Chapter 6Revenue Management

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

The Role of the Revenue Manager

=

Revenue Manager Tasks

Maximize RevPar

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

RevPar is a part of every employee’s job

RevPar

Housekeeping

Restaurant Server

Desk Staff

Maintenance

Bell Staff

Food & Beverage

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Negotiated RatesNational

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Room Type Rack Rate

Standard Double $ 109.00

Standard King $119.00

Executive Double $149.00

Executive King $164.00

Executive Double (Concierge Level) $199.00

Executive King (Concierge Level) $214.00

Double Parlor Suite $269.00

King Parlor Suite $289.00

Sample Hotel Rack Rates

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

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Other rate types:

Seasonal rateSpecial event rateCorporate rateGovernment rateGroup ratePackage rateAmerican plan (AP) or modified American plan (MAP) rateAll-inclusive plan rateEuropean plan (EP) rateDay and half-day ratesFade rate

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

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Step 1 Calculate the hotel’s target profits

Step 2 Calculate all fixed expenses

Step 3 Calculate all operating costs

Step 4 Calculate nonrooms profits

Step 5 Determine room revenue needed to meet obligations/goals

Step 6 Forecast rooms to be sold based on estimated occupancy

Step 7 Calculate 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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier 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. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

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 EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Distribution Channel Management

Step 1 A hotel sells rooms to a travel wholesaler

Step 2 The wholesaler sells rooms to a travel agent

Step 3 The travel agent sells rooms to an individual guest or group

Step 4 The guest stays at the hotel

Historical Distribution Channels

Hotel Operations Management, 2nd ed. ©2007 Pearson EducationHayes/Ninemeier Pearson Prentice Hall

Upper Saddle River, NJ 07458

Walk-ins Regular Mail

Telephone GDS

FaxChain or Brand Central

Reservation System (CRS)

Email Internet

Current Distribution Channels

Distribution Channel Management (cont.)