Planning and evaluating Front office operations - V SEMESTER

PLANNING AND EVALUATING FRONT 

OFFICE OPERATIONS

Basis of Charging Room Tariff

Price is one of the major elements involved in the marketing and positioning of a product or service. The price of goods and services of a hotel should cover the cost of production and overheads, and include a fair amount of profit, so that the hotel business remains sustainable and profitable. The room of a hotel generates the maximum revenue, so an accurate and competitive room rent is one of the prerequisites for running a successful hospitality business. The rate of a hotel room is based on the competition, cost, standard of services and amenities offered by the hotel, the guest profile, location of the hotel, location of the room etc.

Three common approaches to deciding room tariff are given as below:

Market based Pricing: Market based pricing is setting a price based on the value of the product in the perception of the customer. The concept is based on an idea of what the ultimate consumer of goods and services, i.e the guest is willing to pay and then use this as a starting point. In this case, the hotel works backwards as it first makes an accommodation product available at a price that a guest is willing to pay rather than first readying the product and then deciding its tariff on the basis of costs involved.

This approach is common sense approach. Management looks at comparable hotels in the geographical market and sees what they are charging for the same product. The thought behind this is that the hotel can charge only what the market will accept, and this is usually dictated by the competition.

There are many problems with this approach, although it is used very often. First, if the property is new, construction costs will most likely be higher than those of the competition. Therefore the hotel cannot be as profitable as the competition initially. Second, with the property being new and having newer amenities, the value of property to guests can be greater. The market condition approach is really a marketing approach that allows the local market to determine the rate. It may not tale fully into account what a strong sales effort may accomplish.

Close observation of market trend approach further divides it into four types:

•         Competitive Pricing : Charge what the competition charges
•         Follow the leader Pricing : Charge what the dominant hotel in the area charges
•        Prestige Pricing : Charge the highest rate in the area and justify it with better product,                 better service levels, etc
•            Discount pricing : Reduce rates below that of the likely competitors without considering            operating costs

The Rule of Thumb: The rule of thumb approach sets the rate of a room at Rs. 1 for each Rs. 1000 spent on the project cost per room, assuming 70 % occupancy. In case the occupancy percentage is expected to be more than 70% then the rate of a room can be less than Rs. 1 and on the contrary if the occupancy is expected to be less than 70 % then the rate can be more than Rs. 1. For example, assume that the average construction and furnishing cost of a hotel room is Rs. 30,00,000/- the average rack rate of hotel room in this hotel using thumb rule will be Rs. 3000, as illustrated below.

1000:               1

30, 00,000:      3000

The inflation cost is kept in mind while fixing the rack rate. For example if a hotel was built 50 years ago at the cost of Rs. 50,000/- per room than as per the rule of thumb the rack rate per room will be Rs. 50/- only which is not a financially viable rate option. To find out the current rack rate either the present asset value is evaluated or the net present value of Rs. Invested 50 years ago is calculated, keeping in view the inflation and the resultant devaluation of currency.

The rule of thumb approach to pricing rooms also fails to consider the contribution of other facilities and services provided by the hotel in generating revenue. As hotel generates revenue from sources like food and beverage, conference, laundry, telephone etc so it must be a part of calculation while deciding room tariff for the hotel.

The Hubbart Formula :   The Hubbart formula, which is a scientific way of determining the room rent , was developed by Roy Hubbart in America in the 1940s. It resolves all the problems of the rule of thumb approach.

                                              ROI + Operating expenses- Non room revenue

                                                         Projected rooms sold per day X 365

The following steps are involved in calculating the room rent according to Hubbart formula :

  

•     Calculate the desired Return on Investment by multiplying the desired rate of return by the capital investment.
•             Calculate the desired profit after deducting the income tax.
•           Calculate fixed expenses and undistributed operating expenses including depreciation, interest, insurance, Human resources, marketing, maintenance, electricity, general expenses etc
•     Estimate non room revenue. Non room revenue department includes Food and beverage, conferences, health club, laundry etc
•         Give average projected room occupancy for a day and multiply it by 365 to find the projected number of rooms sold per year.
•            Calculate the average room rate by solving the equation of the formula.

Illustration:

Hotel ‘XYZ’ having 40 rooms is constructed at a project cost of Rs 10 crores. The owner’s capital is Rs. 6 crores on which he is expecting 20 % ROI while the remaining capital is arranged through a bank loan at an interest rate of 15% per annum. The income tax rate is 30 % and the hotel is expected to make 60% occupancy. The operating expenses are estimated to be Rs. 2 crores while the hotel is expecting Rs. 1 crore as non room revenue in the first year of its operation. Calculate Average rack rate with the use of Hubbart formula

Solution: Desired ROI- Rs. 60000000 x 20 % = 12000000

Total room nights = 24 x 365 = 8760

Total expenses = Rs. 20000000 + 6000000 ( bank interest) = 26000000

Non room revenue = Rs. 10000000

Pre- tax income -     30 x 12000000      = 5143857

                                           70

5142857 + 12000000 = 17142857 /-

                                    17142857 + 26000000 - 10000000

                                                           8760

=    Rs. 3783 /-   is estimated as average rack rate for the hotel as per Hubbart formula. 

REVENUE MANAGEMENT - VI sem

Revenue Management is the art and science of maximizing the revenue of a commercial establishment. In hotel rooms division various tools and tactics are used to achieve optimum revenue. Airline industry was the first to realize the need for dynamic pricing. This need emerged from the fact that airline seats are a highly perishable product and the costs of airline operations are primarily fixed in nature. There are many other industries, particularly, in service sector, with a similar nature of product. Hotel rooms, car rental, theater seats etc. are examples in this context.  Revenue management is also referred as yield management.

Concept and History: In 1985, American Airlines launched Ultimate Super Saver Fares to compete with a low cost carrier. This was a very successful scheme. . The airline operators realized that their product (i.e. seat in the flight) was highly perishable- as a seat left unoccupied in a flight results in a loss of revenue of that seat forever. To maximize the revenue generated from selling the seats in a flight, the airlines adopted a technique based on demand and supply. When the demand for seats in a particular flight exceeded the supply (or availability) of seats in a flight, the airlines charged higher rates  but when the supply exceeded the demand the airlines offered various types of discounts and package plans, resulting in the lowering of prices , which would lead to the selling of more seats on that particular flight. Airlines charge different airfares from s This way of maximizing revenue generation is termed as yield management. Soon, this concept gained popularity in various sectors selling highly perishable products and services like bus and car rental, hospitality etc.

Yield management or revenue management is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource. The challenge is to sell the right product to the right customer at the right time for the right price.

In the perspective of the hospitality industry, guest room is one of the highly perishable products of the hospitality sector. If a room is not sold on a particular day , the entire potential revenue that could be generated from it is lost forever. To maximize the revenue generated from rooms, hotels now sell their rooms at varying prices. Yield management is composed of a set of demand forecasting techniques, which are used to determine whether the room rates should be raised or lowered, and whether a reservation should be accepted or rejected in order to maximize revenue. Thus, we can define yield management in the hotel industry as a ‘technique based on the principle of demand and supply , used to maximize the revenue generation of any hotel by lowering prices to increase sales during off season and raising the prices during peak season.

Hotels fulfill the three essential conditions for revenue management to be applicable:

Ø  The total room inventory available for sale is fixed

Ø  The room product is highly perishable as actually what we sell is time in a given space

Ø  Different customers are willing to pay a different price for using the same product

Tools and techniques used by Revenue Managers to maximize room revenue

(1)   Capacity Management: It is also known as selective overbooking. It is a high demand period revenue management technique. Overbooking means that more number of rooms is booked by hotels than their actual capacity. Hotels overbook to compensate for the potential losses due to no-show, last minute cancellations and under stays. Managers consider following factors before deciding the number of rooms to be overbooked:

·        Past statistical percentage of no-show, cancellations and under stay in the hotel

·        Ratio of guaranteed and non-guaranteed reservation

·        Reconfirmation status of the reservations for the concerned date

·        History of the non-materialization of the reservation of those guests who are expected to arrive on the date of over booking

·        Ratio of groups and FIT

·        Reservation lead time

·        Experience of the reservation/ Front office manager

·        Availability of rooms in other hotels in case of a bounce-off guest

(2)   Discount Allocation: Discounting is based on the theory that sale of a perishable item at reduced room rate is often better than no sale at all. Discount allocation is a low demand period tactic. As the hotel room product is highly perishable and most of the costs attached with room division operation are fixed in nature, hence, the hotels would like to sell their rooms at the best possible rate even if it is lower than the rack rate so as to optimize their revenue.

Revenue managers decide upon the percentage of discount and the number of rooms to be sold at a discounted tariff depending upon the demand forecast for the period. Therefore, accurate forecasting is an important part of discount allocation process. In yield management, only a certain number of rooms are sold at the discounted tariff while hotels try and sell remaining rooms at the rack rate. Depending upon the revision in demand forecast, hotels then release more rooms for discounted selling.

Another important aspect in discount management process is combining it with up selling. It implies that depending upon the demand scenario hotels may give discounts on higher priced rooms while keeping the lower priced room at rack rate. This is on the assumption that market has certain price elasticity and if a superior product is given at a relatively less difference in the price of the two than the market may upgrade itself to buy the higher priced room.

Various types of discount given by hotels include corporate, Travel agent, airline, weekend, group, offseason etc

(3)   Duration Control:  It is a tactic which is used when some of the days are high demand periods while some others are low demand in a given duration.

Duration control is a process in which multiple day reservation requests are preferred in comparison to single day requests if one or two days are forecasted as high demand days while the adjacent days are relatively low demand days. This means that under revenue management, a reservation for one night stay may be rejected, even though space is available for that night. This control is exercised so that the hotel can accommodate long staying guests which may otherwise be obstructed due to a few sold out days during an otherwise duration of room availability.

Yield Measurement

Yield measurement is a seven step process:

Step I : Potential Average single Rate = Room revenue if all rooms are sold as singles

                                                                                    Total rooms

Step II : Potential Average Double  Rate = Room revenue if all rooms are sold as Doubles

                                                                                                Total rooms

Step III: Rate Spread = Potential Average Double Rate – Potential Average Single Rate

Step IV: Multiple Occupancy % =   Rooms sold on double occupancy

                                                                       Total rooms sold

Step V: Potential Average Rate =  ( Rate spread X Multiple occ %) + PASR

Step VI : Room Rate Achievement Factor =   ARR

                                                                                    PAR

            Step VII : Yield % =      Actual room revenue      X 100

                                                Potential room revenue         

OR,             Rooms sold X ARR

            Total rooms X Rack rate

OR ,        Achievement factor  X  Occupancy %         

Time Share - 6th Semester Front Office

Time share

Definition :  Time share is a marketing concept in which hotels are marketed on a membership basis. Members can avail accommodation in the time share property by paying the upfront advance for the stay of a fixed number of days every year for a specific number of years.

Salient Points:

v  Time share is a marketing concept

v  It is on a membership basis

v  Specific Period

v  Advance payment

Major International brands for timeshare:

• Disney
• Hyatt
• Starwood
• Marriots
• Four Seasons
• Hilton
• Ritz Carlton

Domestic Brands :

• Club Mahindra
• Kamat Group
• Sterling resort
• Toshali Resort
• Cambay group

BRIEF HISTORY OF TIMESHARE

Timeshare is any arrangement whether by membership  or agreement whereby a purchaser receives a right to use accommodation for a specific period of time every year and which extends for a period of more than three years.

It started as a simple idea based on the assumption that people do not need vacation lodging accept for a week or two per year. Take a room, cabin or villa and divide ownership into 52 weeks (in practical, it is divided into 51 weeks with 1 week for maintenance). It allows you to purchase 1/51 of the ownership of the house. The next logical step in the development of timeshare was to be able to exchange time in these places between different people who wanted vacation in theses area each year. So, too entitle a customer deals with are time company itself and an exchange company.

Leisure travel has always symbolized luxury, freedom, pleasure and satisfaction. In fact the word luxury is derived from the Latin word luxu, signifying sensuality, abundance and splendor. The Greeks even believed that leisure was the prerequisite for civilized living. Following the independence, our grandfathers worked for a life of freedom and relaxation. It was after all, the promise of democracy. Yet for most of them, the good life remained a dream. Years later, technology would leverage their hard work for our benefit and the generation to come.

Timeshare, as a form of, vacationing, began in the early 1960’s in Europe, when various families share in the ownership of vacation homes. Instead one family owning a vacation home and using it for years, it made more sense to share the time with others. This way each family owned, what they used and shared the upkeep cost proportionally. When this hared vacation home concept came to America in the early 70’s, it took the form of furnished condominium and mega resorts. Like any new concept timeshare had their teething problem. Once renowned for high pressure sales, long term promises and short earn delivery, the industry had undergone regulations both inside and out, greatly improving public acceptance and security. Resort developers discover that greater consumer satisfaction leads to greater profits. Recognizable names like Disney, Marriots, Hilton, Hyatt, Four Seasons, Ritz Carlton, Starwood etc now offer timeshare and they have helped to improve its image. Leading timeshare company in India include Club Mahindra, Sterling resorts and holiday pvt ltd, Toshali resort , Kamat Group ,etc. Today, more and more people are discussing the benefits of timeshare. Till date 45 million household worldwide own a time share and over 5000 resorts, in over 30 countries. In fact, time share is the fastest growing segment in hospitality industry.

Advantages of Time Share

v  Time share membership provides the member immunity from rising costs and inflation. Accommodation is available even after 10 years at the amount paid today as per the current value of money. More over it has a one time cost for the customer.

v  Time share has an emotional connect as it is a commitment of the member to his family of spending quality time with them every year

v  Time share stay is safer for a member compared to conventional hotels as only the members are given a right to admission. All the guests staying in timeshare are properties are known to the management and they primarily constitute family clientele.

v  Depending upon the company policy members can gift, sell, and transfer their membership to others. Time share may also be considered as an investment in such cases.

v  Facility of exchange provides large range of options for time share members.

v  Overall cost of time share holiday comes out to be less expensive in the long run of time.

v  From the time share company’s perspective there is a guarantee of business and sgenerally it is not affected by recession.

v  Advance payment received by the company helps them to repay their loans. This reduces the interest cost burden on the property and substantially lowers the fixed cost of the property.

v  Time share industry is an employment generator for the locals and it helps in promoting domestic tourism.

Disadvantages of Time Share

v  Large amount taken as an upfront payment is a major deterrent for potential customers.

v  Fly –by- night operators have created a negative publicity for the time share industry and create an anxiety in the mind of the buyer.

v  Sometimes timeshare companies do not provide quality service which creates negative word of mouth publicity for the industry.

v  Time share industry has a very high marketing cost which reduces the profit margin of the promoter.

v  Maintenance cost is high for time share properties.

v  Time share membership is considered expensive by a buyer when he starts calculating the interest component and other associated costs on his investment.

Government’s Role in Time Share

Although, government should not be in the business of running a business but it’s their job to facilitate an environment which is conducive for business. This creates an atmosphere in which confidence of the investor is high and they can focus only on running their business instead of focusing on other issues.

Some of the areas where government plays a pivotal role in time share industry are listed as below:

(1)   Security: Safety and security is an important concern for any industry and specifically so for tourism industry. No tourist wants to visit a destination where he perceives a threat for his life or belongings. It is government’s duty to ascertain that law enforcement agencies such as Police and Para-military work properly to maintain security at the destination. At some places government has also started a concept of tourist police who are specifically responsible for policing in tourist areas.

(2)   Infrastructure: Time share industry is dependent upon infrastructure provided by government to run its operation and to facilitate the convenience of its customers. The infrastructure to be provided by government includes proper roads, continuous supply of electricity, clean drinking water, sewage pipe lines, garbage disposal facility, street lighting, etc.

(3)   Loans and Subsidies: Time share industry is capital-sensitive. It requires huge initial investment to start a time-share business. Government can play an important role in this regard by providing financial assistance on a loan basis through nationalized banks and through other financial institutions. Government also provides subsidy on interest of these loans and other things like import duty, excise duty, etc. to promote industry which is in a nascent stage.

(4)   Regulatory Body: Time share industry has received a setback due to unscrupulous activities of the fly-by-night operators which resulted in loss of credibility for the industry. Government in this case helps the industry by playing the role of a regulatory body which curbs the dishonest players and controls the financial transactions between the properties and their members.

(5)   Taxation: Government’s role also includes collecting taxes and dues from the time share operators and the money collected from the taxation is then used for infrastructure and developmental activities in the region.

AIRDA: The industry must protect the right of both consumers and the industry in order to have a long term profitable business, to protect the rights of travelers/ consumers and the timeshare properties an association by the name “All India Resort Development Association (AIRDA)” was formed.  Most of the important timeshare properties are today the member of AIRDA.  And the slogan given by them is “Ensuring fair practices.  Assuring Safe Holidays.”

FIXED AND FLEXI WEEKS

With timeshare, you own a portion of time within years. There are two common methods for ownership of time:-

·         Fixed weeks

·         Flexi weeks

In fixed weeks, you buy a timeshare for specific week/weeks during a year. This is the most straight forward method, since you can deposit the timeshare directly or the one, you find yourself.

Under flexi weeks, you purchase the right to a certain block during the week. But others also have right of  those weeks and you might have to negotiate for the availability.

MULTI-LOCATION

Some timeshare programs have further expanded their offering with multiple locations, within the same timeshare organization. The obvious advantage of such an arrangement is the additional flexibility to visit others timeshare in other location, which belong within the group. Some assign you a ‘home resort’ with the right to ‘internal exchange’ for other resorts, while others are totally open, depending on your reservation request.

Maintenance and Fees

Maintenance Fee

The maintenance fee is an annual charge that goes toward the upkeep of your timeshare. Your maintenance fee usually covers property taxes, insurance, utilities, cable, telephone and all property upkeep, such as furniture, carpet ant the resort’s common facilities. The resort’s Homeowners Association usually decides upon the fee.

Transfer Fee

A transfer fee is what resorts charge to transfer the ownership from one party to another. The fee applies directly to resale timeshares. Transfer fee are determined by the resort and vary.

Recording Fee

As in all deeded properties, the recording fees are the nominal costs associated with the country from which the deed is being drawn. It is the country to which the timeshare resort is located.

Assessments

If a resort’s maintenance fee does not have a built in reserve fund for replacement and or major repairs, the timeshare homeowners association may reserve the right to charge a special assessment in the event improvements or repairs are required

Split in time share :

Time share is an ownership of a fixed number of days every year. As an example it may be  2 weeks per year for next 10 years. Some companies may allow its members to split this time  to twice a year or thrice a year vacations. It is known as split and its done with prior intimation to the time share company. Some companies may also allow to club the time share of two years again with prior intimation.

Condominiums

They are apartotels or apartment hotels. These units are developed on joint ownership

basis.  Each ownership purchases and has full right of and unit he has purchased and shares the cost common to the complex such as taxes, insurance, maintenance and upkeep of public areas including swimming pool, health club, parking, security, air conditioning, heating, cable, broad band, etc.  Each owner can occupy or sell his unit independently but is required to follow the rules and regulations laid by the management.  The owner enjoys the benefits of property, appreciation but need not bother about its maintenance, security, upkeep, insurance etc.  He is required to pay yearly maintenance charges.  In some cases a corpus can be made and the maintenance expenses are paid from the interest earned from the corpus.  In some cases the management can help the owner in renting out the property.  They take the full responsibility of the owners’ units’ safety and also pay to the owner a major portion of the rent earned from renting out.  Usually, the management requests the owners to rent out in case of major conferences.  The management earns a major portion by renting out conference hall and from catering.

EXCHANGE COMPANIES

You can purchase a timeshare either to use yourself as a vacation or to exchange other timeshare for other location. If you choose to go with the independent exchange company, you need to prove the timeshare availability for that week and that all the utilities and maintenance are paid for. Making a time share available with the exchange company for a week, you should expect to be able to choose the timeshare of similar value and for same amount of time.

Some exchange companies allow you to browse their space-bank (a term for the time shares that are available at one exchange company), before having to place deposit your own timeshare, while others require you to deposit a timeshare before accessing their space-bank. You will specify the geographic location, the time of the year, length of stay, minimum size unit and any amenities you would like. If you don’t immediately find, what you want, it is only because the exchange company may not be having at that moment. Everything in the time share depends on availability and that fluctuates daily.

RCI is the largest and the first exchange company for timeshares.

Resort condominium International

RCI  is a division of the firm Wyndham Worldwide (spin-off from Cendant).Founded in 1974 by Jon and Christel DeHaan, it has grown to become one of the larger brokers of timeshare trades and has evolved from that into travel clubs. RCI's CEO and president is Geoffrey A. Ballotti. RCI's corporate headquarters is in Parsippany, New Jersey. Currently, RCI's biggest competitor in the timeshare market are Dial An Exchange (DAELive) and Interval International.  RCI has over 6,300 affiliated resorts in over 100 countries around the world. Its membership base is approximately 3.8 million members worldwide. RCI operates two main exchange programs - RCI Weeks and RCI Points It is the registered international organization which facilitates exchange of timeshare between members. RCI has an access to 400,000 rooms in more than 100 countries.

Although RCI is affiliated with over 6300 resorts worldwide, their role in the timesharing industry is to provide exchange services to vacation owners at affiliated properties.  RCI does not buy or sell timeshare weeks.

RCI prioritizes exchange requests according to established Trading Power guidelines. The Trading Power of customer’s deposited holiday is based on the supply, demand, and usage of the week, resort and area they deposit. Other factors that influence deposit's Trading Power include season, unit configuration, the resort's Vacation Experience Profile (VEP), and how early you deposit the vacation time with RCI.  Depositing your week in deposit System early, and submitting an exchange request well in advance, maximizes opportunity to confirm a desired exchange

Interval International

Type	Public
Traded as	NASDAQ: IILG
Industry	Hospitality
Founded	1976
Headquarters	Miami, Florida U.S.
Key people	Craig Nash (Chairman, CEO)
Number of employees	5,000 (2012)
Parent	Interval Leisure Group
Slogan	"The Quality Vacation Exchange Network"
Website	www.intervalworld.com

Interval Leisure Group, Inc., or ILG, is a global publicly traded company. ILG is the parent company of Interval International, a leading global provider of membership and leisure services to the vacation industry. As of December 31, 2012, nearly 2,800 resorts located in over 75 countries participated in Interval's primary exchange network. As of that date, the Membership and Exchange segment had approximately two million members enrolled in its various membership programs including approximately 1.8 million in the Interval Network. The biggest competitors for Interval are RCI, Dial An Exchange (DAE) and Platinum Interchange. Interval is the second largest timeshare exchange company after RCI

Marketing of Time share

Effective marketing is one of the most important aspects of the success or failure of time share business. Problems faced in the marketing of time share may be listed as below:

v  Negative image of the industry: Some dishonest people in the industry who vanished after collecting money from members have created a negative image of the industry. This makes it difficult for the marketers to convince a customer to buy membership unless the timeshare company is backed by a very reliable brand. 

v  Large upfront payment: As advance taken as a membership fees is relatively large it substantially reduces the total market size of the potential buyers.

v  Intangibility: Hospitality experience is largely intangible as comfort, friendliness; courtesy etc. can not be measured but only experienced. Marketer finds it difficult to convince the potential buyer as they can not carry their product along with them but can only create a mental image or show pictures, video etc.

v  Cost: Cost of marketing is relatively very high because company has to reach different cities in the country through their own executives and time share product can not be sold through travel agents unlike in the case of conventional hotels.

v  Lack of holidaying culture: In India holiday culture particularly the concept of leisure vacations is still in an infancy stage. This makes it difficult for marketer to convince the customer as there is no pressing compulsion on the buyer to purchase a holiday product.

v  Uncertainty of future : As timeshare business is about selling a product for future use and the future itself is considered to be uncertain by most of us it creates a conflict in the mind of the buyer whether to buy this product or not.