Hotel Revenue Management - Coursework Example

Revenue Management: A critical analysis of pricing and duration as it pertains to Hotel Revenue Management. Introduction In the contemporary society, Revenue Management (RM) practice in hotels has evolved significantly, and has turned out to be one of the most identifiable and integral characteristics of hotel operating strategy. The practice was adopted by hotels in 1980s. This was after the airline industry for instance the British Airways showed huge achievement after using pricing, capacity and inventory to manage revenue (Cross, 1997). However, compared to the last two decades, Revenue Management in hotels in the recent time has redefined considerably. The general approaches to pricing strategy, inventory allocation, channel management, and the use of information related to revenue management has modified greatly (Cross, 1997). This assignment will entirely focus on a critical analysis of pricing and duration as it pertains to hotel Revenue Management including the definition of key terms, importance of pricing in effective Revenue Management, and examples of pricing policies and methods. The aim of the study is to enable students to demonstrate an understanding of the key factors associated with the strategic levers effecting Revenue Management. Definition of key terms, and concepts The assignment will involve the definition of various keys terms used in Revenue Management. These terms are as explained herein. Revenue Management Revenue Management is the employment of disciplined analytics which usually predict clientele behaviour at the micro-market level and capitalize on price and product availability in order to maximize the growth of revenues. The main objective of Revenue Management is to sell the right product at particular price and at precise time to the right clientele. The discipline aims at making individuals understand consumers’ view of product value and correctly aligning placement, product prices, and availability with every consumer segment (Cross, 1997). Revenue Management is a scientific method that integrates Statistics and Customer Relationship Management (CRM), and Operations Research and groups clients into price bands that are based on different services. Statistical analysis of previous data assists in anticipating demand and establishing the suitable price bands. Research has revealed that, if Revenue management is applied appropriately, it can assist hotels to expand their market size and boost revenues (Cross, 1997). Market segmentation Market segmentation is an aspect of revenue management in firms. It is true that, customers’ needs are different at any one time, therefore, company’s have to use market segmentation in order to understand each consumers needs appropriately. Market segmentation involves grouping customers according to their needs based on geographical, psychological, and behavioural factors. In hotels, there constitute two types of travelers: business and leisure travelers. These travelers are grouped based on price insensitive market segment (business travelers) and price sensitive market segment (leisure travelers). Price discrimination This is an aspect that assists firms to attaint their objective of boosting revenues by charging premium prices to the less price sensitive market segments (business travelers), and by charging discounted prices to a price sensitive market segment (leisure travelers) as this leads to amplified consumption of the service that offsets the price reduction (Cross, 1997). Duration/time Seldom, time element is linked with the pricing. This means that, firms will charge high prices when the demand of a service is high and the opposite also applies. The latter involves offering discounts to customers in order to increase sales. In hotels, discounts are provided for earlier bookings, encompassing characteristically group bookings, plus travel during off-peak hours and days. In addition, customers staying for longer period in hotels may also be considered in certain circumstance. The Revenue Management Levers Revenue Management includes a wider range of opportunities to boost revenues. An organization can make use of a series of levers although only a few may increase revenue in a certain situation. Strategic Pricing Pricing strategies vary from one resort to the other and from one department to the other. This depends with various factors including the value, demand, competition, and cost of production. Strategic pricing involves setting the right prices, to the right customers at the right time. Pricing is the most significant feature of Revenue Management that focuses on various innovative and intriguing developments in the current years. Pricing engages redefining pricing strategies and there after developing pricing tactics which allows a firm to increase it revenues and profits. (Cross, 1997). Whilst pricing has constantly been an essential driver affecting both RevPAR and occupancy, in the contemporary environment of unparalleled price clearness, rates have assumed a greater responsibility (Elmaghraby & Keskinocak, 2003). Marketing, inventory and channels are other revenue management levers used by firms in order to maximize revenues thus, increase profits. Importance of pricing in effective Revenue Management Pricing is considered as the most essential feature of revenue management. The main aim of pricing strategy is to forecast the value established for clienteles and there after setting certain prices which assists in capturing that value (Kadet, 2008). In most cases, organizations price against their rivals, but in real sense, pricing strategies should focus on demand and the market conditions as this yields most value. Pricing strategies generally states what an organization should do, while the pricing tactics determines how the organization gains value and revenue. Price optimization on the other hand entails continually optimizing multiple variables for instance, price ratios, price sensitivity, and inventory in order to maximize revenues. It is true that, an efficient pricing strategy, which is supported by analytical based pricing tactics, may considerably improve company’s profitability and revenues (Hormby et al., 2010). Pricing in revenue management allows a firm to remain competitive in the market. This is evidenced by the fact that, most firms set their prices based on those of their rivals. It is true that, before a company sets its prices, it first identifies its competitors, examines its products/services and the prices offered. For example, in a situation where there are few competitors in the market, when one rival lowers the price, the other competitors follows suit in order to remain competitive. Customers in most cases are price sensitive and therefore, they will go for the lowest prices as long as quality and value remains. As a result, firms always offer the right prices to the right customers at the right time to ensure that, they retain their customers and in addition, continue to be successful and competitive in the market. Most firms including hotels apply this pricing policy and they charge their prices for various departments such as rooms, food on the basis of other prices charged by other hotels. In revenue management, the most significant aspect is to determine the most favorable price to present to a potential clientele. Revenue managers always try to present the right rates to customers to ensure that, there is a balance between occupancy and the prices charged. This is the key to successful revenue management strategy (Cross, 1997). Revenue management systems and revenue managers usually rely on stock market standards to work out complex algorithms which generally produce the optimal rate with accuracy (Agrawal & Ferguson, 2007). Both advanced algorithmic approach and automation practices to pricing can be employed in this case. It is apparent that, the demand for resorts varies depending with the customers. Consumers are usually grouped in less sensitive market segment (business travelers), and the sensitive market segment (leisure travelers). In most circumstances, the former is ready to pay regardless of the prices set, while the latter may always go for the lowest prices. As a result, in revenue management, pricing assists a firm to segment its market appropriately and there after charge prices as required. Encompassing price promotion in this circumstance allows firms to increase their sales by temporarily lowering the prices of their goods or services. This as a result assists a firm to maximize its revenues and profits significantly even when there are uncertainties. Generally, strategic pricing in revenue management process allows a firm to significantly increase its revenues and therefore maximize profits. Pricing policies and methods An analysis of the market structure illustrates the procedure as to how the market prices are determined. However, in essence, a firm applies different pricing policies and methods to fix the price for its products and services. Pricing policy can be defined as the policy of establishing the price of products and services by the firm’s management after considering both the internal and external factors influencing the price, and the firm’s objectives. A pricing policy serves as a guideline for making decisions in the firm. Some of the common pricing policies and methods are listed below; Cost-based pricing This involves determining the price of a product or service by determining all the fixed and variable costs in the firm. After determining the costs of both the fixed and variable costs, the management then adds a preferred profit margin to each unit. Cost-based pricing seeks to cover all the costs a firm incurs in producing a product or delivering a service to its customers, in an aim to attain a desired level of profit. This is considered a straightforward method because the managers only require to study the accounting and financial records of the firm in order to determine the prices for its products or services (Cross, 1997). Value-based pricing The value of a product or service is determined by the customer’s preferences, expectations, needs, financial resources and by the competitor’s offerings. Therefore, under value-based pricing, it is considered that the best selling price of a product or service reflects the perceived value of the product or service by the customers (Talluri & Van Ryzin, 2001). The managers therefore have to undertake market research and question the customers in order to determine the value of the product. Furthermore, the managers are required to carry out a comparative analysis of their products or services with those of their competitors in order to identify their value merits and demerits. This approach basically entails increasing profitability through laying more emphasis on a product or service’s value characteristics (Talluri & Van Ryzin, 2001). Demand-based pricing Demand-based pricing is mainly concerned with the characteristics and behaviors of the customers, and the characteristics and the quality of the products or the services. This approach lays more concern on the level of demand, and disregards other factors such as labour, and cost of material. The managers therefore need to consider diverse demand schedules in order to arrive at the best price that will enable the firm attain profits (Cross, 1997). However, to come up with the most profitable sales and production levels, managers need to assess marketing and production costs estimates at various sales levels. Therefore, the prices are established by taking into consideration, the cost estimates at various sales levels, and anticipated revenues from the amount of sales relating to the expected prices. Success in using this approach depends on how reliable the demand estimates are. Competition-based pricing Competition-based approach seeks to set prices basing on the on the prices other firms within its industry charge for their products or services. The first thing therefore is for the firm to identify its competitors, and then examines its products or services before setting its prices, as well as the projected response from the competitors to set the price (Talluri and Van Ryzin, 2001). For instance, in a market where the competitors are few, when one competitor lowers the price, then the other competitors will consequently lower the price in order to remain competitive. Pricing policies and methods within a resort: Peninsula hotels The peninsula hotels are renowned for their matchless style and subtle elegance, offering a wide range of services to its customers (William & Jill, 2007). This group of hotels is distributed throughout the globe for instance; there is the Peninsula All-Suite Hotel, Peninsula Chicago, and the Peninsula Hong Kong, among many others. These hotels are regarded as the best location to all discerning visitors around the world. Besides, visitors are offered superior services that match the real value of their money. In this paper however, we shall focus on the Peninsula Hong Kong, which is one of the famous hotels in Hong Kong. It was established in 1928 with the aim of attracting wealthy visitors to the area. The, major pricing methods applied in hotels include backward pricing, contribution pricing, rate of return pricing and cost-plus pricing (Cross, 1997). However, it is difficult to identify a sole pricing strategy for the services offered due to the heterogeneity among the services offered and lack of empirical evidence. Therefore, it is apparent that the pricing strategies vary from one resort to the other and from one department to the other. The pricing strategy used for the rooms are determined depending on the quality of the rooms or rather the attributes of a specific hotel (Marriott & Cross, 2000). When we determine for instance, why a guest may prefer a certain hotel to the other, most probably the reasons offered are often related to the characteristics or attributes of the hotel. For instance, the prices charged for the bungalows are considered higher compared to the prices charged for the fan rooms. Other attributes include the location of the hotel, size and quality of the hotel rooms, health facilities, transportation, free and high speed internet access, service levels, free parking, free breakfast, business centre, free telephone calls and most probably the value of the sales effort (Mauri, 2007). All these attributes have to be therefore considered when coming up with the pricing strategy for the rooms. In peninsula Hong Kong hotel for example, the visitors are offered a classic comfort and an exceptional room technology that acts as a strategy to retain their customers. Visitors can either choose to stay at the original building or opt to move to the spectacular Victoria Habour outlook from rooms that are located at the modern Tower. This depends on the visitor’s preferences considering the prices charged for the rooms. The pricing strategy offered for the rooms are inclusive of the plasma screen television, fingertip environment controls and the best variety of cityscape views the hotel offers (Mauri, 2007). Therefore, it is apparent that the pricing policy for the rooms is the cost-plus pricing method. The exceptional summer package is inclusive of a daily breakfast, complimentary local calls and broadband internet access. A deluxe room goes for HKD 4360 per night, superior suite goes for HKD 7,360 per night, and a grand deluxe Kowloon view room goes for HKD 5, 060 per night, while a deluxe courtyard room goes for HKD 4,760 per night. The pricing policy for the food and beverage depend on the type of food offered, the rating of the hotel, location of the hotel and the prices offered by other hotels (William & Jill, 2007). In the Peninsula Hong Kong hotel for instance, the prices of the food are determined in relation to the type of the food offered. However, the hotel also takes into consideration, the prices its competitors offer for their food and beverage packages (Hanks et al., 1992). In addition, the Peninsula Hong Kong hotel offers spa services that range from massage parlors, detoxication, gym facilities and Jacuzzis and heated pools among others. The prices charged for spa services in the hotel depend on the type of service the visitors requires, level of technology employed and the package used in booking for the hotel. In addition, the costs utilities and the maintenance of the equipment play an integral part in price determination. Moreover, the level of education and skill, which determines their remuneration, also plays a part in determining the price of spa services (William and Jill, 2007). Conclusion Revenue Management practice in hotels has evolved significantly, and has turned out to be one of the most identifiable and integral characteristics of hotel operating strategy. There are different methods and policies applied in pricing such as cost-plus method, competitive-based pricing, value-based pricing and demand-based pricing. The strategy applied in determining the price differs from one department to the other, with special consideration to the attributes of the services offered. References Agrawal, V. and Ferguson, M. (2007). Optimal customized pricing in competitive settings. Journal of Revenue and Pricing Management 6, 212-228. Cross, R. (1997). Revenue Management: Hard-Core Tactics for Market Domination. New York: Broadway Books. Elmaghraby, W. and Keskinocak, P. (2003). Dynamic pricing: Research overview, current practices and future directions. Journal of Management Science, 49(10), 1287–1389. Hanks, R., Cross, R. and Noland, R. (1992). Discounting in the hotel industry: a new approach. Cornell Hotel and Restaurant Administration Quarterly, 33(1), 15–23. Hormby, S., Morrison, J., Prashant, D, Meyers, M. and Tensa, T. (2010). Marriott International increases revenue by implementing a group pricing optimizer. Interfaces, 40(1), 47-57. Kadet, A. (2008). Price Profiling. Smart Money, 17(5), 80-85. Marriott, Jr., J. and Cross, R. (2000). Room at the revenue inn. In Book of Management Wisdom: Classic Writings by Legendary Managers, ed., Peter Krass, 199-208, New York: Wiley. Mauri, G. (2007). "Yield management and perceptions of fairness in the hotel business", International Review of Economics, 54 (2), 284–293. Talluri, T., and Van Ryzin, G, (2001). "Revenue management under a general discrete choice model of consumer behavior." Journal of Management science, (7)21, 13-17. William, W., and Jill, G, (2007). Asia's legendary hotels: the romance of travel. Singapore: Periplus Editions. Read More