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 %