How to increase the revenues of the hotel with Revenue management?

How to increase the revenues of

the hotel with Revenue

management?

Stanislav Ivanov

Email: stanislav.ivanov@vumk.eu

The Lecturer...

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• Editor-in-chief of the European Journal of Tourism Research (http://ejtr.vumk.eu)

• Vice Rector for Academic Affairs and Research at International University College, Bulgaria (http://www.vumk.eu)

• Member of the International Association of Tourism Experts (http://www.aiest.org)

Content

• What is Revenue management?

• Economic fundamentals of hotel RM

• Hotel revenue management system

• Hotel revenue management process

• RM metrics

• Value creation

• Hotel revenue management tools

• Hotel revenue management software

• Ethical issues in RM

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What is Revenue management?

• A set of tools and actions dedicated towards the achievement of an optimal level of the hotel’s net revenues by offering the right product to the right customers via the right distribution channel at the right time at the right price.

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Economic fundamentals of RM

• Product perishability • Limited capacity • High fixed and low variable costs • Unequal distribution of demand during the

day/week/month/year • Possibilities to forecast the demand • Possibilities to segment the market demand • Different willingness-to-pay of market segments • Different price elasticity of market segments • Possibilities for advance bookings

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Hotel revenue management system

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Booking request

RM process

Booking elements

Data and information

Revenue centres

RM software RM tools

Structural elements

Hotel revenue management system

Macroenvironment

Microenvironment

Impacts

Internal environment

Patronage intentions

Customer

RM team

Perceptions of RM fairness

Revenue management process

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Goals

Monitoring

Implementation

Forecasting

Analysis

Information

Stage Content

RM metrics – RevPAR, ADR, occupancy, GOPPAR Strategic, tactical and operational goals

Operational data and information provided by company’s marketing information system

Analysis of demand and supply in the destination/segment Analysis of operational data and information

Forecasting demand and supply in the destination/segment Forecasting RM metrics on a daily basis Forecasting methods

Pricing and non pricing RM tools Optimization process Approaches for solving RM mathematical problems

Performance evaluation of taken decisions and the RM system as a whole

Decision

Sales techniques Human resource training

RM metrics

• Occupancy

• ADR

• RevPAR

• Length of stay

• GOPPAR

• Yield

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Booking curve for a specific check-in date

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Days prior to check-in

Number of booked rooms

91 14 31 61 7 0

Maximum number of rooms in the hotel

В

А

Days prior to check-in

Number of booked rooms

91 14 31 61 7 0

Maximum number of rooms in the hotel

С

P

P

Booking curve at a specific date

10

Days to check-in

Number of booked rooms

91 14 31 61 7 0

Maximum number of rooms in the hotel

Days to check-in

Number of booked rooms

91 14 31 61 7 0

Maximum number of rooms in the hotel

А

B P

C

P

Value creation

•

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Value creation

• Types of value

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Gross value Net value

Expected

value

Expected gross value

(EGV)

Expected net value

(ENV)

Perceived

value

Perceived gross value

(PGV)

Perceived net value

(PNV)

Value framework for hotel selection

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Value framework of repeat purchases

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Hotel revenue management tools

Pricing RM tools

• Price discrimination

• Lowest price guarantee

• Dynamic pricing

Non-pricing RM tools

• Overcontracting and overbookings

• Room availability guarantee

• Length of stay controls

• 100% satisfaction guarantee

Combined RM tools

• Channel management

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Price discrimination

• Setting different prices for different market segments of the same product and erecting price barriers among them, so that customers with higher prices cannot buy at lower prices and customers with lower prices cannot sell the product to the customers with high prices.

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Price discrimination Hotel revenues with and without price discrimination

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0 Q1

P1 E1

D

D

P

Q 0 Q5

P2 E2

D

D

P

Q

E3

E4

E5

P3

P4

P5

Q4 Q3 Q2 0 Q1

P1 E1

D

D

P

Q 0 Q5

P2 E2

D

D

P

Q

E3

E4

E5

P3

P4

P5

Q4 Q3 Q2

Figure A Figure B

Price discrimination

• Price is the strongest tool for market positioning of the hotel – “the chain saw” metaphor

• Involves manipulating the price structure and price dynamics.

• Price discrimination is not a crime but a desirable strategy by the hoteliers!

• Carefully thought of and strategically justified decision.

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Types of prices in the hotels • Type of services – prices for main and additional

services

• Board – RO, BB, HB, FB, AI

• Type (double/twin, single, studio, suite), category (standard, superior, deluxe), amenities and view of the room

• Market visibility of the hotel – promotional prices for newly built hotels (market penetration pricing)

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Types of prices in the hotels • Time-based criteria:

- Day of the week – weekday and weekend prices

- Period of the year – prices before, during and after the active tourist season

- Prices during special events

- Lead time between booking date and check-in date

- Length-of-stay

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Types of prices in the hotels

• Price format – net and commissionable rates • Demand characteristics: - Trip organisation – prices for unorganised tourists

(rack rates), for corporate customers, for travel agents, for tour operators

- Age – discounts for children and senior travellers - Guest loyalty – discounts for loyal guests - Number of guests – group discounts - Other – government/ municipal employees,

members of a club / organisation / association, travel agency employees, honeymooners, prices for incentive trips, etc.

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Price barriers (tariff conditions)

• Requirement for advance booking and advance booking payment

• Lead period between booking payment date and check-in date (3, 7, 14, 21, 30 days)

• Minimum length of stay requirements

• Day of the week – weekday, weekend

• Group size

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Price barriers (tariff conditions)

• Cancellation charges – 100%, fixed amount, fixed percentage, no cancellation changes

• Amendment possibilities – none, change of check-in date possible but without shortening the length of stay, unlimited against amendment charge, unlimited without amendment charges

• Age restrictions (children, senior travellers)

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Price parity

• The final price for the consumer should be nearly the same in the different distribution channels

• Different final prices increase the mistrust of the customer and he avoids the bookings

• Cannibalisation in the distribution channels – overstimulation of one channel with very low prices “eats out” the other channels.

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Pricing strategies

• Market penetration pricing

• Market skimming pricing

• Product bundling

• Optional product pricing

• Psychological pricing

• Promotional pricing

• Captive pricing

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3D-pricing model

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Types of 3D-pricing strategies

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Overcontracting and overbooking

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Overbookings

• Management of overbookings is a set of managerial techniques and activities connected with continuous planning, reservation and control, aimed at revenue and yield maximization through confirming more rooms than the available capacity of the accommodation establishments.

It includes two groups of activities: • Defining and reserving the optimal number of

overbookings for each date and its controlled modification according to the market changes and specific demand and booking patterns.

• Managerial decisions and operational activities connected with walking guests with overbookings (redirecting clients to other hotels).

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Overbookings Reasons • Not all booking confirmed for a particular date will be really

used. Due to different reasons some of the guests do not arrive and are considered ‘no show’, other bookings are cancelled or amended in the last minute, the stay of other guests is reduced, and the rooms remain unsold.

• Rational hotel managers aim at maximizing the revenues and profits of hotels.

• Hotel services are perishable and cannot be stored or moved to other geographical location. The lost revenue from each unsold room is gone forever.

• Hotels have fixed capacity. In order match capacity with demand they react to short-run changes in demand with changes in prices and the number of confirmed rooms.

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Overbookings The mathematics

Basic model – variables: • X – the number of rooms of guests holding confirmed

bookings for a specific date do not arrive at the hotel (no shows, last minute cancellations, last minute amendments of reservations of already accommodated guests).

• Xi – the actual number of no shows, last minute cancellations, last minute amendments of reservations of already accommodated guests

• F(X) – the distribution function of X • r – room rate • c – costs for accommodating customers in alternative hotel • X* – optimal level of overbooked rooms • MR, MC, TC – marginal revenues, marginal costs and total

costs associated with the overbookings

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Overbookings

The mathematics

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Overbookings

The mathematics

Marginal costs of the overbookings MC are found through differentiating (1):

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Overbookings

The mathematics

The hotel does not receive any revenues from the unoccupied rooms, as well as from walking guests to other hotels due to overbookings. Thus, its marginal revenues are null:

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Overbookings

The mathematics

The hotel can afford to overbook until the marginal revenues from the overbookings exceed the marginal costs from them:

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Overbookings

The mathematics

The optimal number

of overbookings X* is the smallest integer for which inequality (8) is fulfilled (Netessine & Shumsky, 2002:39-40)

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Overbookings

The mathematics

Two types of rooms (H – higher priced, L – lower priced)

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Overbookings

The mathematics

TC =

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Overbookings

The mathematics Marginal costs are determined through:

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Overbookings

The mathematics

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Overbookings

The mathematics

• Coordination of overbooking policies by 2 hotels: summing the distributions of last minute cancellations, no shows and amendments for the two hotels: X1 and X2, respectively.

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Overbookings

The mathematics

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Overbookings

The mathematics

• Application of cancellation charges - m

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Overbookings

Walking guests

Who to be walked?

Factors, influencing the decision

Length of stay

Loyalty

Room rate

Type of booking

Lead period

Distribution channel

Where to walk?

Costs for walking guests

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Length of stay controls

• Requirements for minimum number of overnights during periods of high demand (e.g. special events, long weekend) or very low demand (e.g. weekends for business hotels). The goal is maximum occupancy during that period.

• Nearly always combined with price discrimination and high price barriers (cancellation deadlines)

• Bookings below the minimum length of stay are not confirmed

• Effective if applied by most of the properties in the destination.

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Lowest price guarantee

• If a customer finds a lower price within a predetermined period (usually up to 24 hours after the booking) for the same or another similarly located hotel in the destination with the same room type / board / dates of stay / number of rooms, the hotel matches this low price and provides additional discount.

• Does not have financial value if the period is limited to 24 hours. Real financial value is created if the guarantee includes the whole period between the booking date and the check-in date financial risk for the hotel.

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Types of lowest price guarantee

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Benchmark hotel

Same Similar

Validity 24 hours Type I Type III

The whole period from

booking date to check-in date

Type II Type IV

Types of lowest price guarantee

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100% satisfaction guarantee

• If the customer is not satisfied with the stay the hotel returns all the money paid by the customer without the need the customer to provide explanations for the dissatisfaction.

• In case of a repeat booking the customer does not receive such guarantee, i.e. the guarantee can be used only once by the customer protected interests of the hotel.

• Does not bring revenues but decreases the perceived risk by the customer.

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Room availability guarantee

• Provided by the hotel chains to their regular customers for accommodation outside periods of high demand. Requires 48/72 hours advance booking.

• Guarantees that the guest will not be walked in case of overbooking.

• Requires excellent occupancy planning by the hotel.

• Not valid with free overnights.

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Channel management

• Choice of a distribution channel – GDS, Travel agencies (tour operators, travel agents, OTAs), group buying websites.

Factors, influencing the choice:

• Characteristics of hotel’s product

• Characteristics of the company and its marketing strategy

• Characteristics of distributors

• Characteristics of target market

• Competition

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Channel management

Points to consider:

• Distribution channel cannibalisation

• Large tour operator syndrome

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Channel management

• Determination of prices - prices have to stimulate future bookings, not to serve as a bonus for past sales

• Determination of booking terms – release date, cancellation and amendment terms, payment terms

• Allotment management – commitment, allotment, free sale, upon request

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Relationship between the booking

term dates

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Relationship between the room price and the degree

of financial interdependence between the hotel and

the distributor

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Revenue management software

• http://www.jda.com/solutions/hospitality-revenue-management.html

• http://www.prospricing.com/pricing-software/

• http://www.easyrms.com/products.php

• http://www.micros.com/industries/hotel-management-system.htm

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Ethical issue in RM

Acceptable practices: • Providing customers with all information regarding

prices and booking conditions – hiding information destroys trust;

• Deep discounts in booking rates in exchange for stricter cancellation / amendment conditions;

• Different prices for products perceived by customers as different – e.g.. weekend and weekday prices

Unacceptable practices: • Insignificant price discounts in exchange for stricter

cancellation / amendment conditions; • Changes in booking terms without informing the

customer.

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Revenue management

Final remarks

• Systematic and predictable use of RM tools – frequent changes lead to uncertainty and mistrust among customers

• Considering all sources of revenues in the hotel, not only from Rooms division.

• Optimising the revenues of the single property and the hotel chain in the destination as a whole.

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Selected reading • Ivanov, S. (2006) Management of overbookings in the hotel industry – basic concepts and practical

challenges. Tourism Today 6, pp. 19-32. SSRN Working Paper No. 1295965. Available online at: http://ssrn.com/abstract=1295965

• Ivanov, S. (2007) Dynamic overbooking limits for guaranteed and nonguaranteed hotel reservations. Tourism Today 7, pp. 100-108. SSRN Working Paper No. 1295968. Abstract available online at: http://ssrn.com/abstract=1295968

• Ivanov. S. (2007) Conceptualizing cannibalisation: the case of tourist companies. Yearbook 2007, International University College, ISSN 1312-6539, pp. 20-36. Available online at: http://ssrn.com/abstract=1293730

• Ivanov, S. (2013) Optimal overbooking limits for a 3-room type hotel with upgrade and downgrade constraints. SSRN URL: http://ssrn.com/abstract=2190042

• Ivanov, S., V. Zhechev (2012) Hotel revenue management – a critical literature review. Tourism, 60(2), pp. 175-197. Earlier version available at SSRN: http://ssrn.com/abstract=1977467

• Kimes, S. E. (1989) Yield management: a tool for capacity-constrained service firms. Journal of Operations Management 8(4), рр. 348–363

• Koide, T., H. Ishii (2005) The hotel yield management with two types of room prices, overbooking and cancellations. International Journal of Production Economics 93-94, pp. 417-428

• Lee-Ross, D., N. Johns (1997) Yield management in hospitality SMEs. International Journal of Contemporary Hospitality Management 9(2), рр. 66–69

• Netessine, S., R. Shumsky (2002) Introduction to the theory and practice of yield management. INFORMS Transactions on Education, 3(1), рр. 34-44

• Ng, I. C. L. (2009). The pricing and revenue management of services: A strategic approach. London: Routledge

• Tranter, K. A., Stuart-Hill, T. & Parker, J. (2008). Introduction to revenue management for the hospitality industry. Harlow: Pearson Prentice Hall

• Wirtz, J., S. E. Kimes, J. H. Theng. P. Patterson (2003) Yield management: Resolving potential customer conflicts. Journal of Revenue and Pricing Management 2(3), pp. 216-226

• Yeoman, I. & McMahon-Beattie, U. (eds.) (2011). Revenue Management. A Practical Pricing Perspective. Palgrave Macmillan

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THANK YOU FOR THE ATTENTION!

QUESTIONS?

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