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 %
