The Concepts of Revenue Management - Research Paper Example

 REVENUE MANAGEMENT Best Practices in Revenue Management focused Customer relationship Management TABLE OF CONTENTS Introduction …………………………………………………… 3 Revenue Management ………………………………… 3 Current Practices of Revenue Management……………. 5 Integrating RM and CRM ……………………………………… 6 Current Research ……………………………………….. 6 Research Method being used …………………………… 9 Management Implication ………………………………………. 10 Evaluative Conclusion …………………………………………. 10 References………………………………………………………. 11 Introduction Technology and innovations have changed the way the business is carried out. Business contexts are rapidly changing and hence new concepts, business practices and innovative management strategies are coming up. Revenue management is an emerging interdisciplinary management system that has widely been used in various industries like Hotel industry, Airline industry etc. As far as Hotel Industry is concerned, it also has been affected by innovation in information technology and therefore more powerful and pragmatically effective measures like Revenue Management system have been practiced. The application of revenue management system in Hospitality industry has not only enabled high speed computation of room revenues but it also has turned to be the core competency of hospitality industry. This piece of research paper is an attempt to address the concepts of Revenue Management and to analyze best practice in Revenue management that has focused on Customer Relationship Management. This paper presents detailed analysis on how both Revenue management and customer relationship management are integrated in hospitality industry. The paper provides current literature on the issue and discusses the research methodology being used by these literatures. Revenue Management Revenue Management has been originated with the deregulation of Airline Industry in the US in the late 1970s. It was then practiced by Peoples’ Express as it offered customers a low-priced ticket, but with minimal amenities. Since then, it has gained reasonable attraction from both airline and hotel industries (Ingold, Yeoman and McMahon-Beattie, 2000, p. 3). Revenue management is method for managing capacity profitably in which a firm is involved to sell the right inventory unit to the right type of customers at right time and for right price. This management system guides the decision of allocating undifferentiated units of capacity to the available demand in a way that can generate maximum profit (Ingold, Yeoman and McMahon-Beattie, 2000, p. 3). Revenue management for a hotel is a method of using past history and current levels of booking activities in order to help the firm forecast demand more accurately and to maximize the profits as well. Some specific disciplined tactics that can help the management predict consumer behavior, optimize product availability and pricing of the products are used as part of revenue management (Avinal, 2004, p. 52). Tranter, Hill and Parker (2009) found that various elements like capacity, demand and supply are significant factors that play vital roles in revenue management. According to the, revenue management is the act of skillfully, carefully and tactfully managing, directing and controlling the capacity and sources of income given the constraints of supply and demand (p. 9). Revenue management system comprises of various academic disciplines and its functional areas like Economics, Marketing, Costing, Supply management etc. In revenue management, economic theory of opportunity cost needs to be considered in analyzing one’s decision of purchasing elements of leisure travel or his decision on budget and well being. Similarly, marketing and its functional areas like Marketing mix, consumer behavior and customer relationship management are related to Revenue Management (Tranter, Hill and Parker, 2009, p. 9). Product, price, place and promotion elements are equally important in revenue management and these elements are closely related to how a business perceives its customers and manage the relationship with them. Current Practices of Revenue Management As Avinal (2004) described, firms that have applied Revenue Management techniques have seen revenue increased by 7% without adding amounts of capital expenditures and same time resulting an increase of profit from 50% to nearly 100% (p. 52). Kotler, Bowen and Makens (2006) argued that a well designed revenue management practice will be based on pricing decisions and therefore it would enable the firm increase its revenue by 8% or more. They reported that a 200- room hotel was able to add $600,000 to its revenue after implementing the revenue management system (p. 422). As of today, revenue management has also been practiced in restaurants and lodges where the revenue management system is designed to maximize revenue per available seats. Restaurants and resorts normally go for seat or room utilization along with off-peak pricing strategies (Kotler, Bowen and Makens, 2006, p. 422). As of today’s practice in hospitality industry, revenue management depends on duration control and demand-based pricing. As shown in the diagram, instead of depending on average pricing, a differentiated pricing policy is implemented in hospitality industry by offering discounts and low priced rooms or seats during off-peak seasons. Hotel and restaurant firms, quite often, based on the demand variations and seasonal changes, use variable pricing strategy so as to gain more profitability from the available rooms and seats. More specifically, during a peak demand time, rooms and seats become available only to those customers who are ready to pay higher rates and same time during off-peak demand times, the rooms and seats become available to everybody for low or discounted rates. As from Economic view point, price is discriminated, not based on region or customers, but based on the demand and time. Today’s crucial and competitive marketing environment makes it necessary that revenue management system must be able to access a great deal of information past bookings, seasonal fluctuations and accurate predictions on booking etc. Integrating Revenue Management and Customer Relationship Management O'Fallon and Rutherford (2010) presented an overview of the future of Revenue Management based on interviews conducted with industry experts and they found that four major areas have potential growth in the hospitality industry. They are 1) Integration of Customer relationship management and revenue management. 2) Pricing, segmentation and packaging, 3) Group RM and 4) Organizational structure (p. 139- 140). Out of these four areas, RM (Revenue Management) and CRM (Customer Relationship Management) integration seems to be of greater importance as far as potential growth is concerned and therefore, this research focused on it as the main discussion of the research paper. Current Research Many researchers have advocated an academic step of integrating both Revenue management and customer relationship management in various studies. Noone, Kimes and Renaghan (2003) have put forward a detailed study on integration of RM and CRM and they highlighted the fundamental issue underlying RM and CRM integration and how it can pave way to the ultimate business success. The CRM is designed to align business process and customer strategies for long term customer loyalty and for earning increased profitability. It will be tailored with offering physical product and delivering services to the specific needs and personal preferences of individual customers and thus to enhance customized marketing (Noone, Kimes and Renaghan, 2003, p. 8). Noone, Kimes and Renaghan (2003) argued that the typical application of RM for transient customers is that rate and inventory availability is based on the market and demand forecast (p. 9). This approach can significantly increase the room revenues. A good example for RM and CRM integration in hospitality industry is Harrah’s Entertainment, where various programs are applied like ‘Total Rewards’ so as to enable customers to be tracked across all properties and this has led to gain an increase of 70% of the total revenue of the firm. For this purpose, as part of CRM, detailed customer information have been collected regarding their visits, attitude, when they like to come and how much they gain from gambling etc (Noone, Kimes and Renaghan, 2003, p. 9). In RM and CRM integration in hospitality industry, customers are often assigned to one of many groups or segments, based on various criterions like their worth, spending, rewards and promotional message etc. this helps organization analyze customer preferences and relative gains. Hotel and Resort companies are developing targeted promotion programs as part of their integration of CRM and RM and thus they offer specific customers discounted rates to increase capacity utilization during off-peak demand duration (Noone, Kimes and Renaghan, 2003, p. 10). Achieving increased customer loyalty is of greater importance in CRM. Loyal customers are one of the most valuable assets of an organization because they give back word-of-mouth value to the firm as form of advertisement (Noone, Kimes and Renaghan, 2003, p. 12). Identifying the most valuable customers and then serving them accordingly is always the best way to reach in to loyal customers. Hospitality industry can get loyal customers only through quality services. Customers are always loyal, but types of services being offered to them determine whether customers would turn to be loyal to a particular organization or not. When RM and CRM can be integrated, the organization would be able to have loyal customers who will automatically contribute much to the firm through various ways like word of mouth recommendations. As shown in the diagram, attitudinal loyalty and behavioral loyalty are relevant elements that need to be measured in hotel industries. Noone, Kimes and Renaghan (2003) suggested that incorporating both attitudinal loyalty and behavioral loyalty will lead a firm identify truly loyal customers. They quoted Pritchard and Howard as using spurious loyalty, low loyalty, latent loyalty and True loyalty to identify the commitment of customers toward the organization in their work. In short, a properly designed revenue management system and customer relationship management system value the business and thus attract repeating customers. When customers are treated well, served effectively and maintained their loyalty, they become part of the virtual assets of the organization that brings greater return and revenues. Revenue can be managed more effectively only when customers are treated as they deserve. The repeatedly visiting customers and loyal customers are very often segmented in to a special target group and then they are offered corporate rates for such guests. As part of today’s CRM in hotel industry, direct marketing has been effectively used to develop strong relationship with its customers. Hotel frequency programs offer their members special rates, upgrades on availability, attractive amenities and own lounges etc. Spending money to develop loyalty with valued customers will be always better than spending money to develop new guests despite the fact that the later also is of significant importance (Kotler, Bowen and Makens, 2006, p. 713). Research Method being used Noone, Kimes and Renaghan (2003) found that integration of RM and CRM is highly significant for hospital industry because it can provide customer loyalty and better relationship with customers that in turn is most valuable asset of the firm. They used exploratory research based on a number of literatures and studies. They have used a number of principles and models like Customer Loyalty and LTV. Various revenue management strategies and customer relationship strategies are detailed in their work including the segmentation of customers as done by Reinartz and Kumar (2002) by categorizing customers in to True Friends, Barnacles, Butterflies and Strangers. Management Implication The integration of Revenue Management and Customer relationship management can give better outcome in both achieving increased revenues as well as gaining most valuable assets that are loyal customers who even may work as word-of-mouth advertisement media. In order to integrate RM and CRM, the management first needs to assess the current situation, may be with situational analysis tools, in order to assess customers’ strengths, their commitments etc. In implementing RM and CRM integration, measurement of behavioral and attitudinal loyalty and Life Time Valuation calculation, as is described in the research paper of Noone, Kimes and Renaghan will be effective methods that can provide the data and useful information to segment customers. Customers are then to be segmented like True friends, butterflies, Barnacles, and Strangers and then appropriate Customer loyalty and customer relationship management strategies must be implemented. Direct marketing has been addressed as a strategy to achieve customer loyalty by Kotler, Bowen and Makens (2006, p. 713) Evaluative Conclusion Revenue management is a process of effectively managing the revenue with various strategies like demand based pricing. Customer relationship management is another strategic measure that treats customers loyal and makes them most valuable assets of the firm. Integration of these two strategies is another most effective managerial strategy that hospitality industry can achieve competitive advantages. This research paper has outlined underlying principles of revenue management and examined how this can help an organization bring better outcomes. This research paper has considered the study of Noone, Kimes and Renaghan and concluded that RM and CRM integration will be a most powerful strategy for hotels and hospitality firms. References Avinal E.A (2004), Revenue Management in Hotels, Journal of Foodservice Business Research, The Haworth Press, Inc Ingold A, Yeoman I and McMahon-Beattie U(2000), Yield management, illustrated edition, Cengage learning EMEA Kotler P, Bowen J.T and Makens J.C (2006), Marketing for Hospitality and Tourism, Fourth Edition, Prentice Hall, Pearson Education Noone B.M, Kimes S.E and Renaghan L.M (2003), Integrating customer relationship management and revenue management: A hotel perspective, Journal of Revenue and Pricing Management, Vol-2, Henry Stewart Publication O'Fallon M.J and Rutherford D.G (2010), Hotel Management and Operations, Fifth Edition, John Wiley and Sons 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 Read More