Revenue Management and CRM: the Systems Appropriate for Queens Hotel - Case Study Example

A Study of Revenue Management and CRM: The Systems Appropriate for Queen’s Hotel Introduction The uncertainty and challenges in the economic environment brought about by increased competition have engendered a host of management concepts and practices, which are all calculated to make companies rise above their competitors. Among these nascent management techniques are total quality management, operations management, change management and the Six Sigma management process, all of which essentially strive to handle people and processes systematically to ensure customer satisfaction and give companies that much-needed competitive edge. This paper examines two newfangled management concepts called revenue management (RM) and customer relationship management (CRM) that are increasingly used in the hotel and hospitality industry, where competition is most severe and cutthroat. The study uses the Queen’s Hotel at the British Isle of Wight as backdrop to see how an appropriate RM model and CRM system can lift the operations of a relatively small hotel to new heights of success and profitability. Queen’s Hotel The Queen’s Hotel is a single hotel establishment ideally located in Portsmouth, just two miles from the busy ferry terminal at the British Isle of Wight. Its tradition is as rich and colorful as its surroundings. The hotel was built in 1861 as a lodging house designed by renowned British architect Augustus Livesay, such that it was initially known as Southsea House. After the hotel was razed in a 1903 fire, it was rebuilt into the splendid structure it is today from a design by another famous architect, T.W. Cutler, who specified an Edwardian baroque style dominated by brown terra cotta. People come to Queen’s mostly for the many historic attractions in its vicinity, which include the Royal Naval Museum, Royal Naval Submarine Museum, D-Day Museum, Port Solent, Spinnaker Tower, Portsmouth Naval Base, King’s Theatre, Osbourne House, Southsea Castle, Marwell Zoo, Portsmouth Cathedral, Staunton Country Park, Westbury Manor Museum, Clarence Pier Amusement Park, Gunwharf Quays, and the well preserved birthplace of Charles Dickens. All of these popular tourism sites are within walking distance of Queen’s Hotel. For the leisure type of guests, Queen’s Hotel offers 72 bedrooms, each of which is equipped with a TV set, a computer with free Internet access, direct dial telephone, tea and coffee making utensils, super king size beds, hairdryer and room service until midnight. For fine dining, Queen’s has become famous for the excellent cuisine at its Princess Restaurant, where diners are treated to an unimpeded view of Port Solent and the Isle of Wight. There is also Libby’s Champagne Bar, which is popular among connoisseurs for its outstanding wine list. For conferences, Queen’s has 6 conference-meeting rooms that can accommodate 150 delegates in one setting. Each of these conference rooms boasts of an LCD projector, TV and DVD player, photocopier, fax, secretarial services and overhead projector and screen. From the evidence, Queen’s nurtures no ambition to grow into a hotel chain and would be just as happy maximizing profits from its existing facilities. This smallness can be a handicap in that the hotel cannot adopt the resource-intensive management techniques that have been designed in recent years to invest firms with more efficiency and competitiveness. However, two other management concepts of recent vintage, revenue management and customer relationship management, are comparatively lower in cost and need only the appropriate software. Queen’s is in fact using an RM model now to maximize its business and income. RM & CRM Revenue management as a business improvement strategy was devised by the airline industry in late 1980s, when deregulation was imposed in many countries. As deregulation allowed more industry players, competition toughened for the airlines such that they had to look for innovative ways to give them the competitive edge. By 2003, various models of revenue management began to be widely used in the airline industry for the common purpose of “staying ahead of the curve (Chandler, et al., 2004).” In essence, RM aims to sell the right resources to the right customer at the right time for the right price (Haag, 2006). The management system was designed precisely for service companies like airlines where there is a fixed amount of available resources for sale; the resources being sold are perishable that they lose their value after a certain time; and different customers are willing to pay a different price for using the same amount of resources. For this reason, revenue management is also known as yield management since it is a process of understanding, anticipating and influencing customer behavior in order to maximize revenues or profits from a fixed and perishable resource (Bearden, et al., online). The same condition applies to the hospitality industry as well as car rental firms, cruise lines, media and energy, which were quick to adopt RM. Hotels use RM in much the same way as airlines for the purpose of calculating the rates, rooms and restrictions on sales in order to maximize return for the available property. These RM systems collect and integrate relevant information from various sources such as reservation advance purchase, post-departure data, competitive fare data and transaction data. Thus, RM requires analysts with thorough knowledge of advanced computing system and market conditions that can perform econometrics and implement sophisticated mathematical techniques to examine market behavior and capture revenue opportunities accurately ((Chandler, et al., 2004). Like RM, customer relationship management is a forward-looking management concept that leaves nothing to chance. CRM seeks to achieve interactive and individualized customer contacts (Gronroos, 1994) and summarily rejects transactional marketing, the more popular but myopic view of doing business because it endeavors to attract customers only for that one big sale without bothering about long-term relationships (Crown, 2004). Thus, CRM is defined as “an integrated effort to identify, maintain and build a network with individual customers and continually strengthen the network for the mutual benefit of both sides through interactive, individualized and value-added contacts over a long period of time (Peppers, et al., 1999).” In the effort to establish a long-term relationship with customers, CRM emphasizes the reduction of transaction costs, which becomes possible if information on customers’ previous interactions with the company is on hand. The unique characteristics of the hospitality industry make it unsuitable for applying new management precepts until customer relationship management came along, which appears to have been conceptualized precisely to meet the management challenges unique to this type of service industry. All the management concepts that essentially strive to handle people and processes systematically to ensure customer satisfaction and give companies the much-needed competitive edge have worked well for many industries such as manufacturing, automotive, banking and services, but their applicability is doubted for the tourism and hospitality sector. There is no other industry more people-centered and labor-intensive, since the hospitality business requires a high level of contact between firm and customer. The industry is also dominated by small and medium enterprises, many of which are family owned, that adopting costly and elaborate management systems are simply beyond their means. Moreover, there are different types of establishments catering to different customer groups and no single service category, which make industry standardization especially difficult and inadvisable at the same time. The main benefit derived from RM and CRM by hotel users come in the form of price optimization. These management processes also enable hotels to reduce their transaction costs because the availability of customer data eliminates many of the steps required in processing business transactions, such as the need for customers to furnish the company with their shipping address or information on how they would pay for their service or product. Such transaction costs are further reduced when the firm offers services that are specific to the customer’s known area of interest. Once the customers sensed that the company offering its services to them is familiar with their particular needs and desires they are expected to seek out this firm for their next transaction of the same nature. This predisposition develops into loyalty when the customer sees that the firm keeping data about him treats this information with respect and confidentiality (Zeithaml & Bitner, 2003). Critique RM is seen as a form of price discrimination such that it faces predictable consumer resistance. For example, the factors that determine prices frequent visitor information, which includes a wealth of socio-economic data like age and home address. Hotels may use these data to charge higher prices based on the notion that people aged 30-65 or those who live in rich neighborhood can well afford them. Of course, not all people in that age bracket are financially stable and even rich neighborhoods have poor households too. RM also includes other practices that are less controversial but just as risky. For example, it is feared that RM may harm customer satisfaction and loyalty, interfere with relationship marketing and drive customers away from firms that use RM to firms that do not. In addition, it is acknowledged that companies with an image problem cannot benefit from RM. In 2002, for example, the German railway firm Deutsche Bahn tried RM with the use of frequent use loyalty cards in place of the old fixed pricing system. This led to protests and a decline in passenger numbers. As it happens, most companies fail to foster long-term relationships with customers and induce their loyalty because they pay more attention to strategies and tactics calculated to increase their market share through better quality products (Iyer & Bejou, 2003). Companies take up activities to develop long-term relationships with customers only when these concern business-to-business marketing and service relationships. RM Package The RM model at Queen’s Hotel intends to optimize pricing for its room by considering variability over time and capacity constraints. This is run on Excel spreadsheet whose task is precisely to price hotel rooms and set capacities for various room classes. Operated on three phases, the RM model starts by setting the classes of rooms, identifying prices and expected demand as well as the demand elasticity for each class. Elasticity here refers to the percentage increase in demand with a 1 percent increase in prices. The appropriate Excel workbook is then created that incorporates all these data. In Phase 2, the important data are marked off as reference point for the demand function specifications. The data include target date or season, marginal cost, demand information and values for seasonal multipliers. The way demand comes along over time is set apart in two separate columns. For example, the hotel, using the Standard-class room, estimates bookings for about half of these room 15 days before the expected arrival date for a target season such as summer. In another column, the estimate is for 5 days before target date with bookings of about 75 percent of the standard-class room capacity. The room class segmentation is considered distinct so that no hotel guests switch class if the price differential changes in the optimization process. Seasonal adjustments are also made in Phase 2 based on deviations from the normal demand. For the Standard and Discount classes of rooms, Queen’s Hotel calculates the optimal capacities for each such that if the optimization process warrants it, a room price of $150 is set for the Standard class and $66 for the Discount class. To arrive at the right price, the optimization process is often repeated many times at the Excel Solver. In Phase 3, the RM model at Queen’s tries to determine how many rooms should be set up for each room class based on the prices fixed in Phase 2. All the data that provide target dates, number of days before the target dates and how many rooms are booked so far are marked. The RM model computes any additional demand for the remaining days until the target data and determines the optimal capacity for each class. CRM System For a software-based CRM process to succeed, Henricks (2000) emphasizes the need to consider it as a multiple-step exercise. The first step is to analyze all individual customers by sales volume and profit trends. Step 2 involves selecting the best and most profitable customers and identifying their desires and preferences. The idea is to increase the volume of sale to the most profitable customers and to find more of their kind. This brings the process to the third and final step, which is to stop serving the worst customers – those too small to be worth the trouble or those who actually cost the firm money without getting anything in return (Henricks, 2000). Hilton also made revenue enhancement its strategic goal, not cost savings as in the past, and found that this CRM focus is a better strategy. Moreover, the company implemented a loyalty program called Total Rewards that is a customary conduit for many customized marketing efforts, but at Hilton it was strongly supported by data collection. Information culled from the program was used to achieve a greater understanding of customer needs so the firm can establish a long-term relationship with its most valuable customers. Following this corporate philosophy, the standard procedure at Hilton hotels is to have guests fill up a registration form at the front desk that asks about their preferences. The staff is especially trained to keep an eye on these preferences. The firm’s purpose here is to establish a bond with customers through this information. With this information on file, the hotel now know the kind of services it will deliver the next time around. In any business, it helps if you know and understand the mentality and expectations of customers because it opens the door to gaining their trust through empathy and reciprocity. The company-customer relationship is thus sealed as a bond. Customer relationship marketing is about managing relationship with customers through the primary dimensions of “initiation, maintenance and termination” across all customer contact points to maximize the value of the relationship portfolio (Reinartz, et al., 2004). Each of these dimensions has distinct sub-dimensions. For the initiation stage, the sub-dimensions include customer evaluation, acquisition and recovery management. This means that the organization starts the CRM process by sizing up a new customer, proceeding to acquire that customer through appropriate marketing schemes, and then implementing another set of strategies to bring back old customers. For the maintenance stage, CRM consists of retention, up-selling and cross selling, and referral management, while the termination stage is only about exit management. In all, the primary objective is to develop an army of loyal customers. The three CRM sub-dimensions provide a structure for different activities and serve as basis for a conceptual framework for the CRM process construct (Reinartz, et al., 2004). The “customer” in CRM refers not only to those patronizing a company’s product or services but also to suppliers, partners, investors and employees. These are the stakeholders of a firm that can influence its viability, and each of them has specific and unique requirements and thus needs to be handled differently. To do this job well, CRM integrates all business processes and tools involved in direct interaction with customers, among them customer and field support, marketing, sales and purchasing (Aldhizer & Cashell, 2004). CRM also calls for various approaches to develop stronger and longer-lasting ties with customers, including segmentation of customer markets, management of data on customer behaviors and characteristics, adaptation of marketing strategy based on changing customer needs, mass customization, continual learning, and creation of competitive advantages that can be sustained (Iyer & Bejou, 2003). Organizations have been forced to abandon the time-honored tradition of product and brand-centered marketing in favor of the customer-oriented approach of CRM because of changing market and customer behaviors brought about by globalization, increased mobility (Fux, et al., 2007), new technologies and tighter competition (Reinartz, et al., 2004). Because of intensified competition, small players cannot hope to survive without CRM capabilities (Rodriguez & Espino, 2006). In the product-driven approach, the salability of a product or service is considered the No. 1 success factor; in CRM, the organization places all its marbles on the quality of its interaction with the customer (Ottenbacher, et al., 2004). Improving this interaction with customers based on the notion that customers have different needs and behavior that should be handled differently is only one aspect of CRM called operational CRM, which can be implemented in isolation. Operational CRM is undertaken in support of customer processes involving sales or service representatives (Crown, 2004). The other aspects of CRM are collaborative and analytical CRM. The collaborative aspect makes use of networking and combining of resources among small and medium enterprises, while analytical CRM involves management and analysis of customer data for use in a broad range of purposes. Overall, the CRM tasks are: Collecting customer data for storing in one place. Making the customer information available across the company. Identifying the best customers and finding more of the same. Figuring out the needs and desires of customers. Turning first-time buyers into loyal, long-term customers (Henricks, 2000). Recommendation To attract more guests and maximize revenues, Queen’s Hotel has a choice of following the example set by the Hilton chain of hotels, which made revenue enhancement its strategic goal, not cost savings or transaction cost reduction. The revenue management model of Hilton gives equal importance to CRM as a strategy to collect the necessary information on customers, which data are then used as reference for revenue management computations. An RM model strongly supported by CRM data collection will then enable Queen’s to achieve a greater understanding of customer needs so the firm can establish a long-term relationship with its most valuable customers. If Queen’s is not yet doing this, it is a good idea to have guests fill up a registration form at the front desk that asks about their preferences and other relevant customer data. With this information on hand, the hotel will know the kind of services it will deliver the next time around. In any business, it helps if you know and understand the mentality and expectations of customers because it opens the door to gaining their trust through empathy and reciprocity. The company-customer relationship is thus sealed as a bond. References 1.Aldhizer III, C. & Cashell, J. (2004). “Customer Relationship Management: Risks and Controls.” Internal Auditor, December 2004. 2. Bearden, J.N., Murphy R.O., & Rapoport, A. “Decision Biases in Revenue Management: Some Behavioral Evidence.” Available online at: http://behavioral-org/files/RMPaper1/pdf7 3. Chandler, S., JA, S.S. & Jacobs, T. (2004). “Advantage of Real-Time Revenue Management.” Journal of Revenue and Pricing Management, Vol. 3, No. 4. 4. Crown (2004). “Customer Relationship Management.” Available at: http://www.is4profit.com/com/business-advice/it-telecoms/crm 5. Gronroos, C. (2004). “Quo Vadis, Marketing? Building and Managing Relationships as Valuable Assets.” Journal of Marketing Management 10 (5). 6. Haag, S. (2006). “Management Information Systems for the Information Age.” McGraw Hill Ryerson Ltd., Canada. 7. Henricks, M. (2000). “Customer Relatio0nship Management: More than a Fling.” Entrepreneur Media Inc., September 2000. 8. Fux, M., Matheiu, D. & Myrah, T. (2007). “Cooperative CRM in Alpine Tourist Destinations.” Bern, Switzerland. 9. Iyer, G. & Bejou, D. (2003). “Customer Relationship Marketing in Electronic Markets.” The Hayworth Press Inc. 10. Peppers, D. Roger, M. & Dorf, B. (1999). “Is Your Company Ready for One-to-One Marketing?” Harvard Business Review. 11. Reinartz, W., Kraft, M. & Hoyer, N.D. (2004). “The CRM Process: Its Measurement and Impact on Performance.” Journal of Marketing Research, Vol. XLI. 12. Zeithaml, V.A. & Bitner, M.J. (2003). “Service Marketing: Integrating Customer Focus across the Firm.” McGraw Hill, Boston MA. Read More