HFT4471 Test 2

History of RM

*-The first major users of RM were American and Delta airlines starting around 1985.* *-Both Tom Cook (American) and Robert Cross (Delta) have been cited as the "fathers" of corporate RM.* *-1978 - Airline Deregulation* *-1980 - Hotel Manual Inventory Control* -2015 - Many industries use RM: Rental Cars, Cruise Lines, Restaurants, Hospitals, Golf Courses, Electricity, Advertising, Sport Events, Theater, Pop Concerts, Public transits

Bill Marriott Story

*On the nights when they predicted sell out of all the rooms, he would stick his head out of the window and count the bodies in the cars as they drove up to register. If it had only one or two people in it, he would politely tell them, "No Vacancy." He was saving the last rooms for high value customers with three or more people* *He was maximizing his revenue opportunities by forecasting demand and saving his products for the more valuable customers...RM Core Concept number 4 in the book.*

Product Value Cycles

*Product value cycles are also determined by (price elasticity)* -Demand is *less elastic* when: *Fewer options* *Product is perceived as inexpensive* *Limited time available* -Demand is more elastic when: *More options* are available Product is perceived as *expensive* *Unlimited time*

Dillution

*selling a product* to a customer *at a lower price than* they would have otherwise been *willing and able to pay*

GDS

-*Amadeus, Galileo, Sabre, Worldspan* -connects reservation systems and a number or important sales outlets

The Seven Core Concepts

-*Focus on price rather than costs* when balancing supply and demand -*Replace cost-based* pricing with *market-based pricing* -*Sell* to segmented *micromarkets, not mass markets* -*Save your products* for your *most valuable customers* -*Make decisions* based on *knowledge, not supposition* -*Exploit each products' value cycle* -*Continually re-evaluate* your *revenue opportunities*

REVPAR

-= Rooms Revenue/Available Rooms -Or = Occ x ADR

Creating Rate Structures

-A *rate structure will define the number of rates that the hotel offers* and the *qualifications* it places on each rate, determining when and how the rate is made available -The rates must be *flexible* enough to *target the varied segments* of business selected, but also *organized* enough so that they may be *effectively managed*

Operational PROs (4)

-Analyze Alternatives -Choose the best alternative -Execute pricing (-->The Market) -(The market -->) Monitor and evaluate performance

Market-Based Pricing

-Calculates prices based on *competition* -Ignores *cost, customers* -Liked by *Sales* dept -Market-based pricing bases prices on what competitors are doing

Cost-plus Pricing

-Calculates prices based on *cost* -Ignores *competition, customers* -Liked by *finance* dept -Cost-plus pricing calculates prices based on cost plus a standard margin

Value-Based Pricing

-Calculates prices based on *customers* -Ignores *cost, competition* -Liked by *Marketing* dept -Value-based pricing sets prices based on an estimate of how customers "value" the good or service

3 Major problems of tactical RM

-Capacity allocations (how many cust. from diff class can book) -Network management (how should bookings be managed across a network) -Overbooking (how many total bookings should be accepted to compensate for no shows)

Techniques of RM are applicable when these conditions are met

-Capacity is limited and immediately perishable (example - empty hotel room) -Customers book capacity ahead of time -Prices are changed by opening and closing predefined booking classes

5 Key Components of Revenue Management

-Demand Analysis -Competitive Knowledge -Strategic Pricing and Distribution -Weekly Strategy Meeting -The revenue manager

The PRO process

-Divided into 8 activities -4 activities are part of operational PRO -Executed every time the company needs to change prices -Other 4 are supporting PRO activities -PRO is a closed-loop process; feedback from the market must be incorporated into the operational activities

Critical 9 Steps to Success

-Evaluate Unique Market Needs (SW Airlines) -Evaluate Your Organization and Process -Quantify the Potential Benefits -Enlist Technology -Implement Forecasting -Apply Optimization -Create Teams -Execute, Execute, Execute -Evaluate Success

Internal Factors to consider during the development of pricing strategies:

-Financial Goals -Physical and service products -customer appeal -historical performance

Benefits of Market Segmentation in the Lodging Industry

-Hotels can differentiate prices for different market segments -Helps hotels to focus on more profitable customer groups -Helps hotels for marketing strategies -Helps hotels to design different services for different customer groups -Helps hotels for the decision, dropping, adding or altering some services

External Factors to consider during the development of pricing strategies:

-Market Conditions -Hotel's competitive Positioning -Pricing Position -Competitor Activity -Target Clients -Long-term Strategic Plans -New Product Entry

Overselling (Overbooking) and Wash

-Overselling is the practice of accepting more reservations than actual rooms in order to compensate for the estimated wash factor. *A wash factor is an estimate of no shows and cancellations*

Potential Pitfalls

-Paralysis by Analysis -Failure to Quantify Benefits -Market Segmentation Errors -Lack of Well-defined Plan -Lack of Senior Management Oversight -Viewing the System as the Solution -Held Hostage by Techies

Lessons learned from airlines

-Pricing and revenue optimization can deliver more than short-term profitability -e-commerce enables pricing and revenue optimization -Effective segmentation is critical (Create different products that appeal to different segments Charging different prices to different segments)

*Revenue Managment Process Flow*

-Segment the Market -Predict Customer Demand -Optimize Price -Recalibrate Dynamically

PRO Activities

-Set Goal and constraints -Update market response -Segment Market -Determine Market Response -Analyze Alternatives -Choose the best alternative -Execute pricing (-->The Market) -(The market -->) Monitor and evaluate performance

Different Types of Demand

-Stable demand: groceries -Seasonal demand: holiday items -Perishable demand: fruits, vegetables, and so on -Time sensitive demand: travel or show tix

Cost of Walking

-Tangible: Payout to the receiving hotel to which the guests are being sent & Transportation costs -Intangible: ill will or potential loss of customer to competition & Reputation of hotel due to needing to walk

4 characteristics of e-commerce that increased the urgency of pricing and revenue optimization

-The internet increases the velocity of pricing decisions -The internet makes available and immediate wealth of information about customer behavior -The internet provides a unique laboratory for experimenting with pricing alternatives -The internet may provide deeper information about cost and competitive prices

Harrah's Data Warehousing Architecture

-The patron data base (PDB) serves as an operational data store -The marketing workbench (MWB) serves as the data warehouse (Sourced from PDB, more specific and analytic)

Elements of customer value

-Total spending during the stay -Seasonal or day of week stay patterns -Cost of the booking venue of choice -Cost of sale

Problems for airlines posed by the internet:

-Unprecedented fare visibility This increases the pressure for airlines and others to continually manage their prices and availabilities -It has led to the rise of new online intermediaries Expedia, Travelocity, Priceline, Hotwire -Online shoppers do not care about fare class availability, they want the lowest price for their desired travel (old RM tactics are becoming less relevant)

Understand a list of most common stay controls

-open: free sell. no restriction of availability -closed: no availability is for sale -no arrival or closed to arrival (cta): no arrivals are allowed on a particular day/date -no departure/closed to departure: no reservations are accepted that depart on a particular day/date -maximum length of stay: restricts stays to a maximum time period -minimum length of stay: requires stays for a specific time period allocations: specific number of rooms are allotted to be sold

Three types of forecast and their objective

1. *Strategic forecast*- to support the strategic objectives such as understanding how the unconstrained demand will impact the hotel in terms of occupied rooms, and therefore be incorporated into applying the inventory control strategies 2. *Revenue Forecast*- To have a realistic picture of probable future occupied rooms to compare to budget and see where the variances will occur 3. *Operational Forecast*- To use for operational necessities such as schedules

2 steps to forecasting demand for each segment

1. Build an off line Demand model 2. And online updating system

3 Rules of Good Forecasting

1. Right level of detail 2. appropriate amount of data 3. frequent forcasting

Net contributions

= Revenue + Ancillary contribution - Incremental cost

Revenue Management Strategy

A fundamental element of revenue management strategy at hotels is the distinction between leisure customers and business customers

Niche

A specific subset of a larger market. In the hotel business, a niche might be family travelers or high-end clientele.

SWOT analysis

A structured investigation that compares the *strengths, weaknesses, opportunities, and threats* of a hotel versus its competition.

Examples of different market segments:

AAA, convention group, corporate, family, seniors, leisure, military, religion

Promotional and Discount Planning

By planning for them, hotels can ensure they are incorporated only during need periods

CRS

Central Reservation System

Data Warehouse

Collection of data created to support decision making applications -The entire process of data extraction, transformation, and loading of data to the warehouse and the access of the data by end users and applocations

Exploit Each Products Value-cycle

Core Concept: *Generate max. revenue by* understanding the *value cycle and optimally timing* the availability of prices of the product to each micro-market segment

Make decisions based on knowledge, not supposition

Core Concept: Break the business down in *3 steps* 1. Make submarkets, 2. project revenue trajectory for each market, 3. determine optimal time to launch stage

Replace cost-base pricing with Market-based pricing

Core Concept: Businesses should base prices off of what customers will pay, not based on costs to maximize revenues

Focus on price rather than costs

Core Concept: No transaction costs, precision friendly, virtually instantaneous, seamless adjustment

Sell to segmented micromarkets, not mass markets

Core Concept: Sell to Small Customer Groups, Creates Products for Each Customer Group

3 traditional approaches to pricing

Cost-plus Market based Value optimization

The PRO cube

Enumerating the combination of products, market segments, and channels gives a rough estimate of the total number of prices a company needs to manage

Market Segments

Groupings of customers who share purchase behavior and customer needs

Qualified Business

Guests who have pre-agreed rates or qualified for rates based on set criteria (Contracted corporate rates, Weekend rates)

Harrah's Entertainment

Harrah's Entertainment uses its CRM system to track the gaming patterns of 28 million customers who belong to its Total Rewards loyalty program. These customers are classified in 64 segments based on gaming habits, and Harrah's forecasts daily hotel room demand for each of its properties for each of these segments. The ancillary contribution for each segment is the anticipated gaming profit that Harrah's will realize. Incorporating this contribution into its revenue management system enables Harrah's to ensure that rooms are available for late-booking high-value customers

Firms that use RM

Hotels, Vacations, Car Rentals, Television, UPS, Washington Opera, Television Ads (CBS, ABC, NBC..) UPS, Retail (Tetek, Khimetrics), Real estate (Archstone), Texas Children's hospital

Displacement

In *constrained capacity situations,* the *acceptance of a low value purchase* that *results* in the *denial of a higher value purchase* at a later point in time

Price waterfall

Introduced by Mckinsey and Company as a graphical way of showing the discounts that occur between the list price and the pocket price

Demand forecasting

Involves the use of historical patterns and current trends to forecast future demand

Stay pattern

Is the combination of arrival date and length of stay When maximizing revenue, you want to accept the optimal number of reservations for each stay pattern, not the greatest number of reservations for each individual day

Tactical

Level of RM: Calculate and update booking limits Daily/Weekly (Frequency Daily or Weekly)

Booking Control

Level of RM: Determine which bookings to accept and reject (Frequency Real Time)

Strategic

Level of RM: Segment Market and Differentiate Prices (Frequency quarterly or annually)

Failures of RM

Major airline's use of sophisticated RM system to immediately match or undercut its prices ultimately killed Peoples' Express.

Ancillary Products and Services

Outside or additional service (to what customer initially paid for)

Mckinsey Study

Pricing has the most impact on operating profit

Source of business

Provides hotels with a breakdown of how the business arrived at the hotel or through which channel the business arrived

Critical elements to consider for the forecast

Room Nights, Revenue, Lead Times, No Shows Group Rooms, Departures, Extended Stays, Denials/Regrets, Demand Generators, Rate Changes, RevPAR, Cancellations, Transient Rooms, Arrivals, Walk ins, Early Departure, Length of stay Pattern, Transient group mix and group wash, On the books bookings

Data Mart

Scaled Down version of a data warehouse, includes fewer subject areas used to support specific applications -An independent data mart is created directly form source systems, a dependent mart is populated from a data warehouse

Stay controls

Seek to leverage high demand periods by closing shorter stay patterns and lower valued products (rates) in order to deliver greater revenues and profits to the hotel

Cost of Sales and Distribution

Some distribution channels are most costly than other

Static vs. Dynamic Pricing

Static Pricing is the process of charging one price for a product regardless of the time of year. Dynamic Pricing is the process of actively applying revenue management by selling the same products at different prices to different customers.

3 LEVELS of Revenue Management

Strategic, Tactical, Booking Control

Inventory Control Strategies

Strategically and tactically determines how much total capacity is available and how much of each product will be sold.

Forecasting

Term suggests what customers are likely to do

Optimization

Term suggests what you should do about it

Revenue Management

The application of disciplined tactics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth.

Problems with Forecasting

The problem with this approach is that there was little control over which customer type receive the product and at which price

Definition of unconstrained demand (UD)/ Constrained demand

Unconstrained/ture demand - not constrained by the capacity of the hotel; the demand that could be sold if the hotel had an unlimited number of rooms available to sell

Channel Management

When addressing channel management the following are the key issues that are included: 1. Pricing 2. Rate Management 3. Availability

Updating booking limits = Reoptimization

When demand is reforecasted and new booking limits are calculated based on the new forecast of demand and remaining unbooked capacity *Periodic Updates* *Event-Driven Updates* *Requested Updates*

Denials

are customers who are turned away because of capacity constraints or restrictions.

Regrets

are customers who are turned down because they are not inclined to pay the price of the space or a room (i.e., shoppers).

Unqualified Business

guests who do not have pre-agreed rates or do not meet set criteria (Published rates, Internet)

RM decisions

maximizing expected net contribution

Definition of market segmentation

the general market is divided into distinct groups to direct sale and marketing effort; each segment will have a unique strategy for pricing, promotion, policies, distribution and sales

Fences

tools to maintain segment separation

unconstrained demand

tracking the true demand for a hotel regardless of capacity limitations

3 Information needed to use market segmentation

• A clear customer definition • Segments that apply to both corporate and property level applications • Understanding of the source of business

Hotel distribution channels (Exhibit 1)

• Ex: contact center, walk in, global distribution system, internet • Traditional hotel: hotel direct, central reservation office, travel agencies

RM is applicable under 3 conditions

• Fixed stock or perishable capacity • Pre departure booking • A set of fare classes (rooms) each with a fixed price

Leisure vs Business

• Leisure -Highly price sensitive -Book earlier -More flexible to departure and arrival times -More accepting of restrictions • Business -Opposite

Why hotels are unsuccessful following their revenue strategy

• People override their system's tactics with their own gut feeling • Too little emphasis is placed on the accuracy of group forecast • Inappropriate incentive systems (rewarding on volume instead of profit)