Beruflich Dokumente
Kultur Dokumente
UNIT - V
REVENUE MANAGEMENT
REVENUE MANAGEMENT
The concept of yield management was initially started by the airlines industry in the early
1960’, over a period they have well tuned to change in the demand and maximize on seat
sharing (with other airlines) & maximum occupied seats. Yield management has proven
successful in the lodging, car rental, cruise line, railroad, and touring industries—
basically, in situations where reservations are taken for a perishable commodity.
The key to successful implementation appears to be an ability to monitor reservations and
to develop reliable forecasts. Revenue management is based on supply and demand.
Prices tend to rise when demand exceeds supply; conversely, prices tend to fall when
supply exceeds demand. Proper pricing adjustments, which take existing demand into
account and can even influence it, appear to be the key to profitability.
To increase revenue, the hotel industry is attempting to develop new forecasting
techniques that will enable it to respond to changes in supply and demand with optimal
room rates. The hotel industry's focus is shifting from high-volume bookings to high-
profit bookings. By increasing bookings on low-demand days and by selling rooms at
higher room rates on high-demand days, the industry improves its profitability. In
general, room rates should be higher (in order to maximize rate) when demand exceeds
supply and lower (in order to increase occupancy) supply exceeds demand.
For example, a hotel in a corporate location will see high demand for hotel rooms during
the week versus on the weekend. This is a trend that a revenue manager would be aware
of and take into consideration when setting pricing. The revenue manager is in charge of
setting rate strategies that will help the business capitalize their profits. The revenue
manager will know what the competition is selling and how the competition is fairing.
For hotels there is an STR report that comes out weekly that compares 5-7 hotels in the
area and gives the hotel data on how they are doing compared to their competition when
it comes to revenue. This is a highly used report for revenue managers in the hotel
business. If the hotel is not keeping up with competition, then it lets the revenue manager
know they need to change their strategies. The focus of the revenue manager is knowing
what is going on around them in order to be able to react and price correctly.
Hotel Industry Applications
All hotel companies have a common problem: they produce a fixed inventory of
perishable products that cannot be stored if unsold by a specific time. The commodity
that hotels sell is time in a given space. If a room goes unsold on a given night, there is no
way to recover the time lost and therefore the revenue lost. Therefore, these products are
typically sold for varying, prices that depend on the timing of the transaction and the
proposed date of delivery.
In the hotel industry, revenue management is composed of a set of demand forecasting
techniques used to determine whether room rates should be raised or lowered, and
whether a reservation request should be accepted or rejected in order to maximize
revenue. Front office managers have successfully applied such demand-forecasting
strategies to room reservation systems, management information systems, room and
package pricing, rooms and revenue management, seasonal rate determination, pre-
theater dinner specials, and special, group, tour operator, and travel agent rates. Front
office managers have identified several benefits, including:
Improved forecasting
Improved seasonal pricing and inventory decisions
Identification of new markets segments
Identification of markets segment demands
Enhanced coordination between the front office and sales divisions
Determination of discount policy
Improved development of business plans
Establishment of a value-based rate structure
Planned responses to customer inquiries or requests regarding reservations
3
Discount Allocation Or
Differential Pricing
Duration Control Or
Capacity Management Or
Duration Restriction
Selective Over Booking
Early departure/understay When guests leave the hotel before their expected date of
departure, the number of vacant rooms increases. If a provision is not made, the newly-
vacated room will remain unsold, which would result in the loss of revenue. To avoid this
situation, hotels generally discourage early departure.
adjusted against the advance deposit. However, no-shows result in increasing the room
availability of the hotel, which leads to the loss of revenue in case the room is not sold.
To avoid the loss of revenue from any of the above-mentioned situations, hotels generally
prefer overbooking. Over booking is not done by mere guesswork. Selective overbooking
is done by considering the following factors:
Activities in town:
Sporting events: Events like international cricket, tennis football matches or any
other sports events, which are scheduled to be held on those dates or that period in
around the city.
Cultural events: Events like art festivals, cultural fairs or festivals, music shows,
etc. which are scheduled to be held on those dates or in that period.
Business events: Events like trade fairs, business conferences, which are
scheduled to be held on those dates or in that period.
Protest/unrest/emergency etc.: Events like curfews, bandhs, etc., scheduled to be
held on those dates or in that period.
Selective overbooking varies slightly with room types. The overbooking of lower priced
rooms is advantageous because in case of oversell (i.e., there are no cancellations or no-
shows, all the confirmed guests arrive at the hotel, and rooms are not available), the
guests can be upgraded to a higher category room. The percentage of overbooking will
depend upon the demand for higher-priced rooms in that duration. Overbooking should
be avoided in cases where the hotel has only one or two rooms of the requested category,
like presidential suites, luxury suites, etc. In case there is a reservation request for a suite,
which has already been confirmed, the second reservation should be put on a waitlist. The
guest should be informed that the confirmation of their waitlisted reservation is subject to
5
During the lean time or off peak season, when the occupancy is low, the supply of rooms
is more than its demand. In this situation, hotels offer discounted rates to attract more
number of guests who otherwise might not have planned to stay at that hotel or visit that
city. Hotels may offer off-season rates, package plans, special offers, etc. to attract more
business.
A hotel normally offers discounts as under:
Rack rate (no discount) : Offered to walk-ins during peak season.
10% to 20% discount : Offered to travel agents, groups, regular guests.
30% to 40% discount : Offered to large travel agents and major companies.
50%to 60% discount : Offered to very large multinational companies,
holiday planners, conference and convention
planners.
requiring multi-day stays, even at a discounted rate, rather than accepting reservations for
Wednesday only. Similarly, if the hotel is projected to be close to capacity Tuesday,
Wednesday, and Thursday, then accepting a one-night stay during any of those days may
be detrimental to the hotel's overall room revenue since it may block occupancy on the
other days. Hotels facing such situations may require that reservations for projected full-
occupancy periods must be for more than one night.
These strategies may be combined. For example, duration control may be combined with
discount allocation. A three-night stay may be available for discount, while a one-night
stay may require the rack rate. It must be cautioned, though, that using these strategies
must not be apparent to the guest. It would be difficult to explain to a guest why he or she
must stay three nights to get a discounted rate if he or she wants to stay only one night.
Proper use of revenue management relies on selling; it never divulges the revenue
management strategy being used.
Measuring Yield
Potential revenue can be determined in more than one way. Some properties calculate
their potential revenue as the amount that would be earned if all rooms were sold at the
double occupancy rate. Other properties calculate their potential revenue by taking into
account the percentage mix of rooms normally sold at both single and double occupancy.
The second method results in a lower total potential revenue figure, since single rooms
are assumed to be sold at less than double rooms. In fact, while it is unlikely that a hotel
will attain a potential that is based on 100 percent double occupancy (first method), a
hotel using the second method may actually be able to exceed its "potential" if demand
for double rooms exceeds sales mix projections.
Let us understand this concept with the help of an example. Hotel Sun Star has 600
rooms (200 single rooms and 400 double rooms). The hotel is currently running on 75 per
cent occupancy, with an average room rate of Rs 2,500. The hotel is offering:
on the category of the rooms. If the hotel sells all rooms in single occupancy, the potential
room revenue will be:
Room Category No. of rooms Room Rate (in Rs.) Revenue at 100% single
Occupancy (in Rs.)
Single Room 200 Rs 3,500 7, 00,000
Double Room 400 Rs 4,500 18, 00,000
25, 00,000 (Total)
The potential average single rate can be calculated as under:
= Rs 28, 00,000/600
= Rs 4,666.66
Multiple occupancy percentage = No. of rooms occupied by more than one guest x 100
No. of occupied rooms
Or
No. of rooms occupied by more than one guest
Total number of rooms x Occupancy ratio
8
Rate Spread = Potential average double rate - Potential average single rate
= Rs 4,666.66 - 4,166.67
= Rs 50
Potential Average Rate
Potential average rate is a collective statistic that effectively combines the potential
average single rate, multiple occupancy percentage, and rate spread. It is calculated as
under:
Yield Statistic
An important element in revenue management is the yield statistic. The yield statistic
calculation incorporates several of the previous formulas into a critical index. There are
various ways to express and calculate the yield statistic, all of which are equivalent:
Or
Since, total rooms sold/total available rooms is the occupancy percentage and the actual
average room rate/potential average room rate is the achievement factor, therefore, yield
can also be calculated as:
600
Yield statistics should be tracked daily. Tracking yield statistics for an extensive period of
time can be helpful to trend recognition. However, to use revenue management properly,
management must track yield statistics for future days. Future period calculations must be
done every business day, depending on how far in advance the hotel books its business. If
a hotel is currently at 50 percent yield for a day three weeks away, there may be plenty of
time to put strategies in place to increase the projected level of yield. Discounts may be
10
opened to raise occupancy or closed to raise average rate. If achieving full potential room
revenue is not possible (and it usually is not), the front office manager must decide on the
best combination of rate and occupancy.
Each sales contract for group business should be reviewed individually. Contracts should
be compared with historical trends as well as with budgets. A hotel usually has a group
sales target or budgeted figure for each month. Each group should be examined to see if it
will contribute to meeting the budget. If current transient demand is strong and the group
will produce only minimal revenue, the hotel may consider not booking it. If demand is
weak, the hotel may decide to accept the group simply to create revenue by selling rooms
that would not otherwise be sold. Using group booking pace analyses will help
management determine whether the hotel is on track to reach its target.
Another factor is the actual group booking pattern already on the books. For example, a
hotel may have two days between groups that are not busy. Management may solicit a
lower-revenue-generating group to fill the gap. The opposite may also occur. A group
may desire space during a period when the hotel is close to filling its group rooms goal.
Adding the group may move the hotel group sales above its goal. While this appears to be
favorable, it may displace higher-rated transient business. If the group wants the hotel, it
may need to be quoted a higher than normal group rate to help make up for the revenue
lost through the displacement of transient guests.
The same type of analysis is needed for transient business. For example, due to the
discounts offered by the hotel, corporate and government business may be assigned the
standard category of rooms. As these standard rooms fill, the hotel may only have deluxe
rooms left to sell. If demand is not strong, management may decide to sell the deluxe
rooms at the standard rack rate to remain competitive. It is best to look at a combination
of group and transient business before making firm occupancy and rate decisions.
Revenue management strategies differ during high demand and low demand periods.
High Demand
During high demand periods, as indicated by the forecasts, the management would use
the following tactics:
Reduce group room allocations as groups get very low room rates.
Reduce or eliminate 6 p.m. holds to avoid last moment no-shows or cancellations.
Tighten guarantee and cancellation policies to avoid last moment no-shows or
cancellations.
Raise rates as consistent with competitors to generate optimum revenue.
Consider a rate increase for packages instead of giving more discounts.
Apply rack rates to higher category of rooms like suites and executive rooms.
Select dates that are to be closed-to-arrivals.
Apply deposits and guarantees to the last night of stay.
Low Demand
During low demand periods, as indicated by the forecasts, the management would use the
following tactics:
Sell value and benefits like spa treatments.
Offer packages and special offers.
Keep discount categories like advance purchase rates, corporate rates open.
Encourage upgrades.
Offer stay-sensitive price incentives.
Remove stay restrictions.
Establish relationships with competitors.
Lower rates to attract more guests and to generate more revenue for the hotel.
The manager has to determine what is the lowest rate, to be offered on a particular day.
This rate is known as “the Hurdle rate”. Rates below this will not be offered on a
particular day.
Staff may be offered incentives for selling above the hurdle rate. Incentives may be
provided for long-stay guests.
The yield strategies may change several times during a single day & it must be
communicated to the staff.
C. Available Strategies
or high occupancy period by other hotels. This is intended to keep an occupancy peak on
one day from reducing occupancy on the days before or after the peak.
ii. Closer-to-arrival strategy: This allows reservations to be taken for a certain date
as long as the guest arrives before that date (to avoid strain on that day due to too many
check-ins.)
iii. Sell-Through strategy: Works like a minimum length of stay requirement except
that the length of the required stay can begin before the date, the strategy is applied. This
strategy is effective when one has a peak in occupancy and the management does not
want the peak to adversely affect reservations on other side of the peak days.
While developing a successful yield strategy, the following elements are very important:
Group Room Sales By studying group booking data, hotels can anticipate group
behavior and accordingly make provisions (for cancellations, modifications, etc.) in
group reservations
Group Booking Data Determines whether the Group blocks already recorded in the
Reservation File should be modified or not and adjusts expectations by reviewing the
Group’s Booking History
Group Booking Pace Watches out for the Rate at which Group Business is being
booked (Consider Historical Trends)
Anticipated Group Business Watches out for repetitive Group Patterns and act
accordingly in order to forecast the Pressure on the Market, and hence adjust Selling
Strategies
Group Booking Lead-Time Measures how far in advance of a stay Bookings are
made. This is very important in determining whether to accept an Additional Group and
at what Room Rate to book the New Group
Displacement or Transient Business Occurs when a Hotel accepts Group Business at
the Expense of Transient Guest. This might engender Profitability Problems and Bad
Reputation
13
Group Wash is the process whereby the Revenue Manager looks at the number of
rooms in contracted groups and raises, or usually lowers, that amount based on his
understanding of how the group bookings will eventually materialize. This is an area
where Revenue Managers take a risk to try to increase revenues by keeping inventory
available for more segments and channels to use. Many local markets have similar group
characteristics year round so Revenue managers will often apply a "typical" group wash
to all groups (for example, 15% across the board reduction) as they are booked and adjust
the wash later based on information from the sales force. This is helpful because it is
quick, and, if you almost always use 15%, you can keep track of your overall risks by
exception rather than keep track of various wash percentages for each group. When this
change in the inventory blocked is made without the customer's or meeting planners
knowledge it is called a "blind cut."
Group leads are sources of potential group business. Typically, they may come from
direct phone inquiries into the sales office (passive leads) or are generated from sales
efforts, like previous meetings held at competitive or sister hotels. Group leads are placed
into the group sales data base so that all sales people and the revenue manager know who
is assigned to work with the group.
Transient or Individual Room sales The front office management should monitor the
booking pace and lead-time of individual guests to understand how current reservations
compare with historical and anticipated rates.
Food and Beverage Activities All local food and beverage functions should be viewed in
the light of the potential for booking groups that need a meeting space, food and beverage
service, and guest rooms.
Local and Area-wide Activities Even when a hotel is not in the immediate vicinity of a
convention, individual guests and small groups, who have been displaced by the
convention may be referred to your hotel (as an overflow facility) and this may have a
tremendous impact on the hotel's revenue.
Special Events During special events (like concerts, festivals, and sporting events);
hotels might decide to benefit from high demand by restricting room rate discounts or
requiring a minimum length of stay.
There are a lot of benefits associated with the use of yield management in the hospitality
sector, especially in hotels. These benefits include the following:
Improved seasonal pricing and inventory decisions: It helps in deciding the season
and off season pricing for accommodation products and also in making important
inventory decisions like renovation.
Enhanced coordination between the front office and sales divisions: As the two
divisions work together to forecast and manage revenue and yield, it helps
enhance coordination between them.
Increased business and profits: Good revenue management helps increase revenue
and profits.
Savings in labour costs and other operating expenses: As most of the revenue
management tools are computerized, it helps in saving labour costs and other
operating expenses.
Initiation of consistent guest-contact scripting: Revenue management helps
initiate consistent contact with guests.
The yield management techniques and the models of overbooking, if applied aptly ~
would definitely maximize the revenue of the hospitality industry. But there are some
challenges or problems in this, which include:
Guest satisfaction: Some guests do not like the practice of differential pricing. In
evaluating the efficiency of yield management system, the tradeoff between
generating short-term profits and creating long-term guest loyalty needs to be
studied carefully.
Revenue management software does not make decisions for managers. It merely provides
information and support for managerial decisions. Since revenue management is often
quite complex, front office staff will not have the time to process the voluminous data
manually. Fortunately, a computer can store, retrieve, and manipulate large amounts of
data on a broad range of factors influencing room revenue. Over time, revenue
management software can help management create models that produce probable results
16
of decisions. Decision models are based on historical data, forecasts, and booked
business.
In those industries where computer-based revenue management has been applied, the
following results have been observed:
Future arrival dates status report: furnishes demand data for each day of the week.
This report contains a variety of forecasting information that enables the
discovery of occupancy trends by comparative analysis of weekdays. It can be
designed to cover several future periods.
Single arrival date history report: indicates the hotel's booking patterns (trends in
reservations). This report relates to the booking graph by documenting how a
specific day was constructed on the graph.
Weekly recap report: contains the sell rates for rooms and the number of rooms
authorized and sold in marketing programs with special and/or discounted rates.