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Summary Revenue Management
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All you need to know for the Revenue Management Exam.
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Summary revenue management Book chapters 1,2,4,5,6,7,8,9,10,11,12Revenue Management Chapter 1
The act of skillfully, carefully, and tactfully managing, controlling, and directing sources of income.
Revenue is dependent upon three other elements which address price and availability:
1 capacity:
The amount of space that can be filled during the particular time. For a hotel, space may refer to
guest rooms, meeting rooms, or restaurant seats available over a specified period of time.
2 supply: (aanbod)
The amount of a good or service that a seller is willing and able to sell for any given price at any given
time.
3 demand: (vraag)
The amount of a good or service that a purchaser is willing and able to buy for any given price at any
given time.
Current events, politics and information technology are important for revenue management.
And, understanding the past and forecast the future is an important task inside revenue
management. (The best way to forecast the future is to understand the past)
History of revenue management: Chapter 2
Barter, first trade method.
The first method of trade was Barter. One individual would exchange goods or services with another
individual. The terms of trade were established based upon an item’s worth, which was determined
by an item’s scarcity or by its perceived value in labor. (schaarste en waarde van de arbeid.)
Markets
Revenue management techniques have been applied to hospitality products since the days of the
very first markets. Merchants saved their best wares for their best customers. The last available
room or meal available at the inn commanded a higher price than those served earlier in the
evening. So from the start, prices have been set based upon availability, perceived value and ability
and willingness to pay.
Steamships and ocean liners
As the Industrial Revolution took hold, more and more people ventured further from
their homes in search of commerce or relaxation. (Handel of ontspanning) New modes of
transportation developed to get travelers from here to there. And different prices began to be
charged according to the manner in which these travelers experienced their journeys. The higher the
perceived value of the ocean travel experience, the higher the price the cruise line company could
charge.
Railways
In 1830 the first trains were found out. The railroads quickly caught on the idea of maximizing
revenue by charging higher prices for their more valuable seats on the most highly demanded routes.
Wherever the railroad stopped, a town soon sprung up to service the weary travelers. The most
popular destinations quickly began to charge the highest prices.
, Automobiles (cars)
In 1880 the first car was built in the United States. As more and more people were able to purchase
cars, they began to venture out first on day drives to the country and the on overnight excursions to
visit friends and families. As reaction on that, the motels sprung up along the major highways as
convenient one-night stops. Kemmons Wilson developed the hotel chain Holiday Inn and travels soon
learned that they would experience a clean, comfortable, consistent stay at a Holiday Inn. Soon,
other hotel chains sprung up. In the 1980’s the hotel industry began the experiment with
segmentation and developed products to fit new markets. The Marriott Corporation took the lead in
research and development of new hotel products designed to meet the needs of guests spanning
from the upscale market to the budget traveler.
Las Vegas
The hotel industry as continued to reinvent itself in the gaming industry. Las Vegas understand the
concept of maximizing revenue by looking at every single dollar available from each of the nearly 40
million visitors. In 1980 Las Vegas tried to become a family destination, without success. Now, Las
Vegas is focusing on the adult traveler with their new slogan; what happens in Vegas, stays in Vegas.
Steve Wynn has much hotels in Vegas.
Disneyland
Walt Disney began its career at a cartoon studio in Hollywood in the 1920s. In 1955 the first
Disneyland is opened in Anaheim. The Disney people undertand two core concepts very well.
1. They truly understand the value of the customer. And in return, the customers truly value their
Disney experience.
2. Disney associates understand the value of merchandising. Every new creation, whether it is a
movie or a ride in a theme park, is analyzed in terms of its future marketing and sales potential.
Today, Disney is offering products and services to all segment of the market.
Air travel
The first commercial flights were at the end of World War I. The pilots were air force pilots, returning
home for the war. Occasionally, an independent pilot would offer to take a passenger along on one
of his flights. In 1927 investors noticed and later that year Pan American Airlines was born and
delivered flights between US and Cuba. In 1958 the first Boeing 707 jets were put into service. The jet
age officially begun and led to the great interdependence between the airline industry and other
travel-related products as hotel rooms and car rentals. The airline industry was strictly regulated by
the federal government in its early years. The Airline Deregulation Act of 1978 changed the way the
entire industry operated. Airlines were now free to compete for passengers, fares and routes. The
fare wars (prijzenoorlogen) led to the development of a formalized method of managing and
controlling revenues Yield management.
Yield management was the precursor to the revenue management. Yield refers to the amount of
revenue received by the airline for each mile flown per passenger (passenger mile). Another term;
load factor refers to the percentage of seats sold. There is a formula to calculate the total passenger
seat revenue per flight.
Formula: (Yield X Miles Flown) X (Number of seats X Load Factor)
Lower-cost carriers began entering the market. They flew the same routes, but the fares were lower.
The furious pricing war began, which ensured an unhealthy financial situation for the major carriers.
They started to manipulating the yield and load factors to try to develop an optimum mix per route.
- Airline pricing strategics would determine which fares to offer on which flights to which markets.
- Inventory manager would then determine how many seats to offer at each of the individual fare
levels for each flight.
They lowered their fares More seats sold, but lower total revenue.
,They higher their prices Less seats sold, still low total revenue. (Vaste kosten)
In mid-1980s, American Airlines created a yield management system to resolve this yield/load
dilemma. They were going to use the data stored in the reservation system to help them gain a
competitive marketing advantage.
1. They analyzed the characteristics of each flight for each day of the week.
2. The analysts assigned a value to each seat on each flight.
Booking space was a critical element in this analysis. Booking space is the pattern an d tempo
of receipt and acceptance of advanced reservations. -When did the majority of passengers
book a particular flight?- The computer system was able to provide the historical booking
space for each flight.
3. They assigned fares to each level of seating per flight. (first class)
4. They analyzed the results.
Hotels
Hotels soon caught wind of this new revenue- maximizing system and wanted to join in.
First problem: The lack of adequate technology.
Airlines were first-level adaptors ( tries out new innovations first, before those
innovations are mass produced) while hotels have been historically slow adaptors.
Second: The lack of information.
The hotels had not been capturing much data regarding their guests. They didn’t
know who was sleeping in their hotel, why they were sleeping there or when they
booked.
Third: Length of stay.
While seats in the airplane were sold for a specific time period a day, hotel rooms
could be booked for several nights.
The Marriott organization researched customer demand for their varied hotel products. Based upon
their studies, they determined that customer behavior and demand could be forecasted. They could
decide which rooms would be offered at which price for each day based upon this forecast.
Hoteliers began to seek new opportunities within their organizations for growing revenues. Soon
they were looking at applying revenue management techniques to products and services other than
rooms, such as spa services. Also restaurants and car rental companies, arenas, convention centers,
concert halls, cruise lines, theme parks and other hospitality related companies started to use this
system to optimize revenue.
Marketing segmentation and selection Chapter 4
, Market segments and subsegments
Market segmentation: Dividing a market into smaller specific segments, sharing the similar
characteristics.
The most easy way to divide the hospitality market into subgroups is to look at their reason to travel.
So, divide the guests into business or leisure guests. Hospitality organizations usually break down
the leisure and business segments first into individual and group subsegments.
- Transient A temporary individual hospitality customer. This guest is alone and is
purchasing a product or service to be used for a short period of time.
- Group business More than two individuals coming together for a common reason.
It is possible to break down the business and leisure into even smaller subsegments. You should ask
the question; what might be a reason for leisure travel/business travel?
Leisure; 1. Vacation
2. VFR – visiting friends and relatives
3. Attending special events
Business; 1. May be one aspect of their job responsibilities
2. Attending a training or seminar
3. Attending a meeting or conference
Business travelers are often further subsegmented by industry sectors such as corporate,
government and association.
Each hospitality sector and individual organization will define its market segments and subsegments
differently. It is also possible to look at the demographic characteristics.
- Demographic Based upon the characteristics of a population.
- Age, religion, gender, income, education, nationality.
Frequent traveler programs are designed to reward loyal patronage and induce repeat
business. These programs contains a lot of demographic information, which helps to give
the best service to the customer.
Example of a way to consider dividing up a larger travel market.
Name of segment Includes
Business (or corporate) transient segment Individual business travelers
Leisure transient segment Individuals, couples, families purchasing products/services
for non-business-related reasons
Government/military transient segment Individuals possessing a valid government identification
Contracts All business generated through the negotiation of a contract
Association (vereniging) transient segment Highly location specific, only when an association is nearby
Tour and travel segment Consumers buying an inclusive travel package
Group segment Determined by a signed contract committing to a specified
number of units sold to one group for a specific period of
time
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