Chapter 13: Revenue Management

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

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.
2

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.
3

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
4

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
5

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).
6

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
7

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.
8

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.
9

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
10

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
11

Common Guest Segments
• Group guests
• Business travelers
• Leisure guests
• Government travelers
• Contract guests
12

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)
13

Factors That Have Made Group Attrition Increasingly Important
• Group history
• Online shopping
• Business sourcing
14

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
15

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.
16

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
17a

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…
17b

Potential Average Single Rate
Single Room Revenue Rack Rate
Number of Rooms Sold as Singles
18

Potential Average Double Rate
Double Room Revenue Rack Rate
Number of Rooms Sold as Double
19

Multiple Occupancy Percentage
Number of Rooms Sold as Double
Total Rooms Sold
20

Rate Spread
Potential Average Double Rate
Potential Average Single Rate
21

Potential Average Rate
(Multiple Occupancy % Rate Spread) Potential Average
Single Rate
22

Room Rate Achievement Factor
Actual Average Rate
Potential Average Rate
23

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
24

RevPAR Formulas
Formula #1
Actual Room Revenue
Available Rooms
Formula #2
Occupancy Percentage Average Daily Rate
25

Identical Yields
Identical Yield Occupancy Percentage =
Current Occupancy Percentage X
Current Average Rate
Proposed Average Rate
26

Equivalent Occupancy
Equivalent Occupancy =
Current Occupancy Percentage X
Current Contribution Margin
New Contribution Margin
27

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.
28

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
29

Required Non-Room Revenue per Guest
Required Non-Room Revenue per Guest =
Required Increase in Net Non-Room Revenue
Number of Additional Guests
÷ CMRw
30

RevPAG and GOPPAR
RevPAG =
Total Revenue
Number of Guest
Departmental Revenues – Departmental Expenses
Number of Available Rooms
GOPPAR =
31

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
32

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
33a

Group Room Sales–Pros and Cons
• What impact will this group have on booking additional group
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?
33b

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
34

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
35

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.
36

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.
37

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.
38

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.
39

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.
40

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
41a

Dynamic Packaging
• 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.
41b

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.
42

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
43a

Transient Room Rate Discounting
• An astute manager must know when to eliminate room rate
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.
43b

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.
44

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.
45

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.
46

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.
47

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.
48

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
49

Revenue Management Meeting Participants
• General manager
• Sales managers
• Catering managers
• Reservations manager
• Front office manager
• Food and beverage manager
50

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
51

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
52a

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
the interdepartmental communication plan.
• Reviews the 30–60 day outlook and communicates any
updates in those forecasts.
• Reviews current channel distribution strategies.
52b

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.
53

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
54

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
55

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
56

Four Revenue Management Tactics
• Hurdle rate
• Minimum length of stay
• Close to arrival
• Sell-through
57

Revenue Management Software
Revenue management software provides:
• Continuous monitoring
• Consistency
• Information availability
• Performance tracking
• Special reports
58

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
59

Chapter 13: Revenue Management

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Chapter 13: Revenue Management