success?
E N D - O F - C H A P T E R Q U E S T I O N S 169
C A S E S T U D Y 5 0 1
Margaret Chu, general manager of The Times Hotel, and Ana Chavarria, front office manager, are in the process of developing a policy on overbooking. The current policy prohibits the reservations manager from booking more than 100 percent of the avail- able rooms. Reservations are composed of 60 per- cent confirmed and 40 percent guaranteed.
In the past six months, about 5 percent of con- firmed reservations have been no-shows, resulting in a financial loss of about 500 room-nights. This situ- ation has not been analyzed because Ms. Chavarria has not had time to organize such a study. The loss
of $42,500 (500 rooms 3 $85 average room rate) has forced management to consider developing an aggressive occupancy management program.
Offer some suggestions to Ms. Chu and Ms. Cha- varria concerning the following related concepts:
the legality of overbooking, the need to maintain an accurate accounting of the financial impact of no- shows, and the management of the reservation/occu- pancy categories that make up the hotel’s room sales (confirmed reservations, guaranteed reservations, stayovers, understays, and walk-ins).
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170 C H A P T E R 5 ■ S Y S T E M W I D E R E S E R V A T I O N S
C A S E S T U D Y 5 0 3
Margaret Chu, general manager of The Times Hotel, Lorraine DeSantes, director of marketing and sales, and Ben DiCanta, revenue manager, are interested in developing social media options for attracting guests. Margaret is a member of LinkedIn and feels that media would be a good marketing option. Tom
says Facebook is the way to go. Lorraine says Twit- ter is the in thing and will generate more customers than they can handle.
They are aware that they should start slowly and have a plan. What tips could you provide to start them on the right path?
C A S E S T U D Y 5 0 2
Use the following data to prepare a rooms forecast for the first week of May for The Times Hotel:
Number of rooms available 5 600
Number of rooms occupied on April 30 5 300 May 1:
Departures 5 200 rooms
Arr ivals 5 200 rooms (70 percent confirmed, 30 percent guaranteed)
Walk-ins 5 40 rooms
No-shows 5 0.02 percent of expected arrivals May 2:
Departures 5 50 rooms
Arr ivals 5 100 rooms (60 percent confirmed, 40 percent guaranteed)
Walk-ins 5 10 rooms
No-shows 5 0.02 percent of expected arrivals May 3:
Departures 5 200 rooms
Arr ivals 5 100 rooms (50 percent confirmed, 50 percent guaranteed)
Walk-ins 5 20 rooms
No-shows 5 0.02 percent of expected arrivals May 4:
Departures 5 50 rooms
Arr ivals 5 100 rooms (20 percent confirmed, 80 percent guaranteed)
Walk-ins 5 10 rooms
No-shows 5 0.01 percent of expected arrivals May 5:
Departures 5 300 rooms
Arr ivals 5 70 rooms (30 percent confirmed, 70 percent guaranteed)
Walk-ins 5 25 rooms
No-shows 5 0.0143 percent of expected arrivals May 6:
Departures 5 50 rooms
Arr ivals 5 175 rooms (92 percent confirmed, 8 percent guaranteed)
Walk-ins 5 10 rooms
No-shows 5 0.04 percent of expected arrivals May 7:
Departures 5 200 rooms
Arr ivals 5 180 rooms (10 percent confirmed, 90 percent guaranteed)
Walk-ins 5 25 rooms
No-shows 5 0.0223 percent of expected arrivals
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N O T E S 171
Notes
1. J. Davies, “Social Media: Marketing Magic or Madness” The Knowland Group.
Retrieved from Hotel Online: www.hotel-online .com/News/PR2009_3rd/Jul09_
SocialMediaMagic.html, July 3, 2009.
2. S. Boehle, Managesmarter. Retrieved from www.managesmarter.com:
www.managesmarter.com/msg/content_display/training/
e3iab4a1c734bf748910f209ef8808acaa, March 8, 2008.
3. Hilton Corportation 2009, http://www.hiltonfranchise.com/Marketing/Disclosures/
PDFs/2009FranchiseDisclosureDocument_Hilton.pdf.
4. Katrina Pruitt-Andrews, “Hotels Are Using Business Intelligence To Do More Than Survive the Recession” April 30, 2009, http://www.hotel-online.com/News/
PR2009_2nd/Apr09_TravelCLICKMAR.html.
5. Katrina Pruitt-Andrews “New Technology Enhances Advertising to Travel Agents Who Book $8 Billion in Hotel Revenue” July 3, 2009, http://www.hotel-online.
com/News/PR2009_3rd/Jul09_TravelCLICKTAs.html.
6. Katrina Pruitt-Andrews “Hotels That Withhold Commissions Are Losing Travel Agent Business” March 1, 2009, http://www.hotel-online.com/News/PR2009_
1st/Mar09_TravelCLICKWPS.html.
7. Katrina Pruitt-Andrews “Hotels Build Connections Through ‘Friends’ and ‘Fans’
on Social Networks,” http://www.hotel-online.com/News/PR2009_1st/Mar09_
TravelCLICKITB.html.
8. Sharon H. McAuliffe, “Wresting Back Control from the Online Wholesalers,”
January, 2003.
9. Max Starkov, “Speak To Me . . . In My ‘Language’ Building Customer Loyalty via CRM Strategies on the Hotel Website” Travel Daily News, July 22, 2009, http://www.traveldailynews.com/pages/show_page/32115-Optimising-Internet- Booking-By-Max-Starkov—Courtesy-of-Cleverdis 2009.
10. Carol Levitt, “SynXis Guest Connect Improves Look-to-Book Conversion and Increases Bookings for Hotel Groups” June 2, 2008, http://www.hotel-online.
com/News/PR2008_2nd/Jun08_SynXisConnect.html.
11. Katrina Pruitt-Andrews “TravelCLICK Properties Perform as Clients Increase Revenue 39%, Room Nights 29% Despite Slowing Market,” http://www.
hotelonline.com/News/PR2008_2nd/Jun08_TravelClickProperties.html. Hotel Online, June 2, 2008.
12. Ibid. Max Starkov 2009, Travel Daily News, 2009.
13. John Davies, “Social Media: Marketing Magic or Madness” July 3, 2009, http://
www.hotel-online.com/News/PR2009_3rd/Jul09_SocialMediaMagic.html.
14. Hilton Corporation, 2009, http://www.hiltonfranchise.com/Marketing/Disclosures/
PDFs/2009FranchiseDisclosureDocument_Hilton.pdf.
15. Marriott, 2009, http://www.marriottdevelopment.com/pdfs/CFRSTFeeStructure.pdf.
16. Carol Verret, “The New ‘Tipping Points’ in the Planners Decision Process-You May be Surprised!”June 2, 2009, http://www.hotel-online.com/News/PR2009_
2nd/Jun09_TippingPoints.html.
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172 C H A P T E R 5 ■ S Y S T E M W I D E R E S E R V A T I O N S
Key Words
blocking on the horizon blocking procedures bus association network cancellation code confirmed reservations corporate client current guests daily blocking database interfaces forecasting franchisee full house group planner group travelers
guaranteed reservations hotel broker
hotel representative house count
interhotel property referrals
leisure traveler no-show factor
occupancy management formula outsourcing
overbooking referral member reservation code
reservation referral system reservation status
revenue management rooms forecasts social media stayovers
third-party reservation service third-party reservation website travel directories
true integration understays walk-in guests
17. Enid Burns, “Active Home Internet Users by Country, May 2009,” June 29, 2009.
http://www.clickz.com/3634181.
18. The Honolulu Advertiser News, “Marriott Resorts Launch Twitter, Facebook and YouTube Campaign for 25 Free Trips to Hawaii,” August 3, 2009, http://www.
hotel-online.com/News/PR2009_3rd/Aug09_HawaiiMarriott.html.
19. Rex S. Toh, “Coping with No-Shows, Late Cancellations, and Oversales:
American Hotels Out-do the Airlines,” International Journal of Hospitality Management 5, no. 3 (1986): 122.
20. Ibid., 121.
21. Ibid., 122.
22. Doug Kennedy, “To Get More Bookings – Work With – Not Against Your Cen- tral Reservations Providers” May 2, 2009, http://www.hotel-online.com/News/
PR2009_2nd/May09_CentralRes.html.
23. Ariel Herr, “Pegasus Solutions Appoints Industry Veterans to Key Management Positions” October 8, 2008, http://www.hotel-online.com/News/PR2008_4th/
Oct08_PegasusVeterans.html.
24. Rebecca Oliva, “Singular Solution,” Hotels 35, no. 7 (July 2001): 99.
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O P E N I N G D I L E M M A
The sales manager has left a message for the front office manager, the food and beverage manager, and the revenue manager requesting clearance to book a conference of 400 accountants for the first three days of April. The front office manager needs to check out some things before returning the call to the sales manager.
As mentioned in earlier chapters, revenue management is the technique of planning to achieve maximum room rates and the most profitable guests. This concept originated with the use of yield management, a similar concept, in hotel management circles in the late 1980s; in fact, yield management was bor- rowed from the airline industry to assist hoteliers in becoming better decision makers and marketers. It forced hotel managers to develop reservation poli- cies that would build a profitable bottom line. Although the adoption of yield management was slow in the hotel industry, it offers far-reaching opportunities for hoteliers in the twenty-first century in the form of revenue management.
This chapter applies concepts of yield management to the demands of aggres- sive applications of revenue management. For example, we see in the following description by Dr. Robert McMullin, professor of hotel, restaurant, and tour- ism management at East Stroudsburg University, how aggressive applications of yield management are employed in revenue management.
C H A P T E R
6
Revenue Management
C H A P T E R F O C U S P O I N T S
■ Occupancy percentage
■ Average daily rate
■ RevPAR
■ History of revenue management
■ Use of yield management
■ Components of revenue management
■ Applications of revenue management
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174 C H A P T E R 6 ■ R E V E N U E M A N A G E M E N T
As with other businesses, pricing for the lodging industry is based on supply and demand. A good illustration of this is room rates at hotels near the Pocono Raceway in Pennsylvania, where there are two big races (the NASCAR Pocono 500 and the Pennsylvania 500) every year. Hotels in the area are full for the races, which define the peak season. During peak season, hotels collect rack rates. However, during the valleys, or off seasons, hotels must offer discounts and accept group travel discounts.
The period between the peaks and valleys is called shoulder time, during which hotels build business and offer a variety of rates.1
Occupancy Percentage
To explain revenue management, we first review traditional measures of success in a hotel. Occupancy percentage historically revealed the success of a hotel’s staff in attract- ing guests to a particular property. This traditional approach to measuring the effective- ness of the general manager, marketing staff, and front office staff was used to answer questions like these: How many rooms were sold due to the director of sales’ efforts in creating attractive and enticing direct mail, radio and television ads, billboard displays, or newspaper and magazine display ads? How effective were reservation agents in meet- ing the room and amenity needs of the guests? Did travel agents book reservations? How competent were front office staff members in making sales? Today’s questions include:
Did the director of sales choose the right website to advertise the hotel’s excess room inventory? Did the revenue manager price the rooms at the correct rate for the correct period? Are we hitting the right market segment? While interpretations of occupancy percentage are still indicators of the staff’s efforts, in this chapter we focus on revenue management because it provides a more comprehensive review of factors such as room rate potential, revenue potential, and the nature of groups.
The occupancy percentage for a hotel property is computed daily. The method used to determine it is as follows:
____________________________Number of Rooms Sold
Number of Rooms Available 3 100 5 Single Occupancy %
To see how this formula works, consider a hotel that sold 75 rooms with a room inventory of 100 rooms, resulting in 75 percent occupancy:
75 ____
100 3 100 5 75%
Investors also use occupancy percentage to determine the potential gross income of a lodging establishment. For example, a 100-room property with a daily average 65 percent occupancy and an $89 average daily rate generates about $2.1 million in sales annu- ally: 100 rooms 3 0.65 occupancy 5 65 rooms occupied daily; 65 3 $89 room rate 5 $5785
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revenue per day; $5785 3 365 days in a year 5 $2,111,525 gross income from room sales annually.
However, it is important not to assume that occupancy is standard each night. Varia- tions are reflected in the following example:
A 65 percent occupancy is usually achieved on Monday, Tuesday, and Wednesday evenings. However, Thursday, Friday, and Saturday night statistics reveal a 40 percent occupancy, with Sunday night occupancy at 50 percent. Therefore:
Monday–Wednesday: 100 3 0.65 3 $89 3 156 (52 3 3) 5 $902,460 Thursday–Saturday: 100 3 0 40 3 $ 89 3 156 (52 3 3) 5 $555,360 Sunday: 100 3 50 3 $89 3 156 3 52 5 $231,400
Total: $1,689,220
Double occupancy is a measure of a hotel staff’s ability to attract more than one guest to a room. Usually a room with more than one guest requires a higher room rate and thus brings additional income to the hotel. This method is also traditional in determining the success of building a profitable bottom line. The method to determine double occupancy percentage is as follows:
Number of Guests 2 Number of Rooms Sold___________________________________________
Number of Rooms Sold 3 100 5 Double Occupancy % F I G U R E 6 - 1
A front office manager discusses the elements of yield management as it applies to revenue management in a training session.
Photo courtesy of Hotel Information Systems.
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176 C H A P T E R 6 ■ R E V E N U E M A N A G E M E N T
If a hotel sold 100 rooms to 150 guests, then the double occupancy percentage is 50 percent, computed as follows:
150 2 100 __________
100 3 100 5 50%
Average Daily Rate
Average daily rate (ADR) is a measure of the hotel staff’s success in selling available room rates. Such questions as why more $85 rooms than $99 rooms were sold, or whether the marketing office developed attractive weekend packages to sell the $80 rooms instead of relying on the desk clerk on duty to take any reasonable offer from walk-in guests, are typically answered when the ADR is reviewed.
The method to compute the ADR is as follows:
Total Room Sales _______________________
Number of Rooms Sold
If a hotel has daily room sales of $4800 with 60 rooms sold, the ADR is $80, com- puted as follows:
$4800 ______
60 5 $80
The ADR is used in projecting room revenues for a hotel, as described above in the discussion of occupancy percentage. Occupancy percentage and ADR computations are essential parts of revenue management because they challenge hoteliers to maxi- mize occupancy and room rates.
RevPAR
RevPAR (revenue per available room) was introduced in chapter 1 to allow you to rec- ognize it as one of the financial determinants that hoteliers use in discussing revenue management. RevPAR is determined by dividing room revenue received for a specific day by the number of rooms available in the hotel for that day. The formulas for determining RevPAR are as follows:
Room Revenue ____________________________
Number of Available Rooms or
Hotel Occupancy 3 Average Daily Rate
This type of financial insight into a hotel’s ability to produce income allows owners, general managers, and front office managers to question standard indicators of hotel success. RevPAR answers the question, “How many dollars is each room producing?”
If certain rooms are always occupied because of a lower rate, attractive amenities, or other reasons, then the hotel’s administration may want to replicate those sales in similar
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markets. This questioning opens the door for revenue management, which turns the pas- sive efforts of hoteliers into aggressive financial strategies.
History of Yield Management
Yield management is the source of the concepts that underlie revenue management.
The history of yield management provides a framework for developing a background knowledge of revenue management. The airline industry instituted yield management after deregulation in the late 1970s.2 The airlines blocked out time periods when seats on flights were priced at certain levels; the potential passenger either booked the flight at the price quoted or found other means of transportation. This bold marketing policy met with some problems such as consumer uproar concerning airfare strategies over holidays and weekends, but established the economic structure of airfares.
Hotels and airlines share similar operational features. Each has a fixed number of products (hotel rooms and airline seats) that, if not sold on a given day or flight, cannot be resold. Airlines and hotels sell to market segments that have distinct needs in product and service level. Each has demand periods (holidays, weekdays, and weekends in hotels;
holidays, weekdays, and time of day for airlines) that place the provider in a favorable position. Airlines and hotels offer a range of rates from which guests can choose. Reserva- tions allow managers to use yield management.3 By using computers to track a database of products (hotel rooms and airline seats) and to process reservations, managers have the ability to look at a sales horizon of 45 to 90 days and to set price and reservation policies that will allow a prediction of profitability.
One of the major differences in how yield management is used in airlines and hotels is that at the hotel, the guest may also spend money for products and services besides the room itself. The airline passenger usually does not have an opportunity to spend large amounts of money during a flight. Because of this difference, hoteliers must consider the financial potential of one prospective guest over another in determining reservation poli- cies. For example, one group may want to book a block of 500 rooms with a $50,000 value plus banquets and other food and beverage service events that total $25,000, while another group may want to book a block of 600 rooms with a value of $60,000 but no additional food and beverage income.
Use of Yield Management
Yield management has now caught on in the hotel industry. It is imperative that hoteliers understand the importance of the basic factors of yield management—room rate catego- ries, room inventory, and group buying power—to navigate their way through revenue management. The goal of revenue management is twofold: to maximize profit for guest room sales and to maximize profit for hotel services. These goals are important for future hoteliers to understand, because if they set out to maximize room sales only, the most
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178 C H A P T E R 6 ■ R E V E N U E M A N A G E M E N T
profitable guest may not stay in the guest room. This is the difference between airline yield management and hotel revenue management.
The following discussion shows how revenue management is used in the hotel indus- try. As you read, note how the management staff is using technology to make informed decisions that will reflect favorably on the bottom line. (The terms yield management and revenue management are now interchangeable. Yield management was the earlier concept from which revenue management developed.) The real challenge of developing any computer application is to support the goals of the management staff. The following quote from the International Hotel Association summarizes the importance of using yield management as a business tool: “Yield Management is the must-have business planning tool for hoteliers. The computerized functioning [mathematical model] of yield manage- ment is complex, but the concept is simple: By using a combination of pricing and inven- tory control, a hotelier can maximize profits from the sale of rooms and services.”4 This statement continues to be relevant in today’s hotel marketplace.
A common misperception about hotel revenue management (RM) is that its value diminishes when room occupancy falls. With a healthy economy, an RM system can often appear to be a well-running car engine, doing its job to manage the mix of book- ings to maximize revenues. During low-occupancy periods, some hotel management teams mistakenly view RM as a low-priority activity. However, it is precisely during these challenging times that hotel professionals should be looking under the hood and asking questions regarding the methods and the data used to manage hotel pricing and customer mix. Hotel teams should rely on RM processes to enable responsive sales, marketing, cost containment and pricing decisions that work in today’s economy.5 So how are hotel general managers, revenue managers, directors of marketing, and front office managers applying this technology to produce more profit? Here is an example:
Warren Dehan, president of NORTHWIND-Maestro PMS says, “But no matter how tightly you manage your operation, revenue is the engine that drives property perfor- mance. And to maximize revenue it is essential to utilize an effective revenue manage- ment system. Manual rate setting is no longer an option.”
Industry analysts agree that current market dynamics indicate that Internet channels will be much more important to property revenue as the meeting and corporate seg- ment cools in 2009. “With payrolls being trimmed, hotel staffs do not have time to manage Online Travel Agency (OTA) allotments and prices throughout the day,” says Dehan. “Hotel operators must learn to rely on solid revenue management technology to monitor all sales channels, particularly Internet booking channels.”6
Revenue Manager
Because revenue management has become such an active part of hotel management, a new operational position has emerged: the revenue manager. The revenue manager
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