Archive for the ‘theory of revenue’ Category

>THE SHORT HISTORY OF REVENUE

16 October, 2008

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  • 1970: Yield management was introduced by airlines who realised that they needed to have a strategy for offering an identical flying experience to different customers for different prices, based solely upon the time at which they booked and the flexibility that they required.
  • 1985: American Airlines launched Ultimate Super Saver fares in an effort to compete with low cost carrier PEOPLExpress.
  • 1990: Revenue management spread to other travel and transportation companies, specially at National Car Rental.
  • 1995: Hotel started in an attempt to rationalise the wide variety of rates that they were charging different customers.

>MAIN FACTORS OF HOTEL REVENUE MANAGEMENT

20 August, 2008

>There are three main factors which affect Hotel Revenue Management:

  • length of stay: is a term commonly used to measure the duration of a guest in a hotel.
  • Stay: lenght of stay from a specific check in date to a specific check out date.
  • Price: it is what a buyer pays to acquire products from a seller (including discounts for instance).
  • Rate: it is a tariff integrated in a ranking of rates.
  • Channel: tt.oo., OTA, CRS, GDS, etc.
  • Segment: corporate, leisure, etc.

>RETAIL MODEL Vs. MERCHANT MODEL

13 August, 2008

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Retail Model is a model of IDS comisionable with PVP and restrictions established by hotel (ideal model of Best Available Rate) and provide an immediate Cash Flow.
Merchant Model is a model of dynamic rates, being responsability of hotel to fix mark-up to achive Best Available Rate, working always over net rates.
The Retail Model is winning the touch to Merchant Model because it means lower commisions, in addition to control over PVP.

>TT.OO (TOUROPERATORS) ACTUALLY

12 August, 2008

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Historically, TT.OO. had supremacy over leisure market, even setting rates over hotels. But Irruption of Internet changes play rules because now hoteliere can control his or her availability, domaining his or her dinamic rates, even reducing TT.OO. presence in Urban Markets. So, TT.OO. are opening new ways of business to survive: using FIT rates to distribute through Internet, modifing comercial mark-up (from B2B to B2C as CRSs) following strategy of increasing volume of sales in front of margin of benefit.
However, FIT rates cause disparity problems in face of Hotels and its distributors. In reply to this situation, Hotels must demand pledge of opaqueness, creating packages. Also, Hotels must demand:
  • contract clause to avoid internet distribution of fit rates
  • a minimum mark-up
  • contract clause to control over partners
  • eliminating security quotes
  • promoting free sale

>CRS (CENTRAL RESERVATION SYSTEM) PRESENTLY

11 August, 2008

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CRS has evolves from B2B to diversification, B2B + B2C as a result of irruption of internet but CRSs cannot offer same products (type of promotions) because they have not an appropriate technology. Another question is parity of rates because there is a iron surveillance between competitors.

>EVOLUTION IN ELECTRONIC DISTRIBUTION

9 August, 2008

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Hotel distribution channels are undergoing changes because electronic distribution of room information, prices, and availability has changed the way that hotel properties and chains interact with their vendors and customers. Consequently, as shown in next exhibit, electronic distribution-channel options constitute a complex web of choices through which suppliers and buyers of hospitality services must navigate to ensure favorable transaction results. This form of distribution makes booking hotel services more efficient than are the former telephone-based approaches, but 20% of customers who look at the chain’s website end up calling the chain’s reservation center to make a booking.

  • Hotels and chains are using electonic distribution to reduce costs by shifting transactions from intermediaries to their own facilities through direct connections and websites because this saves intermediaries’ fees (travel-agency commissions, GDS fees per transaction). Most of online bookings will be made by leisure and unmanaged business customers (Hotel and Lodging Commerce 2002-2005, PhoCusWright Inc., November 2002), chains promote loyalty programs with their websites for them. Definitely, hotel chains increasingly use their own web sites, in concert with other marketing and sales efforts, to drive information delivery and online bookings.
  • GDS’s (Global-distribution systems) are repositioning themselves to become maketing and service companies for their suppliers, principally travel agencies, changing their focus form airlines t other travel-industry segments. There are four G.D.S. classified in three Markets: Europe (Amadeus), USA (Sabre and Galileo) and Asia (Worldspan).
  • Travel agencies (sometimes called “brick and mortar” agencies) are also transforming themselves. Facing financial pressure, they are increasingly using the internet as a cost-saving and service-extending tool. They are replacing commissions with incentive payments from suppliers, including hotels, for shifting market share. Even they are looking for ways to exploit the internet, grow their share of revenues from sources other than airlines, and implement alternative-pricing schemes.
  • Distribution-service providers (DSPs) provide switches that link hotel CRSs with GDS and online sites, commission-and fee-payment services, representation services, and PMS services.

>RELATIONSHIP BETWEEN OCCUPANCY AND HOTEL’S RATE

5 August, 2008

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What’s the degree of linkage between a hotel’s rate and its occupancy levels for hotels in different market segments under various competitive situations? Cornell University studies from 2001 through 2003 reveal that hotels that drop their prices relative to their competitive set capture market share from the competition but do not gain higher RevPARs than those same competitors, then these sugests to hold relative rates constant even when demand drops under specific competitive conditions. In other words, raising prices above those of a hotel’s competitive set will lead to loss of occupancy, but that loss does not disminish RevPAR.

Good revenue management exists when hotel rates and occupancies are positively correlated. Comparing the relationship between average daily rate and occupancy for hotels that were pricing above their competition and for those that kept their rates below those of their direct competitors, we come to conclusion of hotels that set rates just slightly below most of their competitors are likely to have strong and positive correlations between their ADRs and occupancies but hotels that priced substancially below their competitors experienced much lower RevPARs.

>ARR and Revpar

1 August, 2008

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To control whether strategies of Revenue is successful or not, is precise to control rooms revenue. There are two important indicators: ADR or ARR (average daily rate or average room rate) and Revpar (revenue per available room).

ADR or ARR: it is the average price of each room sold per day.

Revpar:
it is the average price of each available room per day, per month or per year.

For instance, 100 capacity rooms hotel per day, but just sold 80 rooms and it produces 4.820 euros per month. So occupation percentage is 80%.

allotment 100 rooms
rooms sold 80 rooms

production 4.820 €
Occupancy 80%

Average Room Rate 60 €

Revpar 48 €

ADR or ARR = Rooms Revenue per Month / rooms sold per month (in this case: 4820/80)

Revpar = Rooms Revenue per Month / available rooms (in this case: 4820/100)

Ideal Situation is Revpar = ADR, because it means 100% occupancy.
However, it is a general formula for all fields applicable to Revenue Theory, because in fact ARR or ADR is a Revenue Per Available Time-based inventory Unit (RevPATI): Airlines is Revenue per available seat-mile; rent a car is revenue per available car; restaurant is revenue per available seat; golf course is revenue per available tee-time, etc. Indeed REVPATI is average rate per capacity utilization.

>THE CONCEPT OF REVENUE MANAGEMENT

29 July, 2008

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Revenue Management is about making predictions and decisions about how much and what type of business to expect, and the subsequent decisions a manager makes to get the most revenue from that business.

This concept was originated in the airline industry, becoming discounts, advance-purchase or different fares the norm for airline pricing. Like airline industry, hotel companies have a common problem: there is a fixed inventory of perishable products that cannot be stored if unsold by a specific time.

The goal of revenue management is that it involves selling the right rooms to the right guests at the right rate at the right time. Selecting revenue management strategies and tactics is really about picking and choosing the reservation you want. Each day is a separate situation and implement tactics best suited to your property, your guests, your market and your demand conditions. This is done through:

  • Capacity Management, also called selective overbooking, balances the risk of overselling guestrooms against the potential loss of revenue arising from room spoilage. Capacity management strategies usually vary by room type and it might be economically advantageous to overbook more rooms in lower-priced categories, because upgrading to higher-priced rooms is an acceptable solution to an oversell problem. A walking guest leads to guest dissatisfaction and will change hotels or brands if overbooking relocates them too often. In addition, hotel management must be aware of how the local laws interpret overbooking.
  • Discount Allocation involves the time period and availability. The primary objective is to protect enough remaining rooms at a higher rate to satisfy the projected demand for rooms at that rate, while at the same time filling rooms that would otherwise have remained unsold. And second objective is to encourage upselling, but this technique requires to estimate of price elasticity, referring to the relationship between price and demand.
  • Duration Control places time constraints on accepting reservations in order to protect sufficient space for multi-day requests; this means that a reservation for a one-night stay may be rejected, even though space is available for that night.

These strategies may be combined but it must be cautioned because a guest might not understand the reason. Proper use of revenue management relies on selling; it never divulges the revenue management strategy being used.


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