Importance of Revenue Management in Hospitality/Tourism Industry - Essay Example

Introduction Organizations are constantly dealing with issues concerning the commodities to sell in the market, the target market and the right quantities to sell. Understanding consumer behavior is one of the significant aspects that can enhance revenue collection. The sales team needs to be involved in strategy development, which involves research and data collection to enable the application of data driven strategy. Revenue management allows an organization to offer the desired commodities at accurately determined prices to the targeted consumers through a well designed supply chain for an organization to maximize its revenue. It is a concept that develops through a progression of stages as a business strives to accomplish the desired rate of revenue generation. This paper critically analyzes the main developments of revenue management based on a comprehensive literature review. It also evaluates the impact of revenue management on the hospitality and tourism industry. Importance of Revenue Management in Hospitality/Tourism Industry The early stages in the development of revenue management involve research aimed at determining the type of customers that the organization intends to target. Market segmentation allows the business to organize its customers in to groups with unique characteristics. The process of categorizing the customer needs incorporates the understanding customer needs (Janssen et al. 2005). In a tourist firm, the process is very crucial because the organization must understand how competing firms intend to attract customers. In order to understand the needs of the customers, the organization consults prospective customers through various communication channels such as e-marketing, suggestion boxes as well as through one-on-one discussions with sales personnel. Once the customers have been consulted, the organization interprets customers’ needs correctly with regards to specifications and design, making it possible for the organization to provide operational definitions of output (Fader & Hardie, 2010). Customer base refers to the grouped customers that an organization serves. It is mainly composed of regular customers that contribute a large portion of purchase over a given period of time. The eyeball approach is applied as a measure for actual and potential value for the customer base. The approach is based on the assumption that companies need to rapidly acquire customers so that they can grow. It also enhances the chances of the company to gain first mover advantage and also helps in the creation of network externalities which are very strong (Hamilton & Tavassoli, 2005). Hospitality and tourism firms can effectively apply the eye ball strategy based on the fact that the number of consumers seeking assistance at the customer care desk indicates to the organization whether it has registered positive growth. The assumptions of the eyeball approach have been validated by recent academic research in tourism marketing. Afuah (2009) argues that when financial information from financial statements is combined with the non-financial information, they reveal a regression of the value of the market on these components that indicates that the bottom line net income has no relationship with the price of the shares. The approach reveals that non-financial measures including the number of customers visiting the customer care department and the number of customers that have been returning to the company are significant in determining the target market. The eyeball approach reveals the true intrinsic value of the firm thereby offering an efficient market argument (Gupta et al. 2001). Customer-base analysis attempts to use data on the history of the client purchase patterns. A customer base analysis which reveals a group of customers that will remain active for a long time indicates consumer satisfaction (Hamilton & Tavassoli, 2005). After knowing the customers, the second step in revenue management involves determining what products to offer, matching the different market segments identified. Demand forecasting is also a significant aspect in the development of revenue management whereby the tourism firms explore the demand trends for various products in the market in relation to the market segments. In the hospitality and tourism industry, trends in demand are useful in determining the high and low seasons. For example, the Walt Disney World applies revenue management strategies facilitated by demand forecasting such as offering consumers discounts for early booking (Wasko, 2004). This is a significant strategy that promotes early sales. It increases revenue by ensuring that the organization avoids having a large number of hotel rooms that have not been sold at the end of the high season, which may compel it to drastically lower prices to encourage more consumers to book. Discounts on Disney theme park charges increase hotel room booking thereby increasing revenue for the company (Kim, 2004). However, even though discounts and early booking are important in increasing revenue, effective revenue management requires a ceiling to be established to avoid low revenue generated from price sensitive consumers who may rush to book when prices are low. For example, Hotel Oldcity in Istanbul is among the favorite places for tourist accommodation. The hotel allows early booking from late April to avoid low cost booking in the middle of the low season. This ensures that the discount offered for booking does not significantly affect the expected revenue during the high season. On the other hand, the hotel ensures effective inventory monitoring to ensure accurate over booking (Redford, 2005). This is a strategy that allows the firm to accomplish the expected revenue in case some of the customers who booked early fail to turn up. Last minute cancellations may negatively affect revenue and hence the need to precisely forecast on the likelihood of non-appearance. Nevertheless, overbooking is controlled to ensure that the firm does not lose revenue as a result of customer dissatisfaction due to lack of space that had already been booked for. Such customers are compensated to secure future revenue even though much confidence might be lost leading to decreased loyalty. To deal with the adversity of overbooking, Hotel Oldcity maintains an optimal level of overbooking at the point where the charge for overbooking for each unit to be offered is equivalent to the marginal revenue of the unit (Johan & Jones, 2009). Demand forecasting helps an organization to establish what products to offer in the market and at what time, leading to product differentiation that is based on several factors such as; product or service features, relationship of firm and customers, linkages within or between firms, product mix, product customization, distribution channels, advertising, and reputation among others. The differentiation is meant to achieve customer satisfaction, gain market share and increase sales and profit as well as protect the firm from any barriers that hinder competitive advantage (Raab & Schipper, 2009). New entrants into the market find it difficult to penetrate a product differentiated market as costs incurred in achieving same status are high. It also reduces rivalry among firms through establishment of market segments. Customers become loyal to the firm’s brand hence are price insensitive thus enabling the firm to pass on supplier price increases to them. The power of buyers is also reduced as firms with successful product differentiation act as monopolies and buyers have no alternatives unless close substitutes exist, which is a major reason why hospitality firms engage in continuous environmental analysis to improve products and eliminate any possibility of close substitutes cropping thereby hindering their competitive advantage (Harrington & Chang, 2005). The bases of product differentiation are in such a way that it is difficult to duplicate so as to have sustainable competitive advantage. Revenue management requires hospitality firms to develop good relationship with stakeholders so as to enjoy the benefits of this relationship such as a good reputation and brand loyalty. Good management and organization structure as well as proper compensation policies enhance product differentiation (Raturi, & James, 2005). For example, Warwick International Hotels have been successful in maintaining high revenue globally through concerted product differentiation. The firm engages in good relationship with employees and encourages creativity, innovation and teamwork to accomplish product differentiation, which results in higher revenue generation from the extra price paid by customers for unique products and services offered (Mathisen, 2006). Pricing is the third aspect that is significant in the development of revenue management in the hospitality and tourism industry. Service based pricing is most commonly applied in the hospitality and tourism industry whereby firms focus on certain product characteristics that signify quality and class. The intangible benefits received by the customers are difficult to communicate since they depend on consumers’ perception (Dai et al. 2005). For example, Crom Hotel & Resorts International is among the 4 star hotels that rely on prices associated with prestige. Customers are made to feel important with regards to the services offered compared to lower class hotels. They are made to understand that the treatment they receive in the hotel is special and that they are likely to feel comfortable than any other place. When the expectations are not accomplished, customer feedbacks and complaints are given special attention by the top management and they are also assured that action will be taken to deal with the shortcomings. Generally, customers are made to feel that the services offered are worth their socio-economic class (Kim, 2004). Demand based pricing is also significant in the development of revenue management in the tourism and hospitality industry. Dai et al. (2005) observe that any unsold rooms in a day disappear from a firm’s inventory just as it would if it was sold. This may negatively affect revenue for the firm and hence strategic revenue management in the hospitality and tourism industry is focused on curtailing the existence of any unsold inventory through monitoring the changes in demand resulting from high and low seasons in the market. The demand curve of hospitality and tourism products is parabolic, whereby demand rises with time to reach a peak during high season and then begins to fall as the low season approaches. Highest prices are charged during the peak season while low seasons are characterized by reduced prices as few customers seek tourism and hospitality services. Charging higher prices during the low season may lower revenue especially due to the fact that customers are presented with a wide range of alternatives and therefore may prefer the firms offering services at a cheaper price (Lin & Sibdari, 2009). Nevertheless, Kempinski Hotels & Resorts in Switzerland ensures innovative products and services are offered throughout the cycle to encourage customers even during the low seasons. Price reduction has been the last resort and hence the firm’s capacity to maintain high revenue (Kim, 2004). Marketing plays an important role in revenue management for the hospitality and tourism industry. Sigh (2004) observes that the internet has presented firms with an opportunity to market their products and services globally. With the current developments in the Information Technology sector, 1.8 billion people have access to the internet. It has become possible for tourism and hospitality firms to market their products through the internet, a process that is referred to as E-commerce (Hanson, 2000), which interfaces firms with their customers through interactive websites, enabling them to make orders as well as to compare and evaluate the products of different firms. A hospitality firm uses its website to generate attention through the use of graphics that depict the true nature of the services offered, for example by including location and photographs of the business premises, products offered, catering and accommodation facilities as well as the management teams among other important aspects of the firm which may be helpful in building confidence among customers (Reynolds, 2004). These help to create a picture on the customers’ minds with regards to the credibility of the firm, reason being that photographs communicate more on the image of the organization especially those depicting the desired value for money (Clark, S. 2006). Creating awareness is the main aim of advertising. Through the internet, this goal has been achieved by tourism firms, which have exploited the global market at a cheaper price than print and mass media (Brown, 2006). Bayne (2002) observes that, the current trends in advertisement prove that the future and survival of businesses lies in their ability to embrace technology as well as to keep up with its dynamic nature, which necessitates for constant review of the current systems in place so as to ensure that the business is always ahead of the others. With thousands of potential customers around the world using the internet for purposes such as research, communication and entertainment, internet advertising offers the best platform for hospitality and tourism firms to achieve their marketing objectives through the use of various internet tools such as Google, facebook and twitter, which are among the most popular sites (Tremblay & Polasky, 2002). Internet advertising also has an added advantage over other media due to the fact that it offers immediate response mechanisms both for the customers and the businesses. The process of inquiring about a product is quick and the response is just a click away (Sigh, 2004). This encourages more people to search for service tourism service providers on the internet especially where time and accuracy in selecting the destination are significant for consumer satisfaction. This is as opposed to traditional advertisements such as through print media which do not offer real-time response unless the interested customer visits the business premises for more information (Bayne, 2002). Internet advertising also makes use of e-mails whereby the business generates a database of emails for all the potential customers who may request frequent updates from the firm. This is beneficial in that the information sent reaches only the intended customers, enabling them to get information regularly concerning products which are of interest to them and be able to communicate promptly with the firm. This marketing strategy is also beneficial to the firm as they are able to evaluate customers’ response by tracking the sent emails and their replies so as to know whether the marketing campaign is successful (Constantinides, 2006). Effects of Revenue Management on Business Revenue management results in an increase in the number of customers, it means that the organization has a potential to expand its market share. This also acts as an indicator of its actual value for the customer base, which is likely to enhance competitiveness (Janssen et al. 2005). It allows an organization to set strategies to maintain customer loyalty (Hamilton & Tavassoli, 2005). It also provides essential indicators of the periods when a firm is likely to accomplish the highest revenue. Generally, revenue management positively influences the identification of important financial undertakings as performing contractual decision making with regards to the financial aspects of a business. Nevertheless, from the important accounts’ point of view, revenue management activities adversely affect long term business to business relations and commitments (Fader & Hardie, 2010). Effects of Revenue Management on Management Revenue management enables the managers to apply high-tech forecasting and optimization strategies to enhance sustainability and competitiveness. They are able to counteract any spiral down effect in a straightforward manner as well as to maximize revenue through tracking down all inventories. Cost reduction is accomplished through efficient overbooking and active valuation whereby dynamic pricing competences are added to revenue availability through the application of customers’ database (Dai et al. 2005). However, overbooking may result in management related losses whereby consumers may have to be compensated for lack of space that has already been booked for. Revenue managers have to deal with overwhelming data that may lead to reduced focus with regards to the critical success factors as confusion emerges when evaluating what is to be measured and what is not appropriate. There is a possibility for revenue managers to measure success based on unclear (Fader & Hardie, 2010). Effects of Revenue Management on Period of Revenue Revenue management allows an organization to accurately and competently control the timing of revenue as well as the release of the cost of goods sold, which can effectively be deferred and released easily based on consumer-defined occasions such as customer approval, prolonged payment periods, accomplishment of targets or upon payment by consumers. Revenue management also allows real time forecasting to ensure that the release of inventory coincides with periods of high demand (Dai et al. 2005). Schedules can be developed depending on the expected inventory release dates hence an organization is able to conduct effective revenue forecast. Nevertheless, revenue forecasting may fail to take in to consideration the unexpected occurrences that may adversely affect the business operations. Long-term forecasting may be affected by such changes in the operating environment leading to losses in revenue (Janssen et al. 2005). Conclusion Development of revenue management begins with understanding the customers so that the tourism firms can conduct market segmentation that allows accurate targeting with regards to the products offered thereby establishing a customer base. The eyeball approach of consumer analysis is applied to evaluate the financial and non-financial information thereby offering clear indicators of the trends in visitation through consumer purchase patterns. Demand forecasting is necessary in the avoidance of inventory surplus as well as controlling overbooking. It allows firms to set appropriate ceilings for early booking to avoid excessive booking at low prices during low seasons. Appropriate demand forecasting also enables the firm to make appropriate choices with regards to the products offered in the market. Pricing strategies allow an organization to set the most appropriate prices that encourage consumers to purchase. Value and demand based pricing are the most commonly used pricing strategies in the tourism and hospitality industries due to consumer perceptions and the changes in demand patterns as a result of high and low seasons. Awareness creation through advertising is important in marketing, which is accomplished at a lower cost through the internet. Reference List Afuah, A. 2009. Strategic Innovation: New Game Strategies for Competitive Advantage. New York: Routledge. Bayne, K. (2002) The Internet Marketing Plan: A Practical Handbook for Creating, Implementing and Assessing Your Online Presence, John Wiley & Sons Inc. Brown, B. 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