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Chapter 13: Revenue Management

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Managing Front Office Operations 9th Ed.
Chapter 13 - Revenue Management

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Chapter 13: Revenue Management

  1. 1. Chapter 13: Revenue Management Competencies for Revenue Management 1. Explain the concept of revenue management, and discuss how managers can maximize revenue by using forecast information in capacity management, discount allocation, and duration control. 2. Discuss common formulas managers use to measure and manage revenue. 3. Explain how revenue management decisions are affected by group room sales, transient room sales, other revenue opportunities, local and area-wide activities, special events, and fair market share forecasting. 4. Discuss the revenue manager’s role and position, summarize typical revenue meetings, outline potential tactics to use in periods of high and low demand, discuss revenue management tactics, and explain how revenue management software helps hotel managers. Managing Front Office Operations PowerPoint 1
  2. 2. Chapter 13: Revenue Management Disadvantages of Occupancy Percentage and Average Daily Rate as Performance Measures • Occupancy Percentage and Average Daily Rate are both one-dimensional analyses. As a result, neither of these measuring sticks captures the relationship between these two factors and the room revenue they produce. • For example, a hotel may decrease its room rates, or ADR, in an effort to increase occupancy. This strategy will improve the occupancy percentage but does not account for the revenue lost because of lower room rates. In addition, it does not take into account the cost per occupied room, which can reduce overall profitability. • Conversely, increases in room rates, or ADR, may be accompanied by a decline in occupancy percentage, which means that some revenue will be lost because rooms that might have been sold at lower rates will remain unsold. Managing Front Office Operations PowerPoint 2
  3. 3. Chapter 13: Revenue Management Why Revenue Management Is a Better Performance Measure • Revenue management presents a more precise measure of performance than either Occupancy Percentage or Average Daily Rate because it combines occupancy percentage and ADR into a single statistic. • Revenue management is an evaluative tool that allows the front office manager to use potential revenue as the standard against which actual revenue can be compared. • With the use of specialty application software, revenue management calculations can be automatically performed very quickly and accurately. Managing Front Office Operations PowerPoint 3
  4. 4. Chapter 13: Revenue Management History of Revenue Management The concept of revenue management originated in the airline industry, but has since proven successful in these industries: • Lodging • Car rental • Cruise line • Railroad • Touring Managing Front Office Operations PowerPoint 4
  5. 5. Chapter 13: Revenue Management Flexibility of Revenue Management Once hotel managers began using revenue management strategies, they recognized that room rates could accurately be adjusted based upon the demand of specific market segments, such as the following: • Business travelers booking less than seven days prior to arrival • Leisure travelers booking three to six months in advance of arrival • Members of the hotel’s frequent guest program • Travelers making reservations over the Internet • Travelers making reservations at the hotel’s website • Travelers requiring car rentals, airline reservations, and other components of a complete travel package Managing Front Office Operations PowerPoint 5
  6. 6. Chapter 13: Revenue Management The Key to Successful Revenue Management The key to successful revenue management is: • To sell the right product (guestrooms, banquets, ancillary services) • To the right customer (business, leisure, convention, or government guest) • On the right day (weekday, weekend), • For the right price (rack rate, corporate rate, group rate, government rate, or discount rate). Managing Front Office Operations PowerPoint 6
  7. 7. Chapter 13: Revenue Management Potential Scope of Revenue Management Techniques Hotels can use revenue management techniques to evaluate the total revenue potential of a guest or group, including revenue from: • The sale of food and beverages • Telephone service • Internet access • Spa services • Fitness center services • Business center services • Other hotel goods and services Managing Front Office Operations PowerPoint 7
  8. 8. Chapter 13: Revenue Management Revenue Management Is Based on Supply and Demand Prices tend to rise when demand exceeds supply, which is why revenue management seeks to increase revenue by focusing on high-profit bookings instead of high-volume bookings to high-profit bookings. As a result: • By increasing bookings on low-demand days and by selling rooms at higher room rates on high-demand days, the industry can improve its profitability. • In general, room rates should be higher (in order to maximize rate) when demand exceeds supply and lower (in order to increase occupancy) when supply exceeds demand. Managing Front Office Operations PowerPoint 8
  9. 9. Chapter 13: Revenue Management The Critical Importance of Forecasting All hotel companies share a common problem: they have a fixed inventory of perishable products and there is no way to recover the time and revenue lost. Revenue management strategies seek to address this issue by maximizing the efficiency of the sales that are made, but this cannot be done without the ability to forecast effectively. Thus, managers need: • Reliable information upon which to base their forecasts. • A thorough understanding of the property they manage and the competitive market in which the property operates. • To consider future events—or variables—that might affect business. Managing Front Office Operations PowerPoint 9
  10. 10. Chapter 13: Revenue Management Other Applications of Demand-Forecasting Strategies • Room reservation systems • Management information systems • Room and package pricing • Rooms and revenue management • Seasonal rate determination • Pre-theater dinner specials • Special, group, tour operator, and travel agent rates Managing Front Office Operations PowerPoint 10
  11. 11. Chapter 13: Revenue Management Benefits of Revenue Management • Improved forecasting • Improved seasonal pricing and inventory decisions • Identification of new market segments • Identification of market segment demands • Enhanced coordination between the front office and sales divisions • Determination of discounting activity • Improved development of short-term and long-term business plans • Establishment of a value-based rate structure • Increased business and profits • Savings in labor costs and other operating expenses • Initiation of consistent guest-contact scripting Managing Front Office Operations PowerPoint 11
  12. 12. Chapter 13: Revenue Management Common Guest Segments • Group guests • Business travelers • Leisure guests • Government travelers • Contract guests Managing Front Office Operations PowerPoint 12
  13. 13. Chapter 13: Revenue Management Revenue Management Methods • Capacity management Balances risks of overbooking against potential loss of revenue from reservation cancellations, early departures, and no-shows • Discount allocation Restricts time period and product mix (rooms) available at reduced or discounted rates • Duration control Places time constraints on accepting reservations in order to protect rooms for multi-day reservations (which represent higher levels of revenue) Managing Front Office Operations PowerPoint 13
  14. 14. Chapter 13: Revenue Management Factors That Have Made Group Attrition Increasingly Important • Group history • Online shopping • Business sourcing Managing Front Office Operations PowerPoint 14
  15. 15. Chapter 13: Revenue Management Ways to Reduce Group Attrition • Restricting attendance at meetings to those who stay at host hotels • Charging higher registration fees to attendees who stay elsewhere • Restricting transportation options for attendees who do not stay at host hotels • Charging competitive rates so that there is no incentive to stay elsewhere Managing Front Office Operations PowerPoint 15
  16. 16. Chapter 13: Revenue Management Two Ways to Calculate Potential Revenue • Some resorts calculate their potential revenue as the amount the resort would earn if all rooms were sold at the double occupancy rate. • Commercial hotels often calculate their potential revenue by taking into account the percentage mix of rooms normally sold at both single and double occupancy. Managing Front Office Operations PowerPoint 16
  17. 17. Chapter 13: Revenue Management Revenue Management Formulas • Formula 1: Potential average single rate • Formula 2: Potential average double rate • Formula 3: Multiple occupancy percentage • Formula 4: Rate spread • Formula 5: Potential average rate • Formula 6: Room rate achievement factor • Formula 7: Yield statistic Continued Managing Front Office Operations PowerPoint 17a
  18. 18. Chapter 13: Revenue Management Revenue Management Formulas • Formula 8: RevPAR • Formula 9: Identical yields • Formula 10: Equivalent occupancy • Formula 11: Required non-room revenue per guest • RevPAG • GOPPAR Continued from previous slide… Managing Front Office Operations PowerPoint 17b
  19. 19. Chapter 13: Revenue Management Potential Average Single Rate Single Room Revenue Rack Rate Number of Rooms Sold as Singles Managing Front Office Operations PowerPoint 18
  20. 20. Chapter 13: Revenue Management Potential Average Double Rate Double Room Revenue Rack Rate Number of Rooms Sold as Double Managing Front Office Operations PowerPoint 19
  21. 21. Chapter 13: Revenue Management Multiple Occupancy Percentage Number of Rooms Sold as Double Total Rooms Sold Managing Front Office Operations PowerPoint 20
  22. 22. Chapter 13: Revenue Management Rate Spread Potential Average Double Rate Potential Average Single Rate Managing Front Office Operations PowerPoint 21
  23. 23. Chapter 13: Revenue Management Potential Average Rate (Multiple Occupancy % Rate Spread) Potential Average Single Rate Managing Front Office Operations PowerPoint 22
  24. 24. Chapter 13: Revenue Management Room Rate Achievement Factor Actual Average Rate Potential Average Rate Managing Front Office Operations PowerPoint 23
  25. 25. Chapter 13: Revenue Management Yield Statistic Formulas Formula #1 Actual Rooms Revenue Potential Rooms Revenue Formula #2 Room Nights Sold Actual Average Room Rate Room Nights Available Potential Average Rate Formula #3 X Occupancy Percentage Room Rate Achievement Factor Managing Front Office Operations PowerPoint 24
  26. 26. Chapter 13: Revenue Management RevPAR Formulas Formula #1 Actual Room Revenue Available Rooms Formula #2 Occupancy Percentage Average Daily Rate Managing Front Office Operations PowerPoint 25
  27. 27. Chapter 13: Revenue Management Identical Yields Identical Yield Occupancy Percentage = Current Occupancy Percentage X Current Average Rate Proposed Average Rate Managing Front Office Operations PowerPoint 26
  28. 28. Chapter 13: Revenue Management Equivalent Occupancy Equivalent Occupancy = Current Occupancy Percentage X Current Contribution Margin New Contribution Margin Managing Front Office Operations PowerPoint 27
  29. 29. Chapter 13: Revenue Management Discount Grids • Discount grids are used to assist management in evaluating room rate discounting strategies. • To prepare a discount grid, first calculate the marginal cost of providing a guestroom. • Next, integrate this information into the equivalent occupancy formula and perform the calculations to fill in the grid. • It is quite time-consuming to complete a discount grid manually; spreadsheet programs greatly simplify the process. Managing Front Office Operations PowerPoint 28
  30. 30. Chapter 13: Revenue Management Breakeven Analysis A breakeven analysis involves calculating or estimating: • The net change in room revenue due to room rate changes • The amount of net non-room revenue needed to offset any reduction in net room revenue (when room rates are discounted) or the amount of net room revenue needed to offset any reduction in net non-room revenue (when room rates are increased) • The average amount each guest spends in non-room revenue centers • The change in occupancy likely to result from room rate changes Managing Front Office Operations PowerPoint 29
  31. 31. Chapter 13: Revenue Management Required Non-Room Revenue per Guest Required Non-Room Revenue per Guest = Required Increase in Net Non-Room Revenue Number of Additional Guests ÷ CMRw Managing Front Office Operations PowerPoint 30
  32. 32. Chapter 13: Revenue Management RevPAG and GOPPAR RevPAG = Total Revenue Number of Guest Departmental Revenues – Departmental Expenses Number of Available Rooms GOPPAR = Managing Front Office Operations PowerPoint 31
  33. 33. Chapter 13: Revenue Management Elements of Revenue Management Strategies • Group room sales • Transient room sales • Other revenue opportunities • Local and area-wide activities • Special events • Fair market share forecasting Managing Front Office Operations PowerPoint 32
  34. 34. Chapter 13: Revenue Management Group Room Sales–Pros and Cons When a group room sales request comes in, the decision about whether to accept the request is made at a revenue meeting after considering these questions: • Does the group request fit into the hotel’s strategy for the period? For example, the group requires 100 rooms, but that number will exceed the group allocation for the period. • Are there other groups who are interested in the same period? • What meeting space will the group require? Is it proportionate to the contracted number of guestrooms? Continued Managing Front Office Operations PowerPoint 33a
  35. 35. Chapter 13: Revenue Management Group Room Sales–Pros and Cons • What impact will this group have on booking additional group Continued from previous slide… business for the same dates? • What is the group willing to pay in room rate? • Do the food and beverage functions include catered events or will the group use the hotel’s restaurants? • What revenue can the hotel plan to earn for rooms, food and beverage, and other sources? Managing Front Office Operations PowerPoint 33b
  36. 36. Chapter 13: Revenue Management Group Room Sales and Room Revenue To understand how group sales will affect overall room revenue, the hotel should collect information on: • Group booking data • Group booking pace • Anticipated group business • Group booking lead time • Displacement of transient business Managing Front Office Operations PowerPoint 34
  37. 37. Chapter 13: Revenue Management Group Booking Data Management should carefully examine every group block to try to determine whether the number of rooms may need to be modified for any of the following reasons: • Anticipated cancellations • Historical overestimation of the number of rooms needed • Greater demand than originally anticipated by the group leader Managing Front Office Operations PowerPoint 35
  38. 38. Chapter 13: Revenue Management The Wash Factor • Groups tend to block 5 percent to 10 percent more rooms than they are likely to need, in optimistic anticipation of the number of attendees. • The hotel’s deletion of unnecessary group rooms from a group block is called the wash factor. • Management needs to be careful in estimating how many rooms should be “washed” from the block–if a group block is reduced by too many rooms, the hotel may find itself overbooked and unable to accommodate all of the members of the group. Managing Front Office Operations PowerPoint 36
  39. 39. Chapter 13: Revenue Management Group Booking Pace • The rate at which group business is being booked is called the group booking pace. • Once a hotel has accumulated several years of group booking data, it can often identify a historical trend that reveals a normal booking pace for each month of the year. • Although this forecasting process appears simple, it can become very complicated due to unanticipated fluctuations, such as a one-time, city-wide convention. These variations should be noted so that they can be recognized in future booking pace forecasting. • Management should strive to maintain a straightforward method for tracking group booking pace. Managing Front Office Operations PowerPoint 37
  40. 40. Chapter 13: Revenue Management Anticipated Group Business • Most national, regional, and state associations, as well as some corporations, have policies governing the locations of annual meetings–for example, a group may rotate its meeting location among three cities, returning to each one every three years. • Although such a group will not necessarily return to the same hotel in the area, it may displace other group and non-group business that will need to find alternate accommodations in the area. • The hotel analyzing such data can then forecast the “pressure” in the market and adjust its selling strategies accordingly. • Tentative bookings that await final contract negotiations also should be included in the revenue management analysis. Managing Front Office Operations PowerPoint 38
  41. 41. Chapter 13: Revenue Management Group Booking Lead Time • Booking lead time measures how far in advance bookings are made. • Corporate group bookings tend to be smaller than association meetings and are often made within a year of the planned event; larger association meetings may book two to five years in advance to ensure the availability of the required guestrooms and meeting space. • Management should determine its hotel’s lead time for group bookings so that booking trends can be charted. • Booking trends can be combined with booking pace information to illustrate the rate at which the hotel is booking group business compared with historical trends. • This information can be very important when determining whether to accept an additional group and at what room rate to book the new group. Managing Front Office Operations PowerPoint 39
  42. 42. Chapter 13: Revenue Management Displacement of Transient Business • Management should consult its demand forecast when determining whether or not to accept additional group business. • Displacement occurs when a hotel accepts group business at the expense of “transient guests”–guests who are not affiliated with a group registered with the hotel. • Since transient guests often pay higher room rates than group members and may be more likely to use hotel dining rooms, this situation warrants close scrutiny. Managing Front Office Operations PowerPoint 40
  43. 43. Chapter 13: Revenue Management Dynamic Packaging • Dynamic packaging is the customization of a travel package according to each specific guest’s needs. • Dynamic packaging differs from the traditional custom of static packaging, by which services were bundled into a single package without personalization or customization, with the result that some guests paid for services they did not intend to use. • By contrast, dynamic packaging enables each guest to choose desired services and amenities, which in turn increases the perceived value of the package for the traveler. Continued Managing Front Office Operations PowerPoint 41a
  44. 44. Chapter 13: Revenue Management Dynamic Packaging Continued from previous slide… • Dynamic packages may include airline tickets, hotel guestrooms, car rental agreements, recreational activities, sporting events, dining certificates, spa offerings, entertainment tickets, and other hospitality-related components. • Hotels usually find dynamic packaging especially effective during anticipated periods of low occupancy. • Hotels typically control the number of guestrooms available for dynamic packaging. • Dynamic packaging also offers the opportunity for upselling. Managing Front Office Operations PowerPoint 41b
  45. 45. Chapter 13: Revenue Management Transient Room Sales • Transient business–rooms sold to non-group travelers–is usually booked closer to the date of arrival than group business. • A commercial hotel may book a majority of its group business three to six months before arrival, but transient business only one to three weeks before arrival; at a resort hotel, group bookings may be established one to two years in advance, while transient business may be booked three months in advance. • As with group business, management must monitor the booking pace and lead time of transient business to understand how current reservations compare with historical and anticipated rates. • The result is that transient room rate discounting is an especially complex subject. Managing Front Office Operations PowerPoint 42
  46. 46. Chapter 13: Revenue Management Transient Room Rate Discounting • To build business, hotels may offer rooms at discounted rates to attract guests during times of low demand. • Discounts can be offered to corporate and government travelers, as well as senior citizens, military and airline personnel, travel agents, and others. Quite often, these discounts apply to a substantial portion of a hotel’s business. Continued Managing Front Office Operations PowerPoint 43a
  47. 47. Chapter 13: Revenue Management Transient Room Rate Discounting • An astute manager must know when to eliminate room rate Continued from previous slide… discounts. If room rates are increased too soon, occupancy may be lost. If room rates are increased too late, some rooms may be sold for less than they could have been sold for. When the front office manager believes that rooms can be sold at a higher rate without an offsetting loss in occupancy, any discounts that can be closed should be closed. • Conversely, a higher rate may be charged during periods of high demand, although hotels must consider whether a large increase is a good business practice. Many states require that room rates be posted in each room to limit this practice. Managing Front Office Operations PowerPoint 43b
  48. 48. Chapter 13: Revenue Management Revenue Management Decisions Must Consider All Revenue Opportunities • A hotel that offers meeting and banquet space, recreational facilities, spas, and other revenue centers gives guests many more opportunities to consider and gives management more revenue opportunities to evaluate. • Negotiations with meeting and wedding planners focus on the total package of meeting space, banquet service, audiovisual equipment rentals, etc., rather than focusing narrowly on guestroom rates. • A revenue management analysis must consider all revenue opportunities affecting potential profitability to determine the economic value of the total business to the hotel. • Only after such analysis can management calculate a meaningful room rate. Managing Front Office Operations PowerPoint 44
  49. 49. Chapter 13: Revenue Management Concessions • Meeting planners may request concessions from hotel management in consideration of the meeting, such as providing a meeting space for at no charge and/or reducing the cost of other aspects of the meeting. • Other concessions may include: a VIP suite for the meeting’s leader at no charge; reduced guestroom rates; discounts on meeting room rental, food and beverage pricing, and audiovisual rental; complimentary items, such as daily decorative flowers or a wine and cheese tray, being placed in the VIP suite. • Since concessions represent a loss in revenue, all such low- or no-cost items must be individually negotiated before the hotel determines a fair value for the meeting. Managing Front Office Operations PowerPoint 45
  50. 50. Chapter 13: Revenue Management Local and Area-Wide Activities • It is crucial for a front office manager to be aware of any trend or event that has the potential to affect demand for room sales. • Convention business may render a trend analysis of group and transient activity invalid–if the booking pace of either group or transient rooms sales is significantly altered, the front office manager should immediately investigate. • It is appropriate and legal for competitors to occasionally meet and discuss general business trends. • However, it is illegal under U.S. antitrust laws to discuss room rates or the establishment (fixing) of room rates. Managing Front Office Operations PowerPoint 46
  51. 51. Chapter 13: Revenue Management Special Events • Special events in or near a hotel such as holiday celebrations, concerts, festivals, and sporting events make it possible for hotels to significantly increase revenues. • A minimum length of stay may be required and room discounts may be eliminated. • However, care must be taken not to alienate frequent travelers. Managing Front Office Operations PowerPoint 47
  52. 52. Chapter 13: Revenue Management Fair Market Share Forecasting • Fair market share forecasting involves understanding how well the hotel is doing in relation to the competition. • A primary tool for this analysis is the Smith Travel Accommodations Report, or STAR report. • An analysis should be conducted whenever the STAR report arrives. The STAR report should also be used for forecasting the next several months and the same period next year. • While the STAR report is very valuable, it tends to be somewhat historical in nature. • As a result, managers should also consult forward-looking sources, such as a series of reports produced by TravelCLICK. The series includes Hotelligence, Internet Hotelligence, and RateVIEW/Phaser. Managing Front Office Operations PowerPoint 48
  53. 53. Chapter 13: Revenue Management Revenue Manager Skills and Qualities • Operational skills • Analytical skills • Strategic skills • Organizing skills • Communications skills • Good listening skills • Team-building skills • Training skills • Patience • Creativity • Cooperativeness • Flexibility Managing Front Office Operations PowerPoint 49
  54. 54. Chapter 13: Revenue Management Revenue Management Meeting Participants • General manager • Sales managers • Catering managers • Reservations manager • Front office manager • Food and beverage manager Managing Front Office Operations PowerPoint 50
  55. 55. Chapter 13: Revenue Management Uses of Revenue Meeting Forecasts • Knowing how many guests are in-house can help food and beverage prepare • Rate changes and adaptations in selling strategy affect the sales department • Occupancy percentages will affect housekeeping and uniformed services Managing Front Office Operations PowerPoint 51
  56. 56. Chapter 13: Revenue Management Daily Revenue Meetings During daily revenue meetings, the team typically: • Reviews the three-day forecast and makes sure that previously agreed-upon strategies and tactics are still in place. • Reviews the previous day’s (or weekend’s) occupancy, room revenue, ADR, and yield statistic. • Reviews the booking pace for near-term business (usually within three months). • Reviews old business. Continued Managing Front Office Operations PowerPoint 52a
  57. 57. Chapter 13: Revenue Management Daily Revenue Meetings • Presents new business. • Discusses any last-minute adjustments that need to be made. • Determines what information must be circulated as part of Continued from previous slide… the interdepartmental communication plan. • Reviews the 30–60 day outlook and communicates any updates in those forecasts. • Reviews current channel distribution strategies. Managing Front Office Operations PowerPoint 52b
  58. 58. Chapter 13: Revenue Management Weekly Revenue Meetings At weekly meetings, the team might meet for an hour to: • Review forecasts for 30, 60, 90, and 120 days out. • Discuss strategies for upcoming critical periods. Managing Front Office Operations PowerPoint 53
  59. 59. Chapter 13: Revenue Management Monthly Revenue Meetings At monthly meetings, members of the revenue management team discuss “big-picture” issues, such as: • How to address slow months • Efforts that might boost sales, such as additional marketing, appeals to locals, or special sales force deployment • A review of the ongoing annual forecast • Providing any necessary training on revenue management skills Managing Front Office Operations PowerPoint 54
  60. 60. Chapter 13: Revenue Management High-Demand Tactics • Close or restrict discounts • Apply minimum length of stay restrictions carefully • Reduce group room allocations • Reduce or eliminate 6 p.m. holds • Tighten guarantee and cancellation policies • Increase rates to be consistent with competitors • Consider a rate raise for packages • Apply full price to suites and executive rooms • Select dates that are to be closed-to-arrivals • Evaluate the benefits of sell-throughs • Apply deposits and guarantees to last night of stay Managing Front Office Operations PowerPoint 55
  61. 61. Chapter 13: Revenue Management Low-Demand Tactics • Sell value and benefits • Offer packages • Keep discount categories open • Encourage upgrades • Offer stay-sensitive price incentives • Remove stay restrictions • Involve your staff • Establish relationships with competitors • Lower rates Managing Front Office Operations PowerPoint 56
  62. 62. Chapter 13: Revenue Management Four Revenue Management Tactics • Hurdle rate • Minimum length of stay • Close to arrival • Sell-through Managing Front Office Operations PowerPoint 57
  63. 63. Chapter 13: Revenue Management Revenue Management Software Revenue management software provides: • Continuous monitoring • Consistency • Information availability • Performance tracking • Special reports Managing Front Office Operations PowerPoint 58
  64. 64. Chapter 13: Revenue Management Special Reports That Can Be Generated by Revenue Management Software • Market segment report • Calendar/booking graph • Future arrival dates status report • Single arrival date history report • Weekly recap report • Room statistics tracking sheet Managing Front Office Operations PowerPoint 59

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