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Summary of the first 13 chapters of the book Revenue Management Principles. This book was tutorial material for the Minor Revenue in 2019.
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Revenue Management Principles SummaryChapter 1: Introduction to Revenue Management
Introduction:
Revenue = number of units sold x unit price
→ Total amount of sales achieved in a specified time period.
Effective managers of an organization’s revenues must do three things in order to generate
business success, namely:
1. Understand the importance of revenue management.
2. Understand the complex factors that influence revenue management strategy and
tactics.
3. Become better at making revenue management decisions than their competitors.
The purpose of business:
Hospitality business is an organization providing food, beverages, lodging, travel, or
entertainment services to people away from their home.
What is the purpose of a hospitality business?
1. To achieve profits.
2. To generate returns on investment for the business’s owners.
Accountant’s Profit Formula: Sales = Costs + Profit
Profit = Revenue – Expense
If an organization’s primary focus is the generation of profits, it will inevitably go out of
business because it will lose out to organizations that know enough not to focus on
profitability. The critical nature of profits should not lead those in business (and especially
those in the hospitality business) to focus their efforts on maximizing their companies’ profit
levels. The organizational focus must be elsewhere.
To understand precisely where organizations should direct their primary attention, first the
definition of profits must be analysed. To many hospitality owners and managers, profit is
defined as a firm’s total revenue minus its total cost or expense.
Profit is the net value achieved by a seller and a buyer in a business transaction.
→ This is not the trader’s main concern. This is a factor of interest to those who buy AND sell
products services.
Successful businesspersons understand that in any rational business transaction, both the
buyer and seller seek a profit. To illustrate; if you have ten dollars and purchase an item
priced for that amount, you (the buyer) seek to acquire something that you want more than
you want to keep the ten dollars you already have. This example illustrates clearly a
fundamental truth about the twenty-first-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.
Barter system is a trading system in which goods and services are exchanged without the
use of money.
When exchanging something, both parties take on the role of both buyer and seller. Just as a
barter system erases the lines between buyer and seller, it erases the lines between sellers’
costs and their profits. If both participants in a transaction were voluntary participants in the
trade, it could be said that they agree the cost of one good is the other good it is exchanged
for. A profit in such a trade is not a major consideration. This is so because both parties
involved in a trade achieved a profit— which you will recall is the net value achieved by a
seller and buyer in a business transaction. The profit is the ownership of a new good.
However, there are limitations to a barter system. Goods exchanged can go bad before you
actually want to use them. You also need to find a person who has the goods you want and
who wants your goods in return. The invention of money solved both these type problems.
Money is an acceptable medium of exchange used as the measure of the value of goods and
services. Money is not a measure of value, nor does it represent stored-up value. Money is
simply an easy way to quantify the amount of one item its owner will give up in order to get
another item. Value is different to everyone: a chicken dinner can be worth 10 dollars to
someone, whereas to a vegetarian it would not have any value at all.
In each case of a willing exchange, an independent decision will made by both parties
regarding what will be given up and what will be received in exchange.
The true purpose of a business is:
• Recognizing that customers are equal parties to every trade, and thus it is part of
their job to ensure their own customers make a profit (gain value) on every
transaction.
• While also maximizing returns on an owner’s investment
• And while increasing a business owner’s wealth.
The purpose of a successful hospitality business is to provide profits to its customers (not
itself) and as a result, increase those customers’ wealth (not the wealth of the business
owner)
Businesspersons may maintain that maximizing returns on an owner’s investment, or
increasing a business owner’s wealth, is the true purpose of a business. But what is really the
purpose of business as it relates to the creation of wealth?
Economist’s Profit Formula: Profit = The reward for risk
→ They believe that business organization are not guaranteed a profit.
Therefore, profit is the compensation accruing to entrepreneurs for the assumption of risk in
business enterprise.
,Owner’s return on investment (ROI) = (owner’s investment return) / (owner’s original
investment)
ROI is the short version of Return on Investment, which is the reward to investors for taking
an investment risk.
To illustrate ROI, if an owner invests $800,000 in a business, and achieves $200,000 in
investment returns (defined as revenue in excess of all expense), that owner’s ROI would be
25 percent ($200,000 investment return/$800,000 original investment 5 25% ROI).
The Purpose of Revenue Management
Profits are the result of:
1. Generating revenue
2. Controlling expenses
The purpose of professional revenue management is to significantly increase company
profits and owners’ ROIs through advanced revenue management and strategic pricing
techniques. These techniques are ALWAYS customer-needs driven not company-needs
driven. → Offering a product at the right time, price, quantity, channel, and place. (SEE PPT)
Revenue Manager is the individual or team responsible for ensuring that a company’s prices
match a customer’s willingness to pay.
Customer-centric revenue management is a revenue management philosophy that places
customer gain ahead of short-term revenue maximization in revenue management decision
making.
Channel is a source of business customers. Also, a vehicle used to communicate with a
source of customer. Also known as a distribution channel.
Yield management is a demand-based revenue management strategy, first initiated by
commercial airline companies. It seeks to maximize income via manipulation of selling
prices.
Overbook is to accept reservation for more rooms than a hotel has available or in inventory.
Sometimes referred to as overselling or being oversold.
Average Daily Rate (ADR) is the average (mean) selling price of guest rooms during a specific
time period, such as a day, week, month, year
→ Total Rooms Revenue / Total Rooms Sold
Occupancy percentage is the number of rooms sold during a specific time period, expressed
as a percentage of all rooms available to sell during that same period
→ Total Rooms Sold / Total Rooms Available
RevPAR is the Revenue Per Available Rooms and it is the average revenue generated by each
available guest room during a specific period of time.
, → ADR x occupancy percentage x 100%
→ Total revenue / total rooms available for sale x 100%
Unless stated differently, the revenue figure utilized for RevPAR calculations is ‘rooms
revenue’ only.
RevPOR is the Revenue Per Occupied Rooms is the average revenue generated by each
occupied guest room during a specific period of time.
→ Total revenue / total occupied rooms x 100%
Unless stated differently, the revenue figure utilized for RevPOR calculations is ‘all rooms and
non-rooms revenue’.
GOPPAR means Gross Operating Profit per available room and this is the average gross
operating profit generated by each available guest room during a specific period of time.
→ (Total revenue – management controllable expense) / (total rooms available)
Unless stated differently, the revenue figure utilized for GOPPAR calculations is ‘all rooms
and non-rooms operating revenue’.
Competitive set is a group of similar and directly competing lodging properties to which an
individual hotel’s operating performance is compared. Frequently referred to as the
individual property’s comp set.
Market segment is a subset of a customer group that can be readily identified by one or
more common but individual customer characteristics (e.g. customers’ income, gender,
purpose of travel) They will respond positively to the value propositions presented via your
differential pricing strategies.
User-generated content (web site) is a web site in which content is produced by the site’s
end users. Typical content includes news, information, opinion, gossip, and customer
reviews and businesses. Commonly shortened to UGC.
Pace report is a summary report describing the amount of future demand for a lodging
property’s rooms or other services and the rate at which that business is being captured.
Also referred to as a booking place report.
Rack room rates are the prices of rooms when no discounts of any type are offered to guests
purchasing the rooms.
QSR is short for quick-service restaurant, an operation that provides a limited menu and
usually, limited at-the-table services. QSR customers typically order food at the counter or
drive-through window. When serving menu items, single use product wrapping, dishes,
flatware and beverage containers are most common. QSR restaurants are commonly
referred to by those outside the hospitality industry as Fast Food restaurants.
Revenue source (foodservice) is a sub-section of an operation that contributes a definable
portion of the operation’s total income. Typical factors used in foodservice to differentiate
revenue sources include product sold, time of day, and the method of product ordering or
delivery.
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