Hermsen

Case study Hotel GroupRevenue Management
Martin Hermsen January, 2001
Table Of Content
Yield Management Definition
Doc: YM-RSM2001-A
Copyright Deloitte Consulting © 2001 - Proprietary and Confidential
The eight core concepts of revenue management
Focus on price rather than costs when balancing supply and demand
Replace cost based pricing with market based pricing
Sell to segmented micro markets, not to mass markets
Save your products for your most valuable customers
Make decisions based on knowledge
Exploit each products value cycle
Continually reevaluate your revenue opportunities
Revenue management should be integrated into the strategy, process, systems and mind-set from an organization
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The Leisure value chain is changing: vertical integration, everybody wants to dominate
Marketing
Retail
Reservation
Payment
Core Business
Core business
Moderate presence
The Revenue drivers for the hotel businesses based on both the room revenues AND various related revenue sources
REVENUES
Competitive
Intensity
Internet gives the consumer multiple entry points, leading to different economics per reservation
Global Distribution
Booking a hotel room through the internet
Source: Deloitte Research
Industry Trends
The travel industry is consolidating rapidly in Mature Markets (Europe, US)
Consumers increasingly buy their travel on the Internet.
Consumers become more “Trip Oriented”
The most important revenue driver for Hotel Companies is RevPar
REVPAR, revenue per room = occupancy * average room rate
Hotel chain’s will sell directly to end-consumers on the Internet or via call centers to:
Save the cost of distribution;
Create an opportunity to enhance revenue by selling the exact right product for the best price, at the best moment in a specific market segment as a function from the demand.
Industry Background
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Table Of Content
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CRM Strategy sets direction for how the organization invests in customer relationships…
Customer Segments
Value Proposition
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Customers today have a choice of a variety of interaction channels
Back Office Processes and Systems
Customer Interaction Channels
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Today’s technology enables companies to be true consumer centric (stage 2), however most companies have a long way to go…
Macro Factors
Systems/Technology
Organization
People
Leadership
Processes
Information/Data
Strategy
Mindset
Operations
Our clients are typically in one of these three general evolutionary stages
Customer Relationship Management and the Internet
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…ultimately enabling real time reaction to dynamic customer behavior, market forces and demand fluctuation
The ORGANIZATION responds faster to changing conditions and reinvents itself to meet new customer needs in zero time
CUSTOMER behavior changes over time as a relationship with the enterprise is developed
The organization LEARNS
from every interaction with each customer and captures information from marketing campaigns/customer touch points.
The organization SEGMENTS its customers and TARGETS its offerings (product, service, distribution, message) efficiently and effectively to meet changing customer needs.
TECHNOLOGY allows data to be recorded, stored, and mined for insights
Ultimately, the results of achieving this vision will be real time consumer demand tracking, dynamic pricing, increased wallet share, increased return on campaign spending, greater profitability per customer and greater shareholder value.
Customer Relationship Management and the Internet
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Table Of Content
Appendix
Example of an Approach to Analyze and Design a Yield Management System
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A definition of Yield Management
Yield management is the practice of maximising profits from the sale of perishable assets, such as hotel rooms / airline seats, by controlling price and inventory and differentiating product and service.
Yield management is based on:
The differentiation of tariffs/rates/margin
Differentiation of products and services
Statistical modelling and forecasting demand
By seizing control of the sold volume at each price level, Yield Management permits a significant augmentation of revenue.
Yield Management, The Concept
(days)
Actual
What does the forecast say?
What is the total revenue, actual sold, of the hotel for that day?
What should be the price of the room?
Who is the customer that calls during the time of the red arrow?
Occupancy
Forecast
Budget
100
90
80
70
60
50
40
30
20
10
0
Yield Management Drivers
The Time Focus, (A hotel room that is not sold for a certain night is lost forever).
The closer the moment on the timescale when a hotel room is still empty the larger the probability that it stays empty and will not create revenue.
A Hotel chain will lower it’s selling price of a room when at a certain moment it’s forecast will tell him that, with a certain probability, it will stay empty.
The Customer Focus
How does Yield management interact with Customer Loyalty?
Loyalty programs are designed to lock-in consumers to the product. The frequent customer therefore, could based on his profile, deserve a different treatment and price then a less frequent customer.
Loyal customers expect a consistent discounted price all year long. Yield management policies should therefore have special long-term strategies for loyal customers enforcing repeat visits.
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Time Focus
In the hotel business, a hotel room that is not sold for a certain night is lost forever. The closer the moment on the timescale when a hotel room is still empty the larger the probability that it stays empty and will not create revenue.
This is the reason, that in case of arriving in a city without a reservation, the best time to get a great deal is between 20.00 hours and 24.00 hours, if the hotel has availability (and is below occupancy target).
A Hotel chain will lower it’s selling price of a room when at a certain moment it’s forecast will tell him that, with a certain probability, it will stay empty.
The customer focus
Since the travel industry is in a complete war to be in the best position to win the customer, customer loyalty, reach and customer value are also drivers for yield management. Loyalty programs are designed to lock-in consumers to the product. The frequent customer therefore, could based on his profile, deserve a different treatment and price then a less frequent customer. Both in the airlines and hotel industries there are segmented consumer prices that are even obvious for the consumer: the “upgrade” products. When does a hotel company or airline release a hotel room for an upgrade?
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Example of yield optimization decisions analysis
Actual reservations are below the reservation profile, 60 days before room-night. In this case the Hotel might accept bookings with some discounts, however we are still relatively far from due date, alternative marketing strategies could be pursued.
The actual sales resulted in an occupancy rate above the reservation profile. The hotel will sell rooms only at full rates, to maximise profits, assuming that the demand curve will continue.
The demand curve went down, apparently there where some cancellations and the due date comes closer. The hotel will use aggressive marketing strategies and discount rooms to reach target occupancy.
The demand curve really picks up. The 70% target occupancy is passed 8 days before due date. The hotel goes back to full rates.
Reservation
Profile
Occupancy
Rate %
70
Reservations
Simplified examples of revenue management decisions are shown in the optimisation decision areas in the graph above.
Actual reservations are below the reservation profile, 60 days before room-night. In this case the Hotel might accept bookings with some discounts, however we are still relatively far from due date, alternative marketing strategies could be pursued.
The actual sales resulted in an occupancy rate above the reservation profile. The hotel will sell rooms only at full rates, to maximise profits, assuming that the demand curve will continue.
The demand curve went down, apparently there where some cancellations and the due date comes closer. The hotel will use aggressive marketing strategies and discount rooms to reach target occupancy.
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Revenue gains as a result from yield management increase when we cluster destination area’s and enable consolidation of demand
4%
8%
Overbooking
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Hotel Chain’s with at least two properties in the same area will have the opportunity to manage revenue in a cluster and therefore enabling:
Optimal group placement: groups (leisure and sometimes business) show “location flexibility”. As a result they can be oriented at request time to the hotel that shows the lowest opportunity costs.
Capacity transfer: Adequate upgrade, downgrade and cross-selling of individual demand between hotels minimises denials and therefore lost revenue and customers.
Up-sell: Proposal of higher product (hotel, room category) at reservation time or check-in time for an additional price will result when correctly calibrated and planned, in additional revenues.
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The results of yield management are
A larger margin of price variation
Product differentiation in order to justify the price to the customer
A high priced product should be presented differently in terms of packaging, conditions of the sale, and accompanying privileges than it’s reduced-priced counterparts.
Dynamic control in “real time” of the volume sold at each price level
Definition of these different prices and volumes requires numerous recurrent and complex calculations
Which makes the implementation of a decision-making tool necessary.
The impact or the internet and the rise of dynamic pricing
At the technical level, there is a distinction between traditional revenue management and dynamic pricing
Traditional revenue management models avoid developing an explicit relationship for demand as a function of price
Demand is lumped into product buckets, and forecasts may or may not use price as an input
Dynamic pricing models might be categorized as those models that assume a functional relationship between demand and price
The internet makes it possible to design web sites that experiment with the market in an attempt to elicit information for demand curve estimation
Dynamic pricing may become synonymous with managing and tracking demand in response to posted prices interactively
The internet provides the opportunity to gain more data on the customer at the point of sale: buying behavior: loyalty profile, price elasticity
Dynamic pricing may eventually become synonymous with increasingly refined methods of market segmentation and the ability to capture transaction information that will allow for more detailed pricing
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Table Of Content
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Market Segmentation
Demand Forecasting
Offer Management
Availability Management
Booking Management
The classification and targeting of distinct categories of demand based on customer values, behaviors, usage patterns, price and service sensitivity, cost/profitability to serve, etc.
The creation of products, the definition of target price and service levels, and the negotiation of contracts with suppliers to provide those products at a certain price.
The projection of future demand based on historical trends, cycles, seasonal patterns, and current market conditions or events.
The forecasting and allocation of available capacity to various customers or customer/product segments based on their revenue contributions relative to the “opportunity cost” of selling that capacity.
The “scripting” and execution of the day-to-day booking process through which bookings are either accepted or rejected, routed, and specific price/service commitments are made to customers.
Functional Scope of Revenue Management : from market segmentation through booking management
Implementing a Yield Management System
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Strategic
Tactical
Operational
Real-time
1 year plus 1 to 12 months 3 to 30 days 0 to 3 days
Market Segmentation
Demand Forecasting
Offer Management
Availability Management
Booking Management
* These timeframes are typical of the travel and leisure industry.
Example Revenue Management Time Horizons*
Implementing a Yield Management System
Doc: YM-RSM2001-A
The combination of these two dimensions provides a basis for defining a high-level business process map for Yield Management
Develop reservations scripts and protocols
Plan long-term park/ hotel development
Select key TO partners
Define market positioning and overall pricing policy
Create global advertising plan
Track costs by segment
Negotiate TO and other dedicated allocations
Arrange for transport.
Develop initial time-series forecasts
Define price tiers
Monitor TO realization
Determine individual availabilities
Sell/Up-sell/Cross-sell
Strategic
Tactical
Operational
Real-time
To define the Decision Support Requirements we need to understand the opportunity for analytic tools to support these processes
Develop reservations scripts and protocols
Plan long-term park/ hotel development
Select key TO partners
Define market positioning and overall pricing policy
Create global advertising plan
Track costs by segment
Negotiate TO and other dedicated allocations
Arrange for transport.
Develop initial time-series forecasts
Define price tiers
Monitor TO realization
Determine individual availabilities
Sell/Up-sell/Cross-sell
Market
Segmentation
Demand
Forecasting
Offer
Management
Capacity
Management
Strategic
Tactical
Operational
Real-time
Implementing YM is not a one time event. It is a process of continuous learning and refinement
YM Operational Framework for Continuous revenue optimization
1. Data Collection. Identify and collect required data on demand on hotel level
2. Analyse Demand. Identify competitors and sources of demand,
hotel’s strengths and weaknesses, predict demand and booking patterns
3. Market Segmentation. Identify markets, segment market
(demographic, psychographic, geographic)
avoid displacing higher spending guests
6. Establish capacity levels (Capacity to meet demand of market segments)
7. Yield management pilot/change (City, Regions, Destinations)
8. Evaluate pilot/change. (Customer reorientation, operational evaluation)
9. Improve Yield Management based on latest learning's
Continuous learning and refinement
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