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This page intentionally left blank FMTOC.indd Page i 9/22/10 10:57:06 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 REVENUE MANAGEMENT FOR THE HOSPITALITY INDUSTRY D AV I D K . H AY E S ALLISHA A. MILLER John Wiley & Sons, Inc. FMTOC.indd Page ii 9/22/10 10:57:11 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 Photos were taken by the author unless otherwise noted. This book is printed on acid-free paper. o Copyright © 2011 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright. com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley. com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year. These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. Outside of the United States, please contact your local representative. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at http://www. wiley.com. Library of Congress Cataloging-in-Publication Data: Hayes, David K. Revenue management for the hospitality industry/David K. Hayes, Allisha Miller. p. cm. Includes index. ISBN 978-0-470-39308-6 (pbk.) 1. Hospitality industry–Management. 2. Hospitality industry–Economic aspects. I. Miller, Allisha. II Title. TX911.3.M27H395 2010 647.94068’1–dc22 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 FMTOC.indd Page iii 9/28/10 10:42:46 AM user-f391 /Users/user-f391/Desktop/24_09_10/JWCL339/New File CONTENTS Preface vii Acknowledgment s xv PART I: REVENUE MANAGEMENT PRINCIPLES Chapter 1: Introduction to Revenue Management Introduction 3 The Purpose of Business 5 The Purpose of Revenue Management The Purpose and Design of This Book Chapter 2: Strategic Pricing 1 2 11 12 35 What Is a Price? 36 The Importance of Price in the 4 Ps of the Marketing Mix 45 The Role of Supply and Demand in Pricing 49 The Role of Costs in Pricing 53 Implementing Strategic Pricing 61 Chapter 3: Value 68 The Role of Value in Pricing 69 The Relationship Between Quality and Price 75 The Relationship Between Service and Price 77 The Link Between Quality, Service, and Price 79 The Art and Science of Strategic Pricing 84 Chapter 4: Differential Pricing 91 Ten Priciples of Managing Revenue 92 Differential Pricing 93 Limits to Differential Pricing 99 Applying Differential Pricing 103 Revenue Management or Revenue Optimization? iii 121 FMTOC.indd Page iv 9/22/10 10:57:12 AM user-f391 iv /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 CON T E NTS Chapter 5: The Revenue Manager’s Role 129 The Revenue Manager in the Hospitality Industry Legal Aspects of Revenue Management 133 Ethical Aspects of Revenue Management 139 The Revenue Manager Position 147 The Revenue Management Team 156 130 PART II: REVENUE MANAGEMENT FOR HOTELIERS Chapter 6: Forecasting Demand 163 164 The Importance of Demand Forecasting Historical Data 167 Current Data 174 Future Data 185 Demand Forecasts and Strategic Pricing Chapter 7: Inventory and Price Management 165 193 208 The Marketing Mix Revisited 209 Inventory Management 209 Characterizing Rooms for Optimum Inventory Management 212 Designing Unique Room Codes 215 Classifying Guests by Market Segment 216 Overbooking as an Inventory Management Strategy 227 Price Management 233 Stay Restrictions 249 Principles of Inventory and Price Management 251 Chapter 8: Distribution Channel Management 259 Managing Distribution Channels 260 Nonelectronic Distribution Channels 268 Electronic Distribution Channels 278 Principles of Distribution Channel Management 298 Chapter 9: Evaluation of Revenue Management Efforts in Lodging The Lodging Revenue Paradox STAR Reports 318 307 306 FMTOC.indd Page v 9/28/10 10:42:54 AM user-f391 /Users/user-f391/Desktop/24_09_10/JWCL339/New File CONTENTS v Competitive Set Analysis 325 Market Share Analysis 332 Additional Assessments 335 Common-Sense Revenue Optimization 340 PART III: REVENUE MANAGEMENT FOR FOODSERVICE OPERATORS Chapter 10 : Revenue Management for Food and Beverage Services 349 350 Traditional Foodservice Pricing Methods 351 The Cost Against Cost-Based Foodservice Pricing 359 Applying Differential Pricing in Foodservices 364 Factors Affecting Value Perceptions in Foodservices 373 Chapter 11: Evaluation of Revenue Management Efforts in Food and Beverage Services 391 Food and Beverage Revenue Analysis 392 Examination of Revenue Sources 393 Measurement of Revenue Change 399 Evaluation of Revenue-Generating Efficiency 409 The Revenue Evaluation Process in Foodservices 420 PART IV: REVENUE MANAGEMENT IN ACTION 429 Chapter 12: Specialized Applications of Revenue Management 430 Characteristics of Organizations Applying Revenue Management 431 Service Industries Applying Revenue Optimization Strategies 440 Specialized Revenue Management Duties 441 Revenue Management and Destination Marketing 450 Chapter 13: Building Better Business 458 Keys to Building Better Business 459 Better Business Issues in Moderate to Strong Markets 472 Better Business Issues in Weak or Distressed Markets 480 Index 503 This page intentionally left blank FMTOC.indd Page vii 9/22/10 10:57:12 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 PREFACE Revenue Management for the Hospitality Industry is a book that we were particularly privileged and challenged to create. This is the first textbook that has been developed specifically to examine what revenue managers in the hospitality industry must know and do to be successful. Revenue Management is an emerging field of study. Because that is true, there are honest differences of opinion about what revenue management actually is today—and what it will become in the future. Despite some philosophical differences among revenue management experts, we believe all of them would agree that a good way to describe the goal of revenue management is to say that it is “to charge the right price, to the right customer, for the right product, through the right channel, at the right time.” Doing that well is not as easy as it looks—and as experienced revenue managers will attest, it doesn’t look all that easy. This book was developed to teach its readers exactly how it is done. It is important to note that Revenue Management for the Hospitality Industry is intended for readers with prior knowledge and understanding of the hospitality industry. We believe revenue management should be a unique and separate area of study and is an area best studied by those with a solid understanding of how products and services are sold in the exciting hospitality industry. As it continues to evolve, revenue management will certainly develop more of its own theory, principles, and practices. For the present, much of the information revenue managers need to know is taken from the various fields upon which it has been built. This can be confusing to some. For example, some marketing professionals believe that because revenue managers must understand much about marketing, the terms revenue management and effective marketing are the same. They are not the same. In fact, one very good way to avoid any confusion about what this book is intended to be would be to carefully describe what it is not. Revenue Management for the Hospitality Industry is not a principles of economics textbook, despite the fact that it is critical for revenue managers to understand how and why consumers use scarce financial resources to make purchasing decisions. Concepts such as supply, demand, consumer rationality, and pricing are foundational topics for revenue managers and as a result these and other very specific economic concepts are presented in the book. Neither is this a pricing theory text, despite this book’s strong emphasis on the critical relationship between strategic pricing and effective revenue management. Revenue managers must be experts at understanding how businesses determine prices and how their customers perceive prices. As a result, the principles and concepts revenue managers must know to grasp the intricacies of effective pricing do make up an essential part of this book. This is not a book about managerial accounting although it addresses those accounting principles and practices that revenue managers must be aware of if they are to do their jobs effectively. It is not a textbook about marketing or e-marketing/information technology. Certainly, revenue managers must know a great deal about marketing concepts. As well, the extensive use of the Internet to sell hospitality products requires specialized knowledge vii FMTOC.indd Page viii 9/22/10 10:57:12 AM user-f391 viii /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 P R EFACE to use that tool effectively. As a result, marketing and e-marketing information make up a significant portion of this text. It is not a text about how to manage the front desk in a lodging operation. This is so despite the fact that in a large number of U.S. hotels the revenue manager and front office manager position will often be held by the same individual. Effective front office administration, however, is critical to revenue optimization in hotels. As a result, the book includes a great deal of information about effective front office management. It is not a textbook about leadership, yet experienced revenue managers agree that the ability to communicate goals and build teams who are inspired to achieve those goals is one of a revenue manager’s most critical tasks. As a result, information about the leadership skills that revenue managers must acquire and exhibit are included. Similarly, the book is not about managerial ethics or those laws that directly affect pricing. This is so despite the fact that employees, customers, and society at large care deeply about the ethical aspects of a business’s pricing tactics and strategies. Also, it is important that revenue managers understand that there are very specific legal requirements related to pricing products, and these requirements must be well known. In any industry, the prices charged and the selling methods used must be perceived to be fair, and they must follow the law. As a result, ethics in pricing and the legal aspects of pricing are topics that must be addressed. This book does that. In summary, the book is not an economics, pricing theory, marketing, e-marketing/ information technology, managerial accounting, front office management, leadership, ethics, or hospitality law textbook. Revenue Management for the Hospitality Industry is a book about revenue management. Revenue management is an independent area of hospitality study that draws from a variety of established academic areas to yield a subject of management inquiry as unique as it is exciting. TO THE STUDENT Learning revenue management will not be boring. It is an easy statement to make because revenue management is an exciting subject. It is fun and it is challenging. Revenue Management for the Hospitality Industry will be fun and challenging as well. The book has been carefully designed to include information taken from inside the hospitality industry as well as from a variety of external sources. If you work hard and do your best, you will find you do have the ability to master all of the information in this text. When you do, you will have gained an invaluable skill that will make you one of the rare individuals with a thorough understanding of revenue management in the hospitality industry. That knowledge will enhance your company’s performance and thus help you advance your own hospitality career. TO THE INSTRUCTOR Teaching in a new subject area can be much more challenging for an instructor than teaching in an area that is more well-established. It requires dedicated, innovative, and inspired teachers to organize relevant information and to make that information easy to understand FMTOC.indd Page ix 9/22/10 10:57:12 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 PREFACE ix and interesting to study. In a new instructional area the teaching resources available may be few, while at the same time there are myriad initial pedagogical decisions to be made about what to teach, how best to teach it, and it what order it should be taught. Revenue Management for the Hospitality Industry was carefully designed to serve you as a technically accurate and highly flexible teaching resource. In addition to the content presented in the chapters, we believe revenue management instructors will be pleased to find: 䊏 The material was written in an especially reader-friendly style. Both upper-division undergraduate students and graduate students will find its reading level suitable to them, and they will find the material is presented in a way that makes reading it highly enjoyable. Revenue management is not a dull topic, and this book ensures students will recognize that. 䊏 The book was designed to provide hospitality instructors in a variety of curriculum settings with maximum teaching flexibility. Its separation into four distinct parts allows, for example, lodging management instructors the freedom to include or exclude from their courses detailed information about revenue management in the foodservice segment of the hospitality industry. Similarly, it allows food management instructors the ability to exclude detailed front office management-related guest room sales information from their culinary and foodservice-related revenue management courses. 䊏 The many cases and practical examples used to illustrate revenue management concepts are taken directly from real-world situations. They are challenging and exciting to read. The issues raised in these practical application scenarios provide students ample opportunity to practice their newly acquired revenue management skills and to evaluate their mastery of the material. 䊏 Questions and problems at the end of each chapter are demanding because they are extremely practical. They allow students the chance to perform the calculations and practice the decision-making skills that are used daily by those revenue managers actually working in the industry. In these chapter-ending questions, as well as in the main body of this book, the authors assumed only a working knowledge of basic algebra as the level of math proficiency required for material mastery. 䊏 Most hospitality instructors want their graduating students to possess practical industry knowledge that can be immediately applied on the job. They also want their students to be aware of future trends that predict industry changes students will encounter as their careers progress. This book does both of those things. Students who master the information presented in it will be prepared to assume the day-to-day duties of a revenue manager. They will also understand the managerial philosophy and actions required to create a customer-centric revenue optimization plan and culture in their own organizations. Revenue management will continue to evolve in the hospitality industry and, as a result, in the hospitality classroom as well. As the sophistication of the field grows and as the emphasis moves from the management of revenues to their optimization, the shift from a tactical focus to a strategic focus creates broader responsibilities for revenue management. As the renaissance unfolds, hotels and restaurants will look to revenue management to help FMTOC.indd Page x 9/22/10 10:57:13 AM user-f391 x /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 P R E FACE understand how customers respond to offerings in the marketplace. This customer-centric thinking will focus leading hospitality firms on the essential issues of pricing and customer value, which are fundamental topics of this book. TEXT CONTENT Revenue Management for the Hospitality Industry is a detailed examination of the handson skills revenue managers must know to effectively manage their inventories and prices. As a result, readers will learn how to use those tools that professional revenue managers simply must know and understand. Thus, RevPAR, Flow-through, RevPASH, ADR, Occupancy %, Net Yield %, and Occupancy Index are but some of the industry metrics detailed in the book. Few industry professionals would object to the authors’ inclusion of these important assessment tools. Similarly, most hospitality educators know the value of providing their students with professional skills that can be immediately applied on the job. In addition to developing hands-on skills, the book includes a substantial amount of revenue management–related theory. A theory is simply a tool managers use to better understand what is happening today and to better predict what will happen tomorrow. Many decisions made by revenue managers must be based on what the revenue manager thinks or believes will happen in the future. As a result, they simply must be theoretically wellgrounded. Internationally known management consult William Edwards Deming, famous for his work in advancing manufacturing methods in Japan after WWII, succinctly stated the value of theory in management when said that “Rational behavior requires theory.” The authors believe the purpose of well-developed theories is to explain, predict, or advise others. The theory-related content of this book was carefully reviewed and included only when it clearly helped readers achieve one or more of these three critical objectives. As a result, the book is practical, because practicality enhances learning by allowing students to apply new information from a variety of fields to a setting (hospitality) that is interesting and familiar to them. But it is also unabashedly theoretical because practical advancements in any endeavor, including revenue management, will only result from carefully examining old theories and improving on them. With the goal of effectively aiding in teaching the practical skills and the theoretical principles revenue managers must know to be effective, Revenue Management for the Hospitality Industry is presented in 13 chapters that are divided among four major parts: Part I: Revenue Management Principles Part I introduces readers to the foundations of revenue management and contains the following chapters: 1. Introduction to Revenue Management 2. Stratgetic Pricing 3. Value 4. Differential Pricing 5. The Revenue Manager’s Role FMTOC.indd Page xi 9/22/10 10:57:13 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 PREFACE xi In Chapter 1 of this underpinning section, readers will learn about the history of revenue management and gain an understanding of the material that is included in the remaining chapters of the book. In Chapter 2 the concept of price is examined and in Chapter 3 readers will learn how customers assess value when making their purchases. Differential pricing is the sole topic of Chapter 4. In it readers will learn how revenue managers combine the concepts of price and value to develop pricing strategies based on customer willingness to buy. In Chapter 5, the role of the professional hospitality revenue manager within a business entity is examined in detail. Part II: Revenue Management for Hoteliers Part II of the text addresses the principles and practices applied by revenue managers working in the lodging segment of the hospitality industry. It includes the following chapters. 6. 7. 8. 9. Forecasting Demand Inventory and Price Management Distribution Channel Management Evaluation of Revenue Management Efforts in Lodging In Chapter 6, readers learn how to forecast future demand for their hotel rooms and services. In Chapter 7, the techniques utilized to manage rooms inventory and to price hotel rooms are examined in detail. Chapter 8 addresses management and evaluation of the various distribution channels utilized by revenue managers when pricing and selling lodging products and services. These include both non-electronic and electronic distribution channels. In Chapter 9, readers will learn the various techniques used by revenue managers to assess and evaluate the quality of their revenue management decision making. Part III: Revenue Management for Foodservice Operators Part III of the text addresses the principles and practices applied by revenue managers working in the food and beverage segment of the hospitality industry. It includes the following chapters. 10. Revenue Management for Food and Beverage Services 11. Evaluation of Revenue Management Efforts in Food and Beverage Services Although they may be applied in unique ways, foodservice professionals can and should utilize effective revenue management strategies to optimize sales. Many of the strategies they can use are presented in Chapter 10. In Chapter 11, readers learn the techniques foodservice operators use for assessing and evaluating the quality of their revenue management decision making. Part IV: Revenue Management in Action In the concluding section of the text readers will learn how they can apply what they have learned in a variety of professional settings and under varying economic conditions. The section consists of the following two chapters. FMTOC.indd Page xii 9/22/10 10:57:13 AM user-f391 xii /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 P R E FACE 12. Specialized Applications of Revenue Management in Hospitality-Related Organizations 13. Building Better Business In Chapter 12, readers are shown how the revenue optimization principles they have learned can be utilized by those hospitality-related entities possessing the same organizational characteristics as hotels and restaurants. Examples include golf courses, cruise ships and amusement parks. The chapter addresses the role of the multiunit revenue manager as well as the revenue manager employed by a franchise company and concludes with an examination of the revenue manager’s role in destination marketing. Chapter 13 concludes the book by examining how revenue managers can use their detailed knowledge of inventory management and pricing to improve their organizations’ income levels. The chapter’s primary focus is on the customer-centric revenue management strategies and tactics revenue managers can use to generate more income and improved profits regardless of the economic conditions faced by their businesses. T E X T F E AT U R E S From a reader’s perspective the features of a textbook often are as important as its content. Thoughtfully designed textbook features make the content presented easy to read, easy to understand, and easy to remember. Readers will find that Revenue Management for the Hospitality Industry is especially reader friendly. The following features help readers learn and practice the concepts of revenue management: 䊏 Chapter Outline: The outline preceding each chapter shows the listings for each topic in order of their introduction and provides a simple way to quickly find material within the chapter. 䊏 Chapter Highlights: Each chapter utilizes this three-point feature to explain in short and clear terms (and before any content is presented), exactly what readers will know when they have mastered the chapter’s content. This feature makes it easy for readers to see what the chapter is about and the skills they will acquire by reading it. 䊏 RM in Action: Unlike some other fields of study, revenue management-related issues are frequently described, debated, or clearly exemplified in the current news articles reported by the hospitality and general press. In this entertaining feature, students will see how the revenue management principles presented in the book can be clearly illustrated using real-world examples reported in various news outlets. 䊏 RM at Work: Each chapter contains multiple mini-cases designed to make readers think about how they would personally use the information they have learned to respond to an on-the-job revenue management-related issue or challenge. These thought-provoking and realistic cases allow readers to practice the type of revenue management problems solving methods they will use as professional revenue managers. 䊏 RM on the Web: This feature uses sites listed on the Internet to provide readers with detailed supplemental information about a topic or issue presented in the book. FMTOC.indd Page xiii 9/22/10 10:57:13 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 PREFACE xiii This feature identifies pertinent Web sites to visit and gives readers specific instructions about what they should do, consider, and learn when they visit the site. 䊏 Essential RM Terms: As is true with many areas of specialization, revenue managers often speak their own language. Readers needing help in remembering these key vocabulary terms and concepts will appreciate this feature because it clearly defines important terms where they are first introduced in the text. The terms are also listed at the conclusion of each chapter (in the order in which they were presented) to provide a valuable study aid. 䊏 Apply What You Know: This end-of-chapter feature provides opportunities for readers to solve common revenue management problems using the information presented to them in the chapter. Some of the questions require a conceptual answer, while others can be answered only after making appropriate calculations and computations. Each of the Apply What You Know questions was carefully designed to be fun, to be challenging, and to reinforce important concepts presented in each chapter. 䊏 Key Concept Case Study: This entertaining capstone feature allows readers to follow, via a running case study, the actions of Damario. Damario is the newly appointed revenue manager at the fictitious Barcena Resort. He reports directly to Sofia Davidson, the resort’s general manager. Each case was designed to illustrate a key chapter concept and allows readers to see how revenue managers actually apply the concepts presented in the chapter in their everyday work activities. INSTRUCTOR RESOURCES To help instructors effectively manage their time and to enhance student learning opportunities, an on-line Instructor’s Manual as well as several significant educational tools have been developed. The Instructor’s Manual includes: 䊏 Lecture outlines for each chapter 䊏 Suggested answers for RM at Work case study questions 䊏 Correct answers for Apply What You Have Learned end-of-chapter questions 䊏 Suggested answers to all chapter-ending Key Concept Case Study questions 䊏 A Test Bank including exam questions and answers The Test Bank has been specifically formatted for Respondus, an easy-to-use software program for creating and managing exams that can be printed to paper or published directly to Blackboard, WebCT, Desire2Learn, eCollege, ANGEL, and other e-Learning systems. Instructors who adopt Revenue Management for the Hospitality Industry can download the test bank for free. Additional Wiley resources also can be uploaded into your LMS course at no charge. A password-protected Wiley Companion Instructor’s Web site devoted entirely to this book (www.wiley.com/college/hayes) provides access to the Instructor’s Manual and the text-specific teaching resources. PowerPoint lecture slides are also available on the Web site for download. This page intentionally left blank FMTOC.indd Page xv 9/22/10 10:57:13 AM user-f391 /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 ACKNOWLEDGMENTS Revenue Management for the Hospitality Industry has been designed to be the most comprehensive, technically accurate and reader friendly learning tool available to those who wish to know more about revenue management. We would like to acknowledge the many individuals who assisted in its development. Very special appreciation goes to Peggy Richards Hayes, the individual singly most responsible for ensuring that this text would be easy to read, easy to understand, easy to apply, and easy to remember. In this project she performed as flawlessly as we have come to expect. Her insightful, sometimes kindly, but often brutally offered reactions to each originally drafted page of the manuscript will no doubt ensure the success of this book. She is a relentless and zealous crusader against the kind of writing designed to impress academics rather than to enlighten readers. As a result of her careful manuscript scrutiny, the presentation of complex and challenging revenue management concepts was continually revised, simplified, and improved until it resulted in a text version we believe will be much appreciated by student readers, as well as by those in the academic community. For her energy and passion for clarity we are most appreciative. One of the most challenging aspects of producing a book designed for students as well as practicing professionals is ensuring its industry relevance. In addition to our formal cadre of academic and industry reviewers, the authors are greatly indebted to Michelle Davis, director of revenue management for Hospitality Ventures. Hospitality Ventures is a privately owned, fully integrated hotel ownership and management organization located in Atlanta, Georgia. The company currently owns and/or operates 20 hotels in 12 states. Eighteen of its properties operate under the Hilton or Marriott brands. Prior to undertaking the writing process, we recognized the wisdom of enlisting a talented and innovative revenue manager, and especially one with multiunit responsibilities who daily faces the challenges and opportunities we would be examining and describing in the book. We knew that such an individual could provide key guidance and address complex questions about the evolving roles and responsibilities of practicing revenue managers. Michelle agreed to fill that role for us, and she did so beautifully. Her tireless and rapid responses to our myriad queries added greatly to the practicality of this text. A cum laude graduate of the hospitality program at Johnson and Wales University, her thoughtful reflections on the topics we presented to her display her keen intellect, outstanding training, and varied experience. For her willingness to share her insight with us, and by doing so impart it to the many students and industry professionals who will read this text, we are deeply grateful. We also wish to thank Sofianna A. Pastrana, who provided the ongoing motivation for writing the text. In addition, we wish to thank Laura and David Miller, and Herodina and Joseph Chandler, all of whom displayed extraordinary patience and unrelenting support during the long writing process. Long-time restaurant professional David Berger was especially helpful in critiquing those chapters addressing foodservice-related revenue management issues. North Texas University’s Dr. Lea Dopson’s accounting-related insight was invaluable as well. xv FMTOC.indd Page xvi 9/22/10 10:57:14 AM user-f391 xvi /Users/user-f391/Desktop/Ravindra_22.09.10/JWCL402:207 ACKNOW LE D GME NTS Particular mention is appropriate for those academic and industry professionals who reviewed the original drafts of each chapter. For their comments, collaboration, and constructive criticisms we wish to thank our external reviewers: Eric Browning, Boston University; William Frye, Niagara University; John F. Mulrey, Florida International University; Charles Day, Marriott; Melissa Dallas, Missouri State University; Peter Ricci, Florida Atlantic University; Manisha Singal, Virginia Tech; Eric T. Brey, University of Memphis. Experienced authors know the value of a quality publisher in transforming a very good manuscript into an outstanding book. We remain continually impressed with the high standards exhibited by JoAnna Turtletaub, Wiley vice president and publisher, and by the tremendous support she has shown for this project. Special thanks also go to Julie Kerr, the Wiley expert who served as this project’s developmental editor. Always professional and insightful, Julie’s efforts helped keep the project on track and ensured all the myriad details required for the production of a new text were addressed. James Metzger at Wiley deserves special recognition because of his efforts to organize the feedback received from our reviewers and because of his work in ensuring the quality and clarity of the Instructor’s Manual produced for this text. Finally, the authors were delighted to again team with Wiley Senior Production Editor Richard DeLorenzo in this book’s final production. Richard’s painstakingly detailed efforts ensure this book reflects only the very best of our efforts. We are deeply grateful, as will be the students who read this text, for all of the other production staff at Wiley for their intellect, skill, and patience, in the manuscript layout, design, proofing, and printing of this exciting new book. It is a truism that real joy is not found in finishing an activity but in doing it. Certainly for us, the journey taken to produce the first comprehensive textbook on this topic was as memorable and fascinating as the destination. We invite readers to begin their own personal expedition into the new, constantly changing and always exciting world that can be discovered by exploring Revenue Management for the Hospitality Industry. David K. Hayes, Ph.D. Okemos, MI Allisha A. Miller Lansing, MI c01IntroductionToRevenueManageme1 Page 1 9/6/10 9:03:54 AM f-392 PA RT I REVENUE MANAGEMENT PRINCIPLES CHAPTER 1 Introduction to Revenue Management CHAPTER 2 Strategic Pricing CHAPTER 3 Value CHAPTER 4 Differential Pricing CHAPTER 5 The Revenue Manager’s Role /Users/f-392/Desktop/06::09::10 c01IntroductionToRevenueManageme2 Page 2 9/6/10 9:03:57 AM f-392 CH A P T E R /Users/f-392/Desktop/06::09::10 1 Introduction to Revenue Management CHAPTER OUTLINE Chapter Highlights Introduction The Purpose of Business The Profit Fallacy The Return on Investment Fallacy The Purpose of Revenue Management The Purpose and Design of This Book Part I: Revenue Management Principles Part II: Revenue Management for Hoteliers Part III: Revenue Management for Foodservice Operators Part IV: Revenue Management in Action CHAPTER HIGHLIGHTS 1. Explanation of why an excessive internal focus on profits or owner’s return on investment is detrimental to the long-term success of a hospitality business. 2. Explanation of why businesses exist to create wealth for their customers and how effective RM helps them do that. 3. Overview of the RM-related information contained in the remaining chapters of this book. 2 c01IntroductionToRevenueManageme3 Page 3 9/6/10 9:03:57 AM f-392 /Users/f-392/Desktop/06::09::10 INTRODUCTION 3 INTRODUCTION In increasing numbers, professionals in the hospitality industry are coming to the realization that management of their revenue (revenue management) is critical to their organizations’ success. Essential RM Term Revenue: The total amount of sales achieved in a specified time period. Revenue is calculated as: Number of units sold ⫻ Unit price ⫽ Revenue It may seem surprising that only recently has the full-time position of revenue manager (RM) been created by forward-thinking hospitality organizations. What is really surprising is that it has taken so long. What these progressive entities are discovering is that every member of their organization has a role to play in revenue management. Even the professional hospitality associations that normally provide up-to-date information to their members have only in the past few years (or still have not!) created coursework, certification programs, and continuing education/professional development classes focusing on revenue management. The materials used for instruction are few, and the majority of these materials have been developed primarily for the lodging rather than foodservice segments of the hospitality industry. Similarly, only recently have professional hospitality educators felt that revenue management was a topic of sufficient depth and complexity to warrant its own course content. They are now discovering that virtually the entire hospitality curriculum could (and perhaps should) be designed around the basic tenants of revenue management. This book has been developed to assist hospitality organizations, associations, educators, and most importantly, those professionals who wish to become very highly skilled at managing revenues in the hospitality industry. The book emphasizes the importance of strategic pricing as a key tactic in effective revenue management, simply because the prices charged by a company communicate much information to its customers and determines the total sales revenue the company will achieve. Because of the importance of a business’s revenues, it would seem that implementing effective business strategies designed to optimize revenues would be crucial and fairly straightforward. It is crucial, but for a variety of reasons, it is not easy. The most significant of these reasons is that most traditionally trained hospitality managers do not understand the basic tenants of revenue management, nor do they fully appreciate the large number of organizational misconceptions, biases, and misunderstandings that actually work against them when implementing effective revenue management strategies. This book is designed to address and dispel many of those misconceptions, biases, and misunderstandings. The reasons it is important to do so are fundamental to business c01IntroductionToRevenueManageme4 Page 4 9/6/10 9:03:57 AM f-392 4 /Users/f-392/Desktop/06::09::10 CH A P TE R 1 INTROD U CTION TO R E V E NUE M ANAG EM ENT success because, in the final analysis, effective managers of an organization’s revenues simply must do three things: 1. Understand the importance of revenue management 2. Understand the many complex factors that influence revenue management strategy and tactics 3. Become better at making revenue management decisions than their competitors Interestingly, these goals should not be new. Those in business have, since the beginning of commerce, grappled with the complexity of how to best price the products they made and the services they provided, especially in the face of competition from others offering similar products and services. These early entrepreneurs understood the importance of strategic pricing because of a simple mathematical truth; in a service business, the sum of prices paid by the business’s customers equals the total revenues received by that business. Unfortunately, despite all that has been learned over hundreds of years of commerce and in many academic disciplines, the question of how much to charge for hospitality products has too often been viewed as one best answered by mathematical formula or rule-of-thumb; and thus, it has been addressed primarily by those who specialize in hospitality accounting. The rationale for doing so has been the widely held belief that prices for hospitality products should be directly related to those products’ costs. Knowledgeable revenue managers understand that costs and price are related, but that the latter is not dependent on the former (nor should it be). Yet the firmly ingrained idea that costs should dictate price is just one good example of the misconceptions held by those who do not truly understanding the complexities of selling hospitality products to consumers in today’s post-Internet economy. Readers of this book will find that it presents hospitality professionals with a significant number of additional concepts that may, at first, appear counterintuitive or just plain wrong. Consider this sentence taken from a later portion of this chapter: It is important to recognize that if an organization’s primary focus is the generation of profits, it will inevitably go out of business because it will lose out to organizations that know enough not to focus on profitability. Statements such as this might seem controversial, but they will be presented only when supported by fact, illustrated with real-world examples, or failing those two, proposed for debate based on a preponderance of evidence garnered by the lead authors’ 35-plus years as a hotel owner, foodservice director, professor, writer, and most importantly, life-long student/observer of the fascinating field of hospitality management. The preliminary response to controversial ideas (those that have the potential to change the status quo of revenue management thought to status “Go!”) may be the informed reader’s initial disbelief or disagreement. If, however, that is followed by vigorous debate and open-minded and spirited discussion and ultimately by increased sophistication in the application of revenue management strategy in hospitality, then the industry and its customers can only benefit from the exchange. It is the authors’ hope that, in concert with openminded readers, we can together begin a meaningful exploration of the intriguing topic of revenue management in the hospitality industry. c01IntroductionToRevenueManageme5 Page 5 9/6/10 9:03:58 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE OF BUSINES S 5 THE PURPOSE OF BUSINESS We start our examination at the very beginning. If you are reading this book, it is most likely because you are now, or in the future want to be, in the hospitality business. If that is true, it would be fair to ask: What will be your purpose? Stated differently, if you plan to go into business, what is Essential RM Term the purpose of your business? Even more specifically, what Hospitality business: An organization providing is the purpose of a hospitality business? Ask that question food, beverages, lodging, travel, or entertainment to many hospitality professionals and you are likely to get services to people away from their homes. one of two reasonable answers; 1. To achieve profits 2. To generate returns on investment for the business’s owners Both answers are flawed and if you hope to successfully manage revenues in a hospitality business, you need to understand why. The Profit Fallacy If you want to be in the hospitality business, you likely want to be involved in a profitable hospitality business. That would be a logical choice because, in the long run, only profitable organizations will stay in business. It is important to recognize, however, that if an organization’s primary focus is the generation of profits, it will inevitably go out of business because it will lose out to organizations that know enough not to focus on profitability. The two previous sentences are not contradictory. The critical nature of profits should not lead those in business (and especially those in the hospitality business) to focus their efforts on maximizing their companies’ profit levels. The organizational focus must be elsewhere. To understand precisely where organizations should direct their primary attention, you must first analyze the commonly accepted (but unsatisfactory) definition of profits, and then come to a deeper understanding of the concept of profits. To many hospitality owners and managers, profit is defined as a firm’s total revenue minus its total cost or expense. That seems logical. If you know basic accounting, you also know that, with a very few exceptions, hospitality accountants and managers use the words expense and cost interchangeably. Specific types of costs (expenses) may be identified in a variety of ways. Some common terms for various types of costs include fixed costs, variable costs, controllable costs, and noncontrollable costs, but they are all considered costs. Similarly, the terms sales or income are often used as a substitute for revenue. The result is that it is not unusual for accountants to define profits utilizing one of the following two versions of the accountant’s profit formula: Accountant’s Profit Formula Sales 5 Costs 1 Profit1 Applying basic algebra, and substituting more familiar and commonly used terms, the accountant’s formula becomes: Profit 5 Revenue 2 Expense c01IntroductionToRevenueManageme6 Page 6 9/6/10 9:03:58 AM f-392 6 /Users/f-392/Desktop/06::09::10 CH A P TE R 1 INTROD U CTION TO R E V E NUE M ANAG EM ENT As you will learn in this book, the accountant’s formula (as well as the economist’s profit formula, which you will study later in this chapter) is not completely on target, although it does touch on some aspects of truth regarding profits. You likely are fairly familiar with this commonly accepted but inadequate meaning of the word profit. But being familiar with a concept does not necessarily mean that the concept is fully understood or is useful. To actually generate significant profits in a hospitality business, and to be a successful manager of a business’s revenues, you must comprehend profits both completely and differently. You must acquire a revenue manager’s understanding of the meaning of profits. To begin, you should recognize that successful businesspersons understand that in any rational business transEssential RM Term action, both the buyer and the seller seek a profit. Profit: The net value achieved by a seller and a buyer A careful reading of this definition reveals that, in a in a business transaction. successful business transaction, both buyer and seller gain. If you are reading this book because you are interested in becoming an outstanding manager of your business’s revenues, it is critical that you stop reading now and memorize this profit definition. It is the crucial foundation of effective revenue management and yet it is most often neglected when organizations, in the quest for profits, establish their prices. This somewhat-unorthodox definition of profit is not a new concept. Consider the advice given in the early 1900s by retail business legend Herbert Marcus (co-founder of Neiman Marcus) to his son Stanley when he said: “There is never a good sale for Neiman Marcus unless it’s a good buy for the customer.”2 Think about it and you will recognize it is true. Buyers seek a profit as much as sellers. To illustrate; if you have ten dollars and purchase an item priced for that amount, you (the buyer) seek to acquire something that you want more than you want to keep the ten dollars you already have. If you willingly part with your ten dollars, it is only because you see a value in exchanging the ten dollars for something worth more than ten dollars to you. To keep this illustration very clear, consider Figure 1.1, a recap of a typical buyer’s likely interest in three alternative business transactions (propositions) that have been offered by a business organization whose stated goal is to make profits for itself. In this illustration, the prospective buyer is holding one ten-dollar bill. Note that in this example (as in the real-world), the informed buyer would have a high interest only in proposition #3, the trade that results in a clear profit for the buyer. That Figure 1.1 Three Business Propositions Related to a Ten-Dollar Buyer/Seller Transaction Seller’s Proposition Resulting Profit Informed Buyer’s Willingness to Accept and Repeat the Trade #1. Trade nine $1.00 bills for the buyer’s $10.00 bill. $1.00 to the seller Zero #2. Trade ten $1.00 bills for the buyer’s $10.00 bill. $ 0.00 to seller and buyer Possible, but unlikely #3. Trade eleven $1.00 bills for the buyer’s $10.00 bill. $1.00 to the buyer Highly likely c01IntroductionToRevenueManageme7 Page 7 9/6/10 9:03:58 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE OF BUSINES S 7 same buyer will likely have zero interest in proposition #1; which would result only in the seller’s profit. It is important to understand that it matters not that the item traded in this example is money. In fact, the use of money as the item to be exchanged in this example illustrates clearly a fundamental truth about the twenty-first-century economy; namely that our current technology-driven economy still operates in much the same way as every other barter system in the hisEssential RM Term tory of mankind. Revenue managers can learn important Barter system: A trading system in which goods lessons from that time-tested system. and services are exchanged without the use of All business transactions have evolved from the barter money. system. Bartering is an economic activity that consists simply of two individuals trading one item for another. In such a system, the terms buyer and seller are essentially irrelevant because both individuals participating in the trade take on the dual roles of buyer and seller. To illustrate a barter economy that does not use money as a medium of exchange, assume a baker trades two loaves of bread for a poultry farmer’s single chicken. As you can readily see in this example, the baker as well as the farmer takes on the role of buyer and seller. Just as a barter system erases the lines between buyer and seller, it erases the lines between sellers’ costs and their profits. If both participants in this transaction were voluntary participants in the trade, it could be said that they agree the cost of a chicken is two loaves of bread. The cost of a loaf of bread is half a chicken. A profit in such a trade is not a major consideration of the baker or the farmer. This is so because both parties involved in this trade achieved a profit—which you will recall is the net value achieved by a seller and buyer in a business transaction. The profit of the farmer is ownership of desired bread; the baker’s profit is ownership of a desired chicken. Barter economies work well but do have built-in problems. For example, perhaps the farmer in this example would really like to begin eating one of the loaves of bread today but would prefer to receive the second loaf next week, when the first loaf has been eaten and the second loaf will be freshly baked. Similarly, the baker may want to cook only half a chicken today with the remaining half desired for cooking in a coming month. The limitations of a barter system in this example are evident. There are others. For example, in a barter system, an apple grower who wished to obtain shoes would have to not only locate a shoemaker who wanted apples but also find a shoemaker who wanted to own apples at the time the grower’s crop of apples were available for trading. The invention of money solved both these type problems (and made the Essential RM Term construction of Figure 1.1 much easier)! Money: An acceptable medium of exchange used as It is important to recognize that money has no inherent the measure of the value of goods and services. value. You cannot eat coins or currency, nor can the owners of money do much of anything useful with the metals, paper, or other items people generally accept as money. Money is highly useful, however, because if those who have it can agree on its value, it greatly facilitates the many trade transactions that can take place in a money-based economy. Its use is more efficient and more convenient than a barter system. It should now be clear to you, however, that money is not a measure of value, nor does it represent stored-up value. Money is simply an easy way to quantify the amount of one item its owner will give up in order to get another item. Applying this truth to the hospitality industry, it would be foolish to think that simply because a chicken dinner is offered for sale by a restaurateur for ten dollars, its value is ten dollars. If, in fact, a guest willingly purchased c01IntroductionToRevenueManageme8 Page 8 9/6/10 9:03:58 AM f-392 8 /Users/f-392/Desktop/06::09::10 CH A P TE R 1 INTROD U CTION TO R E V E NUE M ANAG EM ENT the ten-dollar chicken dinner from the restaurateur, it would simply mean that both parties in this trade valued the new item each received (chicken for the diner and money for the restaurateur) more than they valued keeping what they originally had. If the trade of the chicken dinner for the money were actually made, it would be a historical fact that, at a certain time and place, this trade between two trading partners occurred. This historical fact would not necessarily establish the intrinsic “worth” or “value” of a chicken dinner to you or to me. In fact, if you are a vegetarian, you would not likely place any personal value on the chicken dinner. If you were extremely hungry, you might value the chicken dinner at much more than ten dollars. The point to remember is that one consumer’s view of a chicken dinner’s value may, or may not at all, be influenced by what other buyers would exchange for it. This variance in buyers’ willingness to trade is another concept that will be fully explored in this text. To further make the important point about the variable worth of items, let’s return to our barter economy example. Assume that the baker awoke one day to discover he had become extremely allergic to chicken. In such a case, would the worth of one chicken still be equivalent to that of two loaves of bread? Not to that baker. Not surprisingly, an incredibly large number of factors work to influence the willingness of two individuals to take part in a specific trade. The critical point for those in hospitality businesses to remember is that in each case of a willing exchange, an independent decision will made by both parties regarding what will be given up and what will be received in exchange. In today’s Internet-influenced economy, never have so many potential trading partners had more trade-related information available to them. As a result, never have consumers been able to more carefully consider their alternative trade options. In fact, the wealth of information about potential trades available to the average consumer has changed our money-based economy as radically as money changed the barter-based economy (a fact that is especially true for those trades taking place in the lodging segment of the hospitality business; a phenomena directly addressed later in this book). Now that you fully understand barter systems, money, and the roles of the parties to a trade transaction, you are in a better position to reexamine the information in Figure 1.1. Note first that the terms buyer and seller seem less important. In fact, you now likely would be just as comfortable if the terms used were trading partner A and B, rather than buyer and seller. If that is true for you, then you have come to a realization that consistently eludes many in the hospitality business. There are no buyers (customers). There are no sellers (businesses). There are only potential trading partners. Profit (whatever that term may mean to either party) is not the trader’s main concern. What is given up versus what is gained is the main concern. Lest, however, you begin to think the author is proposing that the hospitality business consists simply of one happy group of organizations blissfully seeking to assist like-minded trading partners, read the Red Lobster story presented in RM in Action 1.1. In this Red Lobster example, a hospitality business simply found that its trading partners behaved very normally and maximized what they got in exchange for what they gave up. Alternatively, the Red Lobster company did not; and for that mistake, experienced industry observers would conclude its former president paid dearly. Now that you understand that profit (value) is a factor of interest to those who buy, as well as those who sell, products and services it should be easier to understand the limitations of the accountant’s rather one-sided formula for profits. It should also be easier for you to revisit and understand the wisdom of the statement of Herbert Marcus: “There is never a good sale for Neiman Marcus unless it’s a good buy for the customer.” c01IntroductionToRevenueManageme9 Page 9 9/6/10 9:03:58 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE OF BUSINES S 9 RM IN ACTION 1.1: ALL-YOU-CAN-EAT CAN BE TOO MUCH Some believe that Red Lobster’s chief executive was ousted after a crab promotion lost money. The parent company says that wasn’t the reason. In 2003, television commercials for the nation’s biggest chain of seafood restaurants invited diners to “Red Lobster’s Endless Crab: A celebration of all the hot, steaming snow crab legs you can eat.” What top management of the 645-restaurant chain apparently never expected was a plethora of customers who would eat so much crab that they ate up all of the chain’s profits, as well! Management vastly underestimated how many Alaskan crab legs customers would consume during the promotion that ran from July 21 through Sept. 7 (2003). As a result, Darden Restaurants of Orlando replaced the president of Red Lobster; its biggest chain. “It wasn’t the second helping, it was the third one that hurt,” company chairman Joe R. Lee said in a conference call with analysts. “Yeah, and maybe the fourth,” added Dick Rivera, Darden’s chief operating officer. Rivera has taken over as president of Red Lobster. The former president, who had been in the job only 18 months, and who personally approved the Crabfest promotion, has left “to pursue other interests,” the company said. Many of the chain’s locations reportedly started out by charging about $20 for an entree of allyou-can-eat crab and side dishes. When profits started slipping, managers raised the price by as much as $5 per diner, depending on the market, but it wasn’t enough! Excerpted on 11/11/2007 from www.stpetersburgtimes. com/2003/09/26/State/All_you_can_eat_was_t.shtml. The Return on Investment Fallacy Experienced businesspersons having read the previous portion of this chapter may (if somewhat reluctantly) agree that maximizing company profits should not be the primary purpose of a business. They would recognize that customers are equal parties to every trade, and thus it is part of their job to ensure their own customers make a profit (gain value) on every transaction. These same businesspersons may steadfastly maintain, however, that maximizing returns on an owner’s investment, or increasing a business owner’s wealth, is the true purpose of a business. Actually, the question of the purpose of business as it relates to the creation of wealth has occupied the thoughts and writings of countless bright and insightful individuals; including many studying in Essential RM Term the field of economics. As part of their study of wealth, economists study busiEconomics: The area of study concerned with the nesses and business profits. Like those in the field of acproduction, consumption, and transfer of wealth. counting, economists have a formula for profits that should be understood by revenue managers: Economist’s Profit Formula Profit ⫽ The reward for risk c01IntroductionToRevenueManageme10 Page 10 9/6/10 9:03:58 AM f-392 10 /Users/f-392/Desktop/06::09::10 CH AP TE R 1 INTROD UCTION TO R E V ENUE M ANAG EM ENT What an economist wishes to communicate by using this formula is simply that business organizations are not guaranteed a profit. Stated another way, profit is “the compensation accruing to entrepreneurs for the assumption of risk in (a) business enterprise.”3 Thus, business owners who actually do achieve a profit have done so as a result of their willingness to accept the very real risk of not making a profit. Economics is the area of knowledge that describes how humans earn and spend their resources (money). When business owners elect to spend their own money by investing in a business, they do so to achieve investment returns that, when added to their original investment amount, increase these investors’ total wealth. A simplified formula for expressing an owner’s return on investment (ROI) is stated as a percentage related to the owner’s initial investment. ROI is commonly calculated as: Owner’s investment return 5 Owner’s return on investment 1 ROI 2 Owner’s original investment To illustrate ROI, if an owner invests $800,000 in a business, and achieves $200,000 in investment reEssential RM Term turns (defined as revenue in excess of all expense), that ROI: The short version of “Return on investment”: owner’s ROI would be 25 percent ($200,000 investment ROI is the reward to investors for taking an return/$800,000 original investment 5 25% ROI). investment risk. In reality, calculating ROIs can be quite complex. When performing ROI calculations, legitimate questions about the process include whether investment returns before or after taxes should be considered, as well as how to accurately determine the amount initially invested (e.g., questions arise about whether the investment should include debt and equity financing and how to value assets). Regardless of the finer points of ROI calculation, certainly it would seem it could be safely stated that “the purpose of business is to increase the wealth of the business’s owners.” In fact, the opposite is true. The only legitimate purpose of a business is to increase the wealth of its customers. In fact, the only thing that can safely be said about a business is that it will not continue to exist simply because it is efficient, does a good job controlling costs, or creates many jobs. It should and will continue to exist only to the degree that it creates wealth for its customers. Noted management consultant Peter Drucker put it another way; “The purpose of business is to create and keep a customer.” Businesses do so by ensuring that each customer transaction results in an increase in wealth for the customer. Sometimes managers of a company lament that their customers do not appreciate the fact that their business must make a profit (or earn investment returns) if it is to survive. Actually, this is not surprising when you recognize that customers are absolutely indifferent to the profit or ROI needs or goals of a business. Nor do customers care about a business’s costs, its long-term financial goals, or internal workings, excepting for how those factors affect the value (wealth) gained by the consumer in a transaction with that business. In fact, when asked, most customers would likely maintain that the lower the profits of a business, the more its customers benefit in a seller/buyer exchange. As a result, if a businessperson bemoans the fact that they are not making a profit on a specific sale, or desired levels of ROI, that information will most often be met with the customer’s glee, not sympathy. Just as a focus on operating profits is a short-sighted business strategy, so too is overemphasis on maximizing owner/shareholder investment returns. If it seems to you that an inordinate c01IntroductionToRevenueManageme11 Page 11 9/6/10 9:03:59 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE OF REVENUE M ANAG EM ENT 11 amount of time in this chapter has been devoted to examining what businesses should not do, it is because much too often the same philosophical errors that confuse business professionals’ views of their own purpose also affect their views about the purpose of revenue management. THE PURPOSE OF REVENUE MANAGEMENT Profits are the result of two tasks: generating revenue and controlling expenses. This could be a legitimate argument for those in management spending 50 percent of their time in each of these two processes. However, revenue managers who purchased this book thinking they would learn how to cleverly increase their prices to unsuspecting customers and thus maximize their own company profits by that clever pricing likely recognize by now that that is not the approach that we will be taking. Thus far, you have learned that the purpose of a successful hospitality business is to provide profits to its customers (not itself), and as a result, increase those customers’ wealth (not the wealth of the business’s owners). Businesses that effectively service their customers’ needs will prosper, achieving high levels of their own operating profits and producing attractive ROIs for the owners of the business. Henry Ford nicely summarized this: A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large. Henry Ford It is a concept well understood by outstanding hospitality leaders as well. Ray Kroc, founder of McDonald’s, put it this way: If you work just for money, you’ll never make it; but if you love what you’re doing and you always put the customer first, success will be yours. Ray Kroc (Founder of McDonald’s) The purpose of professional revenue management is to significantly increase company profits and owners’ ROIs through advanced revenue management and strategic pricing techniques. These techniques are always customer-needs driven, not company-needs driven. Revenue managers effectively manage revenue. What does it mean to manage revenue? The answer is too complex to provide in one or two sentences. In fact, it will take the entire contents of this book for you to learn what it truly means to become a professional at managing revenue in a hospitality setting. This book will teach you to be a customer-centric manager of revenues. Essential RM Terms Revenue manager: The individual or team responsible for ensuring that a company’s prices match a customer’s willingness to pay. Abbreviated in this book as RM. Customer-centric revenue management: A revenue management philosophy that places customer gain ahead of short-term revenue maximization in revenue management decision making. c01IntroductionToRevenueManageme12 Page 12 9/6/10 9:03:59 AM f-392 12 /Users/f-392/Desktop/06::09::10 CH AP TE R 1 INTROD UCTION TO R E V ENUE M ANAG EM ENT You have already learned that only those businesses that provide their customers true value will stay in business. As a result, one way to consider the overall purpose of successful revenue managers is to recognize that their role is to help their businesses succeed by ensuring that customers receive true value in every transaction made with that business. For hospitality businesses, that means employing pricing strategies that result in charging prices that informed customers will willingly pay for the right products, in the right quantities, through the right Essential RM Term channels, and at the right times. Channel: A source of business customers. Also, Revenue management can be thought of as the entire a vehicle used to communicate with a source of set of strategies addressing the issue of value offered to cuscustomers. tomers. Strategic pricing is concerned with establishing a Also known as a distribution channel. selling price that best communicates the value provided to customers. When businesses set prices at levels that customers choose to freely and willingly pay, they acknowledge that customers are seeking the value provided by what they are buying and also that their own wealth increases when the customers buy. The process of setting that price, however, is complex. It requires revenue managers and those responsible for marketing to understand their customers well and to apply and communicate sophisticated pricing strategies with great skill. This book will show you exactly how to do just that. THE PURPOSE AND DESIGN OF THE BOOK If you can agree that your primary role as a revenue manager is to make your company, its owners, and you prosper by first making your customers prosper, you are ready to learn how revenue managers create prices that customers are willing to pay. To help you learn how to make your customers rich, this book is divided into four major parts. 䊏 䊏 䊏 䊏 Part I: Revenue Management Principles Part II: Revenue Management for Hoteliers Part III: Revenue Management for Foodservice Operators Part IV: Revenue Management in Action Each part contains information that all revenue managers must understand. This is so because just as hoteliers initially learned much about rooms pricing from other businesses (e.g., the commercial airline industry), today’s hoteliers can learn a good deal about RM and pricing from professionals in the foodservice industry. Likewise, restaurateurs can learn much about pricing from those in the lodging business. All revenue managers need to understand the application and evaluation of revenue management strategies and tactics. The following will give you an overview of the specific information that is contained in this book’s remaining chapters, as well as why it is important for you to know about it. c01IntroductionToRevenueManageme13 Page 13 9/6/10 9:03:59 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE AND DESIG N OF TH E BOOK 13 Part I: Revenue Management Principles Part I of this book consists of five chapters. These chapters will introduce you to the foundational principles of revenue management. In business, managing revenue means accomplishing the very complex task of establishing and managing prices for the products and services the business offers for sale. Understanding how to do this well is critical to the success of your business. You have now completed most of Chapter 1 (Introduction to Revenue Management). In Chapter 2 (Strategic Pricing), you will learn about the important role that thoughtful pricing plays in business, as well as the serious limitations of utilizing either a supply and demand-based or a cost-based, rather than customer value-based, approach to pricing. While it is easy to take the position that a hospitality operation’s prices should be based on the economic theories of supply and demand, a closer look at those theories reveals that they are not a solid foundation for establishing prices or for managing revenue. In Chapter 2, you will learn why this is so. In Chapter 2, you will also learn that the rationale for the traditional cost-based pricing approach was that, because revenue minus costs equal profits, costs were the single most important consideration in the creation of business profits. As a result, to maximize profits, it was believed, an organization should carefully manage its costs. It would then be following the advice given by U.S. Steel company founder Andrew Carnegie, who stated that a business should “Watch costs and the profits take care of themselves.”4 As reasonable as Carnegie’s statement appears, you will discover why an undue focus on costs, as well as relating production costs directly to selling price, are both woefully inefficient and ineffective revenue management strategies. In Chapter 3 (Value), you will come to know what all successful sellers must learn— namely, that individual consumers’ own perceptions of the value and worth of a product is the primary reason they are willing to buy it. In addition, you will discover why consumer perceptions of value are more important to them than the supply of your product, its scarcity, your production costs, or your planned profits. This chapter carefully examines the profound but frequently unrecognized truth: Value (like beauty) is in the eye of the beholder. In this same chapter, you will see why lessons you can learn from public auctions such as those held on eBay are critical to your understanding of consumer buying behavior and, ultimately, to your strategic pricing. In an eBay auction, there are many bidders when the 䉴 RM ON THE WEB 1.1 Establishing prices strategically is a challenge for businesses in every industry. The Professional Pricing Society (PPS) is an association made up of individuals responsible for managing prices and revenues in many business segments. PPS offers its members workshops, conferences, training, and certification. You can learn more about this very specialized professional organization by exploring their site at: www.pricingsociety.com When you arrive, click on Pricing Experts Directory to see a list of consulting companies that specialize in providing pricing-oriented advisory services. c01IntroductionToRevenueManageme14 Page 14 9/6/10 9:04:00 AM f-392 14 /Users/f-392/Desktop/06::09::10 CH AP TE R 1 INTROD UCTION TO R E V ENUE M ANAG EM ENT price is low. As the amount bid increases, the number of potential buyers decreases. Finally, all but the winning bidder drops out. The resulting lesson is not that only a few consumers are willing to pay high prices. Rather, the lesson to be learned from an eBay auction can be briefly summarized as follows: Different people, with identical information, about identical products, but under different buying circumstances, assign different personal values to the same product. For virtually every product on earth, different customers will hold different opinions about what that product is worth. This is why some buyers are willing to pay over $1,000 for a pound of Tsar Imperial Beluga caviar, while others would not consider paying even $1.00 to eat it, but might be willing to part with $1,000 rather than to be forced to eat it. Applying lessons from an eBay auction to your own revenue management (hereafter called RM) activities will allow you to differentiate among your customers and your prices. Doing so will help you identify the customers who willingly, and gladly, pay the prices charged for your products and services, as well as those who would resist buying from you regardless of the prices you charge. In this important chapter you will also learn about the four key buyer-types who purchase hospitality products and exactly what motivates each of them to buy. You will explore how variations in quality, service level, and price directly impact these buyers’ views of value and the importance of communicating the value of your own products and services to them. In the hospitality industry, some professional revenue managers (RMs) emphasize the importance of data management in the revenue optimization process. As a result, mathematical formulas and models take on great importance to them. Other RMs emphasize the importance of their own insight, skill, and experience in making good revenue-optimization decisions. Chapter 3 concludes with a detailed examination of the role data collection and analysis will play in your effort to optimize revenue. It then contrasts the importance of these processes with the equally important task of successfully applying your own insight, experience, and intuition to your future RM-related decision making. Chapter 4 (Differential Pricing) begins with a review of revenue management principles you will have studied thus far. The chapter then investigates in detail precisely how consumers’ differing perceptions of value lead logically to the practice of charging different prices to different customers. You will learn that the best revenue managers do not seek to establish a single price for their products but, rather, establish a set of prices that best satisfies the desires of all of their potential customers. In fact, effective revenue managers utilize a variety of well-established differential pricing techniques that allow them to increase their company’s own profitability by charging different prices to customers with different willingness to pay. Of course, price differentiation must be carefully planned and implemented. As a result, you will learn about the limits associated with differential pricing, as well as eight specific techniques you can use to apply differential pricing effectively. With thoughtful planning and understanding, differential pricing strategies such as offering unique prices based on customer characteristics (e.g., student or senior citizen discounts), the location at which a sale is made, the timing of the sale, and the quantity of product purchased can all be implemented. The specific ways RMs can utilize these approaches will be examined in detail. The distribution channel in which a sale is made (e.g., a third-party Internet site, franchisor web site, or travel agency) can also be used to affect pricing, as can the unique version of product sold. In addition, the concept of bundling (combining) items for special pricing c01IntroductionToRevenueManageme15 Page 15 9/6/10 9:04:00 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE AND DESIG N OF TH E BOOK 15 and the practice of altering price based on payment terms will be presented as effective strategies that can be utilized when implementing differential pricing. Perhaps just as importantly, in Chapter 4 you will discover why differential pricing serves to benefit all of the members of society by ensuring that the maximum number of customers have access to fairly priced hospitality goods and services that can enhance their lives. The chapter concludes by examining the conceptual difference between an RM who practices revenue management and one who practices revenue optimization, which is superior. In Chapter 5 (The Revenue Manager’s Role), you will examine the rationale for making “Revenue Management in the Hospitality Industry” a specialized field of study. The chapter poses and answers this simple question: “Why is specialized knowledge required to effectively price and manage the sale of hospitality industry goods and services?” As you will discover in the chapter, lodging and foodservice products and services must be managed differently from other Essential RM Term consumer products because of their constrained supply. Constrained supply: The condition that exists The effect of constrained supply is evident when you when sellers cannot readily increase the amount consider that many consumer products industries can react of products or services available for sale when to increased demand for their products simply by making consumer demand for them increases. more of them. If, for example, the demand for Apple’s newest iPhone version increases significantly, more of them can be manufactured. In contrast, a hotel that consists of 400 rooms simply cannot sell more than 400 rooms in one night, regardless of how many potential guests want to buy a room. In a similar manner, a restaurant with 200 seats can only offer that same number of seats for sale during its busiest, as well as its slowest, periods of customer demand. The RMs in both these hotel and restaurant examples will find their ability to meet the demands of their customers is restricted; or constrained due to limited supply. Because that is true, the pricing strategies best used in such situations are highly specialized. Even after mastering the conceptual complexities of pricing hard constraint supply and soft constraint products explained in Chapter 5, RMs will find that they are not free to charge whatever they wish for the products and services they sell. Essential RM Terms Hard constraint: A supply constraint that cannot be removed regardless of product demand. Examples include hotel rooms and the capacity of natural gas pipelines. Soft constraint: A supply constraint that can, with sufficient lead time, and/or a reasonable expense, be removed or lessened. Examples include the commercial airline and car rental industries, as well as the taxi business and many foodservice operations. In the United States, businesses have great latitude in setting prices for the things they sell. RMs must recognize, however, that they do not have the unrestricted, unregulated c01IntroductionToRevenueManageme16 Page 16 9/6/10 9:04:00 AM f-392 16 /Users/f-392/Desktop/06::09::10 CH AP TE R 1 INTROD UCTION TO R E V ENUE M ANAG EM ENT ability to determine the fairness of their product and services prices. Nor should they have it. For example, no legitimate case could be made for charging customers different prices based on religion, race, or national origin. Doing so would be morally wrong. It would also be a violation of federal law. Society at large, working through its various governmental entities, now has and will continue to have a direct influence on the prices that may be charged in the hospitality industry. Legislation enacted at the federal, state, and local levels currently influences pricing and revenue optimization decision making in the hospitality industry. This chapter presents and explains the societal rationale for implementing, and the penalties for ignoring, the most significant pieces of pricing-related legislation. All RMs would likely agree that effective revenue optimization must be achieved in a legal manner but the authors argue further that it should also be achieved in an ethical manner. Because of this position, in Chapter 5, you will also examine in detail the significant issues related to ethical aspects of revenue management. Chapter 5 concludes with an examination of the tasks and responsibilities commonly assigned to RMs working in the hospitality industry. As you will learn, the duties performed by RMs and the business titles they hold vary, but commonalities among their jobs do exist. This is because all RMs follow a crucial five-step process, explained in this chapter. Another commonality among RMs in hospitality is the fact that often they will be only one member of a larger group that impacts revenue management decision making. Members of this important group (which also includes customers) do not necessarily share the same RM IN ACTION 1.2: THE ROOM RATE WAS . . . HOW MUCH? Are RMs free to price their products in any manner they choose? Not in Texas. Consider what happened in that state when some Houston area residents sought to escape the threat posed by the rapidly approaching Hurricane Rita. Some travelers escaped the wind and rain, only to find themselves exposed to hotel rooms offered for sale at twice their normal price. The resulting news headline and brief excerpt summarizes what happened next. Texans fleeing a disaster area will have access to standard room rates. We will remain vigilant and will enforce state price gouging laws.” The Texas Deceptive Trade Practices Act prohibits any business from taking advantage of a declared disaster by selling or leasing fuel, food, lodging, medicine, or other necessity at an exorbitant rate. Violators can face penalties of up to $20,000 per incident. Texas Attorney General Settles Price Gouging Complaint. San Antonio’s St. Anthony Hotel Will Pay $190,000 in Consumer Restitution The St. Anthony was not the only hotel fined, and as you will learn in Chapter 5, Texas is not the only state that carefully watches the pricing decisions made by hospitality industry RMs. “Hotels cannot take advantage of Texans during a disaster,” said Texas Attorney General Greg Abbott. “Today’s agreement ensures Excerpted on 8/25/2009 from Texas Attorney General press release posted at www.oag.state.tx.us/consumer/ lawsuits.php?id=2192. c01IntroductionToRevenueManageme17 Page 17 9/6/10 9:04:00 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE AND DESIG N OF TH E BOOK 17 agenda, but they do greatly influence the day-to-day decision making of any hospitality industry RM. As a result, it is important that you understand the roles and goals of these diverse group members. Upon completing this last introductory chapter, you will be ready to apply what you have learned, and what you will learn, to the fascinating challenge of managing revenues in the exciting hospitality industry. Part II: Revenue Management for Hoteliers Part II of this book contains four chapters that present the specific revenue management strategies and tactics used by RMs working in the lodging segment of the hospitality industry. Despite its title Revenue Management for Hoteliers, this part’s content is applicable to those RMs working in full-service hotels, condo-hotels, limited-service hotels, bed and breakfasts, motels, cruise ships, and any other housing facility facing constrained supply of their product, as well as for limited-seating capacity events (e.g., concerts, movies shown in theaters, banquet halls and sporting events). In Chapter 6 (Forecasting Demand), you will learn why it is so important for RMs working in the lodging industry to create accurate estimates of the guest demand for their products. Knowing the number of guests who will be staying in their hotels, or seeking to stay on specific future dates, directly affects both the operation of the property and the specific revenue optimization strategies the hotel will choose to implement. To create accurate demand forecasts, RMs evaluate their hotels’ past performance as well as the current buyer demand for their products and service. They, then, analyze a variety of additional factors to estimate future demand. In this chapter, you will learn about the specific tools RMs use to forecast demand. You will also learn how to analyze and respond to the data these tools produce. This chapter will also explain to you why it is generally counterproductive for an RM to allow guest demand to dictate the prices that will be charged for hotel rooms. Although the authors recognize that implementing yield management as a pricing strategy has long been very popular in the hotel industry, in this chapter you will learn why it can no longer be considered an effective pricing technique. Although the process has been described and practiced in myriad ways, yield management has been defined in the Essential RM Term hospitality industry as “a technique used to maximize the Yield management: A demand-based revenue revenue or yield, obtained from a service operation, given management strategy, first initiated by commercial limited capacity and uneven demand.”5 airline companies. It seeks to maximize income via Because of this book’s view that all revenue managemanipulation of selling prices. ment strategies must be customer driven, yield management, a term sometimes mistakenly used interchangeably with revenue management, will be examined chiefly from its historical perspective and its use by the airline companies that originally developed it. You will learn in Chapter 6 that while yield management was an innovative concept when first introduced by the commercial airline industry, it worked best when consumers’ price-related knowledge was limited. Today, a lodging consumer’s price-related knowledge is clearly not limited. As a result, this chapter presents the case that yield management, as hoteliers have practiced it in the recent past, is not at all an effective strategy for building customer loyalty and repeat business. In fact, honest industry professionals would admit that the practice is now widely viewed by the general public as an opportunistic and excessively greedy business strategy. c01IntroductionToRevenueManageme18 Page 18 9/6/10 9:04:01 AM f-392 18 /Users/f-392/Desktop/06::09::10 CH AP TE R 1 INTROD UCTION TO R E V ENUE M ANAG EM ENT RM IN ACTION 1.3: DIRTY WORDS? USA Today has published its travel team’s 25 pivotal changes that “transformed the way we travel.” Number 14 on the list was “yield management.” This is how it was described: “Yield management—dirty words to travelers . . . now is used universally by airlines, hotels and car rental companies.”6 The article describes how the identified industries adjust prices based on various factors that affect demand for the products they sell. Dirty words? Based on this article, it would appear the hotel industry has not done a good job explaining its pricing rationale to the traveling public. This is an industry communication and marketing problem, not a consumer understanding problem. If you are having difficulty appreciating the very real perception problem consumers frequently have with a pricing system designed to vary prices based on demand rather than on increased operating costs or the value delivered to customers, consider your own reaction to the following hypothetical article if it appeared in today’s edition of USA Today: Gasoline Companies Raise Prices for the Weekend Major gasoline suppliers announced today that, in anticipation of large numbers of drivers hitting the roads for the upcoming holiday weekend, they would be increasing their fuel prices an average of 35 percent for all the grades of gasoline they offer for sale. Said Tom Jones, spokesperson for the Acme Oil Company, one of the country’s largest suppliers of gasoline, “Our historical records and future forecasts tell us there will be big demand for gasoline this weekend so we will sell lots of it. Because so many people will want gas, we decided it would be a good idea for us to raise our prices $1.00 per gallon effective at 8:00 A.M. Friday morning, but we’ll reduce our prices again after the weekend is over and travel returns to normal. If you had just finished reading the article and you were a driver planning a long holiday trip, would you too have dirty words for Mr. Jones and his company? In Chapter 6 you will also learn that accurate demand forecasts have a significant impact on legitimate pricing tactics used by lodging industry RMs. This is so because nearly all RMs working in lodging will be managing a hard constraint supply, while their restaurateur counterparts typically encounter soft constraint supply. As a result, the pricing strategies undertaken by lodging RMs who create and analyze various types of demand forecasts are different from their restaurant industry counterparts. For lodging industry RMs, the impact of demand on price, the impact of price on demand, and the impact of demand forecasts on revenue optimization strategies are all important concepts. After reading Chapter 6, you will know why and how you can forecast future demand for your business. In Chapter 7 (Inventory and Price Management), you will learn how lodging-industry RMs monitor the number of rooms available for sale and the prices to be charged for them. By doing so, they can maximize income and actually increase the amount of revenue generated by their properties without raising their prices. In fact, effective inventory management can even allow an RM to increase total revenues when reducing prices! c01IntroductionToRevenueManageme19 Page 19 9/6/10 9:04:01 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE AND DESIG N OF TH E BOOK 19 The way RMs ultimately manage room availability is affected by the type of customer who purchases the room. In this chapter, you will learn the inventory-control techniques RMs use when reserving rooms for their individual guests and for guests who are part of a group or those who have a special contractual arrangement with the hotel. One of the biggest issues facing lodging industry RMs relates to selling rooms when none are available for sale. Essential RM Term The overbooking of hotel rooms is a controversial issue within the hotel industry and can be the cause of signifiOverbook: To accept reservations for more rooms cant customer and hotel staff frustration. In Chapter 7 you than a hotel has available or in inventory. will examine the financial, legal, and ethical aspects of Sometimes referred to as overselling or being overbooking. oversold. RMs must thoroughly understand the concept of pricing. In Chapter 7 you will review the most important of the hospitality industry’s traditional room pricing theories and strategies. Looking backward prior to looking forward is important in many areas of knowledge, because, as Aristotle stated; “If you would understand anything, observe its beginning and its development.”7 In this chapter, you will also learn how hoteliers currently establish their room rates as well as how they can impose special restrictions on guests’ purchases to impact the amount of income generated from room sales. The chapter concludes with a summary of inventory and price management principles important to RMs. Hoteliers seek to make it as easy as possible for guests to make room reservations. As a result, today’s hotel guests can reserve a room using a variety of different methods. In Chapter 8 (Distribution Channel Management), you will learn how RMs administer various sources of room reservations. As an RM you will manage different channels in different ways because each is unique. For example, in some distribution channels a representative of the hotel is in direct contact with the guests. This is true, for example, of the guest who arrives at a hotel without a room reservation and immediately seeks information about room availability and rates. Alternatively, for those guests making reservations using the Internet, no direct personal contact takes place but critical information is exchanged nonetheless. In Chapter 8, you will learn that distribution channels can be classified as either electronic or nonelectronic. Nonelectronic channels include those designed to make room sales to individuals who are physically on the hotel property, as well as to those who may call the property. In addition to those hotel staff who greet guests in person or answer phone calls, a hotel’s sales and marketing staff represents an additional distribution channel. In nearly all cases, another important additional source of room sales will be the locally funded nonprofit entity responsible for promoting travel and tourism to the area in which the hotel is located. In this chapter, you will learn how each of these nonelectronic channels can help you optimize your property’s revenue. Direct customer contact is important, but increasingly, guests utilize one or more electronic sources to secure information about hotels and to make their sleeping room or meeting room reservations. The Internet is a well-known distribution channel but in this chapter you will learn that there are at least three distinctly different distribution channels housed on the Internet, and each must be managed differently. RMs know that there are important electronic distribution channels that operate in addition to the Internet, and c01IntroductionToRevenueManageme20 Page 20 9/7/10 3:35:37 PM f-392 20 /Users/f-392/Desktop/07_09_10/JWCL402/New File CH AP TE R 1 INTROD UCTION TO R E V ENUE M ANAG EM ENT these must also be well understood by you. In this chapter, you will learn about all of the major channels of distribution and the rationale associated with using each one. As well, you will learn specific principles related to managing each of these channels to optimize your revenues. In Chapter 9 (Evaluation of Revenue Management Efforts in the Lodging Industry), you will learn how a hotel RM’s performance can be evaluated. The assessment of a revenue management team’s efforts can be internal or external, scheduled or sporadic, and in-depth or cursory, but all RMs need to understand the tools commonly used for their evaluations, as well as the strengths and weaknesses of each measure. The chapter begins with an examination of the RM paradox of balancing average daily rate (ADR) maximization with that of occupancy percentage maximization. Essential RM Terms Average daily rate (ADR): The average (mean) selling price of guest rooms during a specific time period, such as a day, week, month, or year. The formula for ADR is: Total room revenue ⫼ Total rooms sold ⫽ ADR Occupancy percentage: The number of rooms sold during a specific time period; expressed as a percentage of all rooms available to sell during that same period. The formula for occupancy percentage is: Total rooms sold ⫼ Total rooms available for sale ⫽ Occupancy percentage In most hotel markets, it is easy for an RM to significantly increase room rates (ADR); however, doing so will most often reduce occupancy rates. In a similar manner, achieving high occupancy rates is relatively easy, but only if ADRs are significantly reduced. This paradox has resulted in the lodging industry’s development of a variety of sophisticated measurements that will be used to evaluate your revenue management-related decision making. In Chapter 9 you will learn about all of these. Knowing about them is important because in many cases the measurement tools are used to appraise your personal performance. As well, they are the same ones used by internal and external reviewers to evaluate the financial results achieved by your hotel. Today, RMs are most often evaluated by using one or more of the following industrystandard revenue generation assessment tools: RevPAR RevPOR GOPPAR c01IntroductionToRevenueManageme21 Page 21 9/6/10 9:04:01 AM f-392 /Users/f-392/Desktop/06::09::10 TH E PURPOSE AND DESIG N OF TH E BOOK 21 Essential RM Terms RevPAR: Short for “revenue per available room.” It is the average revenue generated by each available guest room during a specific period of time. The two formulas for RevPAR yield identical results and are: ADR ⫻ Occupancy percentage 5 RevPAR or Total revenue 5 RevPAR Total rooms available for sale Unless otherwise stated, the revenue figure utilized for RevPAR calculations is “rooms revenue” only. RevPOR: Short for “revenue per occupied room,” the average revenue generated by each occupied guest room during a specific period of time. The formula for RevPOR is: Total revenue 5 RevPOR Total occupied rooms Unless otherwise stated, the revenue figure utilized for RevPOR calculations consists of “all rooms and non-rooms revenue.” GOPPAR: Short for “Gross operating profit per available room.” This is the average gross operating profit (GOP) generated by each available guest room during a specific period of time. Also written as GoPAR. The formula for GOPPAR is: Total revenue 2 Management controllable expense 5 GOPPAR Total rooms available for sale The revenue figure utilized for GOPPAR calculations consists of all rooms and nonrooms (total) operating revenue. In addition, you ...
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Running head: REVENUE MANAGEMENT

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Revenue Management
Name
Institution

REVENUE MANAGEMENT

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Revenue Management

Pricing Hard Supply Constraint Products and Soft Constraint Products, and those with no
supply Constraint.
Hard supply constraint products have limited supply at any given moment, and thus
operators offer them in relation to demand since they cannot be increased; example of these
products are, numbers of rooms in a hotel, number of seat in airplane among others (Hayes &
Miller, 2011) and prices vary with the demand. Soft constraint products are commodities whose
supply can be increased to meet the increase in demand but maybe not at the time when the
demand is very high, and thus it...


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