Revenue Management: Origin, Concepts, and Hospitality Impact Report

This report provides a comprehensive analysis of revenue management (RM) within the hospitality industry. It begins by exploring the origins of RM, tracing its roots back to the aviation sector and dynamic pricing strategies. The report then delves into the core concepts and key characteristics of RM, including fundamental economic principles, performance indicators, and the importance of forecasting. It examines how RM impacts hospitality businesses, focusing on performance improvements, organizational responses, and the achievement of business goals. The report also assesses the role of RM systems and processes in supporting strategic, tactical, and operational objectives. Furthermore, it explores the information requirements of the RM process, the significance of market segmentation, and the creation of profit through customer definition and forecast creation. The report also develops a functional RM plan and strategy to optimize pricing and revenue decisions using pricing and non-pricing tools for a chosen hotel. It also discusses the impact of digital technology on revenue management.

UNIT 26: Revenue Management
MARCH 9, 2022
Grizli777
By:
 Laetitia Marie: NC77202
 Melissa Levasseur: NC7720
 Rolisha Ramdin: NC77209
 Noah Turner: NC77218

Contents
Explore the origin, the core concepts and key characteristics of RM and their impact on the
hospitality industry................................................................................................................................1
P1 Discuss the origin of RM and its relevance to contemporary hospitality management................1
P2 Examine the core concepts and characteristics of RM including fundamental economic
principles and performance indicators that impact the hospitality industry.....................................4
M1: Review the impact of RM on hospitality businesses in terms of performance and
organisational response....................................................................................................................9
Impacts of revenue management on the hotel in terms of performance and organisational
response..........................................................................................................................................10
D1: Critically evaluate the impact of RM and provide justified recommendation for the use and
application of RM in the hospitality industry to achieve business goals and objectives..................12
LO2 Assess the relationship between RM systems and processes and how these link to strategic,
tactical and operational hospitality business goals..............................................................................15
P3 Examine how structural, procedural and other elements of RM support the achievement of
business goals within a hospitality organisation..............................................................................15
M2: Critically evaluate how RM supports the achievement of hospitality business goals within a
hospitality organization...................................................................................................................20
L03: Examine the information requirements of the RM process and the role of market segmentation
in effective business analysis and forecast creation............................................................................24
P4: Examine the information requirements of the RM process for core hospitality industry..........24
P5 Evaluate the process of market segmentation, the creation of profit through customer
definition and forecast creation using a range of hospitality examples..........................................28
LO4 Apply pricing and non-pricing tools in dynamic hospitality contexts to formulate and justify
revenue optimisation decisions...........................................................................................................32
P6 Develop a functional RM plan and strategy to optimise pricing and revenue decisions using
pricing and non-pricing tools for the chosen hotel..........................................................................32
Revenue Management Cycle (RMC)................................................................................................32
Pricing vs. Non-pricing strategies.....................................................................................................35
REFERENCES:.......................................................................................................................................38
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Explore the origin, the core concepts and key characteristics of
RM and their impact on thehospitality industry
P1 Discuss the origin of RM and its relevance to contemporary hospitality
management.
Introduction
The origins of revenue management is related to the aviation sector in the 1980s. Airlines began
implementing an idea known as dynamic pricing in order to optimize financial results. American
Airlines, for example, has had a lot of success using price discrimination strategies and forecasting
consumers' needs.
Now, what exactly is revenue management, as well as what exactly does it implies? In general, it can
be defined as the use of data to help predict customer behaviour just so product accessibility and cost
can be adjusted to create the most amount of revenue attainable. The primary goal of the hospitality
sector is to boost revenue while delivering the same quantity of items or resources, such like hotel
rooms. It's all about balancing supply and demand, and effective revenue management requires an
understanding of how consumers think as well as what their value views are. This may include
declining to sell a room today in order to sell it for a greater price later, but it could also include
recognizing when demand fall enough just to sell at a discount.
Revenue Management in the hospitality industry
Revenue management is the "science and art of enhancing firm revenues while selling essentially the
same amount of product," as according to Dr. Peter Bell of the Ivey School of Business. It's defined as
"the practice of selling the right product for the right price at the right time to the right customer,"
according to an article in Hospitality Upgrade magazine. Revenue management is sometimes known
as yield management in the hospitality business, as seen in the goal to raise the yield over a plane seat,
renting a car, or hotel room.
The major goal of revenue management, which has grown in popularity since the 1980s, is to
maximize revenue and profitability. Perishable items, high fixed costs, low variable costs, and fixed
volume are all factors that contribute to increased profit margin and return as a result of revenue
management in the hotel industry. Hotels and other accommodation establishments, rental car firms,
travel package and tour operators, restaurants, and cruise lines are among them.
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Businesses achieve from revenue management because it allows them to take advantage of price
differentiation through market segmentation. Customers in various segments have diverse needs and
desires. Middle-class leisure travellers, for example, are price conscious, prefer to travel on weekends,
and prioritize cost. Business travellers, on the other hand, place an emphasis on efficiency, preferring
to travel throughout the week and focusing on service quality. Other groups fall somewhere in the
middle. Retirees or seniors, for example, might well be price conscious but willing to travel during the
week.
For example, airline companies adopt revenue management tactics such as providing business class
tickets at significantly greater costs than coaches and overbooking flights, as well as preventing
changes on massively discounted economy prices while enabling alterations on higher-priced tickets.
Hotels utilize revenue management by giving bundle package rates to large groups while charging
single business visitors nearer to the highest prices. Car rental firms cater to several market segments
with cars varying from economy to luxury, and they offer tanks full of gas and damage insurance to
generate more cash.
Managing revenue usually involves a culture change. To obtain the most benefits, revenue
management methods and associated technology must be implemented throughout the board. This
necessitates a higher level of inquiry, measurement, and analysis. All staff working in marketing and
sales, customer care, finance and accounting, and product innovation must become accustomed to
these operations. When hotels include revenue management into their operations, they help to
stimulate innovation, which leads to increased income for both basic "products" like guestrooms and
supplementary services like room service and bar purchases.
Forecasting
Forecasting is a vital subject to comprehend when understanding revenue management. In basic
terms, forecasting is the process of making future predictions based on historical data, current data,
and trend analysis. As a result, a business will be able to predict future situations and events.
Forecasting is beneficial to individuals in hotel management as it makes it far easier to think long
term and make more educated strategic decisions. Furthermore, because a hotel can estimate demand
levels ahead of time, it can help the organisation boost the amount of income made from perishable
inventory.
Below is a list of some of the most important things to remember if using forecasting as parts of a
revenue management strategy.
 Maintain Accurate Records
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The concept of selling the right product, to the right consumer, at the right moment, through the
appropriate channels, for the right cost, at the lowest cost to the business, is at the core of revenue
management. This requires the use of the information accessible to them, which needs the upkeep of
correct records. One should keep records of occupancy rates, income, room prices, and other key
performance indicators (KPIs).
 Use of historical data
Typically forecasts, especially in hotel revenue management, depend significantly on past data and the
belief that past trends will replicate themselves. While looking at the data, one might discover, for
example, that demand drops from April to July, or that the busiest months are frequently in the
summer. This data can be utilized to develop reliable forecasts about how demand will change at
some point.
 Make use of data that are in the books
Information which is already in the books is one of the most valuable things companies have towards
forecasting as well as hotel revenue management in general. This usually refers to guestrooms that
have been already reserved, and also any previously scheduled activities, parties, or meals. The hotel
can, however, look at its google AdWords and social media posts in addition to this. The hotel
industry must remember that the material inside the books is among the most reliable information
they have.
 Take Special Occasions and Holidays into Consideration
It is important that one’s forecasting efforts account for events and celebrations, and that any
necessary changes are made with all these factors in mind. For example, if a hotel uses historical
analysis to predict some certain level of demand but fail to consider the fact that perhaps a big sports
event is taking place in the region, the forecast may be incorrect. Similarly, holidays such as
Christmas, Easter, Ramadan, and Thanksgiving may cause current hotel trends to divert towards
a positive or negative way.
 Maintain a Focus on Industry Trends
It is also critical to pay attention on broader market trends. For instance, has there been a reduction in
overall travel towards the zone where the hotel is located? Are there any global events affecting
bookings, like the COVID 19 pandemic? There could also be new methods of doing business that are
assisting competitors in attracting visitors, or new distribution networks that are worth investigating.
When forecasting, all of these issues must be taken into account.
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There are a few more tips that can help users improve their forecasting and understand fully what
revenue management is really all about. These include staying aware of competitors and segmenting
one's forecasts so that the company can be more precise with their predictions.
 The concepts behind hospitality revenue management.
Revenue management in the hospitality industry is the selling of the right rooms, to
the right customers at the right time for the right price and through the right channel.
It requires data on past revenue, past consumer purchase behaviour, past pricing
strategies, market demand, and more in order to predict future revenue based on future
pricing strategies.
 Where did the concept of revenue management come from?
This concept was originally designed for the airline industry, these companies could
find ways to forecast their customers’ needs and demands. Then it was applicable and
beneficial to any type of industry that involves customers who are willing to pay
different prices for the same product.
 Importance of revenue management in the hospitality industry
They are making the most out of room inventory in order to further maximizes the
revenue. It also led to greater innovation in terms of branding or even their products. It
improves efficiency, drive down costs and improve demand forecasting. We can see the
importance and the great impact this have in any hospitality businesses but it also,
determine the right balance of staff, roaster, and even for example an hotel have an edge
over their competitors.
Hotels have fixed costs whether their rooms are sold or not, using the revenue
management they make sure that they meet their costs and price their services to allow
them to make profit.
 How are hotels suitable to apply revenue management?
Hotels have a fixed capacity of guests; they provide perishable product for example
the rooms and also, they have a high fixed costs and low variable costs which depend
on the type of rooms and special requests. Their product can be priced differently,
demand evolves, and the product can be sold in advance, early bookings. The market
can be segmented, couples, family, businessman and young adults.
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 The impact of digital technology on the evolution of revenue management.
An element that has a direct impact on digital distribution is price parity, sites like
TripAdvisor, Trivago, Kayak etc which allows customers to make price comparison.
Another aspect that has been influence by the digital technology is online reputation,
maintaining a good online reputation of a service or even a destination is an objective
that companies put forward as it has a decisive influence on demand.
Some other ways how digital technology has an impact on revenue management are:
1. The weight of big data.
They can obtain a huge volume of customers’ data through digital analysis tools for
example google analytics and it allows more precise segmentation and better
customisation. For example, they can predict the products the customers may want,
and they can further use those key data to influence the customer’s behaviour.
2. Searching and bookings.
It has now made the process of searching and booking simpler and easier and also
increases products visibility and product demand.
3. Strategic distribution
It involves in aiming the right customer with the right service at the right time and it
also helps in understanding and analysing online reality in order to optimise results.
4. The new revenue manager
They need to have a specific training in revenue management but also a knowledge of
the hospitality market. Companies need to ensure that they have constant training and
development, they need to have a strong analytical, communication, team focus and
dealing skills.
5. Artificial intelligence and machine learning
They help revenue managers to make decision quicker, develop new rate plans and
create more segmented offers. They also help them to identify patterns and highlight
issues before they have a negative impact. Nowadays many hotel groups, for example,
the Marriott group used this Artificial Intelligence in its mobile application called
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Bonvoy, it collects the user’s data, intent data, and attribution data the application is
making complex recommendations around in-destination offerings
P2 Examine the core concepts and characteristics of RM including fundamental
economic principles and performance indicators that impact the hospitality
industry.
Interpretation of the key internal and external RM performance benchmarks including
occupancy, length of stay.
Internal Determinants of revenue management:
This consists of the internal features of the hotel and have various impact on the revenue
management.
It includes:
 Star Rating
The star rating has influence on the customers and this will have influences and impact on
revenue management. That is, there is more than 100 score it means that the hotel has been
successful in booking of rooms and this will also influence potential customers to come to the
business. It has direct influence on RevPAR.
 Hotel location and size
The location of the hotel is very important as it increases the approximate worth of RevPAR
if it is a highly frequented location with high accessibility and so on. Also, the size of the
hotel has an indirect relation between the number of guest rooms and RevPAR and also the
number of employees increase value due to occupancy and this impact on RevPAR.
External Determinants:
This consists of the factors that cannot be control by the hotel industry and which impact on
the revenue management, thus the hotel should make use of the right KPIs in order to achieve
its objectives.
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 Seasonality
It impacts on the performance of the hotel where there will be changes in the room rates
during peak and off-peak seasons which directly impact on the revenue of the hotel. There
tend to be changes in the products and services offered in the various packages during the
different season.
 Technology
The hotel industry nowadays relies a lot on technology to effectuate operations where
revenue management necessitates the gathering of information in a continuous process. Thus,
this required RM necessities for managerial use in order to be successful.
 Uncertainty
The hotel industry can be greatly affected by unpredictable situation which is not under the
control of the hotel. Take the example of the outbreak of Coronavirus Pandemic, this have
negatively affect many hotels across the world and lead to major decrease in revenue where
the hotel had no choice but to adapt and find solution to overcome this challenge.
 Environment dynamism
The hotel industry is a rapid changing environment with quick evolvement of the industry,
where their tends to be continuous and fierce competitions in the industry. Hence, this will
influence the performance of the hotel either in the positive way or negative depending on the
decisions taken by the revenue manager.
 Environmental complexities
The process of product differentiation has direct influence on the hotel where their needs to
be products and services that meets the needs and wants of the consumers. It is crucial due to
the complexity of the industry in order to remain competitive and thus achieve the objectives
of the hotel.
Key Performance Indicator (KPI) is generally defined as the specific measures used to
measure the performance of an individual, a teams or department. It will reflect the critical
success or failure that is useful to understand the current performance of the hotel and be
better prepared for future performance of the hotel. KPI is usually in numbers, percentage,
scale and etc which helps in the identification, measurement, reporting and managing key
development of the hotel and reduces the complexity of the different processes.
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Financial performance of the hotel industry:
This factor has impact on the various strategies and practices of the hotel to increase revenue
where there is the use of metrics which will be examined in the coming paragraphs.
The various determinants include:
 Pricing polices
The price set for the products and services of the hotel will influence revenue in determining
its success in the long-run or whether the KPIs metrics should be changed in order to achieve
objectives of making profits.
 Revenue forecasting techniques
Based on the revenue techniques used in the previous days, weeks, month or year, the hotel
will be able determine and forecast its likely success on the market.
 Social media strategies
This has become very important nowadays in the hospitality industry which to be main
influential tool to encourage bookings of hotel rooms. This is where all information of the
hotel are available and whether will make booking or prefer to go to competitors and this will
impact on the revenue of the hotel.
KPI is it a metric?
As said above it can in number or in ratios where there can be both:
 Number metrics: pageviews, revenue, gross profit, net profit, operating profits or
visits and so on. Ratio metrics: bounce rate, conversion rate, profit margin, return on investment etc. Number KPIs: Day to purchase, revenue, visit to purchase etc.
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In order, for KPI to be successful it needs to have a goal to be effective. It helps in tracking
goals against the hotel objectives and implement changes that are required. The various
attributes include:
Difference between KPI and a Goal:
KPI is not a goal but it is effective in accomplishing goal. Goal refers to the outcome that the
hotel wants to achieve and thus KPIs is a metric that help the hotel situate itself of whether it
is on the right track towards achieving the goals.
1. Available and measurable
Metrics can be used as KPIs which is available at the very first place. As coming something
that is impossible to measure KPI will not be useful then, like the frustration level of the
customers cannot be measure where the left their card at their third purchase.
2. Highly impact its corresponding goals
If it does have great impact on the goals and objectives of the hotel, then it is the suitable
KPI.
3. Relevant to corresponding goals
Having high impact on the goals of the hotel, it means that the KPI is related and relevant to
the hotel.
4. Instantly useful
If the KPI is highly impacted on the hotel, it means that it is instantly useful for the hotel
based on the insight obtained from KPI.
5. Available in timely manner
It should be available in a timely manner so that the hotel can take decisions on time without
delay. The KPI should be assess based on several month or even years to make good
decisions for the hotel.
Important KPIs for the hotel industry:
 Average Daily Rate (ADR)
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This is one the most common metrics that is used in the hotel industry to measure the average
rate per occupied room. That is the Average amount of Revenue that is obtained daily for all
the occupied room of the hotel without unoccupiedroom to prevent irrelevant figures.
It will enable the hotel to measure the key element in the financial performance of the hotel
and help in forecasting marketing and pricing of the product and services. It allows the hotel
to plan and set flexible prices based on the seasons.
Calculation of ADR:
Room Revenue/ Number of rooms sold.
 Revenue Per Available Room (RevPAR)
This consist of the measurement of the average of revenue for a certain period of time, by
the income received through all the booking received. RevPAR tend to create a price metric
of how much revenue is generated per room where there is a good occupancy rate as well as
high ADR.
Calculation:
a) Average Daily Rate X Occupancy rate
b) Total Revenue from Night / Total Number of Room Available
 Average Length of Stay (ALOS)
ALOS is commonly used to determine the occupant’s length of stay divided by the total
number of occupied rooms by the number of bookings. It is calculated based on the number
of night that the customers stay at the hotel.
The data can be used to decide of the pricing strategies to adopt, if there is lower ALOS then
the room rate for short stay should increase and thus offer better deals for longer stay. The
length of stay of the customers have a impact on the revenue of the hotel.
Calculation:
a) Total Occupied Room per Night / number of bookings
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