Revenue Management 1

Running Head: REVENUE MANAGEMENT

The Impact of Revenue Management on Competitive Advantage

Latanya Hughes

Strayer University

HTM 530 Hospitality Marketing

Dr. Dean A. Koutroumanis, D.B.A.

March 7, 2007
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Abstract

Revenue management, also known as yield management, began in the

airline industry during the late 1970s and early 1980s. This

process of strategy has been widely used in the service industry

since it burst onto the scene and is now responsible for what

many organizations within the service industry benefits from –

higher revenues. Through the careful use of online sources as

well as journals and articles, this paper delves into what

revenue management is, forecasting and its significance, and

future technology of revenue management systems. Although the

emphasis of this paper is on the hotel and lodging portion of

the hospitality industry, the principles outlined within

transcends to many aspects of the hospitality industry.

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The Impact of Revenue Management on Competitive

Advantage

History of Inventory Control

Revenue Management, also referred to as yield management,

is a form of inventory control used by hospitality industries

that forces managers to be aware of products and services sold,

rates at which they are sold and the pace at which they sell. In

the late 1970’s and early 1980’s, the airline industry was the

first to really use revenue management as a strategic tool to

maximize revenue. They, the airline industry, used a number of

calculations to determine just how much they can overbook their

flights based on flight patterns and other verifiable

information. The overbooking calculations depended on

predictions of the probability of the number of people who

appeared at boarding time. This stimulated research into

disaggregate forecasting – no-shows, go-shows, and cancellations

(McGill & VanRyZin, 1999).

The goals of revenue (yield) management are to maximize

profit for guest room sales and to maximize profit for hotel

services, i.e. food and beverage, convention services, etc. An

effective yield management strategy separates price-insensitive

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customers from price-sensitive customers according to the time

the service is rendered or a reservation is made. The outcome

should be higher revenue for the operation and customers who are

satisfied that their particular demand characteristics have been

met. When forecasting, allowances should be made for overbooking

and no-shows. An excellent technique is to use the threshold

curve. This curve uses historic data on bookings 60-90 days

before a given date and graphed as a curved line. It uses

aggregate demand rather than demand for each rate class

(Withiam, 2001).

In the hotel market, there are two main strategies used by

revenue managers. When there is a high demand for rooms, room

rates are maximized. When there is a low demand for rooms, room

sales are maximized. In order to execute either of the two

strategies, block-out periods are often in effect. Block-out

periods are when certain dates are tagged in a time period when

rooms have to be sold at a certain rate and/or certain number of

minimum room rental nights.

Many hoteliers struggle with what is affectionately called

“the dilemma of the empty room.” It is easy to create marketing

plans and strategies to get “heads in the beds.” However, simply

filling beds is not enough. It is a far cry from maximizing

revenue, especially when the demand is low. Too often, in order

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to get “heads in the beds,” managers slash their room rates.

Therefore, revenue is sacrificed for occupancy. The problem here

is that cutting prices diminishes revenue. Because too often

there is an increase in expenses – guest supplies, laundry, and

payroll, to name a few.

Many managers forget basic principles of economics and make

decisions based on emotion. Economics teaches us that revenue

changes depend on the price elasticity of demand. So rather than

doing research on the immediate, surrounding market in relation

to the industry as a whole, managers make hasty decisions that

appear to be “quick fixes” to their long-term problems. However,

this often returns to bite the business because the decision

made had more to do with increasing occupancy and reducing costs

and less to do with increasing revenue.

Forecasting

Fundamentally forecasts must be consistent with other parts

of the business and based on knowledge of the relevant past.

Additionally, forecasts must consider the economic and political

environment as well as potential changes. Finally, forecasts

must be timely. With this in mind, managers must be sure to

choose the right forecasting technique – qualitative or

quantitative. Qualitative forecasting is based on judgments of

 Revenue Management 6

individuals or groups. Quantitative forecasting generally uses

significant amounts of prior data as a basis for prediction. It

can be naïve or causal. Naïve forecasting projects past data

into the future without explaining future trends. Causal or

explanatory forecasting attempts to explain the functional

relationships between the variable to be estimated (the

dependent variable) and the variable or variables that account

for the changes (the independent variables) (Keat & Young,

2006).

As previously introduced, disaggregate forecasting is an

analysis of no-shows, go-shows, and cancellations due to

seasons, months, days of the week, time of day, booking class,

itinerary, etc. With this in mind, it can be inferred that

disaggregate forecasting is a form of quantitative forecasting.

Most disaggregate forecasting systems depend on relatively

simple moving averages and smoothing techniques augmented with

careful analysis of recent booking profiles. Forecast accuracy

hinges upon detailed empirical studies of the behavior of

different customer types in response to changes in product/price

offerings (McGill & Garrett, 1999).

It is critical that management be aware of what their

competitors are doing. There is no other way to gain and

maintain a competitive advantage if management is unaware of

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what their market, to include their competitors, is doing around

them. For instance, in an article published by Cornell

University’s Center for Hospitality Research in April 2005, it

was discovered that luxury and upper up-scale hotels as well as

midscale hotels appear to be the strongest revenue managers when

their strategy is to maintain rates at 1-5% above their

competitors (Enz & Canina, 2005).

The industry itself sets prices in relationship with shifts

in demand. It takes into consideration what people will pay for

the quality of the room. Hotels in direct competition make more

money when they maintain comparatively higher prices and avoid

discounting to fill rooms (Enz & Canina, 2005). The best way to

implement a style of yield management is to evaluate past

revenue history, understand the revenue goals of each profit

center, obtain group past history, qualify future potential, and

be prepared to walk away from any piece of business that is not

feasible for the operation (Verret, 2005). In addition to this

information, it behooves management to use competitive set

reports, which can be obtained from any travel agency within the

area.

Another strategy would be to map out the market. Use third

party reports, such as the competitive set reports from travel

agencies. If necessary, redefine the target market. Secondly,

 Revenue Management 8

understand the customers’ objectives and work flow. Explore the

needs of each market segment. Identify any new opportunities. In

proactive sales, this is where the MOL (how many, how often, and

how long) is introduced. Lastly, develop products and services

that provide what users value most. Reexamine product/service

priorities and have a full, rounded view of what is most

promising. Customer strategies must be continually reevaluated

and refined, because markets and competition can change quickly

(Harrington & Tjan, 2008).

Once the information has been gathered, marketers and

revenue managers can begin to predict travel patterns. From the

travel patterns, they can set MLOS (minimum length of stay) and

other restrictions on room nights and room rates.

Simultaneously, sales can look at their Top Accounts (then and

now) and determine who to target and for what purpose. Together,

a marketing strategy can be devised and a plan of execution can

be thought out. Keeping in mind that whatever market plan or

strategy is developed, it should be practical to implement and

strategically sound. With the two departments working closely

together, there are unlimited possibilities and opportunities.

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Future Developments and Technology for Greater

Optimization

Over the past twenty years, development of revenue

management systems has progressed from simply single leg

control, through segment control, and finally to origin-

destination control. The performance of a given system depends,

in large part, on the frequency and accuracy of updates to

control limits and the number of distinct booking classes that

can be controlled. There is emerging the prospect of an

integrated hierarchy of decision systems in which decisions and

information obtained at one level are smoothly available to

other levels (McGill & VanRyZin, 1999).

EzRMS is an Internet Product Suite that offers deal

quotation (Ez-QUOTE), regional management (Ez-REGION), and

competitive analysis (Ez-COMPETE). This system collates all

information in one system and is user-friendly. It is developed

and owned by Easy RMS, founded in July 1999, this organization

defines itself as the global leader and provider of ASP Revenue

and Yield Management Solutions within the hospitality sector.

Choice Hotels has its own system called choiceADVANTAGE. It

is a web-based hotel PMS (property management system) that has a

number of functions – revenue management, occupancy demand

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forecasting, group management, guest tracking, and full

reporting.

New Market International introduced and released Delphi

9.5, an analytical and operational dashboard system that offers

multi-language and multi-currency reports. Some of the dashboard

options are sales pipeline, need period, daily metrics, groups

in house, and my business alerts.

IDeaS, the leading provider of hospitality revenue

management and optimization solutions and one of America’s

fastest growing technology companies, produces and markets IDeaS

V5i On-Demand Revenue Management Solution. This software

balances the need for strategic forecasting. It offers guest

optimization, group pricing, multi-property functions, and is

web-based.

The Hong Kong PolyU School has developed the Hong Kong

Tourism Demand Forecasting System. It is a web-based program

that measures demand by tourist arrival, tourist expenditure,

and hotel room nights. It offers reports available for ten major

source countries and regions. The software was launched February

20, 2008 and currently is available yearly for $2400US.

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Conclusion

The concept of revenue (yield) management has evolved over the

years and, from the ever-increasing emerging software, will continue

to evolve for years to come. Gaining and maintaining competitive

advantage is no easy task, neither is determining strategy for

positioning a business in such a way that sets itself apart from the

competition.

Managers must remember the basic principles of economics when

developing marketing strategy. Additionally, forecasting is an

intricate part of developing marketing strategies. Equally as

important is the method of forecasting used – qualitative or

quantitative. There is no set formula nor is there a one-stop, quick

fix method for “getting rich quick.” However, a combination of the two

methods is a viable option.

When forecasting, it is important to incorporate every aspect of

the business – food and beverage outlets, retail shops, conference

services, etc. The input of these departments are crucial, because

there could be a prospective piece of business overlooked that could

either make or break the business as a whole.

Once the forecast has been completed, a marketing strategy can be

created. Keeping in mind that the strategy must be practical to

implement and strategically sound. Whatever decision is made, it would

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be fruitless without thought or regards to any current or future

(potential) software purchases to enhance market strategy. There are a

number of systems on the market to-date and more that are sure to

emerge in the near future. Now is the time to keep our eyes open and

our ears to the grind for the latest and greatest in technology, for

technology is the wave of the future. If a business is to succeed in

this technological society, it must always be one step ahead of the

trends.
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References

Canina, Linda, PhD and Cathy A. Enz, PhD. (June 2006). Revenue

Management in US Hotels: 2001 – 2005. CHR Reports, 6(8).

Enz, Cathy A., Canina, Linda, & Lomanno, Mark. (August 2004).

Why Discounting Doesn’t Work: The Dynamics of Rising

Occupancy and Falling Revenue Among Competitors. CHR

Reports, 4(7).

Enz, Cathy A. & Canina, Linda. (April 2005). An Analysis of

Revenue Management. The Center for Hospitality Research,

5(6).

Harrington, Richard J. & Tjan, Anthony K. (March 2008).

Transforming Strategy One Customer At A Time. Harvard

Business Review.

hospitalityNET is a professional website that provides a wealth

of information regarding the service industry, ranging from IT

to conferences and educational institutes to market reports

(www.hospitalitynet.org/).

Keat, Paul G. & Young, Philip K.Y. (2006). Managerial Economics:

Economic Tools for Today’s Decision Makers (5th ed.). Upper

Saddle River, New Jersey: Prentice-Hall, Inc.

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McGill, Jeffrey I. & VanRyZin, Garrett J. (May 1999). Revenue

Management: Research, Overview & Prospects. Transportation

Science, 33(2).

Shoemaker, Stowe, Lewis, Robert C., & Yesawich, Peter C. (2007).

Marketing Leadership in Hospitality and Tourism: Strategies

and Tactics for Competitive Advantage (4th ed.). Upper

Saddle River, New Jersey: Pearson Prentice Hall.

Stewart, Thomas A. (March 2008). Staying on Top. Harvard

Business Review.

Verret, Carol. (2005, November 8). Revenue Management & Group

Sales – The Partnership Not the Disconnect. Hotel News

Resource. Retrieved February 18, 2008 from

www.hotelnewsresource.com/article19459.html

Withiam, Glenn. (2001). Yield Management. The Center for

Hospitality Research.