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Revenue Management Running Head: REVENUE MANAGEMENT

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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

forecasting and its significance. this paper delves into what revenue management is. also known as yield management. Through the careful use of online sources as well as journals and articles. 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. began in the airline industry during the late 1970s and early 1980s. and future technology of revenue management systems. the principles outlined within transcends to many aspects of the hospitality industry. Although the emphasis of this paper is on the hotel and lodging portion of the hospitality industry.Revenue Management 2 Abstract Revenue management. .

is a form of inventory control used by hospitality industries that forces managers to be aware of products and services sold. used a number of calculations to determine just how much they can overbook their flights based on flight patterns and other verifiable information.Revenue Management 3 The Impact of Revenue Management on Competitive Advantage History of Inventory Control Revenue Management. the airline industry. The goals of revenue (yield) management are to maximize profit for guest room sales and to maximize profit for hotel services. 1999). rates at which they are sold and the pace at which they sell. They. This stimulated research into disaggregate forecasting – no-shows. food and beverage. 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. go-shows.e. etc. also referred to as yield management. i. convention services. An effective yield management strategy separates price-insensitive . and cancellations (McGill & VanRyZin. The overbooking calculations depended on predictions of the probability of the number of people who appeared at boarding time.

Many hoteliers struggle with what is affectionately called “the dilemma of the empty room. Too often. especially when the demand is low.” It is easy to create marketing plans and strategies to get “heads in the beds. block-out periods are often in effect. allowances should be made for overbooking and no-shows. It is a far cry from maximizing revenue. When there is a low demand for rooms.” However. 2001). The outcome should be higher revenue for the operation and customers who are satisfied that their particular demand characteristics have been met. When forecasting. An excellent technique is to use the threshold curve. It uses aggregate demand rather than demand for each rate class (Withiam. there are two main strategies used by revenue managers. In the hotel market.Revenue Management customers from price-sensitive customers according to the time the service is rendered or a reservation is made. When there is a high demand for rooms. room rates are maximized. This curve uses historic data on bookings 60-90 days before a given date and graphed as a curved line. in order 4 . room sales are maximized. simply filling beds is not enough. 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. In order to execute either of the two strategies.

5 Forecasting Fundamentally forecasts must be consistent with other parts of the business and based on knowledge of the relevant past. Additionally. surrounding market in relation to the industry as a whole. revenue is sacrificed for occupancy. managers must be sure to choose the right forecasting technique – qualitative or quantitative. and payroll. Economics teaches us that revenue changes depend on the price elasticity of demand. Therefore. laundry. Because too often there is an increase in expenses – guest supplies. 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. forecasts must be timely. managers make hasty decisions that appear to be “quick fixes” to their long-term problems. Qualitative forecasting is based on judgments of . However. Many managers forget basic principles of economics and make decisions based on emotion.Revenue Management to get “heads in the beds. With this in mind. Finally. So rather than doing research on the immediate. forecasts must consider the economic and political environment as well as potential changes. to name a few. The problem here is that cutting prices diminishes revenue.” managers slash their room rates.

go-shows. Naïve forecasting projects past data into the future without explaining future trends. and cancellations due to seasons. Forecast accuracy hinges upon detailed empirical studies of the behavior of different customer types in response to changes in product/price offerings (McGill & Garrett.Revenue Management individuals or groups. 1999). days of the week. disaggregate forecasting is an analysis of no-shows. Most disaggregate forecasting systems depend on relatively simple moving averages and smoothing techniques augmented with careful analysis of recent booking profiles. time of day. 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 6 . etc. 2006). It can be naïve or causal. 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. itinerary. months. it can be inferred that disaggregate forecasting is a form of quantitative forecasting. As previously introduced. booking class. With this in mind. Quantitative forecasting generally uses significant amounts of prior data as a basis for prediction.

For instance. 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. is doing around them. in an article published by Cornell University’s Center for Hospitality Research in April 2005. which can be obtained from any travel agency within the area. 2005). In addition to this information. obtain group past history. to include their competitors. and be prepared to walk away from any piece of business that is not feasible for the operation (Verret. 2005). The best way to implement a style of yield management is to evaluate past revenue history. qualify future potential. If necessary. Another strategy would be to map out the market. 2005). The industry itself sets prices in relationship with shifts in demand.Revenue Management what their market. It takes into consideration what people will pay for the quality of the room. Secondly. such as the competitive set reports from travel agencies. redefine the target market. Hotels in direct competition make more money when they maintain comparatively higher prices and avoid discounting to fill rooms (Enz & Canina. 7 . Use third party reports. understand the revenue goals of each profit center. it behooves management to use competitive set reports.

a marketing strategy can be devised and a plan of execution can be thought out. there are unlimited possibilities and opportunities. Explore the needs of each market segment. because markets and competition can change quickly (Harrington & Tjan.Revenue Management understand the customers’ objectives and work flow. how often. this is where the MOL (how many. From the travel patterns. Keeping in mind that whatever market plan or strategy is developed. Identify any new opportunities. marketers and revenue managers can begin to predict travel patterns. 8 . and how long) is introduced. 2008). Lastly. Reexamine product/service priorities and have a full. they can set MLOS (minimum length of stay) and other restrictions on room nights and room rates. sales can look at their Top Accounts (then and now) and determine who to target and for what purpose. In proactive sales. With the two departments working closely together. it should be practical to implement and strategically sound. Simultaneously. rounded view of what is most promising. Together. Once the information has been gathered. develop products and services that provide what users value most. Customer strategies must be continually reevaluated and refined.

and competitive analysis (Ez-COMPETE). development of revenue management systems has progressed from simply single leg control. this organization defines itself as the global leader and provider of ASP Revenue and Yield Management Solutions within the hospitality sector. It is a web-based hotel PMS (property management system) that has a number of functions – revenue management.Revenue Management 9 Future Developments and Technology for Greater Optimization Over the past twenty years. and finally to origindestination control. on the frequency and accuracy of updates to control limits and the number of distinct booking classes that can be controlled. Choice Hotels has its own system called choiceADVANTAGE. It is developed and owned by Easy RMS. regional management (Ez-REGION). through segment control. This system collates all information in one system and is user-friendly. EzRMS is an Internet Product Suite that offers deal quotation (Ez-QUOTE). 1999). in large part. 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. The performance of a given system depends. founded in July 1999. occupancy demand .

and is web-based. an analytical and operational dashboard system that offers 10 multi-language and multi-currency reports. The software was launched February 20. Some of the dashboard options are sales pipeline.5.Revenue Management forecasting. group pricing. produces and markets IDeaS V5i On-Demand Revenue Management Solution. 2008 and currently is available yearly for $2400US. and hotel room nights. multi-property functions. It offers guest optimization. the leading provider of hospitality revenue management and optimization solutions and one of America’s fastest growing technology companies. This software balances the need for strategic forecasting. guest tracking. The Hong Kong PolyU School has developed the Hong Kong Tourism Demand Forecasting System. and my business alerts. tourist expenditure. It offers reports available for ten major source countries and regions. It is a web-based program that measures demand by tourist arrival. daily metrics. New Market International introduced and released Delphi 9. group management. IDeaS. need period. . groups in house. and full reporting.

When forecasting. Keeping in mind that the strategy must be practical to implement and strategically sound. it is important to incorporate every aspect of the business – food and beverage outlets. Gaining and maintaining competitive advantage is no easy task. it would .Revenue Management 11 Conclusion The concept of revenue (yield) management has evolved over the years and. retail shops.” However. forecasting is an intricate part of developing marketing strategies. a marketing strategy can be created. Whatever decision is made. There is no set formula nor is there a one-stop. because there could be a prospective piece of business overlooked that could either make or break the business as a whole. will continue to evolve for years to come. The input of these departments are crucial. Additionally. Managers must remember the basic principles of economics when developing marketing strategy. Once the forecast has been completed. quick fix method for “getting rich quick. conference services. a combination of the two methods is a viable option. etc. from the ever-increasing emerging software. Equally as important is the method of forecasting used – qualitative or quantitative. neither is determining strategy for positioning a business in such a way that sets itself apart from the competition.

There are a number of systems on the market to-date and more that are sure to emerge in the near future. for technology is the wave of the future. it must always be one step ahead of the trends. . Now is the time to keep our eyes open and our ears to the grind for the latest and greatest in technology. If a business is to succeed in this technological society.Revenue Management be fruitless without thought or regards to any current or future 12 (potential) software purchases to enhance market strategy.

(2006).org/). ranging from IT to conferences and educational institutes to market reports (www. Linda. (March 2008). Enz. 5(6). Cathy A.hospitalitynet. Transforming Strategy One Customer At A Time. & Canina. An Analysis of Revenue Management. Inc. Canina. CHR Reports. Revenue Management in US Hotels: 2001 – 2005. Keat. 4(7). Upper Saddle River. Enz.Y. 6(8). Enz. The Center for Hospitality Research. Cathy A. PhD. Why Discounting Doesn’t Work: The Dynamics of Rising Occupancy and Falling Revenue Among Competitors. Linda.. (April 2005). (June 2006). Mark. Managerial Economics: Economic Tools for Today’s Decision Makers (5th ed.Revenue Management 13 References Canina. . Philip K.). & Tjan. Paul G. Harrington. (August 2004). Anthony K. & Young. hospitalityNET is a professional website that provides a wealth of information regarding the service industry. PhD and Cathy A. Linda. Harvard Business Review. New Jersey: Prentice-Hall. CHR Reports. Richard J. & Lomanno.

(2007). (March 2008). Overview & Prospects. Thomas A. November 8). The Center for Hospitality Research. Stowe. 2008 from www. Retrieved February 18. Revenue Management: Research.hotelnewsresource. & VanRyZin. (2005. 33(2). Lewis. & Yesawich. (2001). Transportation Science. Jeffrey I. Hotel News Resource.com/article19459.. Harvard Business Review. Robert C. Stewart. New Jersey: Pearson Prentice Hall.). Peter C. . Garrett J.html Withiam.Revenue Management McGill. Staying on Top. Marketing Leadership in Hospitality and Tourism: Strategies and Tactics for Competitive Advantage (4th ed. (May 1999). Carol. Upper Saddle River. Revenue Management & Group Sales – The Partnership Not the Disconnect. Yield Management. Verret. 14 Shoemaker. Glenn.