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- 1. Lynnekovan.com REVENUE MANAGEMENT PRINCIPLES AND PRACTICES IN 2013
- 2. Revenue Management Principles • Necessary Conditions • Price and Duration - The Two levers of Revenue Management Practice • Quiz • Tips for 2013
- 3. Lynnekovan.com Six Conditions necessary for Revenue Management PRINCIPLES
- 4. Necessary conditions Relatively fixed capacity
- 5. Necessary conditions Appropriate price structure - High fixed costs – low variable costs
- 7. Necessary conditions Convenience factor A price sensitive customer willing to pay for added convenience
- 8. Necessary conditions Segment-able markets with predictable patterns of demand
- 9. Necessary conditions Time variable demand Time of year / day Length of stay
- 10. Defining Revenue Management Revenue Management is the business practice that enables a company to ‘sell the right product, to the right customer, at the right time, for the right price’ with the objective of optimising product price and availability in order to reach the maximum profit. Robert Cross
- 11. Lynnekovan.com The Strategic Levers of Revenue Management PRINCIPLES
- 12. Price and Duration • Successful Revenue Management is predicated on effective control of customer demand. • In 1989 Sheryl Kimes defined the two interrelated levers that we can use to control customer demand: Price & Duration
- 13. Strategic Levers of Revenue Management Internal Uncertainty of Duration Arrival External Management Internal Uncertainty of Duration External Strategic Levers Time between of Customers Revenue Management Optimal Price Mix Demand based Physical Development of Pricing Rate Fences Non Physical Flexible Pricing Sheryl Kimes 1989 Cornell
- 14. Price Fixed Variable Quadrant 1 Quadrant 2 Predictable Convention Cruise Cinema centres Hotel Lines Car Arenas Rental Airline Duration Attractions Unpredictable Restaurant Hospitals Golf Care Course Homes Quadrant 3 Quadrant 4
- 15. Lynnekovan.com Revenue Practices WHAT IS IT THAT I CAN’T SEE?
- 16. Sometimes its easier to do what you always did… • 2013 – a year to search harder for revenue optimisation opportunities • Measuring performance and goal setting is key to understanding where the business is going and uncovering profit opportunity
- 17. RevPAR Total Rooms Revenue 320,000 in July = £86.02 Total Available Rooms 120 rooms x 31 days in July Measuring the Revenue Contribution of each room/unit RevPAR - This measures the revenue generated per available room and takes into consideration both occupancy and rate Applies to all outlets selling rooms or units: Bed and Breakfasts, Holiday Parks, Self Catering, Hotels
- 18. QUIZ questions 1-3 ! TrevPAR and GOPPAR GOPPAR TrevPAR (Total departmental operating (Net Revenues +unit rentals + profit - all undistributed operating other income) expenses ) Total Available Units Total Available Units Why TrevPAR and GOPPAR ? TrevPAR = Sum total of net revenues from all the operated departments plus rentals and other income per available room – considers all revenues from all departments GOPPAR = Gross Operating Profit per Available Room represents the total departmental operating profit less all undistributed operating expenses - a good indicator of overall operational performance - considers costs but does not evaluate rooms revenue separately
- 19. WHY REVPAR ISN’T WORKING
- 20. London – Average room rate and Commissions paid – June 2003 – March 2012 Source :
- 21. Provincial – Average Room Rate and Commissions paid June 2003 – March 2012 Source :
- 22. ARR - MAT : £110 £115 £100 £105 £120 £125 £130 Source Jul-09 Aug-09 Sep-09 £4.63 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 London Net ARR Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 London ARR 2009 – 2012 last 3 years Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 London Net Average Room Rate – less variable costs Apr-12 May-12 +37.6% £6.37 Jun-12 Jul-12
- 23. ARR - MAT : £62 £64 £66 £70 £72 £74 £68 Source Jul-09 Aug-09 Sep-09 £3.49 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Provincial Net ARR Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Provincial ARR Jul-11 Aug-11 Sep-11 costs 2009 – 2012 last 3 years Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Provincial Net Average Room Rate – less variable Apr-12 May-12 +33.2% £4.65 Jun-12 Jul-12
- 24. London F&B Payroll & Profit Conversion Source :
- 25. Provincial F&B Payroll & Profit Conversion Source :
- 26. London – RevPAR & GOPPAR (2002 to 2011) Source :
- 27. Provincial – RevPAR & GOPPAR (2002 to 2011) Source :
- 28. Attractions and Activity Providers Incorporate both revenue and occupancy metrics to gain maximum visibility on yield on a monthly, seasonal, and annual basis. • By product • By outlet • By retail sales per customer • By food and beverage sales Yield = Profit Total Visitors
- 29. KPIs to consider using Average Check Value = RPOLH = Total Revenue Total Revenue ------------------------------------ ------------------------------------ Number of Covers Labour hours used A key metric to measure revenues Measured as sales revenue generated per generated by the guests served labour hour used – but doesn’t account for cost of labour Capture Ratio = Occupancy = Total outlet covers /sales Covers/Tickets Sold ------------------------------------ ------------------------------------ Number of visitor Available Seats/Tickets Measures the performance of the outlet in Measures the performance of the outlet in relation to the number of visitors relation to the number of seats
- 30. Lynnekovan.com The impact of distribution models and progressive pricing policies IN PRICING
- 31. Progressive vs. Regressive Pricing strategies PRICE Day of Arrival Progressive Price Strategy TIME Regressive Price Strategy
- 32. Customer centric booking models work against regressive pricing strategies Tingo refunds customers the difference in the rate between the booking date and day of arrival (within the cancel period)
- 33. Lynnekovan.com Evaluating profit opportunity through strategic pricing and menu engineering IN THE RESTAURANT
- 34. CHALLENGE Menu Engineering and Differential Pricing • Review menus and contribution margins regularly to ensure that the optimal profits are being extracted. • Experiment with differential pricing in different demand periods • Evaluate your Challenges and Workhorses and re-engineer them to make them either more popular (Challenge) or more profitable (Workhorse)
- 35. QUIZ questions 4 &5 ! 10 Steps to effective Menu Marketing Steps to increase GOP Steps to increase GOP • Item Placement • Symbols and Icons – First two and last in section – Can increase sales by as much as • Boxing 15% – 1 out of every 8-10 items • Keep descriptions short – Limit to 10-15% of menu space – Only 1/3 is actually read • Page Panels • Showcase Food Types – 3 page panel, focus on centre – Prime Angus beef not entrees – 2 page Panel, top right hand side • Clean Menus • Pricing Font and Presentation – Dirty menu, dirty kitchen – Keep the font slightly smaller No £ • Menu Insert • Keep fonts large enough to read – Highlight specials uniquely
- 36. Lynnekovan.com Optimising revenues through increased conversion ON THE WEB SITE
- 37. Check Room Details Availability Review Booking Details Goal setting and Conversions • Set up goals in Analytics • Review drop off at each stage of the booking or goal process • Identify the value of each visitor at each stage and evaluate what to invest to optimise the process
- 38. Industry standard conversion levels • From visitor to the site to a booking initiated : 45% • From a booking initiated to a completed reservation: 5% • From visitor to the site to a completed reservation: 2% • Source HEBs/Adobe Omniture Case study
- 39. Reward at each stage
- 41. …and here’s how one hotel is adopting the same reward and reassurance process
- 42. Reinvest incremental revenues gained • PPC campaigns reach the customer closer to the purchase point of the booking process than natural search referrals • In a direct booking strategy, reinvesting a proportion of what would have been paid in commissions is a reasonable strategy • Use in conjunction with in-page analytics to optimise the user experience £50000 500 Cost Commission Net Gain Revenue bookings £2500 £10000 £7500
- 43. Other web tips • Add up the conversion stages – limit the number and the distractions • Divide content clearly into site content and booking engine content • Speed up the booking process, • Limit the rates, offers, special request and details • Make it easy for customers to get the information they need • Strip out redundant functionality
- 44. The Headland Hotel WHAT GETS MEASURED GETS MANAGED PETER DRUCKER
- 45. Lynnekovan.com Collaboration and Creativity 2013 – A YEAR OF SMART WORK!
- 46. Thank you Ally Dombey Director • Follow us: @revenuebydesign • Blog: revenuebydesign.wordpress.com • Email: ally@revenuebydesign.co.uk Thanks to Lynne Kovan for the use of images of Cornwall • www.lynnekovan.com Web: www.revenuebydesign.co.uk
Editor's Notes
- In 1989 Sheryl Kimes of Cornell University proposed a broader definition of revenue management that moved away from the tactical and mathematical definitions to a broader managerial context to allow for a more strategic approach to revenue management, and to expand use of revenue management principles into different service sectors to enable them to benefit from revenue management strategies.Kimes proposes that effective control of customer demand lies at the heart of a successful revenue management strategy, with two strategic levers to manage this – Pricing and Duration of Customer use. Prices can be fixed, or variable, and duration can be predictable or unpredictable. Hotels are increasingly using variable pricing and a specific or predictable duration. Duration Management – Perishable inventory means that we need to reduce the risk of No Shows or late arrivals. Internal (not involving customers) and External (involving customers) approaches can be used. Uncertainty of ArrivalInternal ApproachesOverbooking – by obtaining accurate no show, denials and cancellation recordsExternal Approaches – Use of policies to shift the responsibility of arrival to the customer, with associated penalties such as use of deposit policies, and pre-paid bookings with non cancellable and non refundable bookingsUncertainty of DurationManaging duration enables better decision making of which reservations to accept and better management of operational resourcesInternal Approaches:Accurate forecasting of early and late arrivals and departuresAccurate forecasting by Day of Arrival, Length of Stay and Rate Category,External Approaches:Customer focused management of uncertainty of duration focuses on use of early and late departure fees, and use of depositsTime Between CustomersReducing time between customers means better utilisation of time base inventory units –this is more prevalent in restaurants where time restrictions are frequently added to covers, or with Airlines where low cost airlines such as EasyJet and Ryannair have reduced turnaround time at airports thereby enabling greater aircraft utilisation.PriceOptimal price mixThis requires a thorough understanding of the contribution of market segments and individual customers to overall profitability; the rate blend available in the market at any point in time is the primary driver of the success of revenue strategy at the point of sale.Development of Rate FencesRate fences provide the framework for delivery of a flexible pricing strategy. Physical Rate Fences:These include tangible features such as room type, view, inclusion of value adds or amenitiesNon Physical Rate Fences:These can be used to shift demand to support shoulder periods, such as length of stay restrictions, closed to arrivals, membership or loyalty rewards, pre paid rates, cancellations, and deposit chargesFlexible Pricing We know that effective revenue management is based on customer willingness to pay different prices according to their needs. As s result a differential pricing strategy need to reflect rate integrity – a clear price differential between products on offer with the ability for customer to recognise why the differential exists, and an understanding of price elasticity in the market to avoid pricing based materially on competitive pressures.By reducing the uncertainly of arrival we can reduce the Optimal price mix – this involves filling the restaurant, hotel attraction with the optimal customer segments – those that are likely to provide the greatest revenues and are best suited in terms of segment to your product
- Industries traditionally associated with Revenue Management tend to use variable pricing and a specified or predictable duration. These include Air car renta. Hotels and Cruise lines. Theatre cinemas arenas and convention centres tend t use fixed pricing for a predictable duration – although this is changing, Restaurants and to some extent golf courses use a fixed price with unpredictable duration.Care homes and hospitals will price according to care needs and the duration on the whole tends to be unpredictable.No fixed line between each quadrantA useful tool to assess where you are right now and where you could move to should you implement revenue management practices.Successful yield management approaches are generally conducted from quadrant 2
- Capture ratio – guests in hotel related to guests that come to the outlet Total outlet covers = How do we define a cover? If someone sits at table not consuming- zeroIf here for =lunch and back from dinner – two coversCapture ratio is use to see if there is relation between number of guests in house and production form the departmente.g. breakfast –not standard inclusion – not 100% of all guests – but can predict from capture ratio how many people will take breakfast – either on rate or as walk insIF selling at £37 and decrease to £35 can we increase the capture ratio?IF we increase price to £39 do we negatively affect capture ratio
- Tingo – use as example for avoiding last minute deals
- Price Point Justification. Move your prices into your descriptions to avoid price-shopping by customers. Using the same typeface (or slightly smaller) and removing the dollar sign can further help the customer focus on the product, not the price.2. Item Placement. People most often remember and buy the first two items or the last menu item in each menu category. Place your menu items with the highest gross profit in these spots on the menu.3. Boxing. Impact 10 to 15 percent of the space on your menu by boxing menu items. As a general rule box one out of every 8 to 10 items. Boxes draw attention and usually get orders, so its best to use them on high-profit items. Too many boxes creates clutter and defeats their 'attention getting' purpose.4. Page Positioning. On three-panel (page) menus, people most often look at the center panel first, and then move counter clockwise. On two-panel (page) menus people most often look at the top right-hand side first. Consider putting your high profit items such as specials or specialty drinks in these spots.5. Hospitality Symbols and Icons. Stars, bullets, or other food symbol icons can make your menu unique and draw attention to menu items that you would prefer to sell. Graphics can set items apart and increase sales on those items as much as 15 percent. (Be careful with the ubiquitous Heart symbol that usually denotes 'heart-healthy' as people have learned to translate that into 'tastes awful'.)6. Hold the Hyperbole. Keep food descriptions short because only one third of your menu is actually read. Use wherever possible 'word pictures' rather than lengthy descriptions. And do not fear white space - it allows the eyes to pause and rest.7. Showcasing. Highlight types of foods by including menu headings such as "Fresh Pasta" or "Our Specialties" rather than using generic terms such as Entrees.8. Know your customers. If your customers are mostly over 50, keep the typeface (font) large enough to read in dim lighting and the design uncluttered. If you're a family style restaurant, make your menus appealing to children by including colorful artwork, unusual fonts, and lots of boxed items. A white tablecloth setting calls for a more understated, simple yet tasteful design including a good quality paper stock.9. Menu Inserts. Brand your restaurant by offering a specials menu insert that creates a sense of "You can only get this here". Menu inserts also give your servers something to talk about and keep your menu fresh. Additionally, you can use them to promote high profit specials or new items that could eventually move onto the regular menu.10. Keep your menus clean. Customers often associate a dirty menu with a dirty kitchen. They may not walk out this time, but they are less likely to return if your menu isn't clean and sharp. So keep your menus clean by using protective menu covers that can be washed or replaced.