Chapter 6

Revenue Management

The Role of the Revenue Manager

Revenue Manager Tasks

=
Maximize RevPar

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

RevPar is a part of every employees job

Housekeeping Restaurant Server Desk Staff Maintenance Bell Staff Food & Beverage
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

RevPar

The Role of the Revenue Manager: Revenue Management

Groups Traditionally Eligible for Negotiated Rates

National Associations (Like AAA)

Negotiated Rates

Military and Clergy Personnel

Government Employees
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Revenue Management (cont.)

Length of Stay (LOS) Promotions and stay-over business

Room nights sold divided by rooms sold to guests = LOS

300 / 100 = 3

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Revenue Management (cont.)

Shared Room Rate Management Responsibilities Revenue Manager Tasks

Room Rates FOM Tasks

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

DOSM Tasks
2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Room Rate Economics

Short-term economic supply and demand:

In the short-term, hotel room supply will stay the same; demand will increase and decrease depending on the timeframe examined.
Perishability of hotel rooms. Economic supply: In the long-term, hotel room supply may increase as new hotels are built. Revenue managers will be able to assess an increase or decrease in hotel room supply in their respective markets.
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Room Rate Economics (cont.)

Rate Type:

A single (unique) rate for a specific type of room

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Room Rate Economics (cont.)

Sample Hotel Rack Rates Room Type Standard Double Standard King Executive Double Executive King Executive Double (Concierge Level) Executive King (Concierge Level) Rack Rate $ 109.00 $119.00 $149.00 $164.00 $199.00 $214.00

Double Parlor Suite

King Parlor Suite
Hotel Operations Management, 2nd ed. Hayes/Ninemeier

$269.00
$289.00
2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Room Rate Economics (cont.)

Other rate types:
Seasonal rate Special event rate Corporate rate Government rate Group rate Package rate American plan (AP) or modified American plan (MAP) rate All-inclusive plan rate European plan (EP) rate Day and half-day rates Fade rate
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

The Role of the Revenue Manager: Room Rate Economics (cont.)

Traditional Pricing Strategies Step 1 Step 2 Hubbart Room Rate Formula

Calculate the hotels target profits Calculate all fixed expenses

Step 3
Step 4 Step 5

Calculate all operating costs

Calculate nonrooms profits Determine room revenue needed to meet obligations/goals

Step 6
Step 7

Forecast rooms to be sold based on estimated occupancy

Calculate the hotels required ADR
2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

The Role of the Revenue Manager: Room Rate Economics (cont.)

Web-Influenced Pricing Strategies Competitive Pricing Follow-theLeader Pricing Prestige Pricing

Charge what the competition charges.

Charge what the dominant hotel in the area charges. Charge the highest price, and justify it with better product and/or service levels. Reduce rates below those of competitors without considering operating costs.
2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Discount Pricing
Hotel Operations Management, 2nd ed. Hayes/Ninemeier

Revenue Management Essentials: Making Forecasts

Rooms available to sell for the forecast period Estimated rooms to be sold for the period

Estimated occupancy rate for the period

Rooms Revenue Forecast

Estimated ADR for the period RevPar for the period

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Management Essentials: Managing Occupancy

MLOS: Minimum Length of Stay CTA: Closed to Arrival Overbooking: A situation in which the hotel has more guest reservations for rooms than it has rooms available to lodge those guests; sometimes referred to as oversold. Walk(ed): A situation in which a guest with a reservation is relocated from the reserved hotel to another hotel because no room was available at the reserved hotel.
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Management Essentials: Yield Management

Philosophy
Hoteliers often change pricing based on demand (perishability) Not all companies can operate this way; few consumers would condone an emergency medical supply companys significantly increased product prices immediately following a disaster that caused a surge in product demand

Implementation
Varies by day of week, time of month, season, or in response to local special events

Techniques
Forecast demand, eliminate discounts in high demand periods, increase discounts in low demand periods, use MLOS and CTO maximize revenue, and implement special event rates
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Management Essentials: Measures of Effectiveness Occupancy Index

A ratio measure computed as:

Occupancy Rate of a Selected Hotel Occupancy ________________________ = Index Occupancy Rate of That Hotels Competitors
Hotel Operations Management, 2nd ed. Hayes/Ninemeier 2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Management Essentials: Measures of Effectiveness (cont.)

ADR Index

A ratio measure computed as:

ADR of a Selected Hotel ________________________ ADR of That Hotels Competitive Set
Hotel Operations Management, 2nd ed. Hayes/Ninemeier

ADR Index

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Management Essentials: Measures of Effectiveness (cont.) RevPar Index

A ratio measure computed as:

RevPar of a Selected Hotel ________________________ RevPar of That Hotels Competitors
Hotel Operations Management, 2nd ed. Hayes/Ninemeier

RevPar Index

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Distribution Channel Management

Historical Distribution Channels
Step 1 Step 2 Step 3 A hotel sells rooms to a travel wholesaler The wholesaler sells rooms to a travel agent The travel agent sells rooms to an individual guest or group

Step 4

The guest stays at the hotel

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458

Distribution Channel Management (cont.)

Current Distribution Channels Walk-ins Telephone Fax Email Regular Mail GDS Chain or Brand Central Reservation System (CRS) Internet

Hotel Operations Management, 2nd ed. Hayes/Ninemeier

2007 Pearson Education Pearson Prentice Hall Upper Saddle River, NJ 07458