Importance of Revenue Management in Hospitality Industry - Report Example

Revenue Management- Report 0 Executive Summary Revenue Management is an essential tool for hospitality organisations in today’s competitive business environment. Revenue management assists organisations to balance the supply as well as demand of products and services. In general, revenue management helps in maximising the profit through better optimisation of organisational resources. There are two strategic levers which are used in order to manage the revenue in hospitality organisations, namely pricing as well as duration control. In this regard, the study has aimed to illustrate the scenario of revenue management by incorporating a case of Hayman Island Resort. From studying the case of Hayman Island Resort, it can be observed that the organisation effectively uses different pricing strategies and demand control techniques in order to manage the revenue. The most important cost strategies that are used by Hayman are demand based pricing, cost based pricing, value based pricing, prestige pricing and competitive matching. These pricing strategies help to manage the sales in an effective manner. Table of Contents 1.0Executive Summary 2 2.0 Introduction 4 2.1 Concept of Revenue Management 4 2.1.1 Goals of Revenue Management 5 2.1.2 Revenue Management Procedure 5 2.2 Strategic Levers of Revenue Management 8 2.2.1 Pricing 9 2.2.2 Duration 11 3.0 Importance of Revenue Management in Hospitality Industry 11 11 3.1 Increase in Profit 12 3.2 Control of Sales 12 3.3 Better Administration of Resources 12 4.0 Case Analysis of Hayman Island Resort 13 4.1 Hayman’s Accommodation Strategies 13 4.2 Analysis 15 4.3 Hayman Food & beverage Strategies 16 4.4 Analysis 18 4.5 Competitive Matching 18 5.0 Conclusion 20 6.0 References 21 2.0 Introduction 2.1 Concept of Revenue Management The concept of revenue management has evolved from being recognised as one of the basic financial management practices to being regarded as an extremely sophisticated tool which is applied in large organisations. Revenue management is considered as the discipline which provides efficient knowledge for improving organisational revenues. It has become a component of business which includes a set of revenue maximisation strategies and tactics in order to enhance the profitability of an organisation. Revenue management is a complex procedure since it involves numerous aspects of revenue control such as rate management, cost management and price management among others. Revenue management is a multidisciplinary concept since it blends the components of marketing, operation and cost management in an effective manner (Ivanov & Zhechev, 2012). Considering this notion, the report is based on analysing different aspects of revenue management and evaluating several pricing policies and methods in Hayman Island Resort. The objective of the report is to understand different aspects of revenue management and how these aspects are utilised in business. 2.1.1 Goals of Revenue Management The core rudiment of revenue management is maximisation of profit. This is accomplished by a comprehensive understanding of the marketplace that influences the product demand, judgement along with facilitating to direct the efforts towards ensuring the best possible effects. Revenue management assists in predicting the demand so that organisations can optimise the level of inventory and price. As a result, it helps in enhancing revenue growth. In the aviation industry, revenue management helps to control the travelling charges. In hospitality industry, the importance of revenue management arrives from its capability of controlling the availability of rooms by duration of stay. In vehicle rental industry, revenue management normally entails providing appropriate price along with promotions. Although the similar philosophies of revenue management can be used to these industries, the use of revenue management practices can vary (Yeoman & McMahon-Beattie, 2004). 2.1.2 Revenue Management Procedure Revenue management seeks constant development in the revenue optimisation efforts of organisations. The procedure of revenue management goes through following – phases: Phase 1: Establishment of Prices In the first phase of revenue management, organisations need to establish the price. Price in this context communicates strongly to possible customers about the value positioned on certain products or services. The capability to properly establish pricing is a critical aspect of revenue management. This phase also follows the function of recognising how much a particular product or service is preferred by purchasers at any particular price. However, it is extremely challenging for organisations to assess demand of a product independent of price (Hayes & Miller, 2011). Phase 2: Estimation of Demand After establishing appropriate price for particular products or services, the demand of products or services are estimated in the second phase. If the prices of products or services are changed, it also changes the estimated demand. Revenue management includes the application of sophisticated mathematical modelling tools in order to make appropriate predictions. It seeks to optimise revenue, however in order to make it possible, organisations must have the capability to forecast demand for the products and services (Hayes & Miller, 2011). Phase 3: Management of Inventory The third phase of revenue management is management of inventory. It is a crucial phase which necessitates organisations to understand the way of withholding products and services for specific customers. This task is quite difficult due to the circumstance that revenue optimisation should be observed from long-term along with short-term viewpoints (Hayes & Miller, 2011). Phase 4: Management of Distribution After managing inventory, in the fourth phase, there is a need for managing the distribution. For instance, in almost every division of hospitality industry, mediators are used for supporting the selling procedure. The portion of selling price paid to the mediators can differ on the basis of the value the mediators add to the distribution procedure. Due to this reason, channels of distribution must be managed prudently to enhance the revenue while reducing the selling related costs (Hayes & Miller, 2011). Phase 5: Evaluation of Outcomes Attentive evaluation of outcome is the fifth phase of revenue management. Evaluating the outcomes of revenue management can assist in developing the quality of decisions taken by organisations in order to enhance the productivity. The following figure shows the revenue management procedure which is followed by organisations: Source: (Hayes & Miller, 2011) 2.2 Strategic Levers of Revenue Management On the basis of the nature of an industry, different revenue management techniques can be used by organisations. In general, there are two strategic levers of revenue management which are price management and duration. Industries which can effectively utilise revenue management can be categorised according to these two strategic levers. The following figure demonstrates the application of revenue management according to strategic levers in different industries: Source: (Kimes & Wirtz, 2003) From the above figure, it can be observed that different industries are subject to different combinations of duration control and pricing. It is worth mentioning that successful revenue management applications are usually found in industries which belong to quadrant 2 of the above diagram. The reason is that they can effectively control both capacity as well as price. In this context, the different pricing strategies used by hospitality industry are as follows: 2.2.1 Pricing Cost Based Pricing Cost orientated pricing is considered as the most common practice in the service industry. In this pricing method, operators first establish a chosen product’s cost proportion. On the basis of the assessment of the product cost proportion, a multiplier is determined by taking the reciprocal of that percentage. Subsequently, the total cost is measured. This pricing philosophy involves summing up the product expenses with sought after profit in order to calculate selling price (Hayes & Miller, 2011). Demand Based Pricing In certain conditions, where products have unique features, hospitality organisations use the demand based pricing method. It can be observed that well positioned resorts frequently follow the demand based pricing method in seasonal times. For instance, in January, several visitors desire to reserve rooms in resorts located in Arizona. Due to this reason, prices are high in the resorts of Arizona at that time. However, when new hospitality organisations enter into a market, they usually set prices on the basis of the maximum amount of customers who are eager to pay for certain services (Hayes & Miller, 2011). Top Down and Bottom Up Pricing Top down pricing is a selling method used in hospitality industry. In this method, an hospitality organisation seek to sell the organisation’s highest priced item before making sales of lower priced items. Thus, if guests are not satisfied with the price of top priced items, the organisation will move towards the down level until they are satisfied with the price. On the other hand, in bottom up pricing, organisations seek to sell the lowest priced items before selling the higher priced items (Hayes & Miller, 2011). Value Based Pricing In value based pricing, the products and services of an organisation is subject to customer’s perceived value of products and services. Organisations that use value based pricing strategy set reasonable prices on the basis of product quality and offered services. In value based pricing strategy, prices are consistent with advantages and costs which are related with product or service acquisition. In order to use this strategy, it requires organisations to be highly effectual in operations and marketing in order to keep the expenses and prices low (Ferrell & Hartline, 2008). Competitive Matching In competitive matching strategy, organisations concentrate on matching the prices of products with the competitors. Organisations which utilise competitive matching strategy set the prices on the basis of going rate of the industry (Jogaratnam & et. al., 1999). 2.2.2 Duration Duration is the other strategic lever used in revenue management. Duration includes the selection of highest revenue reservation by managing the availability of products. The major assumption behind duration is that the longer guests stay, the higher organisations’ revenue earning will become. The utilisation of duration control denotes that instead of providing rooms on ‘first come, first serve’ basis, organisations can attach conditions to the offered rooms. The regulations of duration can be applied on arrival time, departure time and minimum duration of stay (Gurbuz, 2011). 3.0 Importance of Revenue Management in Hospitality Industry Revenue management is increasingly becoming an essential function for hospitality organisations which includes making coordinated efforts throughout the operational procedures. Hospitality organisations can use the concept of revenue management by balancing demand, scheduling and pricing. Revenue management is all about selling the right room to the appropriate customers at proper rate. For hospitality organisations, revenue management provides the following advantages: 3.1 Increase in Profit The major purpose of revenue management in hospitality industry is to increase the profit. Through revenue management, hospitality organisations can better manage the prices of products and services according to the preference of customers. Revenue management tools permit hospitality organisations to consider different operational expenses along with the demand of services in the market in order to derive the selling prices. As a result, it can provide maximum profits (Bitran & Mondschein, 1993). 3.2 Control of Sales The other purpose of revenue management is to enhance sales. Through revenue management, hospitality organisations can predict the demand of their products and services and accordingly set prices to gain maximum revenue. For example, every hospitality organisation enhances the rate of their rooms during the seasonal times when demand for their services is high. On the other hand, during off season, hospitality organisations usually provide several promotional offers in order to boost the sales. In this way, revenue management helps to control the sales and to earn maximum revenue (Bitran & Mondschein, 1993). 3.3 Better Administration of Resources Revenue management is also vital for administering rooms in an effective way. Hospitality organisations utilise different revenue management techniques so that different rooms can be utilised to earn maximum revenue. Revenue management allows hospitality organisations to monitor the demand and accordingly manage the resources to derive maximum revenue in a specified period of time (Bitran & Mondschein, 1993). 4.0 Case Analysis of Hayman Island Resort 4.1 Hayman’s Accommodation Strategies Hayman Island Resort is considered as one of the popular deluxe resorts, which is located in Queensland, Australia. It provides sophisticated resort living in beautifully prearranged rooms and habitations. It has different rooms on the basis of features. The revenue strategy that is used in Hayman is demand based pricing strategy and value based pricing strategy (Hayman, n.d.). Demand Based Pricing In this pricing strategy, hotels adjust the prices of rooms on the basis of demand conditions. Hayman also utilises demand based pricing strategy in order to maximise the revenue. In peak season, when the demand of accommodation is high, Hayman provides the rooms at a high rate. The following table will show the room rate for pool room, retreat room and lagoon room from different time duration: Rooms 1st April 2013 to 31st March 2014 21st December 2013 to 5th January 2014 Pool Room AU$590 AU$649 Retreat Room AU$750 AU$825 Lagoon Room AU$790 AU$869 Source: (Hayman, n.d.). From the above table, it can be observed that in pool rooms, the rate from 1st April 2013 to 31st March 2014 is AU$590, while during 21st December 2013 to 5th January 2014, the room rate is AU$649. Similarly, with respect to retreat rooms, the rate from 1st April 2013 to 31st March 2014 is AU$750 where during 21st December 2013 to 5th January 2014, the rate is AU$825. Since, during the period i.e. from 21st December to 5th January, the demand for accommodation in Hayman is high, therefore the organisation uses the demand pricing strategy for enhancing the revenue in peak season. Cost Based Pricing The other pricing approach that is used by Hayman is cost based pricing approach. Hayman usually charges the room rates through prior calculation of expenses. For instance, the room rates of Hayman for certain rooms comprise daily breakfast of up to 2 guests. With respect to pool room, Hayman considers the expenses for everyday mealtime, use of water sport facilities and resort sporting facilities such as tennis, squash, croquet, golf and chipping (Hayman, 2013). Value Based Pricing Hayman also applies the value based pricing strategy. The rates of rooms are demarcated according to the perceived value of customers. For instance, with respect to pool rooms, Hayman offers different room rates according to facilities and amenities. The following table shows the pool room rates of Hayman: Pool Room Rate Night Rate Pool Room AU$590 Pool Access Room AU$670 Pool Deluxe Room AU$690 Source: (Hayman, 2013) From the above table, it can be observed that Hayman provides different rates for pool rooms according to the perceived value of customers. With respect to ordinary pool rooms, these are characterised by lavish gallery and expansive marble bathroom. On the other hand, pool access room has features of direct access from gallery to pool along with expansive bathroom. Then again, pool deluxe room has additional features such as double balcony, drawing room and its interior grace is featured with outstanding views (Hayman, 2013). 4.2 Analysis Hayman successfully manages the revenue in order to derive optimum level of profit throughout its business operations. From the analysis of revenue strategies used in Hayman, it can be stated that the organisation sells the rooms at high rates during seasonal time which helps to boost the revenue. Furthermore, in order to attract more customers, Hayman also adjusts the prices during particular times or situations. For instance, during the month of April, when demand is low, Hayman provides customers promotional offers such as ‘Summer Escape’, ‘Romantic Escape’, ‘Hayman Escape’ and ‘Family Escape’ in order to enhance the sales (Hayman, n.d.). Hayman also manages the duration by providing certain terms and conditions of stay to the customers. For instance, during the seasonal time, Hayman provides customers with minimum duration of two nights stay. Furthermore, it also provides bonus offers such as free stay of one night by staying four nights. These duration control strategies are used to boost up the length of stay in the resort and certainly to enhance the revenue (Hayman, 2013). 4.3 Hayman Food & beverage Strategies Hayman provides several food and beverage services in its number of outlets. The outlets are designed for targeting a wide range of customers ranging from families to different types of travellers. The outlets provide numerous food and beverage menus. Different pricing strategies are used in the food and beverage outlets of Hayman. A few of the pricing strategies are described below: Prestige Pricing Organisations use prestige pricing by promoting an image of exclusivity and superior quality. In order to compete with other organisations, Hayman provides a high quality experience to the customers. For instance, in Twilight Dining, Hayman offers customers six specific dishes at rate of AU$180 for one couple. This outlet provides customers the opportunity to develop their own dishes and to enjoy a new dining experience. It is a practical pricing strategy in circumstances where it is difficult to judge the true worth of product (Hayman, n.d.). Mark – Up Pricing Strategy Mark – up pricing strategy is essentially a cost based pricing technique which is commonly used by organisations where the prices of certain items are derived by adding fixed percentage of cost. The following table will show the mark-up price for a starter menu in one of the outlets of Hayman namely Fontaine: Ingredients Actual Cost (In AU$) Seven Oysters 6 Mignonette 8 Total 14 Mark up percentage 107 Calculation of Mark – up percentage: Mark – up percentage = 100 × Sales Price – Actual Cost Actual cost = 100 × 29 - 14 14 = 100 × 1.07 = 107 Source: (Pride & Ferrell, 2011) The cost of Starter in Fontaine is almost AU$ 29. From the above table, it can be observed that the actual cost of the starter is almost AU$ 14. The calculation depicts that the organisation uses 107% mark-up percentage in order to cover the other expenses related with the production of the food item (Hayman, 2012). 4.4 Analysis Hayman utilises both prestige pricing as well as mark – up pricing strategy in order to maintain its revenue and also to satisfy the customers by providing products with fair cost. By considering its menu as well as the costs, it is evident that the organisation targets affluent target customer segment who wishes to enjoy a pleasant, entertaining and romantic experience. The pricing of food products in its different outlets are set in such a way so that it can add value to the perception of customers regarding the quality and superiority. The pricing strategies used by the organisation in food and beverage segment are also determined by the reputation of the organisation. It is mainly targeted for customers who are not price sensitive and wish to indulge themselves in quality offerings without overtly worrying about expenses. 4.5 Competitive Matching Competition based pricing is another approach used by hospitality organisations in order to make their services superior than others. Competition based pricing is useful for those organisations where competing products are quite homogeneous in nature. There are several competitors of Hayman which also provide luxurious accommodation and hospitality services. Thus, in order to better compete with the services of other organisations, Hayman also utilises competition based pricing strategies (Hayman, 2012). One of the major competitors of Hayman in Australia is Qualia. The following figure will show the room rate of beach house of both Qualia and Hayman: Resorts Off Season Festive Season Qualia AU$4000 AU$4800 Hayman AU$3700 AU$4070 Source: (Qualia, n.d.; Hayman, n.d.) From the above table, it can be observed that price of beach villa room in Hayman is considerably low in comparison with Qualia in off season as well as in festive season. Both the organisations concentrate on providing unique experiences to the customers by means of offering an ambience with natural surroundings and views. With respect to accommodation facilities, the pricing strategies of both hotels are dependent on the demand, as it can be observed that in seasonal times when there is high demand for accommodation, both organisations provide high charges for the rooms. Besides, both the organisations concentrate on the perceived value of customers and their pricing also is attached with it. Since they target similar customer segments, there is not much difference in the room charges. 5.0 Conclusion Revenue management has a great importance for hospitality organisations. Better revenue management tactics can help in managing the profit by considering the expenses as well as demands of products and services. Thus, revenue management serves as a competitive strategy for organisations. From the report, it can be observed that Hayman Island Resort utilises numerous pricing strategies in order to maintain appropriate level of revenue. Since the organisation targets the higher income group customer segment, the pricing strategies are based on the perceived value of customers. Besides, Hayman also considers the prices of competitors while setting room charges in order to attract more customers. Hayman is also found to be providing several promotional advantages for driving sales. The numerous pricing strategies used by Hayman include demand based pricing, cost based pricing, value based pricing and prestige pricing among others. These pricing strategies help it to derive maximum revenue. 6.0 References Bitran, G. R. & Mondschein, S. V., 1993. An Application of Yield Management to the Hotel Industry. Massachusetts Institute of Technology, pp. 1-32. Ferrell, O. C. & Hartline, M. D., 2008. Marketing Strategy. Cengage Learning. Gurbuz, E. G., 2011. Revenue Management Operations in Hotel Chains in Finland. Saimaa University of Applied Sciences Tourism and Hospitality, pp. 1-65. Hayes, D. K. & Miller, A., 2011. Revenue Management for the Hospitality Industry. John Wiley and Sons. Hayman, No Date. Rates. Guest Rooms. [Online] Available at: http://www.hayman.com.au/accommodation-and-reservations/rates/ [Accessed March 02, 2013]. Hayman, No Date. Offers. Great Barrier Reef. [Online] Available at: http://www.hayman.com.au/offers/ [Accessed March 02, 2013]. Hayman, No Date. Twilight Dining. Uploads. [Online] Available at: http://www.hayman.com.au/wp-content/uploads/Twilight-Dining.pdf [Accessed March 02, 2013]. Hayman, 2012. Fontaine. Uploads. [Online] Available at: http://www.hayman.com.au/wp-content/uploads/2012/12/Fontaine-Menu.pdf [Accessed March 02, 2013]. Hayman, 2013. Accommodation. Great Barrier Reef. [Online] Available at: http://www.hayman.com.au/wp-content/uploads/HAY_accombroch2013.pdf [Accessed March 02, 2013]. Ivanov, S. & Zhechev, V., 2012. Hotel Revenue Management – A Critical Literature Review. Tourism Review, Vol. 60, No. 2, pp. 175-176. Jogaratnam, G. & et. al., 1999. Matching Strategy with Performance How Independent Restaurateurs Competitive Tactics Relate to Their Success. Cornell Hospitality Quarterly, Vol. 40, No. 4, pp. 91-95. Kimes, S. E. & Wirtz, J., 2003. Has Revenue Management Become Acceptable? Findings from an International Study on the Perceived Fairness of Rate Fences. Journal of Service Research, Vol. 6, No. 2, pp. 125-135. Pride, W. M. & Ferrell, O. C., 2011. Foundations of Marketing. Cengage Learning. Qualia, No Date. Leeward Pavilion Rates. Luxury Resort Accommodation. [Online] Available at: http://www.qualia.com.au/luxury-resort-accomodation/rates [Accessed March 02, 2013]. Yeoman, I. & McMahon-Beattie, U., 2004. Revenue Management and Pricing: Case Studies and Applications. Thomson Learning, pp. 1-8. Read More