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Revenue Management or Revenue Optimization?

Revenue managementdefinition, most industry professionals would agree that the revenue management process can beidentifi ed by four signifi cant characteristics:

1. It is an active, strategic process requiring extensive,tactical, and insightful decision making onthe part of RMs.

2. It requires a focus on buyers and predicting buyer demand in response to strategicpricing decisions made by RMs.

3. It entails the effective management of available product inventory to maximizepotential revenue.

4. Its primary goal is increasing a business’s income.

Despite its widespread usage, the authors predict that the term or concept of revenue management will soon give way to an improved term. It will be a good change, but as British Novelist Arnold Bennett pointed out well: “Any change, even a change for the better, is always accompanied by drawbacks and discomforts.” Just as the earlier used industry term yield management has been replaced, albeit with some inevitable confusion and discomfort, by the broader scoped term revenue management, increasingly RMs will be employing the term revenue optimization to describe their chief activity of strategically pricing and selling their products and services.

In nearly all cases, revenue optimization is simply a better description of what RMs should do than is revenuemanagement. This is so because the effort to maximize income as undertaken by some RMs leads to undue emphasison the formulas and procedures used to calculate rates and manage inventory in response to current guest demand. Asa result, traditional revenue management techniques too often teach RMs to maximize the business they already have.

Revenue optimization is more proactive. Instead of simply responding to current demand, revenue optimization asks: “How can we use information to create business we do not already have?” Instead of a focus on RevPAR, revenue optimization focuses on GOPPAR. The distinction will be readily recognized by insightful RMs who understand success in business.They realize that increasing market share to maximize revenues without thought to the profits associated with the increase is foolhardy. It is nice to use sophisticated RM techniques to get more business, but the goal should be to get better business.

 

Questions

1. Name ten principles of managing revenue

2. Pricing-related challenges?

3. What is revenue optimization?

Literature:

1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.

2. Revenue Management. American Hotel & Lodging Association (AHLA), 2006

Topic 5. The Revenue Manager role

5.1. The Revenue Manager in the Hospitality Industry

5.2. Legal Aspects of Revenue Management

5.3. Ethical Aspects of Revenue Management

5.4. The Revenue Manager Position

 

The Revenue Manager in the Hospitality Industry

Revenue management has advanced from a focus on variable demand for those products offered for sale to a focus on how customers and channels respond to pricing and how to use that information to direct and shape consumer behavior. This means RMs must increasingly focus on forecasting demand, distribution channel management, internal communications,

and training staff in modern revenue management concepts and strategies. Doing so makes good sense for many businesses; thus, a reasonable question to be asked is, “ Why is revenue management in the hospitality industry any different from revenue management in other fi elds?”

The rationale for revenue management as a distinct field of study within the hospitality industry stems from the fact that, unlike revenue managers in many other industries, RMs in hospitality must manage both hard and soft supply constraints. Recall from Lecture 1 that a hard supply constraint is a restriction on product availability that, in the short run, cannot be remedied at any price; while a soft supply constraint can at some cost allow for additional product availability. Understanding the implications inherent in managing hard and soft constraints makes the hospitality RM’s job quite unique.

The lodging industry is not the only one in which hard supply constraints are encountered. A business selling gas through its pipelines is constrained by the capacity (size) of the lines. Hair salons are constrained by the number of chairs and hair stylists available to service their customers. In each of these businesses, as well as in other businesses facing hard supply

constraints, RMs are forced to implement one of three income-management alternatives when demand for their products is high:

1. Establish one fi xed price, then sell to customers on a fi rst come-fi rst served basis until they have exhausted their supply of products.

2. Allocate the limited supply to selected customers who meet established criteria (i.e.,they are volume buyers, repeat buyers, or they hold other favored buyer status).

3. Raise their prices until demand is reduced suffi ciently to equal the available supply.

 


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