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Copyright Deloitte Consulting 2001 - Proprietary and Confidential

Revenue Management

Revenue management in the Hotel and Leisure Industry

Martin Hermsen January, 2001Senior ManagerStrategy Practice, Deloitte ConsultingTelephone: 31-629-068.604

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- 2 - Copyright Deloitte Consulting 2001 - Proprietary and ConfidentialDoc: YM-RSM2001-A

Table Of Content

Introduction

Industry Background Customer Relationship Management and the Internet

Yield Management Definition

Implementing a Yield Management System

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The eight core concepts of revenue management

1. Focus on price rather than costs when balancing

supply and demand

2. Replace cost based pricing with market based pricing

3. Sell to segmented micro markets, not to mass markets

4. Save your products for your most valuable customers

5. Make decisions based on knowledge

6. Exploit each products value cycle

7. Continually reevaluate your revenue opportunities

8. Revenue management should be integrated into thestrategy, process, systems and mind-set from anorganization

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The Leisure value chain is changing: vertical integration, everybodywants to dominate

Marketing

Retail

Reservation

Payment

To-site Transpo rt

Overnight stay

Entertainment

At-s i te Transpor t

Facil it ies(conferences etc.)

Hotels/Clubs Tour operator Credit card co. Airlines Others...

Core Business

Internet

Internet

Call Centres

In Hotel or viaalliances

Hotel busesvia alliances

Present in Hotel

Via alliancespackage deals

Via alliances

Shops / DM / Internet

Core businessShops / DM / Internet

Volume buying

Clubs / Hotel

Packages

Core business

DM / Internet

DM / Internet

Packageofferings

Via alliances

Internet

Internet

Call Centres

Via alliances

Packageofferings

Via alliances

Packages

Moderatepresence

Strongpresence

Core Business

Countries

CRS Companies

Banks

Theme parcs

Theme parcs

Car rental co.s

Conferencecentres

Bus, Train

Corebusiness

Source: Deloitte Research 1Q2000.

Industry Background

Via Alliances

Via Alliances

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The Revenue drivers for the hotel businesses based on both the roomrevenues AND various related revenue sources

REVENUES

CompetitiveIntensity

Market Conditions

Number of owned/ leased hotels

% in 5* brand

% in 4* brand

% in 3* brand

Macro-economicfactors

Number of roomssold

CRS Revenue

Total RoomRevenue

In-House F&BRevenue

In-HouseServices Revenue

Out-House F&BRevenue

# of Hotels with

special facilities

Usage rate offacilities

Average spendper event

Limi ted

InterventionEffective Scope For Interventio n

Socio-Politicalfactors

Ave. room rate

Number of roomsavailable

Occupancy rate

# of special

Events

Average spendper event

Average spendPer person

Average # ofPersons per event

Number ofIn-houseguests

Ave F&B SpendIn-house guest

Ave. SpendOther Services

Number of Outhouse customers

Ave F&B SpendOut-house cust.

Ave. feeper room

Ave. no. of personsper room

Industry Background

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Internet gives the consumer multiple entry points, leading to differenteconomics per reservation

Global DistributionSystem

Travel Agency

Central ReservationSystem

Switch Company

Hotel Properties

http://www.travelocity.com

http://www.thomascook.com

http://hilton.com

http://www.travelwiz.com

http://holidayinn.com

GUESTS

Call to Property

Call to CRS

Call to Travel Agent

$2 to $3

$3 to $5

$6 to $8

Booking a hotel room via traditional reservation structure

Booking a hotel room through the internet

Source: Deloitte Research

Travel agent(Package)

22%

Travel agent 12%+$4.36

3 rd party site 5%+$4.36

Hotelgroup.com 0

Hotel Group

Entry point Margin paid

Market

Industry Background

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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 chains will sell directly to end-consumers on the

Internet or via cal l centers to:

Save the cost of dist r ibut ion;

Create an op po rtun ity to enhance revenue by sel l ing the exact r ight

produc t for the best pr ice, at the best moment in a specif ic market

segment as a funct ion from the demand.

Industry Background

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Table Of Content

Introduction




C t R l ti hi M t d th I t t

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Customer Segments

Value Proposition

Life Time Value

Targeted Segments

Required CRM Capabilities

Investm ents Prior i t ies

ExpandRetainAcquireTarget

Customer Segments

CustomerIntera

ction

TouchPoints

CRM Strategy sets direction for how the organization invests incustomer relationships

Customer Life Cycle

Customer Relationship Management and the Internet

C stomer Relationship Management and the Internet

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Customers today have a choice of a variety of interaction channels

Back Office Processes and Systems

CustomerIntera

ction

Channels

Internet

Retail

Call Center

Agents/Distributors

Field Personnel

Mail

Broadcast Media

Market ing Sell ing Servicing

Customer Management

Processes



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Todays technology enables companies to be true consumer centric(stage 2), however most companies have a long way to go

Macro Factors

Revenue-based

Generalized

Reactive

One Size Fits All

Isolated Touch Points

Point Solutions

Policies & Procedures

Limited Capture

Customer-aware

Task-oriented

Product/Cost-centered

Observable Qualities

Profit-based

Mass-customized

Proactive

Targeted

Functional Integration

Tactical

Flexible

Data Silos

Customer-intimate

Team-oriented

Mixed Message

Actionable Behaviors

Life Time Value-based

Unique

Predictive

Adaptive

Seamless Enterprise

Strategic

Enabling

Centralized

Customer-collaborative

Relationship-oriented

Loyalty-centered

Stage 0:

Fragmented

Stage 1:

Opt imized Si los

Stage 2:

Integrated Enterpris e

Majority of current companies

Customer Segmentation

Customer Worth

Competition and Market

Dynamics

Value Proposition

Integration Structure

Touch Point /Channel

Structure

Systems/Technology

Organization

People

Leadership

Processes

Information/Data

Stra

tegy

Mindset

Opera

tions

Our cl ients are typic al ly in one of these three general evolut ion ary stages



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TheORGANIZATION

responds faster tochanging

conditions andreinvents itself tomeet new

customer needs inzero time

CUSTOMERbehavior changes

over time as a

relationship withthe enterprise is

developedThe organization LEARNSfrom every interaction with each customer and

captures information from marketingcampaigns/customer touch points.

The organization SEGMENTS its customers andTARGETS its offerings (product, service, distribution,message) efficiently and effectively to meet changing

customer needs.

TECHNOLOGY allows datato be recorded, stored, and

mined for insights

Ult imately, the results o f achievin g this vis ion w il l be real t ime con sum er demandtracking, dynam ic pr icin g, increased wallet share, increased return on campaign

spend ing, greater prof i tabi l i ty p er custom er and greater sharehold er value.

ultimately enabling real time reaction to dynamic customer behavior,market forces and demand fluctuation


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Table Of Content

Introduction




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 andinventory and differentiating product and service.

Yield management is based on:

The differentiation of tariffs/rates/margin

Segmentation of consumers, understanding of consumer lifetime value and

understanding specific consumer needs

Differentiation of products and services

Statistical modelling and forecasting demand

By seizing control of the sold volume at each price level, Yield Managementpermits a significant augmentation of revenue.



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Yield Management, The Concept

Leadtime 60 45 30 15 0(days)

Actual

Forecast of occupancy:With increasing accuracy when time comes closer

Moment in t ime where occupancy is low: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?

Forecast

Budget

100

90

80

70

60

50

40

30

2010

0

g


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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 theprobability that it stays empty and will not create revenue.

A Hotel chain will lower its selling price of a room when at a certain moment its 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 frequentcustomer therefore, could based on his profile, deserve a different treatment and pricethen a less frequent customer.

Loyal customers expect a consistent discounted price all year long. Yield managementpolicies should therefore have special long-term strategies for loyal customers enforcing

repeat visits.

g


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Example of yield optimization decisions analysis

Leadtime (days) 45 30 15 0

Reservation

Profi le

OccupancyRate %

70

Reservations

Optimizat ion Decis ion

Areas

1

2 3

4

1.Actual reservations are below the

reservation profile, 60 days before room-night. In this case the Hotel might acceptbookings with some discounts, howeverwe are still relatively far from due date,alternative marketing strategies could bepursued.

2. The actual sales resulted in an occupancyrate above the reservation profile. The

hotel will sell rooms only at full rates, tomaximise profits, assuming that thedemand curve will continue.

3. The demand curve went down, apparentlythere where some cancellations and thedue date comes closer. The hotel will useaggressive marketing strategies anddiscount rooms to reach target occupancy.

4. The demand curve really picks up. The70% target occupancy is passed 8 daysbefore due date. The hotel goes back tofull rates.


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Revenue gains as a result from yield management increase when wecluster destination areas and enable consolidation of demand

4%

8%

Overbooking

Group quote

Discountallocation

Length of staycontrol

Property levers Cluster levers

Optimal group

placement

Capacitytransfer

Up-sell

Shift of specialcontracts

Marginimprovement


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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, conditionsof the sale, and accompanying privileges than its 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 andcomplex calculations

Which makes the implementation of a decision-making tool necessary.


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The impact or the internet and the rise of dynamic pricing

At the technical level, there is a distinction between traditional revenuemanagement and dynamic pricing

Traditional revenue management models avoid developing an explicit relationship fordemand as a function of price

Demand is lumped into product buckets, and forecasts may or may not use price as aninput

Dynamic pricing models might be categorized as those models that assume a functionalrelationship between demand and price

The internet makes it possible to design web sites that experiment with themarket in an attempt to elicit information for demand curve estimation

Dynamic pricing may become synonymous with managing and tracking demandin 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 transactioninformation that will allow for more detailed pricing

Source: E. Andrew Boyd, PROS.

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Table Of Content

Introduction





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Market Segmentation

Demand Forecasting

Offer Management

Availability Management

Booking Management

The classification and targeting of distinct categories of demandbased on customer values, behaviors, usage patterns, price andservice sensitivity, cost/profitability to serve, etc.

The creation of products, the definition of target price and servicelevels, and the negotiation of contracts with suppliers to providethose products at a certain price.

The projection of future demand based on historical trends,cycles, seasonal patterns, and current market conditions orevents.

The forecasting and allocation of available capacity to variouscustomers or customer/product segments based on their revenuecontributions relative to the opportunity cost of selling thatcapacity.

The scripting and execution of the day-to-day booking processthrough which bookings are either accepted or rejected, routed,and specific price/service commitments are made to customers.

Funct ional Scope of Revenue Management : f rom market segmentat ion throug h b ooking

management

Yield Management process scope covers different functions


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Strategic Tactical Operational Real-time

1 year plus 1 to 12 months 3 to 30 days 0 to 3 days

These processes also span different time horizons

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 *

The combination of these two dimensions provides a basis for definingImplementing a Yield Management System

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The combination of these two dimensions provides a basis for defininga high-level business process map for Yield Management

Develop reservations

scripts and protocols

Plan long-term park/ hoteldevelopment

Select key TO partners Determine oversale cost

Develop macro-economicforecasts of demand

Define market positioningand overall pricing policy

Create global advertisingplan

Analyse & define strategicmarket segments

Define and analysecustomer segments

Track costs by segment

Revise reservation agent

scripts and up-sell/cross-sell approaches

Negotiate TO and otherdedicated allocations

Arrange for transport.capacity

Revise and maintainforecasting models andparameters

Develop initial time-seriesforecasts

Create seasonal pricingcalendars by country

Define price tiers Determine segment

strategic values

Negotiate group andconvention sales

Monitor TO realization Determine individual

availabilities

Project impact ofpromotions

Track booking/cancellationcurves

Adjust forecasts

Establish targetedpromotional pricingprograms

Sell/Up-sell/Cross-sell

Monitor conversion rate

Determine individualavailabilities

Proactively manageoverbooking

Walk-in response


scripts Sell/Up-sell/Cross-sell Monitor conversion rate


Adjust forecasts


MarketSegmentation

DemandForecasting

OfferManagement

Capacity / AvailabilityManagement

BookingManagement

High-Level Process Map Hospital i ty

To define the Decision Support Requirements we need to understandImplementing a Yield Management System

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Develop reservations

scripts and protocols

Plan long-term park/ hoteldevelopment

Select key TO partners Determine oversale cost

Develop macro-economicforecasts of demand

Define market positioningand overall pricing policy

Create global advertisingplan

Analyze & define strategicmarket segments Track costs by segment


scripts and up-sell/cross-sell approaches

Negotiate TO and otherdedicated allocations

Arrange for transport.capacity

Revise and maintainforecasting models andparameters

Develop initial time-seriesforecasts

Create seasonal pricingcalendars by country

Define price tiers Determine segment

strategic values

Negotiate group andconvention sales

Monitor TO realization Determine individual

availabilities

Project impact ofpromotions


Adjust forecasts

Establish targetedpromotional pricingprograms

Sell/Up-sell/Cross-sell

Monitor conversion rate

Determine individualavailabilities

Proactively manageoverbooking

Walk-in response


scripts Sell/Up-sell/Cross-sell Monitor conversion rate


Adjust forecasts

StrategicValueAuditTool

Up-sell /Cross-sellScripting Tools

TOAllocation

Tool

PriceElasticity Model

Group/Conv.Acceptance

Tool

ForecastingSystem

AvailabilityOptimizer


To define the Decision Support Requirements we need to understandthe opportunity for analytic tools to support these processes

High-Level Hospital i ty RM Tool-Process Overlay

MarketSegmentation

DemandForecasting

OfferManagement

CapacityManagement

BookingManagement

Implementing YM is not a one time event It is a process of continuousImplementing a Yield Management System

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YM Operat ional Framework fo r Continuou s revenue opt imizat ion

Implementing YM is not a one time event. It is a process of continuouslearning and refinement

1. Data Collection. Identify and collect required data on demand on hotel level

2. Analyse Demand. Identify competitors and sources of demand,hotels strengths and weaknesses, predict demand and booking patterns

3. Market Segmentation. Identify markets, segment market(demographic, psychographic, geographic)

4. Determine optimal guest mix. Define booking classes

5. Analyse trade-offs. Extensive calculations of monetary leakages,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

Con

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