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History of Revenue Management

Origin of RM
Adaptation of RM in the Hotel Industry
Role of Revenue Manager
The Concept & importance of Revenue Management.
Hospitality Industry Application
Capacity Management, Discount Allocation, Duration Control
Measuring Yield
Elements of Revenue Management
Revenue Management - Potential High and Low Demand
Challenges and Problems in Revenue Management
Revenue Management Computer Software System.

History of Revenue Management

Historically how was Hotels

Performance Measured?
How can the hotels maximize revenue
from rooms?.
Is this strategy borrowed from some
other industry?
What's unique about marketing a hotel
room compared to a product eg.

The term "Yield Management" has been coined in the
airline industry and its objective is to manage the
product inventory (seats on a given flight, rooms for a
given night) in such a way as to maximize revenue.
In 1985, American airlines Launched Ultimate Super
saver fares to compete with low cost carriers.
They realized that Seats are highly perishable,
They adopted a technique based on demand and supply
(price Elasticity) and switched prices accordingly.
Soon this concept gained popularity and spread over to
railways and hospitality sector. Where else do you see
this concept?

Revenue Mngt. & Its

Technique to maximize room revenue
RM /YM is the process of understanding, anticipating
and influencing consumer behavior to maximize
room revenue from a fixed, perishable source.
An art and science of predicting real time consumer
demand and to quote an optimal price based on the
availability of the product. (MICEW)
Yield management is the practice of maximizing
profits from the sale of perishable assets, such as
hotel rooms, by controlling price and inventory and
improving service

Definition and practices

Using information, historical and current, in
combination with policy supports,
procedural supports, and statistical models,
to enhance a hotel's ability to carry out a
number of common business practices and
thereby increase both its revenues and its
customer-service capabilities.
Such business practices include:
Setting the most effective pricing structure;

Limiting the number of reservations accepted for

any given night room type, based on the expected
incremental profitability of a reservation;
Reviewing reservation activity to determine whether
any inventory-control actions should be taken (e.g.,
controlling the availability of discounted rates);
Negotiating volume discounts with wholesalers and
Providing customers with the "right" product (e.g.,
room type, rate);
Obtaining more revenues from current and
potential business; And
Enabling reservations agents to be effective sales
agents rather than merely order takers.

RM & Its Definitions

RM aims at selling the
right product
To the right customer
At the right time
For a right price
Through the right marketing channel
The result Differential pricing, can stretch the
market segment (budget travelers book in advance
for less price)

RM is not new to Hoteliers, since physically identical

rooms have been sold for higher prices during high
season and for lower prices during low season and
weekends for generations.
This was done by more or less experienced staff
with a varying talent to anticipate overall demand at
certain days, weeks or periods of the year for a
limited supply of rooms.
Almost all major lodging corporations, airlines,
cruise lines, car rental and passenger railroad firms
are practicing more or less sophisticated Revenue
management methods, maintain inventory control
systems and have either developed their own
software and hardware configurations in conjunction
with corporate CRS or are currently developing their

Range of Rates Differential

Rack Rate
100% bookings

Single, Private and Chance

80% TAs, Groups eligible for discounts,
corporate discount rates
60% Spl. Corporate rates for larger multiple
TAs and major companies

Lets Suppose we have a hotel with 10 SGL rooms with a rack rate of
The potential revenue that can be earned is
10rooms X 365days X Rs.100 = 3,65,000
Lets suppose, the actual revenue generated in the previous year
was Rs. 2,35,000.
Then the Yield = Actual Revenue produced / Potential Revenue
= 2,35,000, / 3,65,000
= 0.64378 or 64.38%
No. of rooms sold
Actual Average room rate
No. of Available rooms
Room rate

Revenue Mngt. In Hotel


Room is a perishable commodity.

The real commodity that Hotels sell is TIME in a given
Volume sales do not generate desired revenue, we must
think of quality deals in terms of revenue generated per
Focus is shifting from high volume business to high profit
business ( egs. Renting to bachelors/ nuclear family?)
RM is composed of a set of Demand Forecasting
techniques, used to determine
Whether rates be raised/lowered
Whether to accept/reject a reservation to maximise

Application of RM in Hotel Industry

1. Market Segmentation - Demand for the service can be
divided into distinct market segments and price elasticity
varies among the customer segments
2. Fixed Capacity - The capacity supply is relatively fixed
and it is costly or impractical to add or subtract
inventory in the short run.
3. Perishable Inventory The inventory is perishable and
cannot be stored to be sold at a later date.
4. Low Marginal Cost -The cost of selling an additional unit
of inventory is low.
5. Advance Sales - The service is ordered in advance of its
delivery / consumption.
6. Uncertainty of Demand - Demand for the service
fluctuates and cannot be predicted with a high degree of
7. Differential Pricing - The product can be sold to different
market segments for different prices under different

Revenue Mngt. In Hotel Industry

Application and Definition
Price and demand are inter-related and needs to be
In our industry demand is cyclic in nature, it follows a trend.
RM models help pin-point demand by minimizing
uncertainty and producing the best possible forecast.
RM helps in allocating inventory amongst different
segments of guests.
Revenue management in Hotel industry can be defined as a
technique based on the principle of demand and supply,
used to maximize the revenue generation of any hotel by
lowering prices to increase sales during off season (low
demand period) and raising the prices during peak season
(high demand periods).

Revenue Mngt. In Hotel Industry

Application and Definition
Successful revenue management relies on making
predictions called forecasts. For this, managers need
FOMs must understand
The property and the competitive market in which they
Consider future events or variables that might affect
Forecast help them take decisions on raising /lowering
rates, accept /deny/waitlist.
Demand forecasting strategies are applied to room
reservation systems, MIS, package pricing, seasonal rate
determination. Special tour, group, TA & TO rates

The keys to successful yield management:

Knowledge - of what drives demand for your
Awareness - of your competitors activities
Experience - of what can cause fluctuations in
Understanding - of what the hotel expects to
achieve, be it ARR, Occupancy, REVPAR or yield
Training - of all staff so that yield strategies
make sense and can be explained simply to
potential customers

Tools of Revenue Mngt.

Different demand situations call for different
selling tactics.
The challenge is to view each day as a
separate situation and implement tactics that
are best suited for the property, its guest and
demand conditions. This is achieved buy the
following 3 tools of Revenue management .
1. Capacity Management
2. Discount Allocation
3. Duration Control

1. Capacity Control/ selective

Involves methods of controlling and limiting
Room Supply by the following ways
Indulge in selective overbooking
Determining how many walk-ins to accept
Its economically advantageous to overbooks
base rate rooms with an option to upgrade in
case of an oversell
Capacity mngt also influenced by demand for
hotel rooms in the neighborhood

1. Capacity Control/ selective overbooking . Contd

Availability of rooms increase in the foll.

Early departure/ under stay consequences?
Hotels usually discourage such practices.
Cancellations when guests cancel rooms after the
stipulated time, it leads to an increase in the room
availability. Strict retention, cancellation /
amendments policies to overcome this.
No Shows though retention charges are secured,
this situation will increase the room availability.
To avoid loss of revenue from any of the above
factors, overbooking is encouraged.

1. Capacity Control/ selective

overbooking . Contd

OB is not a Guesswork.
Foll. factors to be Considered
I. Past history of Data related
.Cancellation Statistics
.Under stay statistics
.No-show statistics
.Turn away statistics

1. Capacity Control/ selective

overbooking . Contd


Activities in Town

Sporting Events - games/ matches in

the city
Cultural events Art/cultural/music
Business events
Protest/unrest/Emergency etc.
curfews/ bandhs etc.

1. Capacity Control/ selective

overbooking . Contd
III. The Experience of the Manager
Selective overbooking varies with room type
Percentage of Overbooking will depend upon
the demand for higher priced rooms
Avoid overbooking of presidential suites,
luxury suites (less in number, an alternative
is to waitlist them)

1. Capacity Control/ selective

overbooking . Contd
Tips to manage Capacity
Its better to have some rooms at the end of
the day for walk-in than to walk the guests.
Handling group attrition effectively by
strict adherence to pre-payments,
cancellation/ amendment procedures during
the lead time.
Ensure 100% room-night pick-up
commitment of groups.
No loyalty rewards to discounted group rates

2. Discount Allocation/ Differential

Price is a major criteria for a guest that
influences a hotel selection. Its the value of
goods & services expressed in terms of
We price the product based on demand,
competition (their USPs), cost (tangibles),
value additions (quality) in the market
Rev. Mngt attempts to get the right sales mix.
(To sell every category of room/price by
matching it to the market) by balancing the
perishability issue.

2. Discount Allocation/ Differential

pricing Contd
Differential pricing is a sales strategy that allows
us to sell Maximum No. of rooms at the best
rates (BAR), to satisfy the projected demand, at
the same time filling rooms at a discounted rate
to avoid loss due to perishability of room.
Helps us sell the remaining rooms at higher rates
as demand indicates
Rate levels or triggers set at each pressure point.
Pressure points being the occupancy level and
demand as dictated.

2. Discount Allocation/ Differential

pricing .. Contd
Off-season rates, package plans, spl. offers to
attract business in lean seasons.
For Egs, Discounts can include foll. variations
Rack rate (No Discount) : Offered to walkins
10-20% discount : To TA, Groups, regular
30-40% - To Large TAs and major Companies
50-60% - To Very large multinational
companies, holiday planners, MICE

3. Duration Control
Another tool - Places time constraints on
accepting reservations in order to protect
sufficient space for multi day requests.
It means that one night stay may be rejected
even though space is available.
Egs. Wednesday close to sell out but adjacent
days are not.. Here optimize revenue by
accepting a discounted rate for multi-day stays
than selling one room on rack rate for one day.
(Marginal costs low)
Egs of Vice- versa???

3. Duration Control
Depends on the occupancy trends in Commercial Vs
Resort Hotels
MLS is practiced to control the imbalance of
occupancy during the week. Egs. mega conferences,
events in the city stretch out the days.
Now-a-days, many commercial hotels in the city
have MLS during weekend.
A combination of Duration control and differential
pricing is very practical. (price is low for MLS)
Egs 3 nigh stay with discount, while one night stay
is rack rate.

Elements of Revenue Mngt.

Group Room

For developing Successful Revenue

Mngt strategies these elements are

Element 1 Group Room

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 Groups Booking History (wash factor)
Group Booking Pace Watches out for the Rate at
which Group Business is being booked (Consider
Historical Trends) 250 rooms for 12th October booked
during April last year, This year 300 booked fro the
same dates as last year during April. 20% increase
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

Element 1 Group Room sales

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 of Transient Business Occurs
when a Hotel accepts Group Business at the
Expense of Transient /FIT Guest who often pay
higher. This might lead to profitability Problems
and Bad Reputation. This situations needs
close scrutiny.

Element -2 Transient Sales

FO management to monitor booking
pace & Lead time of individual guests
Helps determine how current
reservations are taking place in
comparison to historical and
anticipated rates

Element 3
All F & B activities to be carried out
considering the potential for booking
groups that need a meeting space, F
& B services and Guest rooms
In a sense the hotel can cross- sell
and the revenues that might be
generated from accepting such group
business should be considered while

Element 4 Local & Area- wide Conventions

Good revenue can be tapped during

this time as many hotels even not
located in the immediate vicinity of
the convention, can receive
individual guests and small groups
when your hotel becomes the
overflow facility.

Element 5 Special Events

Concerts, festivals and sporting
events , benefit the hotels from high
demand by restricting Room rate
discounts ( Rack rate sales) or by
applying MLS restrictions.

Pricing Technique Price

Pricing strategy in which amarketer sets a relatively
high price for aproduct orservice at first, then lowers
the price over time.It is a temporal version or price
discrimination or revenue management.
It allows the firm to recover its sunk costs quickly before
competition steps in and lowers themarket price.
Sunk Cost is a costthat has already been incurred and
cannot be recovered.
example, if a firm sinks 2 lakhs on an enterprise
software installation, that cost is "sunk" because it was a
one-time expense and cannot be recovered once spent.

The objective of this strategy is to capture

theconsumer surplus early in the product life cycle
in order to exploit a monopolistic position or the low
price sensitivity of innovators.
Here the firm charges the highest initial price that
customers will pay.
As the demand of the first customers is satisfied, the
firm lowers the price to attract another, more pricesensitive segment.
Therefore, the skimming strategy gets its name from
skimming successive layers of "cream," or customer
segments, as prices are lowered over time.

Penetration pricing
Apricing strategy where the price of a product
is initially set low to rapidly reach a wide
fraction of the market and initiate word of
The strategy works on the expectation that
customers willswitch to the newbrand
because of the lower price.
Penetration pricing is most commonly
associated with marketing objectives of
enlarging market share and exploiting
economies of scale or experience.

Benefits of Revenue Management


Improved forecasting
Improved seasonal pricing and inventory decisions
Identification of new markets
Identification of market segment demands
Enhanced co ordination between front office and
sales division
6. Determination of discounting activity
7. Improved development of short term and long term
business plans
8. Establishment of a value based rate structure
( Rate Integrity Degree to which rooms are
comparable )
9. Increased business and profits
10.Savings in labor costs and other operating
expenses (Better forecasts better HRP)

RM strategies during High Demand

1. Close / restrict discounts to generate
more ARR
2. Apply MLS restrictions carefully.
3. Reduce group business as they impact
4. Reduce / eliminate 4 or holds
5. Tighten guarantee or cancellation policies
6. Raise rates in consistency to competitors
to generate optimum revenue

RM strategies during High Demand

. Contd
7. Consider rate increase through packages
than offering more discounts
8. Apply rack rates to higher category rooms
9. Select CTA dates in advance
10.Apply deposits and guarantees to last night
of stay.
11.Try to define right market mix. To sell highest
possible rates first. (Top-down selling Tactic
to sell most expensive room categories first
as against Bottom-up selling)

RM strategies during High Demand

. Contd
12.Monitor New Business Bookings and
use these changed Conditions to
reassign Room Inventory (As
Occupancy increases, consider
closing out Low Room Rates and
open them Only when Demand
decreases). Look out for pressure
points to manipulate rates.
13.Try to displace Price-sensitive
Groups to Low Demand Days

RM strategies during Low Demand

1. Sell value and benefits egs. Spa
2. Offer packages and special offers
3. Keep discount categories like advance
purchase rates and corporate rates open
4. Encourage upgrades
5. Offer stay-sensitive price incentives
6. Remove MLS restrictions
7. Establish relationships with competitors

RM strategies during Low Demand

8. Lower rates to attract more business which
generates more revenue. NOW Sell more at
low rates
9. Consider maintaining High Room Rates for
Walk-in Guests
. In order to implement these Tactics,
Management needs to establish the Hurdle
Rate (The Lowest Rate for a Given Day)
below which it is impossible to sell any Room

Challenges in Revenue Mngt

1. Measuring performance of Yield
management System
. Occupancy rates and yield are affected by
external competition an ideal measurement
is to use an opportunity model, i.e to segment
the market and fix different rates for different
guests, if revenue is generated from those
rooms , it has to be ideally utilized.
. Ideally performance measurement in this case
must use MSI.

Challenges in Revenue Mngt

. Contd
2. Guest Satisfaction
. Differential pricing was not accepted
initially by guests.
. In evaluating the efficiency of YM
system, hotels had to compromise on
short term profits to create long
term guest loyalty.

Challenges in Revenue Mngt

. Contd
3) Employee Malpractice
) RM practices may influence
employees to follow wrong practices
such as over promising to increase
) Up selling higher priced rooms for
more incentives thereby not selling
basic category rooms and offending
certain guests.

4. Rate recovery
1. The main challenge revenue managers are
facing is rate recovery.
There has been a rally of rate dropping over the
past year the rates in some markets
decreased by 20-30%, sometimes even more.
. Its tough to get back on Track once the market
is used to discounted rate offerings
. It is a separate question, if this drop in rates
generated more demand and helped the
industry or just created a loss in revenues.

5. The customer is trained to look for a deal and

constantly negotiate for lower price
With the emerging strength of online travel agencies and
flash sales sites, weve gotten so far away from trying to
sell our services that we have forgotten what we are
selling. The only thing we offer today is lowest price!
It will be difficult to differentiate yourself and concentrate
on the value you are offering to the customers and not so
much on the price. ( its easy to convince a potential buyer
saying we offer discount than to say we offer Value )
One is the process of how we sell, but the bigger challenge
lies in peoples heads customers as well as employees of
the hotels and how they sell the change is needed here.
Service doesnt come cheap

6. Maintaining Rate parity and Rate Integrity

Rate paritycan bedefinedas maintaining consistentratesfor the same
product in all online distribution channelsExpedia, Orbitz, Hotwire, etc.
regardless of what commission the OTA makes.
Even without the flash sales sites and online travel portal offers, the hoteliers
are not able to keep the rate parity in Internet. The reason is clearly lack of
knowledge in how to control the rate parity over various channels and
manage it. The transparency of the Internet and the fact that customers are
aware of hotels not keeping rate parity has resulted a deal seeking
becoming a norm in travel purchasing.
Rate integrity is simply trust in the fair price of your room. If a hotelier
honestly feels that their hotels room rate coincides with the level of
cleanliness, customer service, location and available amenities of the
property, then he or she is practicing rate integrity.
Thats the reason for many airline to limit free upgrades. Hotels look at
upgrading as a solution to Service failure.
Many guests understand the benefits of Complaining .

Hotels are overcoming this issue by applying a recovery cost incurred

by the department due to service failure. This way rate parity can be
maintained .

7. Local Vs centralized
there is qualified local

Centralized reservation

expertise, all the data can be

According to this argument, Local
analyzed and managed
expertise can be scarce but
locally, even on a portable
centralized structures can utilize
trained specialists to manage
device today with sufficient
multiple units.
computing power. There is no
Remote-control can be exercised
need for a center to call the
well as a result of real-time
play from a distance
access to information and
Locals may have better
sufficient bandwidth coupled with
lightning fast processing speed.
product knowledge and they
The numbers can be crunched
can be more nimble if some
anywhere, the decisions are
tweaking is required when it
instantly communicated, so it
comes to last-minute dynamic
doesn't matter if the nerve
pricing and inventory allocation
center is down the hallway or a
decisions (e.g . instead of
time zone away.
posting a super-saver rate on, why don't we dump
There is no silver bullet. Each hotel will have to determine
30 rooms on for
what works best under a given set of circumstances. The
issue is still very much a subject of discussions in the years to

8. Too Much Data But no

experts to analyze
Technology Improvements over the years have enabled operators to
amass an ever growing database of transactional data. We digitalized
practically all important aspects of hotel operations.
We can gather valuable information not just about those guests who stay
at our hotels and leave traces in the form of data at each swipe or tap of a
card, let it be an entry to the fitness room or the purchase of a drink at the
lounge bar.
We also collect data on those potential guests who never even booked a
room yet but visited our home page. We have analytics on traffic sources
to a landing page, time spent, rate of abandon and much else that may
help us convert the lookers to bookers one fine day. There are terabytes of
data to analyze. (SEM/SEO)
It was discussed at the Revenue Optimization Conference in Baltimore in
2012 that the technology has outpaced the talent base. There is so much
data to analyze and make sense of, while there is a shortage of welleducated revenue analysts, revenue managers and directors of revenue to
leverage the wealth of data and build strategy on that.

9. Elevate to Strategic from Tactical and Embrace Total Revenue


Essentially,strategyinvolves planning a company's next

move, andtacticsinvolve physically carrying out the plan.
Thedifference betweenthe two concepts can be
remembered with the phrase, "strategicis doing the right
things --tacticalis doing things right.
There is an evident need to moving beyond the tactical
approach that narrows down Revenue Management to price
manipulation only. Leaders in the field embrace a much more
strategic approach.
Practicing strategic Revenue Management will separate the
men from the boys.
Moving from the management of room revenue only to the
management of different revenue streams including function
space and food and beverage at the minimum, will move
operators to Total Revenue Management.
Smart strategist will align Total Revenue Management and the
fast-paced field of Distribution Channel Management based on

RM Software
The processing of large databases is impossible without
appropriate RM software
Hotels that employ it gain strategic advantage over those that
rely on intuitive RM decisions only.
RM software helps RM managers by giving suggestions
price amendments,
inventory control and channel management, but it also
influences the decision making process of revenue managers.
On the one hand, the software analyses enormous data bases
and provides useful forecasts based on the optimization models
embedded in it.
RM team Human resource issues are essential in RM system
planning and implementation. Revenue managers and the
revenue management team are vital for the success of any RM
HR Managers to facilitate training by RM specialists with focus
on the specific knowledge in order to be effective and efficient.

Implementation of RM system within a hotel is a
challenging and significant change that might
cause resistance among employees and the
latter should be addressed and dealt with properly.
In many companies the application of RM techniques
is within the responsibilities of the marketing
manager or a person subordinate to him.
However, large hotel chains have recognized the
importance of RM to their bottom line and have
appointed a separate revenue manager) or even
regional revenue management teams to head and
guide companys efforts in optimal management of
its revenues.

Ethical issues in hotel

RM Despite their perceived positive impacts on hotels bottom
line, RM techniques have received a huge amount of
criticism in terms of grievances and lack of sensible benefits.
This is especially valid for price discrimination and
overbooking techniques.
Customers feel belied if they find that they have paid higher
price for the same room or if they have to be moved to
another hotel.
This can be a result of lack of or incomplete information
about booking, cancellation and amendment terms.
In general, research in the area focuses on the perceived
fairness of RM from the view point of the customer It
pinpoints the RM practices that customers consider acceptable
or unacceptable.

Overcoming the issues.

Obviously, when information about booking, cancellation
and amendment terms is available and understood by
the customers or when different prices are charged for
products perceived by them as different, customers are more
inclined to accept revenue management practices.
In the other cases, when discounts are insignificant
compared to booking amendment/cancellation
restrictions or the latter are changed after the booking has
been confirmed customers will be dissatisfied.
Choi and Mattila (2005) furthermore specify that only informing
the customers about hotels rates is not enough to improve
their perceived fairness of they have to know the basis for
rates variability (day of the week, duration of stay) and
booking conditions

Legal issues in hotel RM

The main focus is the discussion of hotels RM system as
a source of competitive advantage, know-how and its
subsequent treatment as a trade secret.
Kimes and Wagner emphasize that only parts of RM
systems are ascertainable through public sources (e.g.
overbooking's and forecasting mathematical models), but
how RM systems components are integrated is
considered proprietary knowledge and is kept
confidential. Its not necessary to reveal how we
make profits from a perishable commodity
However, authors call for greater vigilance among
hotel managers because high turnover among hospitality
employees might cause RM trade secrets leakages to
their new employers. ( HR Poaching)

Hotel revenue management process

Tranter et al. (2008) identify 8 steps in RM
customer knowledge
market segmentation and selection
internal assessment
competitive analysis
demand forecasting
channel analysis and selection,
dynamic value-based pricing
and channel and inventory management.

Future prospects of YM
One to one Revenue management
Sophisticated hotels will move towards this approach
where each individual will be a market segment in itself.
Future technology will help us in calculating
Total customer value is the perception of what a customer
is getting from a given product or service in comparison to
the purchase price. Egs. A product offered along with
service options has a greater value than offering just the
product for a price with no service options.
Total customer value, potential customer spend, based on
history and future potential from demographics, to
determine what rate and what options should be offered
to a potential guest

Total customer value integration

Rev par to Rev PAG and total customer
RM systems will create offers based on
the value or potential value of each
individual guest
Function Room yield
Forecasting and yielding of function
space is taking shape already

Cost of business analysis

Different revenue streams and
channels do not yield the same profit
even though display the same rate
Channel costs to be incorporated in
future RM Decisions.

Goal Alignment
rev management strategies to align
with organizational goals to reach its
full potential
Gap between technology and
Adoption of technology and use of
minds to manipulate them expertly
will help achieve success.

Refer text book on

this chapter