Internal and External Issues at Hearthstone Suites Hotel - Case Study Example

Case Study: Reviving Revenue Management at Hearthstone Suites Hotel Name Institution Course Tutor Date Table of Contents Introduction ..........................................................................................................03 Revenue Management ………………………………………………………….03 Internal and External Issues at Hearthstone Suites Hotel................................04 Hearthstone Revenue Management Program....................................................05 Addressing Low RevPAR.....................................................................................07 Being Familiar and Comfortable with Revenue Management Program.........08 Selling Skills Training...........................................................................................09 Conclusion …………………………………………………………………….....11 References ……………………………………………………………………......12 Introduction Revenue management has played a profound role in the hospitality industry having been previously developed and utilised in the airline industry. The deregulation process of the airline industry in 1970s led to the development of revenue management. Today, revenue management has been expanded and it is a common business practice in many industries including hospitality. It is a technique that is profitably applied by the hotels and restaurants (Ivanov 2014, p. 07). Revenue management is an important instrument that matches supply and demand in the hospitality industry. This is achieved through division of customers into various segments based on their intentions to purchase and allocate capacity to these segments in a manner that maximises the revenue of firm (El Haddad, Roper & Jones 2008). This report focuses on the revenue management at the Hearthstone Suites Hotel. Revenue Management Principles of revenue management are easily applicable across many industries. However, there are specific characteristics in each industry that determines the practicability of revenue management and its application in organisations that are using it. In this case, application of revenue management in the hotel industry may be different from other industries due to the unique characteristics of the sector. Revenue management involves maximisation of revenue under various conditions (Hospitality Professional Association 2013, p. 04). It is a tool used by managers in increasing sales revenues of their companies. This is achieved through manipulation of fixed prices of the hotel rooms offered for sale in relation to the present demand and the forecasted one. Currently, customers are aware that the price they are required to pay for a room in a hotel varies. This is because the price depends on the availability of a room and the point at which a purchase decision is made (Hospital Professional Association 2013, p. 04). Revenue management has become a very useful technique that uses various analytics in predicting consumer demand and in optimisation of inventory and available price so as to maximise revenue. In fact, the essence of revenue management is to understand the perceptions that customers have on the value of a product and accurately align prices of products, its availability and placement with all the segments of the customer. Internal and External Issues at Hearthstone Suites Hotel In most businesses, management are faced with complex decisions regarding the selling and pricing strategies they need to adopt. For example, the target customers for the business need to be identified, the ‘right’ time to sell the product or service, and its price. The Hearthstone Suites Hotel is currently facing various internal and external issues partly caused by the opening of the Fairmont Hotel. The hotel is currently faced with the issue of competition. Fairmont hotel has become a strong competitor and some previous loyal customers of Hearthstone hotel have shifted to Fairmont. The directive of the hotel’s General Manager to sell as many rooms as possible in order to stay competitive may not be the solution. In order to stay competitive, a competitive analysis should be carried out. The strengths, weaknesses, opportunities and threats of the hotel should be used in analysing competitive positioning. Moreover, its revenue management practices should take competitors into account. Competition analysis and scanning of the environment should be carried out by Hearthstone to deal with the issue of competition. In the hospitality industry, competition can be dealt with by developing a strategic marketing plan that includes strategies, procedures, and objectives to be achieved (Tesone 2010, p. 334). Hearthstone hotel can develop a strategic marketing plan in order to stay competitive again. Indeed, the hotel management should evaluate strategic alternatives as well as leveraging the internal resources of the hotel in creating value and sustainable competitive advantage. Hearthstone hotel competitive advantage is under serious threat due to the strong competition posed by Fairmont hotel. The situation gets worst as the hotel has to deal with the issue of revenue management programs that are likely to suffer as the hotel pushes for more occupancy rates. Enz (2009, p. 117) reckons that an organisation has a competitive advantage when it possess a long-lasting business advantage over its competitors. In this case, an organisation has the capability of doing something that its competitors cannot do or has something that its competitors lack. It is very difficult for a firm to sustain competitive advantage (Enz 2009, p. 117). However, organisations create advantages by developing resources and capabilities. Hearthstone hotel used to have a competitive advantage and large number of loyal clients before Fairmont started its operation. The situation is now different as it has to tackle the issue of their loyal clients choosing its rival competitor. Currently, the hospitality industry is very competitive. As such, the hotel operators should be vigilant and conscious of the demands and needs of customers (Abdullah & Mohad 2012, p. 199). For purposes of gaining sustainable competitive advantage, acknowledging the internal and external factors influencing occupancy rates need to be undertaken. The push for occupancy at Hearthstone is likely to affect the revenue management programs. Hearthstone Revenue Management Program Revenue management programs are very important to having a successful business in the hotel industry. These programs are crucial in the generation of profits. In fact, it results from the generation of revenue and control of expenses. Hayes and Miller (2011, p. 11) contends that the purpose of revenue management is increasing the profits of the company and the return on investments of the owners by using strategic pricing techniques. In most cases, these techniques are mostly driven by the needs of the customers. In the case of Hearthstone hotel, the techniques used seem to be company-needs driven and the revenue manager of the hotel forecast that revenue management programs are likely to suffer because of this strategy. In fact, the revenue manager was right and its average daily rate (ADR) went down despite occupancy rate remaining on target. A meeting had to be convened to deal with the issue of low ADR at the hotel. The occupancy rate in a hotel measures how its physical capacity has been utilised (Ivanov 2014, p. 43). The occupancy rate of Hearthstone is on course, but its ADR is a problem. Occupancy rate is very important in the hospitality industry as it indicates the hotel’s capacity in generating revenues in an extensive way (Ivanov 2014, p. 44). This means increasing the number of nights, guests, or rooms to be sold. In the case of Hearthstone hotel, the technique used is to sell as many rooms as possible. Internally, Hearthstone hotel needs to deal with low ADR. The ADR is a relation of the average price that the hotel charges for either room-night or overnight (Ivanov 2014, p. 44). It is a reflection of the hotel’s ability to generate revenues in an intensive manner from the rooms that are occupied, that is, to achieve higher prices rather than have customers stay for more overnights or room-nights. ADR depends on factors such as market segments, the day of the week, the period of the year or presence of special events (Ivanov 2014, p. 44). The demand for accommodation increase in periods where there are special events. It is for this reason that the most experienced front desk agent at Hearthstone hotel reckons that they will not have to use their super-saver rate because of the Home Builders convention. Special events like the convention eliminate the need to carry out promotions in stimulating ADR. The state of revenue management program at Hearthstone hotel is not a good one and it is giving mixed results. The directive of the general manager to the front office and reservations staff to sell as many rooms as possible stretched the capability of the revenue management program to work properly. It resulted in the decrease of ADR by $10 and its corporate segment dropped by 15 per cent which had a negative effect on revenues of the room. Moreover, the ADR of the hotel went down by $ 10. Due to these reasons, Jodie, is of the opinion that the hotel should review its revenue management program. The program has resulted in the hotel gaining lower priced business at the expense of a drop in its corporate segment by 15 per cent. Fundamentally, the revenue management program should recognise any opportunity for maximisation of potential revenue in real-time (Song 2012, p. 129). It should be capable of separating price insensitive customers from those customers that are not sensitive to prices. The revenue program of Hearthstone had failed to achieve this objective and it should be changed as Jodie has pointed out. Addressing Low RevPAR The Low RevPAR that Hearthstone hotel is registering is not good in the hotel industry. The management should, therefore, address the problem. Revenue of a hotel business should be managed and increased in order to have a successful business. In this case, revenue manager should be capable of segmenting customers (Song 2012, p. 129). Segmentation of customers is done based on their willingness to pay for the services provided. Furthermore, it is based on forecasting pricing and demand and abilities for overbooking to occur. Forecasting demand is considered to be the core of revenue management approaches and applications (Hospitality Professional Association 2013, p. 08). The absence of an accurate forecast results in an inability to apply pricing tactics of the hotel in an effective manner. In fact, demand forecasting is an important segment of the revenue management system. In order to maximise revenue, there should be flexibility in the establishment of appropriate price point as demand can sometimes be a variable component that changes over time. The hotel industry operates in a dynamic pricing environment and prices are changing regularly. The demand forecast for a particular day is important in making a decision whether to open or close a price point. Effectiveness and efficiency of the revenue management program used by a hotel can be measured in different ways. Occupancy rates and average daily rate are some of the measures. These alone are not the only measures. The business can have achieved the targeted occupancy rate like Hearthstone hotel, but this does not necessarily mean that they are generating high revenues. In addition, it can have a high ADR but still register low revenues. For instance, low occupancy can still achieve a high ADR while a high occupancy can result in a low ADR (Ivanov 2014, p. 46). In this case, it is best to use ADR and occupancy together resulting in RevPAR metric. RevPAR measures the revenues generated by one room in a hotel that is available for sale (Ivanov 2014, p. 46). ADR and occupancy rate influence RevPAR and this depend on factors that are separately influencing ADR and occupancy rate. Currently, Hearthstone hotel is having low RevPAR. This can be addressed by increasing occupancy which involves extensive growth and the hotel’s ADR which is the intensive growth. It can also be addressed by adjusting both ADR and occupancy rate. Being Familiar and Comfortable with Revenue Management Program Revenue management program used by a hotel should be comfortable enough for employees to use it. They should also be familiar with it. This ensures that revenue management improves optimisation of inventory and generation of revenue (Gregory 2010, p. 61). In order to achieve this gain, the management of Hearthstone hotel should ensure that their employees are familiar and comfortable with the revenue management program. This can be achieved by training and making employees understand how their hotel is generating revenues. This results from a careful monitoring of the source of customers and the costs incurred by the hotel in selling their products to them. In order for the manager to increase and manage the revenue of the hotel, a revenue strategy adopted should be communicated to the employees. Moreover, in ensuring better coordination between management and departments in a hotel regarding revenue management, a revenue maximisation meeting should be conducted every week or on a bi-weekly basis (Song 2012, p. 137). This meeting helps in coordination of responsibilities in the revenue management program. The management of Hearthstone hotel should conduct this kind of meetings periodically so as to enable employees to be familiar and comfortable with the revenue management program. Selling Skills Training In a hotel industry, employees should have selling skills which will be used in the sale of the hotel’s services to the potential and loyal customers. At Hearthstone hotel, selling skills training will benefit staff members such as Linda, Tracey and the rest of the reservationist and front office desk agents. The effective training process is important as it increases the performance of employees (Gazija 2011, p. 195). Training needs in a hotel industry normally occur because employees lack knowledge of the job, lack telephone skills or customer focus. Furthermore, poor sales skills necessitate training to be carried out in a hotel. The selling skills that are to be conducted at Hearthstone hotel will be used in various ways. They will be used in selling rooms of the hotel to various customers by focusing on the needs of each one of them. Furthermore, they will be used in answering telephone calls from customers and convince them that Hearthstone hotel provides them with the best rate in town and the services are exceptional. After selling training skills have been concluded and employees are now dedicated and know their roles, Hearthstones Suites Hotel will now be capable of regaining some of commercial business it had lost. Competitive advantage in a hotel industry can be achieved by developing customer loyalty through the provision of unique benefits to the customers (Kandampully & Suhartanto 2000, p. 346). Hearthstone hotel should start identifying unique benefits it can provide to its customers in order to regain its previous commercial business. The aim of the contemporary hospitality companies is increasing the hotel revenue and rates of occupancy through improvement of customer experience (Minghetti 2003, p. 141). In order to achieve these, management of a hotel should have an extensive knowledge of the needs, behaviours and preferences of the customers. Moreover, they should also be conscious of the various ways in which the services that have been delivered by the hotel create value for their customers and trigger their loyalty. In essence, management should be able to predict the needs and wants of consumers in order to satisfy them successfully. It has become increasingly important for a hotel management to understand consumer and the potential buying behaviour, especially in provisions of targets to the desired market segments (Hospitality Professional Association 2013, p. 14). In order to have proper working revenue management, understanding the conditions and behaviours influencing the individual purchase decisions is very important as compared to an attempt to offer a ‘global solution’. In the hospitality industry, consumers can be organisations making the purchase decisions or it can be the normal individuals acting as personal consumers. Organisations carry out a purchase decision that benefits the organisation while a personal consumer undertakes a purchase decision based on their own needs and requirements (Hospitality Professional Association 2013, p. 14). It is, therefore, paramount for the management of a hotel to equally understand both individual and corporate consumers. Conclusion Revenue management has become an extremely important tactical tool in the hotel industry regardless of the hotel’s size, rating or its segmentation. By systematically applying revenue management program to a business, all things equal, positive impact on the sales turnover will always be achieved. Revenue management demands solid implementation of the program that is being used and frequent attention to it should be carried out. The hotel management needs to realise the importance of satisfying the needs and demands of various customers in order to create a large loyal client base and attract other potential customers. References Abdullah, A. A & Mohad, H. H 2012, ‘Internal Success factors of Hotel occupancy rate’, International Journal of Business and Social Science, vol. 3, no. 22, pp. 199-218. El Haddad, R, Roper, A & Jones, P 2008, The impact of revenue management decisions on customers attitudes and behaviours: A case study of a leading UK budget hotel chain, EuroCHRIE 2008 Congress, Emirates Hotel School, Dubai, UAE, 11th-14th October. Enz, C. A 2010, Hospitality strategic management: Concepts and cases, 2nd edn, John Wiley & Sons, Hoboken. Gazija, A 2011, ‘Importance of staff training in hotel industry Case Study: Hotel Dukagjini’, ILIRIA International Review, vol. 02, pp. 195-206. Gregory, A 2010, ‘Revenue and Inventory Optimization: The Necessary Evolution of Revenue Management’, The Journal of Hospitality Financial Management, vol. 18, no. 2, pp. 61-63. Hayes, D. K & Miller, A 2011, Revenue management for the hospitality industry, Wiley, Hoboken. Hospitality Professional Association 2013, Revenue Management: An Introduction for Practitioners, Wentworth Jones Limited, Bournemouth. 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