing Strategic Pricing 61 Chapter 3: Value 68 The Role of Value in Pricing 69 The Relationship Between Quality and Price 75 The Relationship Between Service and Price 77 The Link Between Quality, Service, and Price 79 The Art and Science of Strategic Pricing 84 Chapter 4: Differential Pricing 91 Ten Priciples of Managing Revenue 92 Differential Pricing 93 Limits to Differential Pricing 99 Applying Differential Pricing 103 Revenue Management or Revenue Optimization? iii 121 FMTOC.indd Page iv 9/22/10 10:57:12 AM user-f391 iv /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 CON T E NTS Chapter 5: The Revenue Manager’s Role 129 The Revenue Manager in the Hospitality Industry Legal Aspects of Revenue Management 133 Ethical Aspects of Revenue Management 139 The Revenue Manager Position 147 The Revenue Management Team 156 130 PART II: REVENUE MANAGEMENT FOR HOTELIERS Chapter 6: Forecasting Demand 163 164 The Importance of Demand Forecasting Historical Data 167 Current Data 174 Future Data 185 Demand Forecasts and Strategic Pricing Chapter 7: Inventory and Price Management 165 193 208 The Marketing Mix Revisited 209 Inventory Management 209 Characterizing Rooms for Optimum Inventory Management 212 Designing Unique Room Codes 215 Classifying Guests by Market Segment 216 Overbooking as an Inventory Management Strategy 227 Price Management 233 Stay Restrictions 249 Principles of Inventory and Price Management 251 Chapter 8: Distribution Channel Management 259 Managing Distribution Channels 260 Nonelectronic Distribution Channels 268 Electronic Distribution Channels 278 Principles of Distribution Channel Management 298 Chapter 9: Evaluation of Revenue Management Efforts in Lodging The Lodging Revenue Paradox STAR Reports 318 307 306 FMTOC.indd Page v 9/28/10 10:42:54 AM user-f391 /Users/user-f391/Desktop/24_09_10/JWCL339/New File CONTENTS v Competitive Set Analysis 325 Market Share Analysis 332 Additional Assessments 335 Common-Sense Revenue Optimization 340 PART III: REVENUE MANAGEMENT FOR FOODSERVICE OPERATORS Chapter 10 : Revenue Management for Food and Beverage Services 349 350 Traditional Foodservice Pricing Methods 351 The Cost Against Cost-Based Foodservice Pricing 359 Applying Differential Pricing in Foodservices 364 Factors Affecting Value Perceptions in Foodservices 373 Chapter 11: Evaluation of Revenue Management Efforts in Food and Beverage Services 391 Food and Beverage Revenue Analysis 392 Examination of Revenue Sources 393 Measurement of Revenue Change 399 Evaluation of Revenue-Generating Efficiency 409 The Revenue Evaluation Process in Foodservices 420 PART IV: REVENUE MANAGEMENT IN ACTION 429 Chapter 12: Specialized Applications of Revenue Management 430 Characteristics of Organizations Applying Revenue Management 431 Service Industries Applying Revenue Optimization Strategies 440 Specialized Revenue Management Duties 441 Revenue Management and Destination Marketing 450 Chapter 13: Building Better Business 458 Keys to Building Better Business 459 Better Business Issues in Moderate to Strong Markets 472 Better Business Issues in Weak or Distressed Markets 480 Index 503 This page intentionally left blank FMTOC.indd Page vii 9/22/10 10:57:12 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 PREFACE Revenue Management for the Hospitality Industry is a book that we were particularly privileged and challenged to create This is the first textbook that has been developed specifically to examine what revenue managers in the hospitality industry must know and to be successful Revenue Management is an emerging field of study Because that is true, there are honest differences of opinion about what revenue management actually is today—and what it will become in the future Despite some philosophical differences among revenue management experts, we believe all of them would agree that a good way to describe the goal of revenue management is to say that it is “to charge the right price, to the right customer, for the right product, through the right channel, at the right time.” Doing that well is not as easy as it looks—and as experienced revenue managers will attest, it doesn’t look all that easy This book was developed to teach its readers exactly how it is done It is important to note that Revenue Management for the Hospitality Industry is intended for readers with prior knowledge and understanding of the hospitality industry We believe revenue management should be a unique and separate area of study and is an area best studied by those with a solid understanding of how products and services are sold in the exciting hospitality industry As it continues to evolve, revenue management will certainly develop more of its own theory, principles, and practices For the present, much of the information revenue managers need to know is taken from the various fields upon which it has been built This can be confusing to some For example, some marketing professionals believe that because revenue managers must understand much about marketing, the terms revenue management and effective marketing are the same They are not the same In fact, one very good way to avoid any confusion about what this book is intended to be would be to carefully describe what it is not Revenue Management for the Hospitality Industry is not a principles of economics textbook, despite the fact that it is critical for revenue managers to understand how and why consumers use scarce financial resources to make purchasing decisions Concepts such as supply, demand, consumer rationality, and pricing are foundational topics for revenue managers and as a result these and other very specific economic concepts are presented in the book Neither is this a pricing theory text, despite this book’s strong emphasis on the critical relationship between strategic pricing and effective revenue management Revenue managers must be experts at understanding how businesses determine prices and how their customers perceive prices As a result, the principles and concepts revenue managers must know to grasp the intricacies of effective pricing make up an essential part of this book This is not a book about managerial accounting although it addresses those accounting principles and practices that revenue managers must be aware of if they are to their jobs effectively It is not a textbook about marketing or e-marketing/information technology Certainly, revenue managers must know a great deal about marketing concepts As well, the extensive use of the Internet to sell hospitality products requires specialized knowledge vii FMTOC.indd Page viii 9/22/10 10:57:12 AM user-f391 viii /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 P R EFACE to use that tool effectively As a result, marketing and e-marketing information make up a significant portion of this text It is not a text about how to manage the front desk in a lodging operation This is so despite the fact that in a large number of U.S hotels the revenue manager and front office manager position will often be held by the same individual Effective front office administration, however, is critical to revenue optimization in hotels As a result, the book includes a great deal of information about effective front office management It is not a textbook about leadership, yet experienced revenue managers agree that the ability to communicate goals and build teams who are inspired to achieve those goals is one of a revenue manager’s most critical tasks As a result, information about the leadership skills that revenue managers must acquire and exhibit are included Similarly, the book is not about managerial ethics or those laws that directly affect pricing This is so despite the fact that employees, customers, and society at large care deeply about the ethical aspects of a business’s pricing tactics and strategies Also, it is important that revenue managers understand that there are very specific legal requirements related to pricing products, and these requirements must be well known In any industry, the prices charged and the selling methods used must be perceived to be fair, and they must follow the law As a result, ethics in pricing and the legal aspects of pricing are topics that must be addressed This book does that In summary, the book is not an economics, pricing theory, marketing, e-marketing/ information technology, managerial accounting, front office management, leadership, ethics, or hospitality law textbook Revenue Management for the Hospitality Industry is a book about revenue management Revenue management is an independent area of hospitality study that draws from a variety of established academic areas to yield a subject of management inquiry as unique as it is exciting TO THE STUDENT Learning revenue management will not be boring It is an easy statement to make because revenue management is an exciting subject It is fun and it is challenging Revenue Management for the Hospitality Industry will be fun and challenging as well The book has been carefully designed to include information taken from inside the hospitality industry as well as from a variety of external sources If you work hard and your best, you will find you have the ability to master all of the information in this text When you do, you will have gained an invaluable skill that will make you one of the rare individuals with a thorough understanding of revenue management in the hospitality industry That knowledge will enhance your company’s performance and thus help you advance your own hospitality career TO THE INSTRUCTOR Teaching in a new subject area can be much more challenging for an instructor than teaching in an area that is more well-established It requires dedicated, innovative, and inspired teachers to organize relevant information and to make that information easy to understand c09EvaluationofRevenueManagement334 Page 334 9/22/10 12:29:20 PM user-f391 334 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING In February the subject hotel contributed 10.7 percent of the comp set’s total rooms available to sell, captured 11.5 percent of demand (rooms sold), but achieved only 9.0 percent of the comp set’s total revenue In this scenario, the hotel is not achieving its fair share of the revenue generated by the comp set, despite the fact that the number of rooms sold is more than in keeping with its share of supply This is not a good situation both because room rates are depressed and because of the direct costs associated with selling “too many” rooms relative to the revenue generated In this scenario, strong consideration should be given to reducing room discounts and/or raising rack room rates In March the subject hotel contributed 10.7 percent of the comp set’s total rooms available to sell, captured 9.0 percent of demand (room sales) and achieved 11.5 percent of the comp set’s total revenue This set of results indicates aggressiveness in increasing or maintaining higher room rates, despite a depressing effect on the property’s occupancy levels This may be a very good situation because higher room rates help increase guests’ perceptions of quality and because the direct costs associated with selling excess rooms relative to the revenue generated by the hotel are avoided In this scenario, strong consideration should be given to increasing marketing efforts In April the subject hotel contributed 10.7 percent of the comp set’s total rooms available to sell, captured only 8.5 percent of demand (room sales), and achieved only 8.5 percent of the comp set’s total revenue This difficult and unfortunate scenario could indicate a below comp set average property (e.g., inferior brand, older property, poor service, or quality levels) If the property is truly competitive, however, it indicates a too low room rate structure and ineffective marketing and/or servicing of current guests In May the subject hotel contributed 10.7 percent of the comp set’s total rooms available to sell, captured 11.5 percent of demand (room sales) and achieved 11.5 percent of the comp set’s total revenue In this ideal scenario, the subject hotel leads the comp set in room sales and revenue generation RMs encountering this very desirable circumstance can examine their opportunity to reduce discount rate offerings even further, increase selected rates (especially to less cost-sensitive guests) and work to ensure continued high levels of guest satisfaction Note: A realistic reassessment of the composition of the competitive set may be in order if this performance level remains consistent This would be done to ensure that the comp set has not been chosen, either intentionally or unintentionally, to artificially inflate the perceived performance of the subject property In June, the subject hotel contributed 11.7 percent of the comp set’s total rooms available to sell, captured 11.5 percent of demand (room sales) and achieved 11.5 percent of the comp set’s total revenue The results of this month illustrate the importance of monitoring supply as well as demand and revenue When a hotel’s supply contribution changes, it is likely its demand and revenue performance will change as well In this case, the subject hotel’s market share increased, which could be the result of its adding more rooms, the closing of a competitor, or the offering of a reduced number of rooms (due to renovation) by one or more competitors In scenarios such as this one, both demand and revenue results must be evaluated c09EvaluationofRevenueManagement335 Page 335 9/22/10 12:29:21 PM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 ADDITIONAL ASSESSM ENTS 335 in light of the variation observed in the subject hotel’s supply contribution In this case, the property’s demand and revenue generation were equal to the prior month (May) However, because of its larger supply proportion, this would represent disappointing demand and revenue results because they are unchanged from those experienced in April ADDITIONAL ASSESSMENTS A recurring theme of this book is that maximized revenue generation, by itself, is not the best measure of an RM team’s effectiveness As a result, while a continual assessment of occupancy, ADR, RevPAR, competitive set performance, market share and, if the data are available, GOPPAR and flow-through is important, at least three additional revenue-related areas of assessment are also important These areas of examination and the specific questions they can answer are: ᭿ ᭿ ᭿ Source of business: Who are our buyers? Distribution channels: At what cost our buyers purchase from us? Web 2.0: What our buyers say about their experiences with us? For some RMs, the answers to these questions may be provided by an effective hotel sales and marketing department or the property’s GM This is so because the answers to these type questions are critical to effective hotel sales and operations, as well as to revenue optimization The correct responses to these questions, however, are just as critical to revenue management teams because the answer to the question, “Who are our buyers?” will provide data essential to initial differential pricing decision making Knowing the distribution channels that deliver the majority of a hotel’s rooms buyers and the costs of those channels is key to effectively opening and closing room discounts and to rooms inventory allocation Also, better understanding guests’ experiences during their stay can help an RM provide valuable assistance in product improvement, as well as in identifying areas in which a hotel excels and thus could gain marketing and perhaps pricing advantages Source of Business Assessment In many hotels, answering the question, “Who are our customers?” falls to the sales and marketing department As a result, fortunate RMs may be provided with detailed information about the proportion of a hotel’s guests who are defined as transient, corporate, government, SMERF, other Essential RM Term SMERF: Acronym used to describe Social, Military, group, contract, or any of a number of alternative designations designed to assist in the selling of hotel rooms and Educational, Religious, and Fraternal buyers of services hotel rooms and services Some hoteliers prefer Those RMs working in environments in which answers to use the term Sports as oppose to Social when to the question “Who are our buyers?” are not routinely identifying their market mix provided to them can make use of a number of excellent The European term in use is often MICE hospitality-specifi c marketing management resources that (Meeting, Incentive, Conference, and Event) can help them answer it.5 c09EvaluationofRevenueManagement336 Page 336 9/22/10 12:29:21 PM user-f391 336 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING For RMs, the assessment and evaluation of sources of business are important for improved decision making Marketing mix: The relative proportion of revenue This is so because the marketing mix achieved by a hotel contributed by each of a hotel’s most important guest directly affects its revenue-generation ability and its proftypes (e.g., transient, group, or contract guests) itability Experienced RMs know a simple fact: All customers are not created equally The truth is that some customers are a good deal more desirable (worth more) than others To illustrate, consider the Essential RM Term value to a hotel of two different pieces of business, each staying two nights, each paying the same room rate of $199.99 Ancillary revenue: Nonrooms income Examples include guests’s food and beverage purchases, meeting per night and buying the same number of rooms (200 total room nights); but with very different nonrooms or ancillary room rental, AV-related income, parking, spa charges, revenue expenditures In this example, attendees at a conand activity fees Also known as nonrooms revenue vention held by the Veterans of Foreign Wars (VFW) spend very differently than equal numbers of leisure travelers In Figure 9.16, the revenue variance between these two groups is 32 percent The variance is calculated as: Essential RM Term $57,798 VFW revenue 2 $43,798 Transient revenue Revenue variance $43,798 or $14,000 32% revenue variance $43,798 Figure 9.16 Guest Revenue Contribution Calculation Group VFW Convention Leisure Traveler 100 100 $ 199.99 $ 199.99 200 200 Total revenue @ ADR ϭ $199.99 $ 39,998 $ 39,998 Daily per room ancillary revenue $ 89.00 $ 19.00 Total ancillary revenue (Daily ancillary x 200) $17,800 $ 380.00 Total Revenue 2-night stay $ 57,798 $ 43,798 RevPOR $ 288.99 $ 218.99 Nightly rooms sold ADR Total room nights (2-night stay) Revenue Variance 32% c09EvaluationofRevenueManagement337 Page 337 9/22/10 12:29:21 PM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 ADDITIONAL ASSESSM ENTS 337 In this example, it is easy to see that 200 VFW convention rooms are simply more valuable to the hotel’s revenue optimization efforts than are 200 transient rooms even though the rooms are sold at the same room rate The importance of knowing the relative value of your guests is clear In fact, frequent traveler or similar guest-rewards programs work mainly because they are designed to let customers know they are more valued than the average guest Hotel companies know that the value of guests increase as they spend more and as they spend more often, and these type guests should be rewarded or treated in other special ways RMs must be able to recognize all of their most valuable customers RMs must also understand the value of their current customers and, just as importantly, they must be able to assess the potential value of future customers Figure 9.16 also demonstrates the significant limitations RMs would encounter if they used only ADR, rooms sold (occupancy), or RevPAR generation as the primary means of guest value assessment Note that in such a limited assessment, both customer types in this illustration would, erroneously, be considered equal in value In addition to decisions related to rate determination (higher valued guests may be deserving of reduced room rates to encourage their continued business), RMs must understand the source and value of their guests if they hope to implement other revenue optimization strategies To illustrate, consider Mitch and Sonia, two RMs whose hotels compete in the same market and routinely offer government workers a $99.00 room rate and corporate guests a $149.00 room rate Assume that Mitch elects, during the Thanksgiving holidays, to offer a 20 percent discount on his corporate travel rate Sonia’s RM team is considering the wisdom of offering a matching rate Prior to doing so, it is critical that Sonia’s team understand well the proportion of rooms they sell to this specific group If Sonia’s hotel generates percent of her total room revenue from corporate travelers, the impact of this rate-management decision will be very different than if corporate travelers typically contribute 75 percent of her hotel’s total revenue Those hospitality professionals with a foodservices background will recognize the similarity of this particular rooms-related challenge to the menu mix challenges they routinely face This will be examined in Chapter 10 In a hotel, raising room rates significantly on insignificantly small sources of business will likely result in minimal revenue increases Even minimal rate reductions or increases, however, for significantly large sources of business, can result in significantly increased or reduced total revenues Distribution Channel Assessment Historically, the most common approach to the quality assessment of alternative distribution channels has been related to total revenue generation The widely shared belief was that those distribution channels that contribute the most revenue volume (Room rate ϫ Rooms sold) were considered best Increasingly, RMs understand that it is total revenue generation less channel distribution costs that characterizes a high-quality distribution channel This is illustrated well by the advertisement for seminars and training offered by industry professionals specializing in revenue management One popular revenue management consultant advertised one of her new Webcast seminars with the following headline: c09EvaluationofRevenueManagement338 Page 338 9/22/10 12:29:21 PM user-f391 338 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING Distribution Management RevPAR is no longer the only metric Revenue managers now must manage distribution channels based on the cost of reservation in order to achieve maximum revenue “flow-through.”6 In Chapter you learned that net ADR yield is the actual revenue realized by a hotel after subtracting the cost of fees and assessments associated with revenue generated by a specific These “reservation costs” can, of course, be significant You also learned that net ADR yield is a concept useful in determining differential price points and in managing pricing in such a manner as to move repeat buyers from higher cost to lower cost channels of distribution Recall that the formula for net ADR yield is: Net room rate Net ADR yield Standard ADR In this formula; Standard ADRϪDistribution channel costs ϭ Net room rate An effective assessment of alternative distribution channels requires RMs to again apply the net ADR yield concept Figure 9.17 shows a typical variation from the average (mean) distribution channel performance that can occur when distribution channels with differing net ADR yields contribute to a hotel’s total revenues As shown in Figure 9.17, even when the number of rooms sold and the rate at which they area sold is identical, variation in the cost of the channel can result in above or below average net revenue To objectively assess the quality of a distribution channel, RMs must consider the standard ADR achieved in it, as well as the total number of rooms sold They must also, however, carefully assess the channel’s relative cost (Net ADR Yield) if they are to make informed revenue management-related decisions about its continued use Figure 9.17 Variation from the Average (mean) Distribution Channel Performance Source Net ADR Yield Rate Net Per Room Rooms Sold Net Revenue Channel 98% $ 299.99 $ 293.99 100 $ 29,399 10% Channel 95% $ 299.99 $ 284.99 100 $ 28,499 6% Channel 90% $ 299.99 $ 269.99 100 $ 26,999 1% Channel 88% $ 299.99 $ 263.99 100 $ 26,399 Ϫ1% Channel 85% $ 299.99 $ 254.99 100 $ 25,499 Ϫ5% Channel 80% $ 299.99 $ 239.99 100 $ 23,999 Ϫ10% 600 $ 160,795 100 $ 26,799 Total Average 89% $ 299.99 $ 267.99 1/2 Average 0% c09EvaluationofRevenueManagement339 Page 339 9/22/10 12:29:22 PM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 ADDITIONAL ASSESSM ENTS 339 ᭤ RM ON THE WEB 9.2 Information related to a hotel’s market performance is typically provided by STR, a hotel’s franchise company, and its own marketing intelligence information TravelCLICK is another excellent source TravelCLICK helps RMs by providing data regarding e-booking sources Information supplied by their Hotelligence program helps RMs analyze competitive rates, target desirable travel agents and GDS sources, analyze the impact of their revenue optimization decisions, and create action plans for future months To learn more about TravelCLICK you can review its web site at www.travelclick net Since individual travelers and travel professionals increasingly utilize the Internet to book rooms, RMs must make strategic decisions about partnering with and supporting specific GDS companies and individual travel-related web sites TravelCLICK carefully monitors and reports on these popular distribution channels Monitoring Web 2.0 Increasingly, potential guests seek information and make decisions about the hotels they will frequent via Internet user postings As a result, RMs understand that they have an increasingly important role to play in closely monitoring travel social media sites like TripAdvisor and others like it that post travel reviews In the 1940s, the flamboyant and controversial film actor Errol Flynn observed: “It isn’t what they say about you, it’s what they whisper.”7 Today, the Internet allows customers to whisper (or text and twitter!) about your hotel to millions of readers at a time Although few people actually enjoy criticism, especially when it is unfairly delivered, good or bad comments from guests provide valuable information you can use to improve your product and services It is important to recognize that you cannot manage or control social media content You can, however, carefully monitor it One easy way to so is to set up a free Google Alerts account for your property (www.google.com/alerts) Tools such as this one search news, blogs, videofile sharing sites, and others for your hotel’s name and then notify you (via e-mail) of the search results TripAdvisor can set up a similar program to notify you of any comments about your property that have been posted on their site Although it is important to monitor and respond to negative comments (see Chapter 8), it is also important to recognize that the majority of comments posted on social media sites are actually positive, not negative For that reason, it makes sense to carefully monitor social media sites for positive posting about your property These performance observations, obtained with the permission of the individuals posting the comment, can be posted on your own web site in the c09EvaluationofRevenueManagement340 Page 340 9/22/10 12:29:22 PM user-f391 340 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING ᭤ RM ON THE WEB 9.3 Savvy RMs increasingly rely on the Internet to better understand their customers’ attitudes toward their hotel stays One tactic that is gaining in popularity is that of replacing paper and pencil guest satisfaction surveys with Web-based surveys In a Web-based survey system, hotel guests are sent an e-mail at the conclusion of their stay asking them to comment about the quality of their hotel room, performance of the hotel’s staff, and their overall feelings about price paid versus value received After the guest completes the survey, the data go directly into the hotel’s customer experience management system, allowing properties to track guest satisfaction and identify any problem areas that need to be addressed Medallia is an industry leader in providing hoteliers web-based customer survey assistance and industry tracking data You can view its web site at www.medallia.com Hotels now utilizing Web-based customer survey systems report increased response rates, respondent-friendly surveys that are easier to complete, significant cost savings, and much faster guest feedback form of a testimonial list Multiple positive comments such as these can have significant power with rooms buyers for the very reason that they are user generated, not property supplied C O M M O N - S E N S E R E V E N U E O P T I M I Z AT I O N For RMs working in the lodging industry, a continual evaluation of evolving revenue optimization strategies, tactics, and results is crucial Revenue optimization techniques in the industry have advanced far beyond a simplistic “head-in-beds” approach that focused on maximizing a property’s occupancy percentage Such an approach all too often caused RMs to reduce their room rates in the false belief that doing so would increase demand and, as a result, maximize RevPAR As you have learned, today’s best practices require RMs to establish differential room rates based on market segment acceptance; consider historic, current, and future demand; and manage room rates to reflect room supply and occupancy demand Knowledge of pricing theory and understanding consumer perceptions of value are also of great importance to an RM’s success Increasingly, the integration of profit maximization based on GOPPAR and flowthrough assessment require RMs to consider opening and closing rate codes based on c09EvaluationofRevenueManagement341 Page 341 9/22/10 12:29:22 PM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 COM M ON- SENSE REVENUE OPTIM IZATION 341 the level of profitability associated with each of a hotel’s market segments Doing so requires that RMs know their hotel’s true costs of sales and that they accept increased responsibility for bottom-line profitability Regardless of their job title or their personal impact on their hotels’ departmental operations, however, RMs must ultimately establish their room rates based on their customers’ perceptions of value received for price paid Experienced RMs know that room rates, because they are prices, set their guest’s initial expectations for their hotels’ products and services Rates that are too high set unrealistic guest expectations Rates that are too low undervalue the efforts of the hotel’s staff and deprive the property of deserved profits An overemphasis on Internet intermediaries (who seek their own revenue optimization strategies) as a hotel’s primary selling tool risks product and brand commoditization and in too many cases has led to lack of pricing credibility What is needed, of course, is a common-sense approach to room rate determination While common sense is much too often uncommon, RMs would well to recall the definition of common sense proposed by author (of Uncle Tom’s Cabin) Harriet Beecher Stowe’s son C E Stowe, who observed: “Common sense is the knack of seeing things as they are, and doing things as they ought to be done.”8 RMs should be those hospitality industry leaders who see things as they are and ensure things are done as they ought to be done Those RMs in lodging who possess good amounts of common sense know that to the right things they must: ᭿ Understand the importance of accurate data when forecasting based upon historical, current, and future room demand ᭿ Recognize the impact of current guest demand or pace on rooms pricing ᭿ Carefully assess the impact of their pricing decisions on future guest demand and long-term guest loyalty ᭿ Avoid pricing practices that lead to the commoditization of rooms; the lodging industry’s primary product ᭿ Take into account the impact of their revenue optimization decisions on each of their property’s: Transient markets Group markets ᭿ Contracted rooms markets Consider all aspects of overbooking before applying it as an effective rooms inventory management strategy ᭿ ᭿ ᭿ ᭿ Utilize sound and creative discounting and stay restrictions as supplements to differential rooms pricing strategies ᭿ Implement and regularly measure the effectiveness and costs related to their nonelectronic distribution channel management strategies ᭿ Implement and regularly measure the effectiveness and costs related their electronic distribution channel management strategies including the: c09EvaluationofRevenueManagement342 Page 342 9/23/10 10:56:18 AM user-f391 342 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING ᭿ ᭿ ᭿ CRS GDS IDS ᭿ Monitor guest experiences using Web 2.0 ᭿ Calculate and analyze the statistics necessary to assess the RM team’s decisionmaking effectiveness, including: ᭿ ᭿ ᭿ ᭿ ᭿ ᭿ ADR Occupancy RevPAR (limited-service hotel) or Total RevPAR (full-service hotel) RevPOR GOPPAR Flow-through ᭿ Monitor the performance of competitors via the insightful analysis of a justifiable comp set ᭿ Take pricing risks when it is prudent to so; and accept and learn from mistakes ᭿ Create realistic RevPAR and profit increase goals and broadly communicate those goals within their organizations ᭿ Resist the urge to discount rates as a means of increasing profitability because it is a counterproductive strategy ᭿ Communicate to the entire RM team that neither occupancy, ADR, or RevPAR is the end goal—rather, customer-centric and profitable revenue generation is the end goal Common sense and the right management assessment tools lead to revenue optimization success for RMs, their RM teams, and their hotels ❖ ESSENTIAL RM TERMS Statistic Income statement Total RevPAR Room-related occupation costs Minimum ADR sales point formula Gross operating profit (GOP) Flow-through Market share Metropolitan Statistical Area (MSA) Flag SMERF Marketing mix Ancillary revenue c09EvaluationofRevenueManagement343 Page 343 9/23/10 10:56:26 AM user-f391 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 APPLY WH WHAT AT IS YOU A PRICE? KNOW 343 ➠ APPLY WHAT YOU KNOW Antonio is the RM at the 180-room Hawthorne Suites Disappointed in his occupancy rate last year, he decided to reduce his room rates this year by 10 percent to help increase sales and improve his RevPAR This action resulted in an upswing in occupancy, from 75 percent last year, to 85 percent this year; an increase of 13.3 percent Last year, Antonio’s controllable operating costs were $61.00 per room This year, they rose to $62.00 per room, an increase of only 1.6 percent Help Antonio better understand the overall results of his rate reduction strategy by completing his hotel’s May operating performance worksheet and then answering the questions that follow Hawthorne Suites May Performance Statistics Occupancy % Last May This May 75% 85% $129.99 $116.99 Rooms sold ADR Rooms revenue RevPAR Controllable operating costs Gross operating profit GOPPAR A B C D What was Antonio’s RevPAR “Last May?” What was Antonio’s RevPAR “This May?” What was Antonio’s GOPPAR “Last May? What was Antonio’s GOPPAR change from last May to this May: In dollars? _ In %? _ E Compare Antonio’s GOPPAR performance this year versus last year How effective you believe Antonio was in devising and implementing his revenue optimization strategy? Paige Vincent is the RM at the City Center Novotel For over 12 months, she has been working hard to improve the performance of her hotel Paige just received the following performance data Help her understand the revenue optimization trends for her property by completing the chart and then answering the questions that follow c09EvaluationofRevenueManagement344 Page 344 9/23/10 10:56:32 AM user-f391 344 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING City Center Novotel Performance: Occupancy % Novotel Comp Set This month 57.2 58.1 Last months 55.1 57.7 Last 12 months 51.3 55.6 Index ADR This month $266.57 $270.15 Last months $244.91 $269.69 Last 12 months $231.45 $268.95 RevPAR This month Last months Last 12 months A B C D E What was Paige’s occupancy index this month? What was Paige’s ADR index for the last three months? What was Paige’s RevPAR index this month? What was Paige’s RevPAR for the last 12 months? Compare Paige’s property performance for the past 12 months to that of her competitive set How effective you believe Paige has been in devising and implementing her revenue optimization strategy? Jamie Lynn is the RM at a 250-room full-service hotel property Her comp set includes five full- and limited-service properties: Property Number of Rooms Sheraton 235 Radisson 220 Holiday Inn Crown Plaza 271 Hyatt Place 314 Clarion 210 Supply The demand and revenue performance of Jamie Lynn’s hotel for the time period January through May is listed below c09EvaluationofRevenueManagement345 Page 345 9/23/10 10:56:37 AM user-f391 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 APPLY WH WHAT AT IS YOU A PRICE? KNOW Month Demand Revenue January 16.2 23.7 February 18.5 15.5 March 16.7 17.1 April 20.1 20.5 May 23.7 16.2 345 A Assume there were no changes in the number of rooms offered by the comp set or by Jayme Lynn, during the period January to May What was Jayme Lynn’s proportion of the comp set’s supply? B In which months did Jamie Lynn’s occupancy rate exceed that of her comp set? _ C In which months did Jamie Lynn’s ADR exceed that of her comp set? _ D Based on Jamie Lynn’s January results, what rate-related advice would you give her? E Based on Jamie Lynn’s May results, what rate-related advice would you give her? Jerielle Pelley is the front office manager at the 125-room limited-service Best Stay Inn She also serves as her property’s RM Jerielle has just taken a call from Lawrence, a friend and the RM at a hotel within her comp set Because of an internal oversight, Lawrence’s hotel is overbooked by 70 group rooms next Saturday Lawrence would like to purchase that number of rooms from Jerielle at their previously agreed upon walk rate of $75.00 Jerielle’s normal rack rate is $129.00 Currently, she has 55 occupied rooms (arrivals and stayovers) on the books for that day She estimates that she could sell, at her normal ADR, another 30 rooms by Saturday Complete the source of business worksheet and then answer the questions that follow Source of Business Calculation Group With Lawrence Walks Without Lawrence Walks Sold ADR $ $129.00 Total revenue estimate $ $ Daily per room ancillary revenue $8.00 Total ancillary revenue $ $8.00 $ (continued) c09EvaluationofRevenueManagement346 Page 346 9/23/10 10:56:43 AM user-f391 346 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING Source of Business Calculation (continued ) With Lawrence Walks Group RevPOR Without Lawrence Walks $ $ Amount $ % 114.6 Total revenue Revenue Variance A What would Jerielle’s ADR be if she accepted all of Lawrence’s walked rooms? _ B What would be Jerielle’s RevPOR with the walked rooms? _ C What would be Jerielle’s RevPOR without the walked rooms? _ D What would be the dollar difference in her hotel’s total revenue if Jerielle agreed to take the rooms? E What would be the % difference in her hotel’s total revenue if Jerielle agreed to take the rooms? F If you were Jerielle, would you accept the walked rooms from Lawrence’s hotel? Explain your answer Watson Walbert is on the corporate RM team for the Sunbird Hotel Corporation Sunbird is the franchisor for Red Robin and Falcon hotels Part of Watson’s job is evaluating revenue and Net ADR Yields for the distribution channels used by the company franchisees Sunbird charges its franchised hotels a total of percent of gross room revenue for each room sale made Additional fees (listed as a percentage of ADR) that are assessed for each distribution channel are presented in the following table Calculate the information required to complete the chart Watson is working on and then answer the questions that follow: ADR Total Fees: 5% franchisor fee PLUS an additional; Third-party Web sites $166.54 27% Franchisor Web site $229.99 7% Proprietary Web site $239.99 5% Travel agent $209.59 11% Channel Net ADR Net ADR Yield c09EvaluationofRevenueManagement347 Page 347 9/23/10 10:56:49 AM user-f391 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 APPLY WH WHAT AT IS YOU A PRICE? KNOW 347 A Which source provides the hotels with their highest net ADR? B Which source provides the hotels with their lowest net ADR? C What is the net ADR yield on rooms delivered via this hotel group’s franchisor operated web site? D What is the net ADR yield on rooms delivered to the hotels via travel agents? _ _ E Which source provides the franchisor with the highest per-room revenue? _ F Which site provides the franchisees with the highest per-room revenue? KEY CONCEPT CASE STUDY “Thanks for coming in, Damario,” said Sofia Davidson, the GM at the Barcena Resort Damario, the revenue manager at the 480room Barcena Resort had now been on the job for 12 months “I want to get the Strategic Pricing and Revenue Management Advisory Committee to become more aggressive I want to eliminate our lowest-yield channels and focus even more on our best customers,” said Damario “I’ve been reviewing the data from last month and I have to tell you, the owners are really pleased with our progress,” said Sofia “Best as in highest rated? That does make sense,” said Sofia “But what exactly will that mean for us?” “I’m pleased, too,” said Damario “We’ve come a long way.” “Rate increases, for one thing,” replied Damario “I believe we are ready for our first significant rate increase in a long time I’m thinking an percent RevPAR increase for next year is a realistic target Based on our guest feedback results, I know we can it And I want to get more involved on the F&B pricing side I think we can make great strides there as well.” “Our occupancy index for the past three months has exceeded our comp set by 10 points, and you’ve managed to keep our rate index in the high 90s,” said Sofia “That’s a real credit to our RM team,” Damario replied “You’re being too modest The forecast and pricing systems you designed and implemented for us are going great The controller is happy, the DOSM is happy, and that makes me pretty happy too!” said Sofia “What’s next? “We still have some real challenges,” replied Damario, “but I think we are ready for the next big step.” “And what would that be?” asked Sofia For Your Consideration What evidence in the conversation between Sofia and Damario would lead him to believe the property was ready to seek significant rate increases? Assume you were on Damario’s RM team Since the property’s room rates are below the competitive set’s, what specific additional data would c09EvaluationofRevenueManagement348 Page 348 9/23/10 10:56:59 AM user-f391 348 /Users/user-f391/Desktop/Ravindra_23.09.10/JWCL402:Hayes:207 CH AP TE R E VALU ATION OF R E V E NUE M ANAG EM ENT EF F ORTS IN LODG ING be required to convince you that it would be a good time to raise your rack rates? Assume you were in favor of increasing the RevPAR target next year by percent Would you be in favor of increasing rack rates, reducing discounts offered, or increasing the ENDNOTES Excerpt from Accor, August 2008 Report to shareholders; at http://www.accor.com/gb/upload/ pdf/CP_S1_VA.pdf Joe Griffith, Speaker’s Library of Business (Englewood Cliffs, NJ: Prentice Hall 1990), 65 http://thinkexist.com/quotes/ernest_a._fitzgerald/ Retrieved 11/25/2008 http://thinkexist.com/quotes/bill_gates/4.html/ Retrieved 11/26/2008 number of discounted rooms available for sale? What specific additional data would you want to see before making your decision? Assume you were Sofia Based on his current results, would you favor Damario’s increased involvement in the hotel’s F&B pricing systems? Robert Reid and David Bojanic, Hospitality Marketing Management, 4th ed (Hoboken, NJ: John Wiley and Sons, 2006) http://www.carolverret.net/viral/readtopic php?id=45 Retrieved 9/25/2009 http://www.quotegarden.com/gossip.html Retrieved 11/29/2008 http://thinkexist.com/quotation/common_sense_ is_the_knack_of_seeing_things_as/145812.html Retrieved 11/15/2008 ... Manager’s Role 12 9 The Revenue Manager in the Hospitality Industry Legal Aspects of Revenue Management 13 3 Ethical Aspects of Revenue Management 13 9 The Revenue Manager Position 14 7 The Revenue Management. .. Team 15 6 13 0 PART II: REVENUE MANAGEMENT FOR HOTELIERS Chapter 6: Forecasting Demand 16 3 16 4 The Importance of Demand Forecasting Historical Data 16 7 Current Data 17 4 Future Data 18 5 Demand Forecasts... Fallacy The Purpose of Revenue Management The Purpose and Design of This Book Part I: Revenue Management Principles Part II: Revenue Management for Hoteliers Part III: Revenue Management for Foodservice