Revenue Management - Research Paper Example

REVENUE MANAGEMENT How does pricing strategy and price optimisation become strong elements in revenue management to the independent boutique hotels in London Your name ………………………… College/ Course ……………………… Date of submission ……………………. Introduction The hotel industry remains extremely dynamic. The hotel and hospitality industries have recently fostered a number of changes in management strategies and innovative business practices. Revenue management, pricing strategies like price optimisation and price discrimination, brand segmentation, new product concepts and customer focus are but a few of its strategic forces that in turn have caused this industry to be highly dynamic. Revenue management and its functional areas of pricing strategies have turned to be effective tools for creating and achieving customer value and satisfaction that are at the heart of hotel industry (Kotler, Bowen and Makens, 2006, p. 6). This piece of research paper explains how does pricing strategies and price optimisation become strong elements of revenue management in hotel industry, especially in independent boutique hotels in London. This paper details various pricing strategies like price optimisation, price discrimination and describe how these can help hotels to increase revenues as well as create customer focus. Revenue management and Pricing strategies in independent boutique hotels in London Revenue management is a process of managing capacity profitability that a hotel is involved in selling right inventory to the right customers at right time and for right price. One of its basic elements in allocating undifferentiated units of capacity to the available demand to generate maximum profit (Ingold, Yeoman and McMahon-Beattie, 2000, p. 3). Past and current levels of booking records are used to help the firm forecast demand and to maximize the profits as part of revenue management (Avinal, 2004, p. 52). Tranter, Hill and Parker (2009) emphasized that the hotel industries should develop a customer-centric approach to pricing. The pricing strategies that hotel industries adopt should be basically centered upon the perceptions and buying behaviour of the customers rather than solely focusing upon the products, service and profit margins (p. 117). In today’s highly competitive marketing environment, hotel industries have realized the importance of customer focus and customer centric approach along with its pricing strategies. Most boutique hotels perceive customer value as centre to its marketing concept and pricing strategies. One of the very common pricing strategies used in hotel industries is demand-based pricing, in which the hotels research the quantities of the products or services that would be purchased at different prices. This pricing method helps hotels to ensure that amounts produced can almost be sold out, but, making accurate demand estimation is not as simple as it may sound (Walker, 2006, p. 520). Cross (1997) found that purchasers are also looking the opportunity to buy the product under the right circumstance sand right process. The revenue management is mainly about demand based pricing which recognizes the value cycle of a perishable product or service, provided that this value cycle may vary according to the local market, seasonal value and competitive value (p. 234). Avinal (2004) argued that two strategic issues are involved in revenue management, duration control and demand based pricing (52). Kimes (2003) argued that predictable-duration and variable price class are integral parts of strategic forces prevailing in the hotel industry. Hotels are making pricing more variable and using techniques to predict customers’ use of hotel services in order to achieve revenue gains. Hotels charging high price during the peak demand season and less in the low demand duration is an illuminating example for this and this is prevailing in today’ boutique hotels in London as well. Hotels that have applied revenue management techniques, including price strategies, have disclosed 7% increase in its revenue without adding amounts of capital expenditures and also an increase of profit from 50% to nearly 100% (Avinal, 2004, p. 52). A well organized revenue management system will be entirely based on pricing strategies and effective pricing decisions and therefore it would enable the organizations to increase its revenues by 8% or more (Kotler, Bowen and Makens, 2006, p. 422). In most hotels, especially boutique hotels, revenue management depends on duration control and demand based pricing that in turn helps apply differentiated pricing strategy rather than average pricing technique. Salver (2009) pointed that hotel industry is characterized by highly differentiated supply and demand levels. Different hotels cater varying services, specializing in different segments like travelers, business travel, holidaymakers, vacation trips and so on (p. 36). This increases the opportunity to the hotels to find the extent of demand levels and charge prices accordingly. It is also important that various segments have different interests and motives that rather than impacting on the risks levels of the hotels increase the potential to maximize its revenue, giving greater emphasis on customer focus and customer value perceptions. Hotel industries adopt differentiated pricing strategy by offering discounts and low priced rooms or seats during off-peak seasons. Hotels use variable pricing strategy so that it can gain more profitability from the available rooms and seats. During a peak demanded period, the room and seats become available only to those who are high class or they are able and ready to spend more on their holidays, travels, vacation trips etc. during off-peak demand time, the rooms and seats become available to everybody for low or discounted rates. Becher (2008) argued that price differentiation results in a higher producer surplus and a lower consumer surplus (p. 36). When airline industry applied variable pricing strategy and has resulted significant growth in its revenues, hotels managers became impressed and started implementing the same. Hotel industries didn’t directly started using the concept of qualified rate, in which customers were to meet certain requirements to obtain a lower room rate. Hotel industries but relied heavily on top-down pricing. In a way that reservation agents quoted the highest rates first and several lower rates next until the customers are almost covered or the company reached its pre-determined levels (Lovelock, 2009, p. 210) Weber (2005) argued that a good pricing structure only cannot yield to the success of variable pricing strategy. Hotels must have rate fences that can be used in order to justify price discrimination by using in several times of room reservation or when the service is consumed. Early advantages rate and last minute rates are some example of how hotels can use rate fences. Rate fences should be used by hotels so that it can find customers who meet specific qualifications to receive a discount or gain offers etc (p. 35). From the Economic point of view, the revenue management system encourages price discriminating, not based on different region or customer, but purely based on demand and time. In order to generate good profits, the revenue management system promotes accessing great deals of information of past bookings, seasonal fluctuations and accurate predictions on booking so that it can effectively help implement better price differentiation. Armstrong and Porter (2007) argued that price discrimination can be said to be existing only when prices vary across customer segments in a manner that cannot entirely explained in terms of variations in marginal costs (p. 2224). The price differentiation strategy that currently prevails in today’s hotel and airline industries is a form of economic price discrimination. When two similar products, having same marginal costs to produce, are sold by a hotel at different pricing (Armstrong, 2006, p. 1) is an example of effective price differentiation strategy. Revenue optimisation is a key element in today’s revenue management system. The goal of the revenue optimisation to increase contribution, which is total revenue minus total incremental costs from sales. According to Philips (2005), one of the fundamental tasks of revenue management is to set initial booking limits and to perform a periodic re-optimisation of the booking limits. The revenue management system thus includes a forecasting module to derive probabilistic forecasts of future demand and an optimisation module to forecast along with other information that helps determine optimal booking limit (p. 145). In revenue optimisation and value based pricing technique of revenue management system, a number of price and value related factors are to be analyzed and reviewed. What is customer’s thought of the worth, product, service, value and so on. In value based pricing, the price is determined by considering the value perception and demand for the product as well (Tranter, Hill and Parker, 2009, p. 212). It shows that, value and demand are very basic two elements that determine the pricing and the extent that a particular pricing will be successful or not. Different customer perceives ‘value’ differently and therefore the price determination success is depending on the optimal price and value relationship. Defregger and Kuhn (2007) used the term of dynamic pricing in context of revenue management system. A business firm, like hotels and airline companies, can try to influence external demand for its products or services by changing prices or quoted due dates. This is the direct strategy of quoting different price for a certain products or services over time (p. 140). Conclusion This research paper has addressed various including revenue management, pricing strategies, revenue optimisation, price differentiation and price discrimination. The paper has highlighted how price strategy and revenue optimisation become basic elements of revenue management and how these can be used by hotels to increase its revenue potential as well as to focus on customer value and customer focus. Revenue management not only helps a firm to increase its potential to earn reasonable profits but also to create customer loyalty and customer reputation because the basic tools used in revenue management are perceiving customer values, charging prices accordingly and treating them according to their requirements References Armstrong M and Porter R (2007), Handbook of industrial organization, Volume 3, Illustrated Edition, Elsevier Armstrong M (2006), Price Discrimination, University College London Avinal E.A (2004), Revenue Management in Hotels, Journal of Foodservice Business Research, The Haworth Press, Inc Becher M, 2008, Integrated Capacity and Price Control in Revenue Management: A Fuzzy System Approach, DUV Cross R, 1997, Revenue Management, The Orion Publishing Group Limited, London Defregger F and Kuhn H, 2007, Revenue management for a make-to-order company with limited inventory capacity, Springer Ingold A, Yeoman I and McMahon-Beattie U(2000), Yield management, illustrated edition, Cengage learning EMEA Lovelock C, 2009, Services Marketing People, Technology, Strategy, 5/e, Pearson Education, Kimes, S.E, 2003, Revenue Management: A Retrospective. The Cornell Hotel and Restaurant Administration Quarterly, p. 131- 138 Kotler P, Bowen J T and Makens J C, 2006, Marketing for Hospitality and Tourism, Fourth Edition, Prentice Hall, Person Education Inc Philips R L, 2005, Pricing and revenue optimisation, Illustrated edition, Stanford University Press Salver J, 2009, Brand Management in the Hotel Industry and Its Potential for Achieving Customer Loyalty, GRIN Verlag Tranter K.A, Hill T.S and Parker J (2009), An Introduction to Revenue Management for the Hospitality Industry: Principles and Practices for the Real World, Prentice Hall, Pearson Education Walker J R, 2006, Introduction to Hospitality, Prentice Hall, Pearson Education Inc Weber W K , 2005, Dynamic Pricing: Strategies to Grow Profits in the Hospitality Industry of the 21st Century, Books on Demand Read More