Notesale: Turn your study into money

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Week 1
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Revenue management overview

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3

Types of Business Analysis

Market Analysis
Measures a market

Macro: Political, Economic, Demographic, Sociocultural, Technological, Environment

Micro: Customers, Competitors, Suppliers, Intermediaries, Company, Publics
SWOT Analysis
Measures a business unit, a proposition or idea

External: Opportunities and threats

Internal: Strengths and weaknesses
Cost – Benefit Analysis
Measures the monetary value of a decision or idea

Placing monetary value to the cost and benefit of the proposition and comparing through for example the pay back period
Opportunity Cost Analysis
Measures the cost of the next best alternative forgone to pursue the chosen decision

The difference in return between two alternatives
Financial Risk Analysis
Measures the underlying uncertainty that shareholders will lose investment with a certain decision
Scenario Analysis
Analysing several future outcomes by determining certain events

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Week 2
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Business analysis continuation
Revenue management overview and basics
Revenue management team and organisation evolvement
Performance measurement
Revenue management reporting

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Performance measurement


Performance measurement
“Performance measurements are common sources of hotel business intelligence”
I
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
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Business reports
Competitive set comparisons
Comparison with previous hotel
performance
Alert about changes in the particular
hotel’s business via revenue
management system
Forecasts





Learning Emphasis
 Understand the measurements formula
(‘why’)
 Calculations (operational task)
 Interpretation of the data (paving the
road for RM Analysis)
 When and where to use the data
(paving the road for RM decision –
making)

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2

RevPAR and Yield

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4

GOPPAR

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MPI

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8

Market Share



Includes subjects available rooms

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Revenue management reporting

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Why STR?

Benchmarks performance
Allows overview on competitors and market
Perspective on good or bad performance

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Helps pricing decisions and improve profitability
Allows monitoring the effect of business strategies
View changes in the market on demand, supply and revenue

Basic Terminology

Week
Comparable day
Weekday
Weekend

Il Sunday through Saturday
Il Same day of the same week (DTD) vs Date to date
Il Sunday through Thursday
Il Friday and Saturday

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1 Competitive set
Direct Competitors
 Usually similar hotels
 Usually hotels in close proximity
 Number may include or exclude the subject
property
Local competitive set/ 2nd
competitive set
Chain = 1 comp set, company
another set
Competitive set chosen by hotel or
corporate

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Confidentiality rules
4 or more reporting hotels
Less than 40% of the rooms in a chain
Less than 60% of the rooms in a
company
Changes in pairs to prevent isolation
Ad-hoc reports for isolation

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Incl/ Excl
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3

Il Rooms sold in a block of 10 or more with corresponding revenue
Il Rooms sold at rates stipulated by contracts (permanent guests/airline crew etc
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1 Segmentation as a part of revenue
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Market Segmentation

Segmentation variables

Segmentation in the hospitality industry
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Market targeting
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Market positioning

Positioning map
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3 Contribution margin displacement analysis
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Exercise 4: Displacement Analysis 2 pg
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4 Conversion analysis
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Exercise 5: Displacement Analysis Conversion pg
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Segmentation as a part of revenue management
“A market is a set of actual and potential buyers who share a need or want that can be satisfied through exchange relationships”

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Market Segmentation
“Market segmentation involves dividing large, heterogeneous markets into smaller segments that can be reached more efficiently and
effectively with products and services that match their unique needs”

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Segmentation in the hospitality industry
Segment by type of hotel
Chain scale segment

Luxury

Upper scale

Upper scale
independent

Others
Region segment
Size (number of rooms)
Type of hotel guest

Urban

Airport

Destination
resort

Convention

Segment by type of guest
Traveler type segments

Transient

Group

Contract
Price segment

Premium

Rack rate

Corporate rate,
individual traveler

Special corporate
rate, based on
volume

Discounts
Business segments

Room

F&B

Others

Typical
Characteristics

Transient

High rates
Stable occupancy %
Season sensitive

Marketing Segmentation
•
Segment the
whole market
•
Different hotels
will segment the
market
differently
•
Segment from
the market’s
perspective
...


•

Seldom questions the
target market benefits
sought

•

Offering a way to
better organize hotel
guests

Rate Codes
Retail (benchmark rate)
Package
Restricted (OTA)
Opaque
Discounts
Corporate rate
 TMC
 LRA
(99% occ, rate available)
 NLRA
(rate closed after predicted occ%)
Government
Wholesale
Loyalty rates
Groups only
Business meetings
Incentives
Government
Associations
Tour series
Group leisure others (SMERFE)
 Sport
 Military
 Education
 Religious
 Fraternity
 Ethinc

Airline crews
Permanent stays
Complementary (no
revenue)
Day use

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Market Targeting
Evaluate market segments
•Segment size and growth
•Company resources

Decide which segments to target

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Market positioning

“Product positioning is the act of designing the company’s offering and image to occupy a distinctive place in the mind of the target
market”

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Positioning map

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5

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Customer worth
Primary revenue: rooms revenue
Peripheral revenue: Additional revenue (F&B etc
...
of times the guest return per year

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Displacement analysis
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Understanding displacement

~ Example ~
Hotel ABC has 100 rooms
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The following table illustrates displacement

Rooms

20 rooms
10 rooms

100
90
80
70
60
50
40
30
20
10
Group

Transient
1st night

Total

Group

Transient
2nd night

Total

Group

Transient
3rd night

Total

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30 rooms are displaced for the transient guests if the group is accepted
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5 step model:
Calculate the total number of displaced transient room nights
Calculate total transient loss value in CM
Deduct the value of group items (meeting, F&B etc
...
68)
=5,250-3,570

Displacement Analysis Excel Format
Group
Result
Formula
Result
7000
=150*X
?
2100
=150*30
4,500
4,900
=150*X - 150*30 ?
5,250
1,500
1,500
3,570
?
1,680
=1500*0
...
90
3,600
=150*X - 150*30
+ 480 + 3600
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Contribution margin displacement analysis (Exercises)
See exercise 4: Displacement Analysis 2 pg
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Conversion analysis (exercises)
See exercise 5
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Displacement analysis conversion factors
Investment cost
 Long term forecast in transient segment hotel rooms
 Long term forecast in conference rooms
 Combination of the two

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Week 4 and 5
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Competition analysis
o
Revenue management approach to competition analysis
o
Revenue management approach to product management
Ownership models and its relation to revenue management
Revenue management strategies
Forecasting
o
In marketing
o
In revenue management
o
Errors
o
Models and theories

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Revenue management approach to competition analysis

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Occupancy Rate
b
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RevPAR
Index comparing the hotel’s performance to the average performance of the competitors
a
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ARI
c
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The Marketing’s Competitive Analysis Approach


SWOT Analysis
 Strengths and weaknesses: Internal Analysis
 Opportunities and threats: External Analysis


External Analysis
Marketing strategies start with an external scan in the “marketing environment
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RM Approach
No big picture
Focuses on the average of the competitive set
Quantitative comparisons between company’s
performance and the competitive set
Comparisons based on narrowly defined aspects of
performance

The RM’ Product Management Approach


Rooms as inventory
As RM emphasis distribution (place strategy) and price strategy, rooms are seen as inventory
RM does not address product evaluation or product design issues

Inventory control
RM must determine the number of rooms available in each product, rate or channel category to have ‘control’ after them
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Attributes include size, colour, functionality, components and
features that affect the product’s appeal or acceptance in the market”
When evaluating product attributes for improvements, there should be a red line between the concept of STP and product attributes

Product line
“A group of related products manufactures by a single company”
A hotel can have linen, food, catering, events named as a product line
~Distinction between product mix and product line example ~
Product mix: Phones, fridge, tablets, pc’s etc
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Demand forecasting


Purpose
To determine the unconstrained demand for the hotel to ensure proper strategies are implemented to support the projected demand
and it is not to be discussed with the ownership or senior management



Important notes
o
It requires the tracking of historical and future patterns, i
...


Room nights
Lead time/booking pace per segment
‘on the books’ bookings
Transient and group mix
Group blind cut and group wash

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Group rooms
Departures
Extended stays
Denials/regrets
Demand generator

Rate changes
RevPAR
Cancellations
Transient rooms
Arrivals

Walk-ins
Early departures
LOS pattern
No shows
Revenue

o
Key points before a demand forecast can be created
Identify current technology
Identify available reports that provide the necessary information
Identify the gaps in the tracking ability
Implement manual business process to track missing information

The Process
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Customise tool to reflec all constants (e
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market segments, no
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Determine how far out to do the forecast (as far out as the booking are received)

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Begin data entry process
•Enter special parameters for out of order rooms, demand generators etc
•Enter all on the book information
•Enter all projected demand (Rooms, revenue, and ADR)
•refer to historical information, demand generators, current booking pace, patterns, and internal analysis


Denial

Key terms
Il “When a facility is not able to accommodate a guest due to unabilable rooms (product / service) at
that price”

Regret

Il “When a facility has the product / service available, but the customer chooses not to buy based on
price or some other factor”

Stay

Il “Number of nights the guest occupies the rooms “

Stay Pattern

Il “A pattern in the arrival day, number of nights stayed, and departure for a guest”

Constrained Demand

Il “Demand that is held back or confined by rules, restrictions and availability”

Unconstrained Demand

Il “Naturally occurring demand in the absence of restrains and restrictions”

Lost Business

Il “Business that had considered an organisation’s product/services, but in the end decided to purchase
from another organisation”



Reasons to track loss business:
 Highlight physical deficiencies
 Help management to justify needed capital expenditure
 Problems with customer service
 Open the view of other competitors
 Evaluate the appropriateness of the organisation’s pricing policy and strategy

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4
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It should be in line with the demand forecast (same time period)

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%
99
89
79
69

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Sharable with the all the stakeholders
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Review the special parameters, they should be similar to the demand forecast

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Enter the projected forecast for each market segment day by day that is constrained
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Operational forecasting


Purpose
To prepare the operational departments information on their areas of responsibility

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
Important notes
Easily extracted information from the revenue forecast
It requires the following items
 Identify the department that require the information
 Understand the specific requirements and for what purpose per department
 Identify how often and when the required departments needs the information


Forecasting terminology
DBA – 1 Il Day after arrival
DOA
Il Day of arrival
DBA
Il Day before arrival
DBA 7
Il 7 days before arrival
WBA
Il Week before arrival

MBA
Booking Curve
Booking pace
Pick Up
ROH

Il Month before arrival
Il Graphical representation of the correlation between ROH and DBA
Il The pattern and tempo of receipts of advance reservations
Il Number of reservations not received ye that will be received before DBA -1
Il Reservations on Hand

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Forecasting in Marketing
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The value per segment must be determined to maximize revenue (displacement
analysis)

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Forecasting in Revenue Management
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Maximising Revenue through Rate Threshold

Determine how many rooms to allocate per segment, the decision should depend on the booking pace (compare year on year)

Determine when to open and close rates

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~Example~
Close cheaper rates
Close special corporate rates
o
Last room availability

At 99% occupancy, the rate is still available
o
Non last room availability

At a certain forecasted occupancy %, the rate is closed
Close employee rates
Close discounts

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Maximum stay
 Protect certain day of arrival
 Protect number of check ins
Closed to arrival (CTA)
 Able to stay through date, not arrive

Forecast with the pickup method

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Forecasting errors

Nearly all forecasted data deviates from the actual data
...
To ensure a minimised amount of
error rate, the mean of deviation and the mean of percentage errors must be calculated

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Calculating the mean absolute percentage errors

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Week 6
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Strategic issues on pricing
 Economic principles
 Micro economics and price sensitivity
 Pricing roles
 Price models and revenue
 Discount
 Game theory and pricing dilemma
Tactical issues on pricing
 Profit maximization
 Flow through
 Breakeven point
 Marginal analysis
 Ways to cope with supply and demand imbalance
 Price-profit relationship
 Rate fences
 Competitive pricing strategies
 Best available rate (BAR)
 Revenue management

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Strategic issues on pricing: Micro Economics and Price
Sensitivity
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Micro economics
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Demand
Demand
“The willingness and ability to purchase a good or service at a given price level“

Law of Demand
↑ P → ↓ Qd
↓ P → ↑ Qd

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Market equilibrium

Market Equilibrium
When supply equals demand

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Shift in the Demand Curve
If the demand curve shifts, there needs to be a change in price to optimise
revenue


Important factors that shift the demand
 Changes in the prices of related goods (both substitutes and
complements)
 Changes in disposable income
 Changes in expectations
 Changes in tastes and preferences
 Population size and composition

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Price Sensitivity
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ll Inelastic demand
ll Elastic demand

Demand Curve

Every demand curve is both elastic and inelastic depending on how low or high the prices are
Elastic Demand Curve (Flat line)

~Example: Designer clothing ~

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Price Elasticity of Hotel Segment Demand

The different consumer segments have different elasticity’s of demand
Usually

Business guests = price inelastic
 Change in price = small change in quantity demanded

Leisure guests = price elastic
 Change in price = larger change in quantity demanded

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2
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Independent variable
Seller’s price goes up
Seller’s price goes down
Market demand = ↑
Market demand = ↓

Dependent variable
Market demand = ↓
Market demand = ↑
Seller’s price goes up
Seller’s price goes down

Implementation of Supply and Demand in Revenue Management

In order to implement the economic principles for revenue management, the following conditions must be applicable
 Fixed amount of resources for sale (fixed capacity)
 Resources must be perishable
 Different customers willing to pay a different price for the same amount of resources

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Strategic issues on pricing: Pricing Models and Revenue
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Understanding of elasticity for rates
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1
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Thus, multiple rates per zone
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Formulating a rates structure

Rates are affected by
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


Market demand
Rates of brand competitors
Expected ROI



Rates are affected by:
Competitive advantage
 Brand image and perceived
product value
 Location

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Quality of services
Amentities

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Rate parity

“When the same rate structure for a hotel exists across all its distribution channels “
Rate parity is important because the consumer is more confident to book and rate integrity is assured
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Discounting to obtain more rooms does not necessarily mean a higher revenue
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Strategic issues on pricing: Game Theory and Pricing Dilemma
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Game theory

“The game theory is an interdisciplinary approach to the study of human behaviour in which an individuals’ success in making choices
depends on the choices of his/her opponents”
It is used to help analyse the management’s decision-making in different strategic interactions
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The prisoner’s dilemma
illustrates the intrigue of strategic interactions between opponents
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Tactical issues on pricing: Profit Maximisation

Analysing revenue is entirely focused on the relationship between volume and rate in the effort to maximise total revenue
Analysing profitability includes revenue and expense analysis (food and wage expenses are the most important expenses to analyse
and control)

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Cost behaviour

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VC/unit

Increase volume, increases VC, VC/unit remains constant

TVC

Increases in a linear fashion to the volume of sales

FC/unit

Increase in volume, decrease in FC/unit

TFC

Increase in volume is irrelevant to the TFC

TC/unit

Increase with volume

TC

Increases only by selling additional volume and adding TFC

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For example, according to Aptech, if a property earns $100,000 revenue over and above budget, and the gross operating profit is
$70,000 over budget, then the flow through rate is 70 % t (in other words, 70,000 divided by 100,000); however, other factors may affect
the flow-through rate, such as increased variable costs for staffing or utilities
...
Tactical issues on pricing: Breakeven Point

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How to Calculate Maximum Contribution Margin



Solve the equation



Standard steps
o
Calculate the price of the highest revenue
o
Add 50% of the VC/unit to the answer of 2
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Marginal Analysis Conclusion

Just because revenue is maximised, it does not mean profit is maximised
At profit maximisation, price nor demand is not necessarily at the highest

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1
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2
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Free trail: unused capacity can be utilised to develop customer loyalty
Capacity for bundling; improve employee motivation, exchanging, pledging to build channel relationships
Improving services by reducing the service personnel and guest ratio

Tactical issues on pricing: Price – Profit Relationship

Tactical issues in pricing
 Rate fences
 Pricing strategies
 Price quoting and selling strategies

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1
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Transactions
Controlled availability
Room size/floor/amenities

Frequent customer/ senior citizens
Online /non-refundable reserations
Coupons / area restriction

Tactical issues on pricing: Competitive Pricing Strategies

Most common used pricing strategies in the hospitality industry
Single - rate pricing
Segmented pricing
Variable – rate pricing
Promotional pricing
Demand – based pricing
Competitive pricing
Dynamic pricing
BAR Pricing (Best available rate)
Competitive pricing strategies
Skim
Start with the highest initial price and keep until the first customers are satisfied
before lowering the price
Match
When an organisation promises to match the another organisation’s price
Surround
To set the price of an organisation’s around the competitors price
Undercut
setting the price below the competitors in hope to increase revenue by the
volume
Penetrate
Start with the lower prices and keep until the first customers are satisfied before
increasing the price

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Week 7
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
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Distribution
 Channel of distribution models
 Categories of hotel channel of distribution and SM
 Channel contribution
 Types of fees/commission
 Channel of distribution and markup and markup chain
 Channel management
Overbooking models
Total hotel revenue management initiatives and tools

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1

Channel of distribution models

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Hotel direct
800 Number/Reservation Centre
Hotel website (Brand web)
OTA’s
Third party internet intermediaries (auction sites, opaque sites)
GDS
Special intermediaries: meeting planners, corporate travel managers, incentive travel planners
Social media
Roomkey
...
2
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Agency model vs Merchant model


Agency model
No commitment for capacity allotment or rate for the channel members involved
...
The hotel has control over the price and availability

Merchant model
An online intermediary takes a negotiated capacity allotment with a cut-off date at BAR or at the wholesaler rate, mark it up and resell
it to the customer

1
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1
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5

Channel of distribution and markup and markup chain

In conventional terms, mark up is the amount of the seller adds to the unit of cost of a product to derive at the seller price
...
It allows hotels to pick up incremental revenue without damaging their rate integrity
...
Overbooking models
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2

Formula

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Examples of legal responsibilities

Securing a room at a comparable alternative hotel
Providing or paying for transportation to and from the alternative hotel
Providing reimbursement for the telephone calls used to inform people about the use of the alternative hotel

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