Chapter 6 Revenue Management

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ The Role of the Revenue Manager = Revenue Manager Tasks Maximize RevPar

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ RevPar is a part of every employee’s job RevPar HousekeepingRestaurant ServerDesk Staff Maintenance Bell Staff Food & Beverage

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Negotiated Rates National Associations (Like AAA) Military and Clergy Personnel Government Employees Groups Traditionally Eligible for Negotiated Rates The Role of the Revenue Manager: Revenue Management

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ The Role of the Revenue Manager: Revenue Management (cont.) Promotions and stay-over business Length of Stay (LOS) Room nights sold divided by rooms sold to guests = LOS 300 / 100 = 3

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Revenue Manager Tasks DOSM Tasks FOM Tasks Room Rates Shared Room Rate Management Responsibilities The Role of the Revenue Manager: Revenue Management (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ 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. Short-term economic supply and demand: 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. Economic supply: The Role of the Revenue Manager: Room Rate Economics

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Rate Type: A single (unique) rate for a specific type of room The Role of the Revenue Manager: Room Rate Economics (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Room TypeRack Rate Standard Double$ Standard King$ Executive Double$ Executive King$ Executive Double (Concierge Level) $ Executive King (Concierge Level) $ Double Parlor Suite$ King Parlor Suite$ Sample Hotel Rack Rates The Role of the Revenue Manager: Room Rate Economics (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ 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 The Role of the Revenue Manager: Room Rate Economics (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Step 1Calculate the hotel’s target profits Step 2Calculate all fixed expenses Step 3Calculate all operating costs Step 4Calculate nonrooms profits Step 5Determine room revenue needed to meet obligations/goals Step 6Forecast rooms to be sold based on estimated occupancy Step 7Calculate the hotel’s required ADR Traditional Pricing Strategies Hubbart Room Rate Formula The Role of the Revenue Manager: Room Rate Economics (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Web-Influenced Pricing Strategies Charge what the competition charges. Competitive Pricing Charge what the dominant hotel in the area charges. Follow-the- Leader Pricing Charge the highest price, and justify it with better product and/or service levels. Prestige Pricing Reduce rates below those of competitors without considering operating costs. Discount Pricing The Role of the Revenue Manager: Room Rate Economics (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Revenue Management Essentials: Making Forecasts Rooms Revenue Forecast Rooms available to sell for the forecast period Estimated occupancy rate for the period RevPar for the period Estimated ADR for the period Estimated rooms to be sold for the period

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ 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.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Revenue Management Essentials: Yield Management Varies by day of week, time of month, season, or in response to local special events Hoteliers often change pricing based on demand (perishability) Not all companies can operate this way; few consumers would condone an emergency medical supply company’s significantly increased product prices immediately following a disaster that caused a surge in product demand 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 Philosophy Implementation Techniques

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Occupancy Index A ratio measure computed as: ________________________ Occupancy Rate of a Selected Hotel Occupancy Rate of That Hotel’s Competitors = Occupancy Index Revenue Management Essentials: Measures of Effectiveness

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ ADR Index A ratio measure computed as: ________________________ ADR of a Selected Hotel ADR of That Hotel’s Competitive Set = ADR Index Revenue Management Essentials: Measures of Effectiveness (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ RevPar Index A ratio measure computed as: ________________________ RevPar of a Selected Hotel RevPar of That Hotel’s Competitors = RevPar Index Revenue Management Essentials: Measures of Effectiveness (cont.)

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Distribution Channel Management Step 1A hotel sells rooms to a travel wholesaler Step 2The wholesaler sells rooms to a travel agent Step 3The travel agent sells rooms to an individual guest or group Step 4The guest stays at the hotel Historical Distribution Channels

Hotel Operations Management, 2nd ed.©2007 Pearson Education Hayes/NinemeierPearson Prentice Hall Upper Saddle River, NJ Walk-insRegular Mail TelephoneGDS Fax Chain or Brand Central Reservation System (CRS) Internet Current Distribution Channels Distribution Channel Management (cont.)