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markets. This questioning opens the door for revenue management, which turns the passive efforts of hoteliers into aggressive financial strategies.
History of Yield Management
Yield management is the source of the concepts that underlie revenue management. The history of yield management provides a framework for developing a background knowledge of revenue management. The airline industry instituted yield management after deregulation in the late 1970s.2 The airlines blocked out time periods when seats on flights were priced at certain levels; the potential passenger either booked the flight at the price quoted or found other means of transportation. This bold marketing policy met with some problems such as consumer uproar concerning airfare strategies over holidays and weekends, but established the economic structure of airfares.
Hotels and airlines share similar operational features. Each has a fixed number of products (hotel rooms and airline seats) that, if not sold on a given day or flight, cannot be resold. Airlines and hotels sell to market segments that have distinct needs in product and service level. Each has demand periods (holidays, weekdays, and weekends in hotels; holidays, weekdays, and time of day for airlines) that place the provider in a favorable position. Airlines and hotels offer a range of rates from which guests can choose. Reservations allow managers to use yield management.3 By using computers to track a database of products (hotel rooms and airline seats) and to process reservations, managers have the ability to look at a sales horizon of 45 to 90 days and to set price and reservation policies that will allow a prediction of profitability.
One of the major differences in how yield management is used in airlines and hotels is that at the hotel, the guest may also spend money for products and services besides the room itself. The airline passenger usually does not have an opportunity to spend large amounts of money during a flight. Because of this difference, hoteliers must consider the financial potential of one prospective guest over another in determining reservation policies. For example, one group may want to book a block of 500 rooms with a $50,000 value plus banquets and other food and beverage service events that total $25,000, while another group may want to book a block of 600 rooms with a value of $60,000 but no additional food and beverage income.
Use of Yield Management
Yield management has now caught on in the hotel industry. It is imperative that hoteliers understand the importance of the basic factors of yield management—room rate categories, room inventory, and group buying power—to navigate their way through revenue management. The goal of revenue management is twofold: to maximize profit for guest room sales and to maximize profit for hotel services. These goals are important for future hoteliers to understand, because if they set out to maximize room sales only, the most
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profitable guest may not stay in the guest room. This is the difference between airline yield management and hotel revenue management.
The following discussion shows how revenue management is used in the hotel industry. As you read, note how the management staff is using technology to make informed decisions that will reflect favorably on the bottom line. (The terms yield management and revenue management are now interchangeable. Yield management was the earlier concept from which revenue management developed.) The real challenge of developing any computer application is to support the goals of the management staff. The following quote from the International Hotel Association summarizes the importance of using yield management as a business tool: “Yield Management is the must-have business planning tool for hoteliers. The computerized functioning [mathematical model] of yield management is complex, but the concept is simple: By using a combination of pricing and inventory control, a hotelier can maximize profits from the sale of rooms and services.”4 This statement continues to be relevant in today’s hotel marketplace.
A common misperception about hotel revenue management (RM) is that its value diminishes when room occupancy falls. With a healthy economy, an RM system can often appear to be a well-running car engine, doing its job to manage the mix of bookings to maximize revenues. During low-occupancy periods, some hotel management teams mistakenly view RM as a low-priority activity. However, it is precisely during these challenging times that hotel professionals should be looking under the hood and asking questions regarding the methods and the data used to manage hotel pricing and customer mix. Hotel teams should rely on RM processes to enable responsive sales, marketing, cost containment and pricing decisions that work in today’s economy.5
So how are hotel general managers, revenue managers, directors of marketing, and front office managers applying this technology to produce more profit? Here is an example:
Warren Dehan, president of NORTHWIND-Maestro PMS says, “But no matter how tightly you manage your operation, revenue is the engine that drives property performance. And to maximize revenue it is essential to utilize an effective revenue management system. Manual rate setting is no longer an option.”
Industry analysts agree that current market dynamics indicate that Internet channels will be much more important to property revenue as the meeting and corporate segment cools in 2009. “With payrolls being trimmed, hotel staffs do not have time to manage Online Travel Agency (OTA) allotments and prices throughout the day,” says Dehan. “Hotel operators must learn to rely on solid revenue management technology to monitor all sales channels, particularly Internet booking channels.”6
Revenue Manager
Because revenue management has become such an active part of hotel management, a new operational position has emerged: the revenue manager. The revenue manager
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reports to the general manager, works closely with the marketing and sales department, and consults with the front office manager. The job of the revenue manager is to oversee the room inventory and room rates offered throughout the year to groups and individuals and through the various channels: central reservation systems, global distribution systems, third-party reservation systems, toll-free reservation numbers, and so on. The revenue manager also identifies trends and methods to match those trends. The person in this job communicates regularly with members of a revenue management team. The following is a management job listing for a revenue manager.
1.Monitor, analyze, and report on demand patterns, sales, and losses.
2.Develop, implement daily, and improve sales strategies as needed.
3.Work with Sales, Catering, and Conference Planning to balance transient and group business. Provide feedback about potential new customers.
4.Analyze no-shows, cancellations, early departures, and unexpected stayover patterns.
5.Direct weekly revenue meetings.
6.Assist with product development and marketing of transient packaging.
7.Adjust all rates and restrictions on property and through all transient channels.
8.Provide weekly reports about business pace and changes in consumer behavior that affect revenue.7
Jeffrey Beck, in a study focusing on professional issues of revenue managers, asked survey questions about concepts such as software, career path, commitment to organization, allocation of time, and activities for success. A majority of respondents (55 percent) expected to be in their current positions within the next two years. The survey delved deep into time spent on specific revenue management activities, from managing inventory, developing offers, and forecasting the property’s room revenues to evaluating revenue management activities, managing customer relationships, and interacting with other managers regarding revenue management activities.8
H O S P I T A L I T Y P R O F I L E
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as a guest service agent and in catering sales, |
ebra Kelly is the revenue man- |
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Dager for the Sheraton Parsip- |
group sales, and reservations. She moved on to |
pany Hotel in Parsippany, New |
the Sheraton Parsippany Hotel, where she was |
?Jersey. She began her career as a |
“director of rooms pricing” prior to her current |
travel agent and then worked at Loews Hotel |
position. |
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(continues) |
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H O S P I T A L I T Y P R O F I L E ( C O N T I N U E D )
Ms. Kelly’s role as revenue manager focuses upon several objectives in the hotel. The main objective is producing a profit for the hotel which is supported through knowing the various markets, competition, and trends. The various Markets such as corporate, group, and or leisure each have various needs with regard to rooms, room rates, and accommodations. The competition has to be observed for new hotels entering those that are departing, or ones that are sold out on a particular night. Trends and shifts in the meeting patterns of groups, corporate travel, and leisure travel has to be closely watched also. Another part of her job is the creation and interpretation of reports. She uses Top Line Profit Enterprise revenue management software to assist her in her role as revenue manager. She inputs historical data of room numbers at certain rates, and at specific dates. It then produces an invaluable piece of advice on trends for upcoming dates. For example, she may consider taking a group of 200 rooms for May 10, May 11, and May 12, Top Line Profit Enterprise, could cite that the hotel already has 35 rooms booked on May 10 and May 11 with a busy leisure business, that weekend expected. It says that the hotel will probably be sold out and should not take that piece of business for those dates.
Ms. Kelly adds that you have to regularly feed the computer program with current data such as past weather conditions, the closing of nearby hotels, and other business situations that would affect the business climate. This information assists the computer software in making accurate decisions.
The revenue manager doesn’t work alone in a hotel. Ms. Kelly said that she works with the general manager and the director of sales and marketing. She said the front office manager has
to be kept informed of the position that the revenue team is taking on room inventory and room pricing. This information is then shared with the front office staff and feedback is solicited from guests to share with the revenue team. Also, the front office staff is involved in selling rooms, so they have to know this information on room inventory and room pricing.
Expedia and Travelocity, referred to as thirdparty reservation services, provide a wealth of information to prospective guests. Hoteliers have come to the recognition that we are partners with them. Ms. Kelly indicates that it is costlier to be involved with them (as opposed to selling rooms directly through the Sheraton. com website or through the toll-free number), but it is a cost that is justified in order to attract a certain amount of additional business. She uses the Extranet to place their hotel’s inventory of rooms on the third-party reservation services. She also receives a channel report from Sheraton that lists all the sources of reservations that have been used. This allows the revenue management team to determine which reservation sources—central reservation systems, global distribution systems, travel agents, toll-free numbers, direct calls to the hotel, visits to the Starwood website, or third-party reservation services—are most profitable.
Debra Kelly highly recommends a career in the hotel business if you want a job where something new pops up each day. If you like to work with numbers, then try the revenue management area of the hotel; if you like advertising, work your way into the marketing department. The marketing department is trying many new concepts on their web-sites. She also advises a career in the hotel business because there are so many different types of hotels to continue your profession.