Cost analysis in the hotel industry

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an ABC customer focused approach and
the case of joint revenues

Profitability analysis and the classical division based
It is commonly believed that the development of management
accounting in the last part of the 19th century, along with the emergence
of large enterprises in industries like textile, railroads and
steel (Taylor, 2000), was a consequence of the growing management’s
need for support of decision-making. The growing complexity
of the business due to the enlarging scale of the activities
and the consequential search for practical solutions is often seen as
the driver of most of management development (Chandler, 1962),
whereby the structure of profitability analysis was driven by needs
like controlling internal efficiency in large decentralized organizations,
and supporting adequate product decisions.
Johnson and Kaplan (1987) claim that management accounting
was developed mainly for the manufacturing industry. The articles
suggest that consequentially the accounting techniques were meant
to focus on efficiency control of manufacturing processes (activities
and production phases) and calculating total product costs.
Under these circumstances, it is not surprising that the structure
of cost and profit analysis adopted by most firms has been mainly
a cost centre based and product focused analysis. Therefore, efficiency
(cost per unit of output) and effectiveness of organizational
units (in terms of total volume and margin), along with product
profitability, were the main areas managers had to monitor for
maximizing short- and long-term company profitability.
It can be recognized that the traditional reporting approach
(cost centre based product profitability analysis) is suitable for
supporting the two main management’s tasks: product decision
along the product life cycle (pricing, promotion, R&D decision)
and internal efficiency (products’ unit cost). Products and organizational
units (departments) were the most important cost objects
for management accounting techniques, because they were the
most important management’s ‘decision objects’.
Most of the development of management accounting in the last
part of the 20th century has probably been driven by the growing
complexity of management decision-making. Particularly, both
the increase of the share of indirect costs in both manufacturing
and non-manufacturing activities and the broader scope of management
decision-making are some of the most important problems
‘modern’ management accounting systems had to face in
the 1990s (Johnson and Kaplan, 1987).
The introduction of activity-based costing accounting techniques
allows broadening of the scope of cost analysis, particularly in
non-manufacturing activities. In this article some of the so-called
‘modern’ accounting techniques like activity-based costing will be
used for improving the capability of accounting data in supporting
management’s decision in the hospitality industry. However, the
aim of this article goes beyond the adoption in the service industry
of already well known activity-based accounting techniques. The
simple case presented in this article is not only the opportunity for
seeing how an activity-based approach can change cost allocation in
hospitality, but is also a way for proposing a different approach to
profitability analysis, getting somehow away from the traditional
department based profit analysis.


The classical product profitability reporting implies that managers are capable of taking specific product decisions (pricing, promotion)on individual products without affecting other products. Event hough it is widely known that, very often, individual products have some degrees of interdependence, the traditional analysis tends to neglect the effect of decision-making on one product over other products. Only in the extreme case of ‘joint production processes’,in which all products must be produced together in a fixed proportion,are the interdependencies considered and individual products profit analysis is considered useless for decision-making. In the hospitality industry, this ‘accounting tradition’ has led to the design of the Uniform System of Accounts for the Lodging Industry, an American based reporting scheme, mainly based on the two dimensions previously recalled: departments and services. In this reporting approach, in order to limit the effects of cost and revenues commonality, services are grouped on the basis of the departments in which they are mostly produced, i.e. rooms,food and beverages. Eventually, with the goal of focusing on management control and responsibility reporting, these two dimensions have led to a reporting structure in which divisions and service groups tend to overlap: departments and services are unified into a single report in which departments’ efficiency and services’ profitability are analysed. Under this perspective, direct controllable costs are allocated over department/service groups with the purpose of identifying their contribution to the firm’s overall profitability and organizational areas, and services that are not revenue generating are treated as pure overheads. This simple approach, where most costs are directly traceable to departments and very little allocation is required, allows managers to understand how different business areas and different responsibility centres contribute to the overall profitability of the firm. In this article, following a simplified hotel case, different approaches to profitability analysis are presented and explained. Particularly, some peculiar characteristics of the customers’ purchasing behaviour in the hospitality industry, i.e. the ‘bundle’ purchasing decisions, are considered. When bundle purchasing is considered, the interdependence across different services must betaken into account. The case – introduction The case presented in this article is a simplified example of cost and profit analysis in hotel operations. Most of the emphasis of the proposed analysis is on customers’ purchasing behaviour; the case is an example of how some peculiar characteristics of customers’ demand in the industry can be taken into account in both cost and profitability analysis. The hotel is a small family owned hotel by the seaside of North East Italy. It has 40 bedrooms and provides accommodation,meals and beach service. The accounting system provides the following cost information,which refers to the last financial period:                                 Euros Personnel                 262 500Food and beverage 115 000Lining (leasing)            6 000Electricity                   24 000Telephone                  12 000Services                      4 500Rent                           75 000Miscellaneous           10 000Total                        509 000


Where can I find the occupancy rate of this hotel?

The structure of the management accounting systems identifies thefollowing cost centres on the basis of the internal organizationalstructure, i.e. cost centres tend to identify with organizational units:- Room division- Restaurant- Bar- Beach- Maintenance- General overheads.In Table 9.1, the costs directly traceable to the cost centres arepresented.Table 9.1Costs directly traceable to cost centresIMAGE( accounting report is structured around four managementprofit objects:- Room division- Restaurant- Bar- Beach.Accordingly with this structure of the profitability analysis, revenuesare accounted as follows:Rooms      310 000Restaurant 280 000Bar         37 000Beach       25 000As a first step, a pure direct costing report is provided in Table9.2, where each revenue generating department’s direct costs arecompared with their respective revenues and all other expensesare treated as general overheads.Table 9.2First step of pure direct costingIMAGE( a second step, some indirect costs are allocated to profit centreson the basis of some cost drivers. More specifically, the selecteddrivers are the following:- Rent expenses: square meters- Electricity expenses: power of the equipment- Maintenance expenses: number of hours of maintenance.

The data for the allocation of indirect costs are the following:IMAGE( the basis of this information, some of the costs previouslyincluded in ‘overheads’ are now allocated to profit centres/departments.Tables 9.3 and 9.4 show the accounting process and the finalreport.Table 9.3Accounting process of cost allocationIMAGE( 9.4Final report of cost allocationIMAGE( customers’ profitability analysis in acase of ‘bundling’The profitability analysis based on a department’s contribution tothe total profit, shown in Table 9.2, is suitable for the need of supportingthe managers’ performance evaluation process. Individualdepartment managers are responsible for achieving an adequatelevel of contribution to the firm’s total profit. The actual margin producedby each profit centre (department) is compared with the goalset in the budget and individual performance is appraised accordingly.

Therefore, the structure of the profit report is consistent withthe structure of the responsibility within the organization and thefinal report highlights the performance of individual profit centres.Usually, when tangible products are exchanged in a market, thecharacteristics of the products, and in particular the ability ofdecoupling production from consumption, allow consumers toexpress a specific demand for each single product, even though theconsumption process implies a combination of different productsat the same time. Customers have the capability of composing thedesired bundle of products at a different time and place from theones in which they buy them. Under this perspective, customersare able to formulate specific independent demand for individualproducts, evaluating price and values of each product separately.Under these circumstances, producers can evaluate the profitabilityof each individual product and production and marketing decisionscan be taken independently for each single product.It is easy to recognize that this approach to profitability analysisdoes not appear very consistent with the structure of decisionmakingin the market related decisions for many service industries,and particularly in hospitality, where not only consumption andproduction cannot be decoupled, as in all services, but the wholevalue for the customers is produced by a combination of servicesthat must be obtained together, and for which customers are notcapable of expressing independent demands. In fact, the immaterialityof services implies that the production process and the consumptionprocess take place jointly and therefore, when differentservices are part of a set of items meant to satisfy a single set of a customer’sneeds, as it is in hospitality, no separate purchasing decisioncan be taken by the customers: all services have to be acquired at thesame time in the same place and from a single source, i.e. serviceshave a complementary relationship, they are acquired in a bundle.This introduces the concept of complementarity relationshipamong different products. Complementarity can take place at thetechnical level, when products interact with each other physically orat the customers’ utility function level, when customers are perceivinga higher level of satisfaction by purchasing together differentservices than acquiring them individually (Guiltinan, 1987). Asa matter of fact, we should recognize that most services providedby hotels have a high degree of complementarity: it is oftenquite difficult to imagine the different services offered by a hotel(accommodation, restaurant, bar and other amenities) being offeredindependently from each other. Moreover, it is quite difficult toimagine customers expressing an independent demand for eachspecific service. The case for a high degree of complementarity isstrongly supported by the fact that several services are provided byhotels at no charge, i.e. as part of the whole service, even thoughthey are not unavoidable in a customer’s view. The distinctionbetween independent services and services that are part of a wholeproduct is hard to find. However, when specific services are perceivedas unavoidable, they can be seen as part of the ‘main product’and therefore customers do not express an independent demand forthem. In this case, these services are offered as additional attractionfactors and they contribute to building the customers’ opinion ofthe other services. These complementary services contribute to justifythe price of the main service to which they are linked. Theseservices are seen as part of a complex product and clearly theirprofitability cannot be evaluated individually. When no independentdemand can be expressed by the consumers, customers’ perceivedvalue does not reflect into prices and therefore no independentprofitability analysis can be carried out. This consideration can beextended to the case of services that are provided at a price, but areperceived by customers as strongly complementary with other servicesand therefore customers do not assess individually the value ofeach specific service. The fact that some services are revenue generating,when a high level of complementarity is recognized, makesthis service’s profitability as difficult to evaluate as the one of servicesthat are free of charge because prices do not represent customers’perceived service value.

Taking a company’s perspective, the main consequence of thisconsumer behaviour lies in the fact that no independent marketeffort can be taken by the producer: decisions on one service areinvolving, to some extent, other services included by customersin the same bundle. As a consequence, the profitability analysisof each individual service might not be useful in supporting marketrelated decision-making, because of joint demand that customersexpress for a bundle of services. In order to comply withthis bundle effect of demand, several strategies can be chosen by acompany (Bojamic and Calantone, 1990):1 pure bundling strategy, in which services can be sold as a packageat a given price2 pure components strategy, where products are sold and pricedindependently3 mixed bundling strategy, in which services are offered bothindividually and in a bundle at a discount price.In the case of the hospitality industry, it has to be recognized thatnormally, the firm’s strategy can be seen as a mixed strategy:some services are offered as a bundle at a specific price and othersare supplied on demand and charged accordingly. In a pure bundlestrategy, the packages can be seen as a complex product andprofitability can be analysed by individual package as if theywere ‘simple’ products. When packages are made of a variablecombination of elements and single elements participate in morethan one package (as it happens in most cases), they can be seenas modular products in which the cost of each package is the sumof the cost of individual modules.Much attention has been devoted in the literature to the profitabilityanalysis of bundle strategies; bundle strategies are seenas particularly useful when both the ratio of fixed to variablecosts and the degree of cost sharing are very high (Guiltinan,1987). Given the level of fixed and common costs, in the short run,profitability is mainly a matter of sale volume and therefore thecompany has little interest in reducing individuals’ demands onsome services by pricing. Bundle pricing is often a way of maximizingsale volume by providing additional services that have nomarginal costs in the short run and that can attract more customerdemand.The case of the hotel that we are considering in this article, can beseen as a case of mixed strategy in which several services are provided,sometimes at a price and sometimes at no charge, in a situationin which customers do not express an independent demandfor each service, but the mix, i.e. the amount of each service requiredby an individual customer is set by each individual customeraccording to his or her needs. Regardless of the fact that a pricemight or might not be charged for individual services, a profitabilityanalysis in which cost and revenues are analysed in terms of‘service’ or ‘service group’ does not help the company in understanding‘where’ it is producing more value. Of course, taking intoconsideration some of the consequences of a customers’ bundlepurchasing approach does not imply that a product or servicefocused cost and revenues analysis is an important source of informationfor managing efficiency and for performance appraisalwithin the organization: the point here refers only to profitabilityanalysis as a source of information in product and service decisionmaking.From product and service profitability to customersprofitability analysis

Several articles have noted how customers vary, in general, interms of profitability (Cooper and Kaplan, 1991; Slywotzky andShapiro, 1993) because they do not generate the same level of revenuesand costs. In general, profitability varies across differentcustomers because they express a demand for different productswith different individual profitability. In other terms, profitabilityvaries among customers (if products have different contributionmargins) because of the different product mix they purchase.Consequently, companies have been considering the search forprofitable customers as an important marketing goal along withthe ‘usual’ search for profitable products.The customers’ purchasing bundle approach, regardless ofwhether the firm chooses to adopt or not to adopt a bundle pricingstrategy, highlights the need for refocusing profitability analysis,moving from product and service focus to customer focus. Thewhole customers’ bundling demand becomes the focus of managementattention in supporting decision-making, because productsand services are not independent objects of customers’ buyingdecisions. The main purpose of any product and service policy isno longer to sell profitable products and services, but to attractcustomers who buy products and services in a profitable mix. Thecustomers are potential buyers of a range of services from thecompany and, therefore, profitability should not be seen only asthe relation between costs and revenues of each product, but asthe relation between costs and revenues of the whole with referenceto a specific individual customer with a specific purchasingmix. Concepts like ‘relationship management’ and ‘system selling’are becoming popular among marketing managers in theservice industry (Guiltinan, 1987) along with the idea of customerrelation management, clearly supported by a customer profitabilityanalysis. The marketing effort should not be driven towardsselling products and services, but towards both attracting customerswith a high ‘potential’ in terms of purchasing attitude andbroadening the firm’s relationship with its profitable customers.A marketing policy should be evaluated in terms of capability ofattracting ‘good’ customers. The concept of ‘good’ customersrefers to attributes like loyalty (or repurchasing attitude) andcustomer profitability.This approach was first developed in the banking industry in theearly 1990s, when all costs and revenues of each individual customerwere re-unified in one single record. Having understoodthat about 50 per cent of customers were unprofitable (Storbackaet al., 1994), banks have been trying to encourage a relationshipwith profitable customers. Thanks to the information provided bysuch a customer profitability analysis, banks have been able todevelop marketing strategies for specific groups of customers thatappeared to be more profitable than others. Under this perspective,the profitability of each product is just a contribution to the totalprofitability of a single customer. As mentioned before, a customer’sprofitability depends on two main factors: individual serviceprofitability and a customer’s purchasing mix. Products thatmight not appear very profitable per se, might be part of the purchasingbundle of customers who show a high profitability in thewhole set of products and services they buy and, therefore, mightbe seen as an important factor of attraction of profitable customers.Clearly, this approach might significantly change the management’sperception about what produces value.

The issues of joint revenuesWhen the bundle purchasing approach is taken into consideration,it becomes clear that an individual product’s profitability has onlya limited capability in explaining a firm’s profitability. In fact, customersdo not mind much the individual prices of single products orservice they acquire, but focus their attention in terms of the valueto-cost relation of the whole bundle of products they purchase.Therefore, the profit of individual products or services does notguarantee that the value customers received from that specific itemis bigger than the price they pay: customers could buy a service(and pay the price) because of the value they received from theother related services. Under these circumstances, there is a stronginterdependence among the revenues generated by the differentproducts and services acquired by a single customer. This interdependenceis so strong that revenues have to be considered jointly, asany attempt to separate them would not be consistent with the customer’sbundling approach: this case can be defined as a case of conjunctionof revenue due to the purchasing process. Similarly withthe case of joint costs in production processes, it is possible to refer tothe case presented here, as a case of joint revenues. The case of jointcosts refers to production processes in which several independent(in terms of market demand) products are produced in a singleprocess with common resources without any reasonable way of distinguishingthe contribution of common resources to each product.The most cited case of joint production costs is the case of an oilrefinery in which, from a given amount of crude oil, several products(like gasoline for cars, burning oil, coal tar, lubricants) with differentmarket demands and prices, are produced (Collini, 2001). Itis well accepted in the accounting literature that the profitabilityof joint products must be assessed jointly, given that there is nomeaning in individual products’ profit (NACA, 1957). Technically,joint products are linked to each other by the technical characteristicsof the production process: in the case presented here, theconjunction is due to the way the demand is expressed by the customers.Alfred Marshall (1923:192) defines technically joint productsas products for which ‘it is not practicable . . . to produce anyone (member of the group) without, at the same time, producingthe others’; joint products ‘because of demand’ can be defined asthose for which it is non-practicable to sell any one without sellingall or some of the others. Given that all the consequences ofconjunction are due to the fact that when one product is producedand sold, some of the others must be produced and sold, it is clearthat whether their conjunction is originated either by productionor by demand does not change the consequences in terms of profitabilityanalysis of the products; therefore, it has to be recognizedthat cost and revenue relations of individual products cannot beanalysed when products are joint products, regardless where theconjunction is originated.The fact that the mix among different products and servicesmight change from one customer to another does not necessarilyimply that the assumption about joint revenues has to be dismissed:even in the case of joint costs, a flexible mix (withina range) does not change the need for a joint evaluation of theeconomic consequence of production, as long as the linkages arestrong enough to make Marshall’s statement applicable.When a customer focus profitability analysis is considered, theway individual service’s profit is seen has to change: the existenceof a positive profit margin on individual products and servicesdoes not imply that they are part of a positive customers’ valueproduction process. Profitable products and services could bepart of a non-profitable customer’s purchasing bundle and, therefore,their contribution to value production is unclear becausethe contribution of each individual product or service to the productionof value is not automatically measured by the revenuesit appears to generate. Their contribution is related to both theinfluence they have on the customer’s purchasing decision ofthe bundle of products and the value the customer attributes tothe whole bundle.

The profit analysis schemeHaving dismissed the idea of evaluating services contribution tothe overall profit only in terms of individual services profitability,the profit generation analysis has to be performed according to theneed of supporting ‘customer relation management’. In ‘customerrelation management’, customer selection based on profitabilityis seen as a key point (Kaplan and Norton, 2001): most of the marketingeffort has to be devoted to attract profitable customers. Acustomer profitability analysis can help in evaluating different‘customer segments’ and detecting the customers’ characteristicsthat appear to have a positive relation with profit.In order to analyse the profitability of different groups of customers,the management accounting system must compute costsand revenues by individual customer, making each individual customera profit object. Having available a data set on individual customer’sprofit, any group analysis can be performed by groupingtogether customers with the same characteristics (like geographicorigins, distribution channels, age, family size, time of the year, timeof booking, etc.).Short-term and long-term analysisProfitability analysis is based on detecting the contribution toprofit of changes in volume of products and services sold in aperiod of time. It is widely known that this analysis requires ex antethe definition of the time horizon of such an effect. In the so-called‘short-term’, fixed costs are not affected by any decision and actionregarding sale volume and, therefore, their effects on profit aremeasured in terms of contribution margin (difference betweenchanges in revenues and changes in variable costs). As mentionedabove, in service organizations, and particularly in the hospitalityindustry, pure variable costs are a small share of total costs andtherefore, contribution margin analysis has a limited capability ofexplaining profitability, given that margins tend to equal revenues.Customer management (selection, acquisition, retention) tends tomaximize the value of the customers, and therefore the value creationin general (Kaplan and Norton, 2003) in the long run. Theseactions require mainly a long-run mind set because they tend toshow their effects over time. Even though some action (like selection)might produce some effects in the short run, the firm shouldfocus on long-term value production by selecting customer groupscapable of producing value in the long term. All these reasons aresuggesting that a ‘data warehouse’ with detailed informationregarding long-term profitability of each individual customershould be put in place for supporting decision-making in the marketingarea. In order to develop such analysis, a full cost approachis required. Full cost, when carefully done, allows the understandingof the implications of customers’ behaviour on resource usage inthe long run. Of course, when a long-run approach is taken, theshort-term relation between costs (fixed and variable) and volumeis neglected and all costs are seen as variable.It is widely recognized that an activity-based cost system is themost suitable accounting approach for cost allocation in this case(Kaplan and Narayanan, 2001). An activity-based cost system isparticularly suitable for cases in which the degree of cost commonalityamong different products and services is high, as is thecase in the hotel industry.As it is well known, an activity-based cost system requiresthe allocation of indirect costs over a set of activities by ‘resourcedrivers’ and, afterwards, the allocation of the cost of activitiesto processes on the basis of the individual activity’s contributionto each process, measured by the activity drivers (Turney, 1992).

In the hotel industry, each customer can be seen as a processwhere the different services are considered as activities performedby the company and consumed by the customer. When anactivity-based approach is applied, the individual customer’svalue chain can be analysed in terms of cost of the activities andtotal revenues regardless of any allocation of value on individualactivities/services.The case – continuedIn the simple case presented in this article, a set of activities hasbeen identified. Activities have been selected because they bothconsume resources and are supposed to produce value for thecustomers. The following activities were selected for the designof an activity-based cost system:Room division- Reception and check-in and out- Room cleaning- Room service- Mini bar refurnishing- Luggage service to the room.Restaurant- Meal service- Breakfast service.Bar- Service.Beach service- Check-in (preparing the contract at the beginning of the stay)- Parasol setting (daily)- Chair setting (daily).After having selected the relevant activities, working time is chosenas resource driver for allocating departments’ costs over activities.According to activity-based costing terminology and techniques,resource drivers are used in order to allocate resources overactivities. Resource drivers should measure the effort, in terms ofresources, carried out by individual organizational units, in performingindividual activities. The amount of activities used by eachprocess (customer) is measured in terms of activity drivers. Theamount of activity drivers causes a proportional use of the activity.The ‘effort’ of each department in performing the different activitieswas measured in terms of total working time devoted to each one.On the basis of a ‘one time analysis’, the amount of time was measuredand the percentages of total working time devoted to eachactivity was calculated, as shown in Table 9.5.Table 9.5Allocation of time to activitiesIMAGE(

Figure 9.1Profitability of different customers’ groups.IMAGE( the data it emerges that customers showing interest in differentactivities performed by the hotel have a different level oflong-run profitability. On the basis of this knowledge the companycould evaluate the opportunity of committing resources in activitiesthat appear not to be part of value added processes. In theexample, customers using parking facilities and luggage roomservice appear to be much more profitable than those that requireroom service. This could lead to the conclusion that, even though itis impossible to assess the value of parking in a customer’s ‘utilityfunction’, those customers that appreciate these services appear tobe more profitable than others and therefore, it would be possibleto conclude that parking and luggage service participate to highvalue added processes.Obviously, customers included in one group can be included inanother group (there are no reasons why customers parking thecar are not asking for room service) and therefore it would beimportant to check not only the average profitability of the group,but also the variability around the mean in the group: a quite highvariability could suggest that the grouping factor might not explainthe level of profitability of the group of customers.

The data for the allocation of indirect costs are the following:IMAGE( the basis of this information, some of the costs previouslyincluded in ‘overheads’ are now allocated to profit centres/departments.Tables 9.3 and 9.4 show the accounting process and the finalreport.Table 9.3Accounting process of cost allocationIMAGE( 9.4Final report of cost allocationIMAGE( customers’ profitability analysis in acase of ‘bundling’The profitability analysis based on a department’s contribution tothe total profit, shown in Table 9.2, is suitable for the need of supportingthe managers’ performance evaluation process. Individualdepartment managers are responsible for achieving an adequatelevel of contribution to the firm’s total profit. The actual margin producedby each profit centre (department) is compared with the goalset in the budget and individual performance is appraised accordingly.

The consumption of each activity is measured by a specificactivity driver. Drivers are based on units of activity performedduring the period of time of the analysis. In Table 9.6, the driversselected for the chosen activities are shown.Table 9.6IMAGE( costs (like the cost of food at the restaurant) can be seen asdirect costs and charged directly to each individual customer (onthe basis of actual or standard consumption) and therefore are notincluded in activities’ costs. All non-direct costs are consideredactivities’ costs and therefore allocated according to the percentageof effort (resource driver) over the activities. On the basis of theavailable data, the costs of activity and the cost of each unit of activity(also called cost driver) can be calculated as in Table 9.7.Table 9.7The cost of each unit of activity, i.e. cost driversIMAGE( an example, three customers have been selected in order todevelop the profitability analysis (Table 9.8). For the purposeof calculating the full cost of servicing these clients, the specificservice consumption profile (in term of number of activity drivers)of each customer is presented. Obviously, this calculation shouldbe carried out for each individual customer in order to create therequired data set of customers’ profitability.Table 9.8Example of profitability analysis based on three customersIMAGE(

On the basis of these data, the profitability of these three customerscan be calculated as in shown in Table 9.9.Table 9.9Profitability calculated in the example of three customersIMAGE( the three customers present different levels of profitabilitydue to a different level of service usage and different revenues.Each customer has his or her own profile of activities consumptionand revenues due to the mix of services he or she required. Whenthis analysis is developed for all customers, the management can,by analysing profitability by specific groups of customers, identifysome characteristics like age, nationality, distribution channel(tour operator, travel agency, walk in clients) and any other characteristicthat might be perceived as a factor to which a peculiarconsumers’ behaviour can be associated.The issue of activities’ valueHaving accepted the idea that individual service profitability cannotcompletely satisfy the need for analysing value production inthe case of bundling, the problem of understanding how the valueadded is produced remains unsolved. The example of customerprofitability analysis has shown how different customers mightaffect a firm’s profitability according to their different activityconsumption profile, but the contribution of individual activities tothe production of value remains unclear. In other words, the analysishas suggested the existence of a positive (or negative) valueadded for each customer/process, but it has not shown how activitiescontribute to the production (or destruction) of that value. Asclarified earlier in this article, it does not make sense to pursue thegoal of calculating the value added of each individual activity – i.e.not sold and priced individually – because prices, when they exist,do not represent a measure of the recognized customer’s valueproduced by each activity. In a joint process, the contribution ofindividual elements of the process cannot be identified.Even though any attempt to solve this problem might appear toneglect the original assumption about bundling on customer behaviour,some ideas regarding the contribution to value production ofthe individual activities can be found in the value of the processesto which the activities contribute. The data set of individual customer’sprofitability can be used for understanding how muchvalue is produced in those customers/processes to which each individualactivity contributes.

Following this approach, the consumption of a specific activityby a customer is identified as a grouping factor: in other words, allcustomers that have used a specific service item (unit of activity)are included in a group and the profit of the group is the sum ofthe profit of all customers included in the group. In this way, theprofitability of the customers taking advantage of a specific activitycan be seen as a hint of the contribution to the value producingprocess of that specific activity. Even though it would be quitehazardous to jump to the conclusion that an activity participatingto some processes with high profitability is a value added activity,it might be a useful piece of information to know that an activityparticipates in processes in which production of value (for thefirm) is high, low or negative. In the example presented in thisarticle, several groups of customers could be identified on thebasis of the services they consumed during their stay at the hotel.As an example, three possible groups have been analysed:- Customers requiring room service- Customers using the parking facility- Customers requiring luggage room service.The data regarding the three possible groups are presented inTable 9.10.Table 9.10Three possible groups of customersIMAGE( different levels of profitability of the three groups areshown in Table 9.11 and Figure 9.1.Table 9.11Profitability of the three groups of customersIMAGE(

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