Short course of lectures
“Revenue Management” discipline
for students of the specialty 5В091200 – “Restaurant and Hotel Business”
ALMATY 2016
The Purpose of Business
We start our examination at the very beginning. If you are reading this book, it is most likely because you are now or in the future want to be, in the hospitality business. If that is true, it would be fair to ask: What will be your purpose?
Stated differently, if you plan to go into business, what is the purpose of your business? Even more specifi cally, what is the purpose of a hospitality business? Ask that question to many hospitality professionals and you are likely to get one of two reasonable answers;
1. To achieve profits
2. To generate returns on investment for the business’s owners
Both answers are fl awed and if you hope to successfully manage revenues in a hospitality
business, you need to understand why.
Essential RM Term
Hospitality business: An organization providing food, beverages, lodging, travel, or entertainment services to people away from their homes.
The Profit Fallacy
If you want to be in the hospitality business, you likely want to be involved in a profi table hospitality business. That would be a logical choice because, in the long run, only profi table organizations will stay in business. It is important to recognize, however, that if an organization’s primary focus is the generation of profi ts, it will inevitably go out of business because it will lose out to organizations that know enough not to focus on profi tability. The two previous sentences are not contradictory. The critical nature of profi ts should not lead those in business (and especially those in the hospitality business) to focus their efforts on maximizing their companies’ profi t levels. The organizational focus must be elsewhere.
To understand precisely where organizations should direct their primary attention, you must fi rst analyze the commonly accepted (but unsatisfactory) defi nition of profi ts, and then come to a deeper understanding of the concept of profi ts.
To many hospitality owners and managers, profi t is defi ned as a fi rm’s total revenue minus its total cost or expense. That seems logical. If you know basic accounting, you also know that, with a very few exceptions, hospitality accountants and managers use the words expense and cost interchangeably. Specific types of costs (expenses) may be identifi ed in a
variety of ways. Some common terms for various types of costs include fi xed costs, variable costs, controllable costs, and noncontrollable costs, but they are all considered costs.
Similarly, the terms sales or income are often used as a substitute for revenue. The result is that it is not unusual for accountants to defi ne profi ts utilizing one of the following two versions of the accountant’s profi t formula:
Accountant’s Profi t Formula
Sales = Costs+Profit
Applying basic algebra, and substituting more familiar and commonly used terms, the accountant’s formula becomes:
Profit = Revenue - Expense
As you will learn in this course, the accountant’s formula (as well as the economist’s profit formula, which you will study later in this chapter) is not completely on target, although it does touch on some aspects of truth regarding profi ts. You likely are fairly familiar with this commonly accepted but inadequate meaning of the word profi t. But being familiar with a concept does not necessarily mean that the concept is fully understood or is useful. To actually generate signifi cant profi ts in a hospitality business, and to be a successful manager of a business’s revenues, you must comprehend profi ts both completely and differently. You must acquire a revenue manager’s understanding of the meaning of profi ts.
Essential RM Term
Profit: The net value achieved by a seller and a buyer in a business transaction.
In fact, the use of money as the item to be exchanged in this example illustrates clearly a fundamental truth about the twenty-fi rst-century economy; namely that our current technology-driven economy still operates in much the same way as every other barter system in the history of mankind. Revenue managers can learn important lessons from that time-tested system.
Essential RM Term
Barter system: A trading system in which goods and services are exchanged without the use of money.
It is important to recognize that money has no inherent value. You cannot eat coins or currency, nor can the owners of
money do much of anything useful with the metals, paper, or other items people generally accept as money. Money is highly useful, however, because if those who have it can agree on its value, it greatly facilitates the many trade transactions that can take place in a money-based economy. Its use is more effi cient and more convenient than a barter system.
Money: An acceptable medium of exchange used as the measure of the value of goods and services.
As part of their study of wealth, economists study businesses and business profi ts. Like those in the field of accounting, economists have a formula for profi ts that should be understood by revenue managers:
Economist’s Profi t Formula
Profit = The reward for risk
Economics is the area of knowledge that describes how humans earn and spend their resources (money). When business owners elect to spend their own money by investing in a business, they do so to achieve investment returns that, when added to their original investment amount, increase these investors’ total wealth.
A simplifi ed formula for expressing an owner’s return on investment (ROI) is stated as a percentage related to the owner’s initial investment. ROI is commonly calculated as:
ROI: The short version of “Return on investment”: ROI is the reward to investors for taking an
investment risk.
Questions
1. What kind of three things effective managers of an organization’s revenues simply must do?
2. What is barter system?
3. Who is customer-centric manager of revenues?
Literature:
1. Mark Haley, Jon Inge “Revenue Management. It should be called profit management” http://ishc.com/wp-content/uploads/art_rm04.pdf
2. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
What Is a Price?
Unfortunately, RMs who wish to better understand what the term price means based on a dictionary definition will face a dilemma. This is so because the meaning of the word price varies based on one’s perspective. An economist views price as “the cost at which something is obtained.” The accountant prefers to defi ne price as “the amount of money something
would bring if or when it is sold.
Hospitality professionals with a marketing background will no doubt have encountered a defi nition of price similar to one of the following:
Price: The value placed by a fi rm on its products and services.
Price: The amount of money charged for a good or a service.
To begin, it is important to understand that, for an RM, the term price is both a noun and a verb. A very careful examination of price as defi ned in this text will reveal two important details:
1. Both the seller and buyer are part of the definition.
2. The concept of value “given up” is present whether price is used as a noun or a verb.
Essential RM Term
Price: Noun: A measure of the value given up (exchanged) by a buyer and a seller in a business
transaction. For example: “The price of the room is $245.00 per night.”
Verb: To establish the value to be given up (exchanged) by a buyer and a seller in a business transaction. For example: “We need to meet with the revenue management team to price the New Year’s Eve dinner package.”
Questions
1. What are supply and demand laws?
2. What are the variable and fixed costs?
3. How prices encourage efficient production?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
Topic 3. Value
3.1. The Role of Value in Pricing
3.2. The Relationship Between Quality and Price
3.3. The Relationship Between Service and Price
3.4. The Link Between Quality, Service, and Price
Questions
1. What is perceived value in hospitality?
2. Four I’s of Service?
3. Buyer’s view of value formula?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
Differential Pricing
Value based (pricing): The practice of establishing prices for a fi rm’s products and services based
primarily on the buyer’s perceived value of those products and services.
Differential pricing: The practice of a seller charging different prices to different buyers for the same product or slightly different versions of the same product. This is sometimes referred to as demand-based pricing, segmented pricing, price differentiation, or price discrimination.
Some industry professionals do not believe pricing can or even should be value based. Those hospitality managers with a background in accounting often make the case for a numerical formula-based approach to pricing. Such an approach typically considers fixed and variable costs, desired profi t level, and the costs of a business owner’s initial investment.
Familiar terms for these managers include the Hubbart room rate formula, contribution margin pricing (for restaurants), and investment rates of return. Readers unfamiliar with these terms and how they impact price decisions will not have diffi culty locating them in the hospitality literature.
Similarly, those managers who view pricing as essentially a marketing-related task make the case for the utilization of a variety of pricing approaches depending upon the goals of management. These approaches include skim pricing, penetration pricing, neutral pricing and cost-oriented pricing, demand-oriented pricing, and competitive pricing.
Despite the cases that can be made for accounting and marketing-related pricing approaches, in nearly all cases they recommend the use of fixed pricing.
Experienced RMs understand that differential pricing is a more powerful pricing approach than is fi xed pricing. This is true, in part, because price differentiation also provides the rationale to practice inventory management; one of the most critical tasks that can be undertaken by effective RMs.
Inventory management: The process of allocating and modifying the number of products available for sale at various prices and through various distribution channels.
Differential pricing means charging different prices to different guests. The potential ethical issues related to differential pricing will be addressed in the next chapter, but it is important for you to recognize that your customers, as well as your hotel, clearly benefit from differential pricing. Using your 500-room hotel as an example, consider that when differential pricing was applied, the same 250 buyers purchase their room for $150.00. For them, differential pricing had no effect.
Questions
1. Name ten principles of managing revenue
2. Pricing-related challenges?
3. What is revenue optimization?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Revenue Management. American Hotel & Lodging Association (AHLA), 2006
Questions
1. What is price gouging?
2. Four pricing-related ethical issues that must be considered?
3. Reporting relationships of RM?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Stanislav Ivanov. Hotel Revenue Management: From Theory to Practice. 2014. Varna: Zangador
3. Revenue Management. American Hotel & Lodging Association (AHLA), 2006
Topic 6. Forecasting Demand
6.1. The Importance of Demand Forecasting
6.2. Historical Data
6.3. Current Data
6.4. Future Data
6.5. Demand Forecasts and Strategic Pricing
Historical Data
To begin the data collection and demand forecast process, it is important to understand that every operating hotel generates historical data even if the data are not recorded or analyzed.
Understanding historical data is essential because a key aspect of any RM’s job is to see into the future. Understanding a hotel’s past (historical) performance is one of the best ways to make good decisions about future performance.
The specifi c historical data that may be of interest to RMs and thus should be regularly collected for future analysis will vary somewhat by property but would typically include the data related to the following:
_ Number of reservations/ room nights booked per day
_ Number of reservations/ room nights denied per day
_ Number of daily reservation cancellations
_ Total number of room nights canceled
_ Number of check-ins (arrivals)
_ Number of check-outs (departures)
_ No-shows
_ Walk-ins
_ ADR achieved
_ Occupancy % achieved
_ By the property
_ By room type
_ Average number of guests per room
_ Average length of guest stay
Current Data
Current data aid in understanding the present. Current data can be examined best when it is divided into its three main reporting areas:
_Occupancy and Availability Reports
_Group Rooms Pace Reporting
_Nonrooms Revenue Pace Reporting
_Occupancy and Availability Reports
What is happening now is best communicated by the monitoring of four key areas:
1. The number of rooms available to sell
2. The number of rooms reserved
3. The number of rooms held or blocked
4. The estimated ADR resulting from currently reserved or blocked rooms
Whether purchased as stand-alone programs or directly interfaced with the CRS or PMS, by utilizing information gleaned from the hotel’s historical and current sales data, these programs can:
_ Recommend room rates that will optimize the number of rooms sold
_ Recommend specifi c room rates that will optimize sales revenue
_ Recommend special room restrictions (e.g., minimum length of stay (MLOS) requirements) that serve to optimize the total revenue generated by the hotel during a specific time period
_ Identify special high consumer demand dates that deserve special management attention in pricing
Future Data
The careful and continual monitoring of historical and current data help RMs better understand previous and existing demand for their hotel’s guest rooms. This data also are essential because of their ability to help guide decision making and estimates related to future room demand. Of course, even the best of RMs will fi nd their crystal balls to be a bit fuzzy at times. These same RMs understand, however, that the essence of their job is to learn from the past, manage the present, and by doing so shape the future.
While the variation in individual properties makes it difficult to precisely identify the factors that will most affect the future demand for any single hotel’s guest rooms, for most properties these factors include:
_ Demand generators
_ Demand drains
_ The strength or weakness of the local as well as state or national economy
_ The property’s addition or elimination of specifi c services
_ The opening or closing of competitive hotels
_ Predictable factors such as planned road construction or seasonality
_ Unpredictable factors such as unplanned events, road construction, or severe weather
_ The pricing decisions made by the property’s competitors
_ The pricing decisions made by the property
Important terms include the following:
_ Stayover: Guests not scheduled to check out of the hotel on the day his or her room status is assessed.
That is, the guest will be staying and using the room(s) for at least one more day.
_ No-show: A guest who makes a room reservation but fails to cancel the reservation (or arrive at the
hotel) on the date of the reservation.
_ Early Departure: A guest who checks out of the hotel before his or her originally scheduled check-out date.
_ Overstay: A guest who checks out of the hotel after his or her originally scheduled check-out date.
Questions
1. Three main reporting areas of current data?
2. Factors affecting future data for most properties?
3. Why RM seeks to optimize revenue in a highly constrained supply setting?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Stanislav Ivanov. Hotel Revenue Management: From Theory to Practice. 2014. Varna: Zangador
3. Revenue Management. American Hotel & Lodging Association (AHLA), 2006
Inventory Management
In the lodging industry, sleeping rooms are the primary item sold. As a result, lodging industry RMs seek to optimize their facility revenue through the aggressive management of their unique products—the guest rooms that make up the hotels’ rooms inventory.
Rooms inventory: All of the unique forms of guest room products offered for sale by a lodging facility.
In the common industry vocabulary rooms inventory management is also known as inventory management, which is simply a shortened term for the same concept.
Recall from that inventory management is the process of allocating and modify the number of products available for sale at various prices and through various distribution channels. For RMs, inventory management is the process of allocating room types, room rates, and restrictions among the hotel’s various distribution channels. Inventory management
can best be viewed as the control of product availability and its nonavailability.
Price Management
When RMs have accurately forecasted buyer demand and monitored their product availability, their next task is price management. Recall from that the establishment of an initial price is the fi rst step in revenue management. This is so because the demand forecast for a hotel’s rooms reflects buyer response to an established price. Price management is the process of adjusting that initial price to infl uence demand.
To illustrate, consider your own personal interest in purchasing a fi ve-night stay in Miami, Florida, to visit South Beach. If you are like most buyers, your interest in purchasing the fi ve-night stay can only be determined after you know its price. At a very low price, your interest will likely be high. At a higher price, your interest will likely decline. Thus, it is an RMs’ response to forecasted demand and supply levels at initially determined rates or prices that is the essence of price management.
Hoteliers may establish their initial rate offerings based on a variety of factors including the season, their hotel’s location, its operating costs, and the service levels it provides. Understanding exactly how hoteliers historically determined their initial room prices is helpful in understanding how it is done today, as well as how a hotel’s initial rates can be price managed to optimize revenues.
Questions
1. Differential pricing strategies for optimum inventory management?
2. Name the the reasons for unintentional bookings?
3. What is price management?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Stanislav Ivanov. Hotel Revenue Management: From Theory to Practice. 2014. Varna: Zangador
3. Revenue Management. American Hotel & Lodging Association (AHLA), 2006
Questions
1. How profitability impacts net ADR yield
2. What is the difference between GRS and GDS?
3. Name principles of distribution channel management?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Stanislav Ivanov. Hotel Revenue Management: From Theory to Practice. 2014. Varna: Zangador
3. Revenue Management. American Hotel & Lodging Association (AHLA), 2006
The Lodging Revenue Paradox
As you have learned in the previous two chapters, all RMs should use relevant data and their insight to make good inventory management, pricing, and distribution channel management decisions. But how do they know if they have done so? The answer will be important to how you assess your own efforts, as well as to the operating statistics others will use to evaluate your performance.
To equitably assess revenue generation in a hotel, occupancy percentage and room rate must be evaluated at the same time. This revenue assessment paradox exists in the lodging industry and is quite similar to the load factor paradox faced by airlines. In both industries, RMs must carefully balance the quantity of product sold (hotel rooms or airline seats) with the prices charged (ADR or air fares) to optimize revenue. Recall that the formula for RevPAR is:
ADR X Occupancy percentage = RevPAR
Note that this formula permits RMs to simultaneously consider the impact of ADRrelated decisions and Occupancy %-related decisions on their hotels’ revenue generation.
Since the mid-1990s, efforts and strategies designed to maximize RevPAR have been a major focus of lodging property RMs. Interestingly, while property RMs and a good number of management companies use RevPAR to measure their effectiveness, sophisticated hotel owners typically do not. The reasons why are many, but they relate directly to the importance of revenue optimization and profi tability (GOPPAR), not revenue maximization.
STAR Reports
In a typical report, the subject (your) hotel’s performance is compared to that of its competitive set, and the subject hotel’s rank (e.g., fi rst in the set, or second, third and so on) on each criteria is listed. Examining a single segment of a STAR report related to hotel occupancy will help illustrate how a STAR performance report can be used to assess your own RM-related performance. To interpret Figure 9.7, assume that your hotel is the 400-room property referred to earlier. Your competitive set is the six similar hotels that you have identifi ed as your competition. In Figure 9.7, the “Property” column refers to your hotel.
The Comp Set column in this STR Trend Report refers to the data from the six hotels you have chosen as your competitive set. The monthly occupancy percentages listed represent the occupancy rates, respectively, of your hotel and the combined (average) occupancy of your comp set.
One of the most important features of a STAR performance report will be your hotel’s index on various criteria. This occupancy, room rate, or RevPAR ratio is calculated as:
Performance of subject of your hotel/ Performance of competitive set hotels = index
For example, if your hotel achieved an occupancy of 70 percent last month, and your competitive set achieved an occupancy of 70 percent, your occupancy index would be computed as:
70% occupancy (Subject hotel)/ 70% (Comp set) = 100% occupancy index
If, however, your hotel achieved an occupancy of 70 percent last month, and your competitive set achieved an occupancy of 75 percent, your occupancy index would be computed as:
70% occupancy /75% occupancy = 93.3% occupancy index.
Competitive Set Analysis
Lodging industry RMs know that their hotels will perform better than some of their direct competitors and perhaps less well than others. Variations in a brand’s reputation, a hotel’s location, its age, the skills of the workers in its operating departments, and the decision making ability of its revenue management team members all combine to allow some hotels to charge more and to achieve above average occupancy rates. Alternatively, some hotels can charge more, but only at the expense of reduced occupancy levels. Other hotels achieve higher occupancy rates, but only by reducing rates. How a hotel ranks among its competitive set in terms of ADR, occupancy, and RevPAR generation can tell the property RMs much about how guests perceive the value proposition offered by their hotels’ pricing structures and how future rate and inventory management decisions should be made. A few RMs discount competitive set reports. They would argue that true success simplymeans meeting the goals they have set for themselves, regardless of the performance of others.
All RMs must be able to read and understand how to interpret the following performance indexes:
· Occupancy Index Analysis
· ADR Index Analysis
· RevPAR Index Analysis
Market Share Analysis
A complete competitive set evaluation must also include a market share analysis. For this important assessment, market share refers to the percentage of supply, demand, and revenue accounted for by a hotel property.
The terms supply, demand, and revenue are defined as follows:
Supply: Number of rooms available to sell X Number of days in the period
Demand: Number of rooms sold (excluding complimentary rooms)
Revenue: Total room revenue generated from the sale or rental of rooms
This ratio is calculated as:
Available rooms subject hotel / Available rooms comp set (including subject hotel) = Supply share (%).
Similar calculations are undertaken to compute the subject hotel’s demand and revenue generation
Rooms sold by subject hotel/Rooms sold by comp set (including subject hotel) = Demand share (%).
Rooms revenue generated by subject hotel/Rooms revenue generated by comp set (including subject hotel) = Revenue share (%).
RMs analyzing this portion of a monthly performance report (STR includes this specific report as part of their “Monthly STAR Summary”) could encounter a variety of possible outcomes, each of which may be helpful in evaluating the hotel’s revenue optimization performance.
Additional Assessments
A recurring theme of this book is that maximized revenue generation, by itself, is not the best measure of an RM team’s effectiveness. As a result, while a continual assessment of occupancy, ADR, RevPAR, competitive set performance, market share and, if the data are available, GOPPAR and fl ow-through is important, at least three additional revenue-related areas of assessment are also important. These areas of examination and the specific questions they can answer are:
_ Source of business: Who are our buyers?
_ Distribution channels: At what cost do our buyers purchase from us?
_ Web 2.0: What do our buyers say about their experiences with us?
For some RMs, the answers to these questions may be provided by an effective hotel sales and marketing department or the property’s GM. This is so because the answers to these type questions are critical to effective hotel sales and operations, as well as to revenue optimization. The correct responses to these questions, however, are just as critical to revenue management teams because the answer to the question, “Who are our buyers?” will provide data essential to initial differential pricing decision making.
Knowing the distribution channels that deliver the majority of a hotel’s rooms buyers and the costs of those channels is key to effectively opening and closing room discounts and to rooms inventory allocation. Also, better understanding guests’ experiences during their stay can help an RM provide valuable assistance in product improvement, as well as in identifying areas in which a hotel excels and thus could gain marketing and perhaps pricing advantages.
Questions
1. How did you understand the lodging revenue paradox?
2. What are the specific questions that are answered by RM to maximize revenue generation?
3. What is Web 2.0?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Segmentation, Revenue Management and Pricing Analytics by Tudor Bodea and Mark Ferguson. First edition by Routledge, 2014. ISBN 0-415-89832-3
3. Pricing Segmentation and Analytics by Tudor Bodea and Mark Ferguson, 2012. (ISBN: 978-1-60649-257-4)
Questions
1. What are the general concepts of traditional foodservice pricing methods?
2. What are the factors for differential pricing strategies?
3. What are the key factors to be considered to influence revenue management strategy?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Segmentation, Revenue Management and Pricing Analytics by Tudor Bodea and Mark Ferguson. First edition by Routledge, 2014. ISBN 0-415-89832-3
3. Pricing Segmentation and Analytics by Tudor Bodea and Mark Ferguson, 2012. (ISBN: 978-1-60649-257-4)
Questions
1. Name three main activities that can be grouped into supplemental assessment efforts.
2. On what will be focused your income analysis efforts?
3. What is the formula of Revenue per Available Seat Hour (RevPASH)?
Literature:
1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.
2. Segmentation, Revenue Management and Pricing Analytics by Tudor Bodea and Mark Ferguson. First edition by Routledge, 2014. ISBN 0-415-89832-3
3. Stanislav Ivanov. Hotel Revenue Management: From Theory to Practice. 2014. Varna: Zangador
Short course of lectures
“Revenue Management” discipline
for students of the specialty 5В091200 – “Restaurant and Hotel Business”
ALMATY 2016
Topic 1. Introduction to Revenue Management
1.1. Introduction
1.2. The Purpose of Business
1.3. The Purpose of Revenue Management
1.1 . Introduction
In increasing numbers, professionals in the hospitality industry are coming to the realization that management of their revenue (revenue management) is critical to their organizations’ success.
Essential RM Term
Revenue: The total amount of sales achieved in a specified time period. Revenue is calculated as:
Number of units sold X Unit price = Revenue
It may seem surprising that only recently has the full-time position of revenue manager (RM) been created by forward-thinking hospitality organizations. What is really surprising is that it has taken so long. What these progressive entities are discovering is that every member of their organization has a role to play in revenue management. Even the professional hospitality associations that normally provide up-to-date information to their members have only in the past few years (or still have not!) created coursework, certifi cation programs, and continuing education/professional development
classes focusing on revenue management. The materials used for instruction are few, and the majority of these materials have been developed primarily for the lodging rather than foodservice segments of the hospitality industry. Similarly, only recently have professional hospitality educators felt that revenue management was a topic of suffi cient depth and complexity to warrant its own course content. They are now discovering that virtually the entire hospitality curriculum could (and perhaps should) be designed around the basic tenants of revenue management.
Because of the importance of a business’s revenues, it would seem that implementing effective business strategies designed to optimize revenues would be crucial and fairly straightforward. It is crucial, but for a variety of reasons, it is not easy. The most signifi cant of these reasons is that most traditionally trained hospitality managers do not understand the basic tenants of revenue management, nor do they fully appreciate the large number of organizational misconceptions, biases, and misunderstandings that actually work against them when implementing effective revenue management strategies.
This course is designed to address and dispel many of those misconceptions, biases, and misunderstandings. The reasons it is important to do so are fundamental to business success because, in the final analysis, effective managers of an organization’s revenues simply must do three things:
1. Understand the importance of revenue management
2. Understand the many complex factors that infl uence revenue management strategy and tactics
3. Become better at making revenue management decisions than their competitors
Interestingly, these goals should not be new. Those in business have, since the beginning of commerce, grappled with the complexity of how to best price the products they made and the services they provided, especially in the face of competition from others offering similar products and services. These early entrepreneurs understood the importance of strategic pricing because of a simple mathematical truth; in a service business, the sum of prices paid by the business’s customers equals the total revenues received by that business.
It is important to recognize that if an organization’s primary focus is the generation of profi ts, it will inevitably go out of business because it will lose out to organizations that know enough not to focus on profi tability.
The Purpose of Business
We start our examination at the very beginning. If you are reading this book, it is most likely because you are now or in the future want to be, in the hospitality business. If that is true, it would be fair to ask: What will be your purpose?
Stated differently, if you plan to go into business, what is the purpose of your business? Even more specifi cally, what is the purpose of a hospitality business? Ask that question to many hospitality professionals and you are likely to get one of two reasonable answers;
1. To achieve profits
2. To generate returns on investment for the business’s owners
Both answers are fl awed and if you hope to successfully manage revenues in a hospitality
business, you need to understand why.
Essential RM Term
Hospitality business: An organization providing food, beverages, lodging, travel, or entertainment services to people away from their homes.
The Profit Fallacy
If you want to be in the hospitality business, you likely want to be involved in a profi table hospitality business. That would be a logical choice because, in the long run, only profi table organizations will stay in business. It is important to recognize, however, that if an organization’s primary focus is the generation of profi ts, it will inevitably go out of business because it will lose out to organizations that know enough not to focus on profi tability. The two previous sentences are not contradictory. The critical nature of profi ts should not lead those in business (and especially those in the hospitality business) to focus their efforts on maximizing their companies’ profi t levels. The organizational focus must be elsewhere.
To understand precisely where organizations should direct their primary attention, you must fi rst analyze the commonly accepted (but unsatisfactory) defi nition of profi ts, and then come to a deeper understanding of the concept of profi ts.
To many hospitality owners and managers, profi t is defi ned as a fi rm’s total revenue minus its total cost or expense. That seems logical. If you know basic accounting, you also know that, with a very few exceptions, hospitality accountants and managers use the words expense and cost interchangeably. Specific types of costs (expenses) may be identifi ed in a
variety of ways. Some common terms for various types of costs include fi xed costs, variable costs, controllable costs, and noncontrollable costs, but they are all considered costs.
Similarly, the terms sales or income are often used as a substitute for revenue. The result is that it is not unusual for accountants to defi ne profi ts utilizing one of the following two versions of the accountant’s profi t formula:
Accountant’s Profi t Formula
Sales = Costs+Profit
Applying basic algebra, and substituting more familiar and commonly used terms, the accountant’s formula becomes:
Profit = Revenue - Expense
As you will learn in this course, the accountant’s formula (as well as the economist’s profit formula, which you will study later in this chapter) is not completely on target, although it does touch on some aspects of truth regarding profi ts. You likely are fairly familiar with this commonly accepted but inadequate meaning of the word profi t. But being familiar with a concept does not necessarily mean that the concept is fully understood or is useful. To actually generate signifi cant profi ts in a hospitality business, and to be a successful manager of a business’s revenues, you must comprehend profi ts both completely and differently. You must acquire a revenue manager’s understanding of the meaning of profi ts.
Essential RM Term
Profit: The net value achieved by a seller and a buyer in a business transaction.
In fact, the use of money as the item to be exchanged in this example illustrates clearly a fundamental truth about the twenty-fi rst-century economy; namely that our current technology-driven economy still operates in much the same way as every other barter system in the history of mankind. Revenue managers can learn important lessons from that time-tested system.
Essential RM Term
Barter system: A trading system in which goods and services are exchanged without the use of money.
It is important to recognize that money has no inherent value. You cannot eat coins or currency, nor can the owners of
money do much of anything useful with the metals, paper, or other items people generally accept as money. Money is highly useful, however, because if those who have it can agree on its value, it greatly facilitates the many trade transactions that can take place in a money-based economy. Its use is more effi cient and more convenient than a barter system.
Money: An acceptable medium of exchange used as the measure of the value of goods and services.
As part of their study of wealth, economists study businesses and business profi ts. Like those in the field of accounting, economists have a formula for profi ts that should be understood by revenue managers:
Economist’s Profi t Formula
Profit = The reward for risk
Economics is the area of knowledge that describes how humans earn and spend their resources (money). When business owners elect to spend their own money by investing in a business, they do so to achieve investment returns that, when added to their original investment amount, increase these investors’ total wealth.
A simplifi ed formula for expressing an owner’s return on investment (ROI) is stated as a percentage related to the owner’s initial investment. ROI is commonly calculated as:
ROI: The short version of “Return on investment”: ROI is the reward to investors for taking an
investment risk.
Дата: 2019-07-24, просмотров: 401.
