Revenue management essay

A most important purpose of every profit oriented business is to convey a reasonable income. As a result, “earnings” are the significant measure of effectiveness of the business. In practice, businesses can be manage there profits in different ways. As an example, an industry can handle its turnover by charging in a different way from the customers. It means that, various customers are willing to pay various prices for using the same amount of resources. Basically this procedure is called as “revenue management” also known as a “yield management”. According to the Kimes (1997) , it is basically can be described as “selling the right product to the right customer at the right time for the right price”. Revenue management is most applicable for industries which have relatively fixed capacity, segment markets, perishable inventory and product sold in advance. Revenue management firstly developed for the airline industry in the early 1960s, but in these days, revenue management successfully used by hotels, television broadcasters, theatres, car rental agencies, hospitals, telecommunications, and cruise lines so on. There are different definitions and arguments for the revenue management and also this is one of the most researched areas in the industry world. Mainly, revenue management or yield management is concerned with maximising the revenue, or obtaining the best possible yield, that can be derived from available capacity at any given point in time.

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Rod McColl, Bill Callaghan & Adrian Palmer (1998) noted that, Revenue management can be commonly defined as the application of information systems and pricing strategies to sell the right capacity to the right customers at the right prices and also Jones (1999) introduced more detailed and systematic definition for the revenue management. It states that, “yield management” is a system for hotel owners to maximise profitability through their senior management in hotels identifying the profitability of market segments, establishing value, setting prices, creating discount and displacement rules for application to the advanced reservations process and monitoring the effectiveness of these rules and their implementation. Basically, revenue management helps managers to plan an ideal business mix for their business. Christopher Lovelock, Paul Patterson, Rhett Walker (2007), says that, yield management can be use as a tool for manage the four C’s of perishable service. First C is “calendar”. It states that, how far in advance reservations are made. Next one is “clock”. It shows the time of the day service is offered. Third one is “capacity”. It can be explain as the inventory of service resources. Last one is “cost”. It is the price of the service. These things are essential tools for maximise profitability in service sector.

Gallego and Phillips (2004) introduced the concept of flexible products for revenue management. This is another important issue for the service industries and they define a flexible product as a “menu” of two or more alternative, typically substitute, products offered by a constrained supplier using a sales or booking process. In this situation, products include not only physical goods but also service offerings. Researchers have applied revenue management models in a wide variety of industries where suppliers offer flexible products. After the airlines started using yield management, many hotel managers were confused with the increased revenue claimed by the airlines and applied the concept of variable pricing to the hotel industry. When hotels started using variable pricing, they did not apply the concept of qualified rates, in which customers has to meet certain requirements to obtain a lower room rate. They instead relied on top down pricing, in which reservation agents quoted the highest rate first and, if faced with resistance offered the next of several lower rates until the customers acquiesced or they reached a minimum level previously establish by management. Many major hotel chains still use this pricing method, although short term revenue gains may result from top down pricing.

In reality, revenue or yield management involves setting prices according to predicted demand levels among different market segments. The least price sensitive segment is the first to be allocated capacity, paying the highest price. Other segments follow at progressively lower prices. As higher paying segments often book closer to the time of actual consumption, firms need a disciplined approach to save capacity for them as a replacement of simply selling on a first-come, first-served basis. For example, business travellers often reserve airline seats, hotel rooms and rental cars at short notice, but people on holidays may book their travel months in advance, and convention organisers often block book hotel space years in advance of a big event.

Further more, yield management can control customer demand though the use of variable pricing and capacity management to enhance profitability. According to Christopher Lovelock, Paul Patterson, Rhett Walker (2004), there are two basic interconnected areas for the effective control of customer demand such as pricing and duration of customer use. For the most part, prices can be fixed or variable. “Fixed price” can be introduced as the one price for the same service for all customers for all times and “variable price” can be explained as different prices for different times or for different customer segments. Variable pricing helps to control demand theoretically an uncomplicated process. It can take the figure of discount prices at off-peak hours for all customers or it can be in the form of price discounts for certain classes of customers, such as senior’s discounts at restaurants. Duration control presents a more complicated judgment problem, but at the same time represents an area that would improve the usefulness of revenue management. Through implementing duration controls, industries take full advantage of their overall profits across all time periods rather than just doing high demand periods. If managers want to amplify control over duration they can refine their definition of duration, reduce the uncertainty of the duration, or reduce the amount of time between customers.

In fact, Hoffman, John (2006) said that, various industries use different combinations of variable pricing and duration control. Industries typically associated with yield management such as hotels, airlines, rental cars, and cruise lines tend to use variable pricing and a specified or predictable duration. But movie theatres, performing art centres, arenas and convention centres use a fixed price for a predictable duration whereas restaurants, golf courses, and internet service providers use a fixed price with unpredictable customer duration. Mainly this classification method helps industries that not currently using yield management develops a strategic framework for developing yield management. As indicated above, successful revenue management applications are generally found in first category. The reason is that a predictable duration enables clear description of the service portfolio, and variable pricing enables generating highest revenue from each service offering within the portfolio.

O.C.Ferrell & Michael D. Hartline (2005) point out that, Yield management systems are also useful in their ability to segment markets based on “price elasticity”. It means, yield management allows a firm to offer the same basic product to different market segments at different price points. According to the degree of competition today, hotels must know when and where to rise prices to increase revenue, or to lower prices to increase sales volume. As an example, hotels can reach different market segments with attractive off season pricing. Many customers take advantage of the lower prices at theme parks and beach resorts by travelling during the off season. How ever these challengers are acute in service industries. Because service capacity is perishable and service demand is highly time dependent, service firms must have a viable means of balancing pricing and revenue considerations with their need to fill unused capacity.

Furthermore, yield management allows the service firm to simultaneously control capacity and demand in order to maximise revenue and capacity utilization in two ways Christopher Lovelock & Lauren Wright (2002).First the service firm controls capacity by limiting the accessible capacity at certain price points. As an example, in a hotel, limited rooms can be available to different market segments at different times of the year. In the off season, many hotels schedule routine maintenance and remodelling, and reduce rates for conventions in order to fill unused capacity. Second, the service controls demand through price changes overtime and by overbooking capacity. These activities ensure that service demand will be consistent and that any unused capacity will be minimized.

“Services research” is another important component for revenue management in hospitality industry. Kotler (1997) describes that, this is mostly concentrate on studies involving corporate image, demand shifting, customised verses standardising of the service offer, employee’s research and the detailed service offer design. Additionally, assessing customer satisfaction and loyalty levels is also probably given more emphasis in service research. Market research helps revenue managers to make management decisions in various ways, such as defining market needs, for example defining the services required by package holiday purchases who use travel agents, describing decision criteria and processes for example a client may wish to have described to them only the decision making behaviour of families with children when purchasing package holidays, measuring market size for example estimating the size of the holiday market for packages from Sydney to Bali and analysing market characteristics more thorough investigation of the above information as an example an analysis of holiday buying behaviour according to the age, income or lifestyle of different segments of the population.

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To develop a successful yield management program an organisation needs to undertake a review of many of its internal processes and instil a profit maximisation focus throughout the organisation. It’s very essential to understand that the market for the specific service industry. There needs to be a common and extensive understand of the key market segments, the demand drivers and relative values of each segment. Essentially, an organization needs to know where it makes money and which customers are the most important in profit generation. It’s better to review the structure and processes of the service industry to ensure the implementation of the new profit maximisation focus. If there is no perfect structure, it’s better to be successful in three distinctive tasks and business processes should be recognised such as analysis, control and technology. Analysis into the constantly changing dynamics of the market and the wise application of this knowledge, through the control of price and availability, is the key factor in the yield management process. Technology becomes more important the larger the organisation and market size, but even small operations can achieve significant gains with forecasting and optimisation techniques.

A well-implemented revenue or yield management strategy does not tell only about short term profit maximisation. J. Wirtz & S.E. Kimes (2003) introduced that, there are some specific approaches to superior revenue management practices with customer satisfaction, trust and goodwill in hotel industry. The first thing is that revenue managers should design price schedules and fences that are clear, logical and fair. It means, firms should proactively spell out all fees and expenses such as no-show or cancellation charges clearly in advance so that there are no surprises. It can be done by developing a simple free structure so that customers can more easily understand the financial implications of a specific usage situation. Communicate consumer benefits of revenue management is another significant way of having good revenue management system in hotel industry. Because, marketing communications should position revenue management as a win-win practice. Different price and value balances help customers to self-segment and enjoy the service. It allows each customer to find the price and benefits balance that best satisfies their needs. For example, charging a higher price for the best rooms in a hotel recognises that some people are willing and able to pay more for a better and comfortable space and makes it possible to sell other rooms at a lower price.

Another important thing is take care of loyal customers in your hotel. Firms should build in strategies for retaining valued customers, even to the extent of not charging the maximum possible amount on a given transaction. After all customer perceptions of price gouging do not build trust. Revenue management systems can be programmed to integrate faithfulness for regular customers, so that reservations systems can give them “special treatments” status at peak times, even when they are not paying premium rates. Further more, use service recovery to compensate for overbooking is also important for hotel industry. It means that many service firms overbook to compensate for predictable cancellations and no-shows. Profits increase but it can be causes for unvalued reservations. As an example “walked” by a hotel can lead to a loss of customer loyalty, and mainly it can be affect for hotel’s reputation. So it’s important to back up overbooking programs with well designed service recovery procedures such as giving customers a choice between retaining their reservation and receiving compensation, providing sufficient advance notice that customers are able to make alternative arrangements and if possible offering a substitute service that delights customers.

There is however some concern over the applicability of revenue management into the hotel industry as well. Kimes (1989) and Orkin (2003) have identified some difficulties with the potential application of accessible revenue management strategies. First thing is multiple night stays. Air line seats can be used on one day only and at one time only. But hotel guests can arrive on a low rate day and stay though a number of high rate dates. This leads problems with rate determination. Another important thing is multiplier effect. By concentrating on the revenue that can be generated from the accommodation function, a hotelier may be ignoring the potential revenue which could be generated from other areas in the hotel such as restaurants, bar, banqueting suits, conference and leisure facilities. Moreover lack of distinct rate structure is another problem. Because, it is well established that airlines have restrictions and barriers which for example, prevent business travellers from securing a rate that has been structured for leisure travellers. But very few hotels have such restrictions.

In conclusion, it is important to know that, developing a range of unique strategies and tactics specifically made for the organisation is essential to overcome these challengers and difficulties in revenue management in hospitality industry. Some tactics which are likely to be applicable to most organisations applying yield management are, using variable pricing to capitalize on fluctuating seasonal and customer segment demand, favouring the most valuable customers, forecasting at a detailed but meaningful micro market segment level, providing staff that control price and availability with tools to help make their decisions and with the accountability, responsibility and authority. Decision support tools are also playing a critical role in the constantly changing business environments like hospitality industry where yield management is practised. There is too much data for humans to consistently comprehend, but no computer system can effectively deal with the uncertainty of demand and the many elements which affect it. Systems which incorporate forecasting, optimisation recommendations, simulations and management reports are now common and essential elements of many successful revenue management programs in hospitality industry. Revenue management is continuously changing. Older strategies will not always be applicable for these new situations. As an example, revenue management can be spread for the many more industries within next few years. It means that, yield management offers benefits to non-service industries whose products vary in value throughout their product life cycle, like fashion industry. Yield management can be utilised to find the optimum price and timing for each stage of the product lifecycle with the aim of maximizing total profit for that lifecycle. Other possible more exciting development is the application of customer loyalty and direct marketing information sources to the revenue management process. Large volumes of very detailed customer preference and demand information is available in these systems which can potentially be used to truly favour a company’s most valuable customers when combined with the yield management process. Because improving services and benefits to the customer can be mainly cause for improve profits to organisation.

References:

• Ferrel, OC & Hartline, MD 2005, Marketing Strategy, 2nd edn, South Western College Pub, Masion-Ohio.
• Gallego, G & Phillips, R 2004, ‘Revenue management of flexible products’, Manufacturing & Service Operations Management, Vol. 6, pp. 321-337
• Hoffman, K & John, EG 2006, Service Marketing concepts, strategies and cases, 3rd edn, South Western Pub, Mason-Ohio.
• Jones, P 1999, ‘Yield management in UK hotels: a system analysis’, Journal of the Operation Research Society, Vol. 50, pp. 1111-1119.
• Kimes, SE 1989, ‘The basics of Yield Management’, Cornell Hotel and Restaurant Administration Quarterly, Vol. 30, no. 3, pp. 14-19.
• Kotler, P 1997, Marketing Management, 9th edn, Prentice Hall Australia, Sydney.
• Lovelock, C & Wright, L 2002, Principles of Service marketing & Management, 2nd edn, Prentice Hall, Upper Saddle River.
• Lovelock, C , Patterson, P & Walker, R 2004, Services Marketing, 3rd end, Prentice Hall, Frenchs Forest.
• Lovelock, C , Patterson, P & Walker, R 2007, Services Marketing, 4th edn, Prentice Hall, Frenchs Forest.
• McColl, R, Callaghan, B & Palmer, A 1998, Services Marketing, 2nd edn, McGraw Hill, Australia.
• Orkin, E 2003, ‘The emerging role of function space optimisation in hotel revenue management’, Journal of revenue & Pricing Management, Vol. 2, pp.172-174.
• Wirtz, J & Kimes, SE 2003, ‘Revenue management: resolving potential customer conflicts’, Journal of Revenue and Pricing Management, Vol. 2, no. 3, pp. 216-228.