Rooms Division Basic Theories Series II - Revenue Management

By Eugene Win CRDEFor Kabul Serena Hotel 2009

Copyright. Eugene Win CRDE 2009

Revenue Revenue Management... Management...

Marriott International Lodging Revenue Management


Where is it originated?

It is originated in the airline industry.

Seats on airplane divided into different products base on

different restrictions.

$1,000 Y Class: Can be purchased at any time, refundable.

$ 200 Q Class: Required 3 weeks advanced purchase. Penalties on

cancellation or amendment.

Revenue Revenue Management...Management...



“Selling the right product

to the right customer

at the right time

for the right price.”

Revenue Management Revenue Management is ….is ….


Revenue Management is concerned with

maximization of revenue

by allocating fixed capacity (room-nights)

to different customer segments

with different rates.

Revenue Management is…Revenue Management is…



BASED ON SUPPLY AND DEMAND.

Prices tend to rise when demand exceeds supply; prices tend to

fall when supply exceeds demand.

Revenue Management Revenue Management is ...is ...


Desire is to Focus on REVPARDesire is to Focus on REVPAR

REVPAR = Rate x Occupancy

Rate Occupancy


How Does a Property Increase How Does a Property Increase REVPAR ?REVPAR ?

SAFEST

• Increase restrictions on lower rates

• Eliminate last room availability for Special Corporate accounts

• Eliminate non-producing Special Corporate accounts

MODERATE

• Close out lower rates on peak days

• Raise rates for smaller Special Corporate accounts

• Raise prices on discount rates

RISKIEST

• Raise the Corporate Rate

• Eliminate discount rates


Revenue Cycle Revenue Cycle

CREATE

DEMAND MAXIMIZE

REVENUE SUPERIORSERVICE

EXPERIENCE


Revenue Management

How we

Control and

Limit the room

supply

How we sell

our product

How we protect

sufficient space for

longer stays

MAXIMIZING REVENUE

Capacity

Management

Discount

Allocation

Duration

Control


Revenue Cycle

MAXIMIZING REVENUE

PRICING

How we price

our product

SELLINGSTRATEGY

How we sell

our product

INVENTORYALLOCATIO

N

What we put on the shelf


Revenue management is designed to measure revenue achievement.

Yield Statistic is the ratio of actual room revenue to potential room revenue.


We will illustrate the new formulae by using a particular scenario:

Tower Hotel has 300 guest rooms with an average room rate of $35.00. It is currently operating at 70% average occupancy. The hotel has 200 standard double bedrooms, and 100 double deluxe rooms. At rack rate, the standard rooms sell at $40.00 at single occupancy and $50.00 at double occupancy, whilst the deluxe rooms sell at $50.00 at single occupancy and $60.00 at double occupancy.


Formula 1: Potential Average Single RateThe hotel has varied its single rate by room type,

so we need to calculate the potential average single rate:

Room type- Number of rooms- Single Rack rate- Revenue at 100% occupancy

Standard 200 $40 $8,000 Deluxe 100 $50 $5,000

Total 300 $13,000

Potential Average Single Room Revenues at Rack Rate

Single Rate = Number of Rooms Sold as Singles

= 13,000/300 = $ 43.33Copyright. Eugene Win CRDE

2009

Formula 2: Potential Average Double Rate Since we also have varied rates by room type

the potential average double rate must be calculated:

Room type- Number of rooms- Double Rack rate- Revenue at 100% occupancy

Standard 200 $50 $10,000 Deluxe 100 $60 $6,000

Total 300 $16,000

Potential Average Double Room Revenues at Rack Rate

Double Rate = Number of Rooms Sold as Doubles

= 16,000/300 = $ 53.33Copyright. Eugene Win CRDE

2009

Formula 3: Multiple Occupancy Percentage

This is the proportion of a hotel’s rooms that are occupied by more than one person. This percentage indicates sales mix and helps balance room rates. If 168 rooms from the total of 210 rooms sold (70% of 300 rooms) are sold at double occupancy then the computation is as follows:

Multiple Occupancy 168Percentage = 210

= 80%Copyright. Eugene Win CRDE 2009

Formula 4: Rate Spread The determination of a room rate spread

among various room types can be essential to the use of yield decisions in targeting a hotel’s specific market. The mathematical difference between the hotel’s average single rate (Formula 1) and potential average double rate (Formula 2) is known as the rate spread.:

Rate Spread = Potential Average Double Rate – Potential Average Single Rate

= $ 53.33 - $ 43.33= $ 10.00


Formula 5: Potential Average Rate This is a collective statistic that effectively

combines the potential average rates, multiple occupancy percentage, and rate spread.

Potential = ( Multiple x Rate Spread ) + Potential Average

Average Rate Occ % Single Rate

= (0.8 x $10.00) + $ 43.33

= $ 51.33


Formula 6: Room Rate Achievement Factor The percentage of the rack rate a hotel

actually receives is contained in the hotel’s achievement factor, also referred to as the rate potential percentage.

Achievement Factor = Actual Average Rate x 100Potential Average Rate

= $35.00/$51.33 x %= 68%


Formula 7: Yield Statistics This is perhaps the most important element in

yield management. We have already seen how to express and calculate this statistic. Here we will use the following computation:

Yield Statistics = Occupancy % x Achievement factor

= 0.7 x 0.68= 0.476= 48%


Formula 8: Identical Yield Statistics This is the point where we can ask “What if

…?” questions to determine how discounting will affect our revenue. If we were to decrease or increase our rate, what occupancy percentage would we need to achieve to produce the same yield? Let’s suppose that our hotel wants to decrease its rate by $2.00 to $33.00.Identical Yield = Current x Current RateStatistics Occ % Proposed Rate

= 70% x ($35/$33)= 0.742 = 74%

To achieve the same yield the hotel must have an occupancy of 74%.Copyright. Eugene Win CRDE

2009


Business

Rooms Division Basic Theories Series II - Revenue Management