Revenue management

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The most simple and commonly used definition of revenue management is ‘the business practice of selling the right inventory to the right customer at the right price at the right time so as to maximize total revenue’, profit, and market share. With the emergence of Internet travel Web sites, the definition may be extended to include ‘.through the right channel.’ More over, the above definition truly describes the objective of revenue management. Effective hotel revenue management is dependent on accurate demand forecasting of future arrival dates at a granular level as well as a relative understanding of the demand and rate positioning of competitors. To achieve optimal revenue performance over time, hotels must forecast total arrivals demand by rate, market segment, length of stay, and distribution channel while positioning the rates within each channel and market segment giving consideration to several factors such as seasonal market demand, citywide events, competitors’ rate positioning and demand levels. An understanding of total consumer spending habits (beyond just the room rate) by market segment will further enhance the results derived from the revenue management process.

In very simple terms, revenue managers face one of two conditions: excess demand (where forecasted demand for a given arrival date exceeds the available supply of rooms) or excess capacity (where the supply of rooms exceeds fore casted demand). The strategies deployed against these two conditions vary greatly.

When hotel capacity exceeds demand over a consecutive period of future arrival dates, the revenue management strategy is fairly simple: open run of house availability of all rates to all qualified market segments (negotiated entitlement rates such as American Automobile Association (AAA), American Association of Retired Persons (AARP), discount clubs, local and national corporate accounts, etc.) of all stay patterns in all channels. When the excess capacity condition exists, optimal revenue and profitability will not be achieved if any demand from qualified segments is rejected. Retail (non qualified market segment, i.e., consumers who pay the ‘rate of the day’) pricing then requires artful positioning based on the retail rates, product quality, location, brand strength and demand levels of direct, upper, and lower tier competitors.

When hotel demand exceeds capacity, the revenue management strategy becomes more complex. The goal is to accept the demand that produces the greatest level of profitability over time. It’s not just about getting the highest average rate on the night(s) with the excess demand. It is about filtering reservation requests that cross over the excess demand date(s) usually accepting the reservations with the longest lengths of stay and rejecting the reservation requests with the shorter lengths of stay. When extreme excess demand is projected, further filtering may be attempted by accepting the longest length of stay reservations with the highest room rate from the least expensive distribution channels. When excess demand exists, the objective is to fill as many rooms as possible on the excess capacity dates that surround the excess demand date(s) before the excess demand date(s) become overbooked to the point of having to be completely closed. To achieve this objective, revenue managers deploy length of stay restrictions in the distribution channels. These restrictions trigger the acceptance or rejection of all incoming reservation requests. An example of the use of this demand filtering strategy would be the deployment of a two night length of stay restriction on a Saturday where extreme excess demand is projected surrounded by a Friday and Sunday with projected excess capacity. The two night minimum length of stay restriction on Saturday triggers a rejection of all Saturday one night stay requests while accepting Saturday arrivals with a multi night length of stay pattern. The restriction also allows pre Saturday arrivals to stay through and beyond Saturday night. If the length of stay restriction is not deployed, less profitable one night reservations will be accepted until the Saturday in question becomes so overbooked that it must be closed to all reservation requests. When this occurs, all revenue from future multi night reservation requests that include Saturday in the stay pattern including those that benefit the surrounding excess capacity dates will be lost.

Revenue management produces optimal results in hotels that have: access to accurate granular historical information, robust forecasting tools, strong competitive intelligence, a talented director of revenue management, and a strong revenue management focused leadership team including the general manager, director of revenue management, director of sales, director of operations, controller, and reservations manager.

Reference

Smith B.C., Leimkuhler J.F. and Darrow R.M., Yield management at American Airlines, Inter faces, 22(1), January February 1992, pp. 8 31.

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