How to increase the revenues of the hotel with Revenue management?

1. How to increase the revenues of
the hotel with Revenue
management?
Stanislav Ivanov
Email: stanislav.ivanov@vumk.eu

2. The Lecturer...
2
• Editor-in-chief of the European Journal of
Tourism Research (http://ejtr.vumk.eu)
• Vice Rector for Academic Affairs and Research at
International University College, Bulgaria
(http://www.vumk.eu)
• Member of the International Association of
Tourism Experts (http://www.aiest.org)

3. Content
• What is Revenue management?
• Economic fundamentals of hotel RM
• Hotel revenue management system
• Hotel revenue management process
• RM metrics
• Value creation
• Hotel revenue management tools
• Hotel revenue management software
• Ethical issues in RM
3

4. What is Revenue management?
• A set of tools and actions dedicated towards the
achievement of an optimal level of the hotel’s net
revenues by offering the right product to the right
customers via the right distribution channel at the
right time at the right price.
4

5. Economic fundamentals of RM
• Product perishability
• Limited capacity
• High fixed and low variable costs
• Unequal distribution of demand during the
day/week/month/year
• Possibilities to forecast the demand
• Possibilities to segment the market demand
• Different willingness-to-pay of market segments
• Different price elasticity of market segments
• Possibilities for advance bookings
5

6. Hotel revenue management system
6
Booking request
RM process
Booking elements
Data and
information
Revenue
centres
RM software RM tools
Structural elements
Hotel revenue management system
Macroenvironment
Microenvironment
Impacts
Internal
environment
Patronage
intentions
Customer
RM team
Perceptions of RM
fairness

7. Revenue management process
7
Goals
Monitoring
Implementation
Forecasting
Analysis
Information
Stage Content
RM metrics – RevPAR, ADR, occupancy, GOPPAR
Strategic, tactical and operational goals
Operational data and information provided by company’s marketing
information system
Analysis of demand and supply in the destination/segment
Analysis of operational data and information
Forecasting demand and supply in the destination/segment
Forecasting RM metrics on a daily basis
Forecasting methods
Pricing and non pricing RM tools
Optimization process
Approaches for solving RM mathematical problems
Performance evaluation of taken decisions and the RM system as a whole
Decision
Sales techniques
Human resource training

8. RM metrics
• Occupancy
• ADR
• RevPAR
• Length of stay
• GOPPAR
• Yield
8

9. Booking curve for a specific check-in date
9
Days prior to
check-in
Number of booked
rooms
91 14
31
61 7 0
Maximum number of
rooms in the hotel
В
А
Days prior to
check-in
Number of booked
rooms
91 14
31
61 7 0
Maximum number of
rooms in the hotel
С
P
P

10. Booking curve at a specific date
10
Days to check-in
Number of booked
rooms
91
14 31 61
7
0
Maximum number of
rooms in the hotel
Days to check-in
Number of booked
rooms
91
14 31 61
7
0
Maximum number of
rooms in the hotel
А
B
P
C
P

11. Value creation
•
11

12. Value creation
• Types of value
12
Gross value Net value
Expected
value
Expected gross value
(EGV)
Expected net value
(ENV)
Perceived
value
Perceived gross value
(PGV)
Perceived net value
(PNV)

13. Value framework for hotel selection
13

14. Value framework of repeat purchases
14

15. Hotel revenue management tools
Pricing RM tools
• Price discrimination
• Lowest price guarantee
• Dynamic pricing
Non-pricing RM tools
• Overcontracting and overbookings
• Room availability guarantee
• Length of stay controls
• 100% satisfaction guarantee
Combined RM tools
• Channel management
15

16. Price discrimination
• Setting different prices for different market
segments of the same product and erecting price
barriers among them, so that customers with
higher prices cannot buy at lower prices and
customers with lower prices cannot sell the
product to the customers with high prices.
16

17. Price discrimination
Hotel revenues with and without price discrimination
17
0 Q1
P1
E1
D
D
P
Q 0 Q5
P2 E2
D
D
P
Q
E3
E4
E5
P3
P4
P5
Q4
Q3
Q2
0 Q1
P1
E1
D
D
P
Q 0 Q5
P2 E2
D
D
P
Q
E3
E4
E5
P3
P4
P5
Q4
Q3
Q2
Figure A Figure B

18. Price discrimination
• Price is the strongest tool for market positioning of
the hotel – “the chain saw” metaphor
• Involves manipulating the price structure and price
dynamics.
• Price discrimination is not a crime but a desirable
strategy by the hoteliers!
• Carefully thought of and strategically justified
decision.
18

19. Types of prices in the hotels
• Type of services – prices for main and additional
services
• Board – RO, BB, HB, FB, AI
• Type (double/twin, single, studio, suite), category
(standard, superior, deluxe), amenities and view
of the room
• Market visibility of the hotel – promotional prices
for newly built hotels (market penetration pricing)
19

20. Types of prices in the hotels
• Time-based criteria:
- Day of the week – weekday and weekend prices
- Period of the year – prices before, during and
after the active tourist season
- Prices during special events
- Lead time between booking date and check-in
date
- Length-of-stay
20

21. Types of prices in the hotels
• Price format – net and commissionable rates
• Demand characteristics:
- Trip organisation – prices for unorganised tourists
(rack rates), for corporate customers, for travel
agents, for tour operators
- Age – discounts for children and senior travellers
- Guest loyalty – discounts for loyal guests
- Number of guests – group discounts
- Other – government/ municipal employees,
members of a club / organisation / association,
travel agency employees, honeymooners, prices for
incentive trips, etc.
21

22. Price barriers (tariff conditions)
• Requirement for advance booking and advance
booking payment
• Lead period between booking payment date and
check-in date (3, 7, 14, 21, 30 days)
• Minimum length of stay requirements
• Day of the week – weekday, weekend
• Group size
22

23. Price barriers (tariff conditions)
• Cancellation charges – 100%, fixed amount, fixed
percentage, no cancellation changes
• Amendment possibilities – none, change of check-
in date possible but without shortening the length
of stay, unlimited against amendment charge,
unlimited without amendment charges
• Age restrictions (children, senior travellers)
23

24. Price parity
• The final price for the consumer should be nearly
the same in the different distribution channels
• Different final prices increase the mistrust of the
customer and he avoids the bookings
• Cannibalisation in the distribution channels –
overstimulation of one channel with very low prices
“eats out” the other channels.
24

25. 25

26. Pricing strategies
• Market penetration pricing
• Market skimming pricing
• Product bundling
• Optional product pricing
• Psychological pricing
• Promotional pricing
• Captive pricing
26

27. 3D-pricing model
27

28. Types of 3D-pricing strategies
28

29. Types of 3D-pricing strategies
29

30. Types of 3D-pricing strategies
30

31. Types of 3D-pricing strategies
31

32. Types of 3D-pricing strategies
32

33. Types of 3D-pricing strategies
33

34. Types of 3D-pricing strategies
34

35. Types of 3D-pricing strategies
35

36. Overcontracting and overbooking
36

37. Overbookings
• Management of overbookings is a set of managerial
techniques and activities connected with continuous
planning, reservation and control, aimed at revenue and
yield maximization through confirming more rooms than
the available capacity of the accommodation
establishments.
It includes two groups of activities:
• Defining and reserving the optimal number of
overbookings for each date and its controlled modification
according to the market changes and specific demand and
booking patterns.
• Managerial decisions and operational activities connected
with walking guests with overbookings (redirecting clients
to other hotels).
37

38. Overbookings
Reasons
• Not all booking confirmed for a particular date will be really
used. Due to different reasons some of the guests do not
arrive and are considered ‘no show’, other bookings are
cancelled or amended in the last minute, the stay of other
guests is reduced, and the rooms remain unsold.
• Rational hotel managers aim at maximizing the revenues
and profits of hotels.
• Hotel services are perishable and cannot be stored or moved
to other geographical location. The lost revenue from each
unsold room is gone forever.
• Hotels have fixed capacity. In order match capacity with
demand they react to short-run changes in demand with
changes in prices and the number of confirmed rooms.
38

39. Overbookings
The mathematics
Basic model – variables:
• X – the number of rooms of guests holding confirmed
bookings for a specific date do not arrive at the hotel (no
shows, last minute cancellations, last minute amendments of
reservations of already accommodated guests).
• Xi – the actual number of no shows, last minute cancellations,
last minute amendments of reservations of already
accommodated guests
• F(X) – the distribution function of X
• r – room rate
• c – costs for accommodating customers in alternative hotel
• X* – optimal level of overbooked rooms
• MR, MC, TC – marginal revenues, marginal costs and total
costs associated with the overbookings
39

40. Overbookings
The mathematics
40

41. Overbookings
The mathematics
Marginal costs of the overbookings MC are
found through differentiating (1):
41

42. Overbookings
The mathematics
The hotel does not receive any revenues from
the unoccupied rooms, as well as from walking
guests to other hotels due to overbookings.
Thus, its marginal revenues are null:
42

43. Overbookings
The mathematics
The hotel can afford to overbook until the
marginal revenues from the overbookings
exceed the marginal costs from them:
43

44. Overbookings
The mathematics
The optimal number
of overbookings X* is
the smallest integer
for which inequality
(8) is fulfilled
(Netessine &
Shumsky, 2002:39-
40)
44

45. Overbookings
The mathematics
Two types of rooms (H – higher priced, L –
lower priced)
45

46. Overbookings
The mathematics
TC =
46

47. Overbookings
The mathematics
Marginal costs are determined through:
47

48. Overbookings
The mathematics
48

49. Overbookings
The mathematics
• Coordination of overbooking policies by 2
hotels: summing the distributions of last
minute cancellations, no shows and
amendments for the two hotels: X1 and X2,
respectively.
49

50. Overbookings
The mathematics
50

51. Overbookings
The mathematics
• Application of cancellation charges - m
51

52. Overbookings
Walking guests
Who to be walked?
Factors, influencing the decision
Length of stay
Loyalty
Room rate
Type of booking
Lead period
Distribution channel
Where to walk?
Costs for walking guests
52

53. Length of stay controls
• Requirements for minimum number of overnights
during periods of high demand (e.g. special events, long
weekend) or very low demand (e.g. weekends for
business hotels). The goal is maximum occupancy
during that period.
• Nearly always combined with price discrimination and
high price barriers (cancellation deadlines)
• Bookings below the minimum length of stay are not
confirmed
• Effective if applied by most of the properties in the
destination.
53

54. 54

55. Lowest price guarantee
• If a customer finds a lower price within a
predetermined period (usually up to 24 hours after
the booking) for the same or another similarly
located hotel in the destination with the same room
type / board / dates of stay / number of rooms, the
hotel matches this low price and provides
additional discount.
• Does not have financial value if the period is
limited to 24 hours. Real financial value is created
if the guarantee includes the whole period between
the booking date and the check-in date  financial
risk for the hotel.
55

56. Types of lowest price guarantee
56
Benchmark hotel
Same Similar
Validity 24 hours Type I Type III
The whole period from
booking date to check-in date
Type II Type IV

57. Types of lowest price guarantee
57

58. 58

59. 100% satisfaction guarantee
• If the customer is not satisfied with the stay the
hotel returns all the money paid by the customer
without the need the customer to provide
explanations for the dissatisfaction.
• In case of a repeat booking the customer does not
receive such guarantee, i.e. the guarantee can be
used only once by the customer  protected
interests of the hotel.
• Does not bring revenues but decreases the
perceived risk by the customer.
59

60. 60

61. Room availability guarantee
• Provided by the hotel chains to their regular
customers for accommodation outside periods of
high demand. Requires 48/72 hours advance
booking.
• Guarantees that the guest will not be walked in case
of overbooking.
• Requires excellent occupancy planning by the hotel.
• Not valid with free overnights.
61

62. 62

63. Channel management
• Choice of a distribution channel – GDS, Travel
agencies (tour operators, travel agents, OTAs),
group buying websites.
Factors, influencing the choice:
• Characteristics of hotel’s product
• Characteristics of the company and its marketing
strategy
• Characteristics of distributors
• Characteristics of target market
• Competition
63

64. Channel management
Points to consider:
• Distribution channel cannibalisation
• Large tour operator syndrome
64

65. Channel management
• Determination of prices - prices have to
stimulate future bookings, not to serve as a
bonus for past sales
• Determination of booking terms – release date,
cancellation and amendment terms, payment
terms
• Allotment management – commitment,
allotment, free sale, upon request
65

66. Relationship between the booking
term dates
66

67. Relationship between the room price and the degree
of financial interdependence between the hotel and
the distributor
67

68. Revenue management software
• http://www.jda.com/solutions/hospitality-
revenue-management.html
• http://www.prospricing.com/pricing-software/
• http://www.easyrms.com/products.php
• http://www.micros.com/industries/hotel-
management-system.htm
68

69. Ethical issue in RM
Acceptable practices:
• Providing customers with all information regarding
prices and booking conditions – hiding information
destroys trust;
• Deep discounts in booking rates in exchange for stricter
cancellation / amendment conditions;
• Different prices for products perceived by customers as
different – e.g.. weekend and weekday prices
Unacceptable practices:
• Insignificant price discounts in exchange for stricter
cancellation / amendment conditions;
• Changes in booking terms without informing the
customer.
69

70. Revenue management
Final remarks
• Systematic and predictable use of RM tools
– frequent changes lead to uncertainty and mistrust
among customers
• Considering all sources of revenues in the hotel,
not only from Rooms division.
• Optimising the revenues of the single property and
the hotel chain in the destination as a whole.
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71. Selected reading
• Ivanov, S. (2006) Management of overbookings in the hotel industry – basic concepts and practical
challenges. Tourism Today 6, pp. 19-32. SSRN Working Paper No. 1295965. Available online at:
http://ssrn.com/abstract=1295965
• Ivanov, S. (2007) Dynamic overbooking limits for guaranteed and nonguaranteed hotel reservations. Tourism
Today 7, pp. 100-108. SSRN Working Paper No. 1295968. Abstract available online at:
http://ssrn.com/abstract=1295968
• Ivanov. S. (2007) Conceptualizing cannibalisation: the case of tourist companies. Yearbook 2007,
International University College, ISSN 1312-6539, pp. 20-36. Available online at:
http://ssrn.com/abstract=1293730
• Ivanov, S. (2013) Optimal overbooking limits for a 3-room type hotel with upgrade and downgrade
constraints. SSRN URL: http://ssrn.com/abstract=2190042
• Ivanov, S., V. Zhechev (2012) Hotel revenue management – a critical literature review. Tourism, 60(2), pp.
175-197. Earlier version available at SSRN: http://ssrn.com/abstract=1977467
• Kimes, S. E. (1989) Yield management: a tool for capacity-constrained service firms. Journal of Operations
Management 8(4), рр. 348–363
• Koide, T., H. Ishii (2005) The hotel yield management with two types of room prices, overbooking and
cancellations. International Journal of Production Economics 93-94, pp. 417-428
• Lee-Ross, D., N. Johns (1997) Yield management in hospitality SMEs. International Journal of
Contemporary Hospitality Management 9(2), рр. 66–69
• Netessine, S., R. Shumsky (2002) Introduction to the theory and practice of yield management. INFORMS
Transactions on Education, 3(1), рр. 34-44
• Ng, I. C. L. (2009). The pricing and revenue management of services: A strategic approach. London:
Routledge
• Tranter, K. A., Stuart-Hill, T. & Parker, J. (2008). Introduction to revenue management for the hospitality
industry. Harlow: Pearson Prentice Hall
• Wirtz, J., S. E. Kimes, J. H. Theng. P. Patterson (2003) Yield management: Resolving potential customer
conflicts. Journal of Revenue and Pricing Management 2(3), pp. 216-226
• Yeoman, I. & McMahon-Beattie, U. (eds.) (2011). Revenue Management. A Practical Pricing Perspective.
Palgrave Macmillan
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72. THANK YOU FOR THE ATTENTION!
QUESTIONS?
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