Revenue management for the hospitality industry

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DAVID K. HAYES

ALLISHA A. MILLER

John Wiley & Sons, Inc.

REVENUE MANAGEMENT

HOSPITALITY INDUSTRY FOR

THE

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Photos were taken by the author unless otherwise noted.

This book is printed on acid-free paper. o

Copyright © 2011 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Hayes, David K.

Revenue management for the hospitality industry/David K. Hayes, Allisha Miller.

p. cm.

Includes index.

ISBN 978-0-470-39308-6 (pbk.)

1. Hospitality industry–Management. 2. Hospitality industry–Economic aspects. I. Miller, Allisha. II Title.

TX911.3.M27H395 2010

647.94068’1–dc22

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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CONTENTS

Preface vii

Acknowledgments xv

PART I: REVENUE MANAGEMENT PRINCIPLES 1

Chapter 1: Introduction to Revenue Management 2

Introduction 3

The Purpose of Business 5

The Purpose of Revenue Management 11

The Purpose and Design of This Book 12

Chapter 2: Strategic Pricing 35

What Is a Price? 36

The Importance of Price in the 4 Ps of the Marketing

Mix 45

The Role of Supply and Demand in Pricing 49

The Role of Costs in Pricing 53

Implementing Strategic Pricing 61

Chapter 3: Value 68

The Role of Value in Pricing 69

The Relationship Between Quality and Price 75

The Relationship Between Service and Price 77

The Link Between Quality, Service, and Price 79

The Art and Science of Strategic Pricing 84

Chapter 4: Differential Pricing 91

Ten Priciples of Managing Revenue 92

Differential Pricing 93

Limits to Differential Pricing 99

Applying Differential Pricing 103

Revenue Management or Revenue Optimization? 121

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Chapter 5: The Revenue Manager’s Role 129

The Revenue Manager in the Hospitality Industry 130

Legal Aspects of Revenue Management 133

Ethical Aspects of Revenue Management 139

The Revenue Manager Position 147

The Revenue Management Team 156

PART II: REVENUE MANAGEMENT FOR HOTELIERS 163

Chapter 6: Forecasting Demand 164

The Importance of Demand Forecasting 165

Historical Data 167

Current Data 174

Future Data 185

Demand Forecasts and Strategic Pricing 193

Chapter 7: Inventory and Price Management 208

The Marketing Mix Revisited 209

Inventory Management 209

Characterizing Rooms for Optimum Inventory Management 212

Designing Unique Room Codes 215

Classifying Guests by Market Segment 216

Overbooking as an Inventory Management Strategy 227

Price Management 233

Stay Restrictions 249

Principles of Inventory and Price Management 251

Chapter 8: Distribution Channel Management 259

Managing Distribution Channels 260

Nonelectronic Distribution Channels 268

Electronic Distribution Channels 278

Principles of Distribution Channel Management 298

Chapter 9: Evaluation of Revenue Management Efforts in Lodging 306

The Lodging Revenue Paradox 307

STAR Reports 318

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Competitive Set Analysis 325

Market Share Analysis 332

Additional Assessments 335

Common-Sense Revenue Optimization 340

PART III: REVENUE MANAGEMENT FOR FOODSERVICE OPERATORS 349

Chapter 10: Revenue Management for Food and Beverage Services 350

Traditional Foodservice Pricing Methods 351

The Cost Against Cost-Based Foodservice Pricing 359

Applying Differential Pricing in Foodservices 364

Factors Affecting Value Perceptions in Foodservices 373

Chapter 11: Evaluation of Revenue Management Efforts in Food and

Beverage Services 391

Food and Beverage Revenue Analysis 392

Examination of Revenue Sources 393

Measurement of Revenue Change 399

Evaluation of Revenue-Generating Effi ciency 409

The Revenue Evaluation Process in Foodservices 420

PART IV: REVENUE MANAGEMENT IN ACTION 429

Chapter 12: Specialized Applications of Revenue Management 430

Characteristics of Organizations Applying Revenue

Management 431

Service Industries Applying Revenue Optimization

Strategies 440

Specialized Revenue Management Duties 441

Revenue Management and Destination Marketing 450

Chapter 13: Building Better Business 458

Keys to Building Better Business 459

Better Business Issues in Moderate to Strong Markets 472

Better Business Issues in Weak or Distressed Markets 480

Index 503

CONTENTS v

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PREFACE

Revenue Management for the Hospitality Industry is a book that we were particularly

privileged and challenged to create. This is the fi rst textbook that has been developed

specifi cally to examine what revenue managers in the hospitality industry must know and

do to be successful.

Revenue Management is an emerging fi eld of study. Because that is true, there are

honest differences of opinion about what revenue management actually is today—and what

it will become in the future. Despite some philosophical differences among revenue man￾agement experts, we believe all of them would agree that a good way to describe the goal of

revenue management is to say that it is “to charge the right price, to the right customer, for

the right product, through the right channel, at the right time.” Doing that well is not as easy

as it looks—and as experienced revenue managers will attest, it doesn’t look all that easy.

This book was developed to teach its readers exactly how it is done.

It is important to note that Revenue Management for the Hospitality Industry is

intended for readers with prior knowledge and understanding of the hospitality industry.

We believe revenue management should be a unique and separate area of study and is an

area best studied by those with a solid understanding of how products and services are sold

in the exciting hospitality industry.

As it continues to evolve, revenue management will certainly develop more of its own

theory, principles, and practices. For the present, much of the information revenue managers

need to know is taken from the various fi elds upon which it has been built. This can

be confusing to some. For example, some marketing professionals believe that because

revenue managers must understand much about marketing, the terms revenue management

and effective marketing are the same. They are not the same. In fact, one very good way to

avoid any confusion about what this book is intended to be would be to carefully describe

what it is not.

Revenue Management for the Hospitality Industry is not a principles of economics

textbook, despite the fact that it is critical for revenue managers to understand how and why

consumers use scarce fi nancial resources to make purchasing decisions. Concepts such

as supply, demand, consumer rationality, and pricing are foundational topics for revenue

managers and as a result these and other very specifi c economic concepts are presented in

the book. Neither is this a pricing theory text, despite this book’s strong emphasis on the

critical relationship between strategic pricing and effective revenue management. Revenue

managers must be experts at understanding how businesses determine prices and how their

customers perceive prices. As a result, the principles and concepts revenue managers must

know to grasp the intricacies of effective pricing do make up an essential part of this book.

This is not a book about managerial accounting although it addresses those account￾ing principles and practices that revenue managers must be aware of if they are to do their

jobs effectively. It is not a textbook about marketing or e-marketing/information technology.

Certainly, revenue managers must know a great deal about marketing concepts. As well,

the extensive use of the Internet to sell hospitality products requires specialized knowledge

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to use that tool effectively. As a result, marketing and e-marketing information make up a

signifi cant portion of this text.

It is not a text about how to manage the front desk in a lodging operation. This is so

despite the fact that in a large number of U.S. hotels the revenue manager and front offi ce

manager position will often be held by the same individual. Effective front offi ce adminis￾tration, however, is critical to revenue optimization in hotels. As a result, the book includes

a great deal of information about effective front offi ce management.

It is not a textbook about leadership, yet experienced revenue managers agree that the

ability to communicate goals and build teams who are inspired to achieve those goals is one

of a revenue manager’s most critical tasks. As a result, information about the leadership skills

that revenue managers must acquire and exhibit are included. Similarly, the book is not about

managerial ethics or those laws that directly affect pricing. This is so despite the fact that

employees, customers, and society at large care deeply about the ethical aspects of a business’s

pricing tactics and strategies. Also, it is important that revenue managers understand that

there are very specifi c legal requirements related to pricing products, and these requirements

must be well known. In any industry, the prices charged and the selling methods used must be

perceived to be fair, and they must follow the law. As a result, ethics in pricing and the legal

aspects of pricing are topics that must be addressed. This book does that.

In summary, the book is not an economics, pricing theory, marketing, e-marketing/

information technology, managerial accounting, front offi ce management, leadership,

ethics, or hospitality law textbook. Revenue Management for the Hospitality Industry is a

book about revenue management. Revenue management is an independent area of hospitality

study that draws from a variety of established academic areas to yield a subject of management

inquiry as unique as it is exciting.

TO THE STUDENT

Learning revenue management will not be boring. It is an easy statement to make because

revenue management is an exciting subject. It is fun and it is challenging. Revenue

Management for the Hospitality Industry will be fun and challenging as well.

The book has been carefully designed to include information taken from inside the

hospitality industry as well as from a variety of external sources. If you work hard and do

your best, you will fi nd you do have the ability to master all of the information in this text.

When you do, you will have gained an invaluable skill that will make you one of the rare

individuals with a thorough understanding of revenue management in the hospitality industry.

That knowledge will enhance your company’s performance and thus help you advance your

own hospitality career.

TO THE INSTRUCTOR

Teaching in a new subject area can be much more challenging for an instructor than teaching

in an area that is more well-established. It requires dedicated, innovative, and inspired

teachers to organize relevant information and to make that information easy to understand

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and interesting to study. In a new instructional area the teaching resources available may

be few, while at the same time there are myriad initial pedagogical decisions to be made

about what to teach, how best to teach it, and it what order it should be taught. Revenue

Management for the Hospitality Industry was carefully designed to serve you as a technically

accurate and highly fl exible teaching resource. In addition to the content presented in the

chapters, we believe revenue management instructors will be pleased to fi nd:

The material was written in an especially reader-friendly style. Both upper-division

undergraduate students and graduate students will fi nd its reading level suitable to

them, and they will fi nd the material is presented in a way that makes reading it

highly enjoyable. Revenue management is not a dull topic, and this book ensures

students will recognize that.

The book was designed to provide hospitality instructors in a variety of curriculum

settings with maximum teaching fl exibility. Its separation into four distinct parts

allows, for example, lodging management instructors the freedom to include or

exclude from their courses detailed information about revenue management in the

foodservice segment of the hospitality industry. Similarly, it allows food management

instructors the ability to exclude detailed front offi ce management-related guest room

sales information from their culinary and foodservice-related revenue management

courses.

The many cases and practical examples used to illustrate revenue management

concepts are taken directly from real-world situations. They are challenging and

exciting to read. The issues raised in these practical application scenarios provide

students ample opportunity to practice their newly acquired revenue management

skills and to evaluate their mastery of the material.

Questions and problems at the end of each chapter are demanding because they

are extremely practical. They allow students the chance to perform the calculations

and practice the decision-making skills that are used daily by those revenue managers

actually working in the industry. In these chapter-ending questions, as well as in

the main body of this book, the authors assumed only a working knowledge of basic

algebra as the level of math profi ciency required for material mastery.

Most hospitality instructors want their graduating students to possess practical

industry knowledge that can be immediately applied on the job. They also want

their students to be aware of future trends that predict industry changes students will

encounter as their careers progress. This book does both of those things. Students

who master the information presented in it will be prepared to assume the day-to-day

duties of a revenue manager. They will also understand the managerial philosophy

and actions required to create a customer-centric revenue optimization plan and

culture in their own organizations.

Revenue management will continue to evolve in the hospitality industry and, as a

result, in the hospitality classroom as well. As the sophistication of the fi eld grows and as the

emphasis moves from the management of revenues to their optimization, the shift from a

tactical focus to a strategic focus creates broader responsibilities for revenue management.

As the renaissance unfolds, hotels and restaurants will look to revenue management to help

PREFACE ix

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understand how customers respond to offerings in the marketplace. This customer-centric

thinking will focus leading hospitality fi rms on the essential issues of pricing and customer

value, which are fundamental topics of this book.

TEXT CONTENT

Revenue Management for the Hospitality Industry is a detailed examination of the hands￾on skills revenue managers must know to effectively manage their inventories and prices. As

a result, readers will learn how to use those tools that professional revenue managers simply

must know and understand. Thus, RevPAR, Flow-through, RevPASH, ADR, Occupancy

%, Net Yield %, and Occupancy Index are but some of the industry metrics detailed in the

book. Few industry professionals would object to the authors’ inclusion of these important

assessment tools. Similarly, most hospitality educators know the value of providing their

students with professional skills that can be immediately applied on the job.

In addition to developing hands-on skills, the book includes a substantial amount

of revenue management–related theory. A theory is simply a tool managers use to better

understand what is happening today and to better predict what will happen tomorrow. Many

decisions made by revenue managers must be based on what the revenue manager thinks

or believes will happen in the future. As a result, they simply must be theoretically well￾grounded. Internationally known management consult William Edwards Deming, famous

for his work in advancing manufacturing methods in Japan after WWII, succinctly stated

the value of theory in management when said that “Rational behavior requires theory.” The

authors believe the purpose of well-developed theories is to explain, predict, or advise others.

The theory-related content of this book was carefully reviewed and included only when it

clearly helped readers achieve one or more of these three critical objectives.

As a result, the book is practical, because practicality enhances learning by allowing

students to apply new information from a variety of fi elds to a setting (hospitality) that is

interesting and familiar to them. But it is also unabashedly theoretical because practical

advancements in any endeavor, including revenue management, will only result from

carefully examining old theories and improving on them.

With the goal of effectively aiding in teaching the practical skills and the theoretical

principles revenue managers must know to be effective, Revenue Management for the

Hospitality Industry is presented in 13 chapters that are divided among four major parts:

Part I: Revenue Management Principles

Part I introduces readers to the foundations of revenue management and contains the

following chapters:

1. Introduction to Revenue Management

2. Stratgetic Pricing

3. Value

4. Differential Pricing

5. The Revenue Manager’s Role

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In Chapter 1 of this underpinning section, readers will learn about the history of revenue

management and gain an understanding of the material that is included in the remaining

chapters of the book. In Chapter 2 the concept of price is examined and in Chapter 3 readers

will learn how customers assess value when making their purchases. Differential pricing is

the sole topic of Chapter 4. In it readers will learn how revenue managers combine the

concepts of price and value to develop pricing strategies based on customer willingness

to buy. In Chapter 5, the role of the professional hospitality revenue manager within a

business entity is examined in detail.

Part II: Revenue Management for Hoteliers

Part II of the text addresses the principles and practices applied by revenue managers work￾ing in the lodging segment of the hospitality industry. It includes the following chapters.

6. Forecasting Demand

7. Inventory and Price Management

8. Distribution Channel Management

9. Evaluation of Revenue Management Efforts in Lodging

In Chapter 6, readers learn how to forecast future demand for their hotel rooms and

services. In Chapter 7, the techniques utilized to manage rooms inventory and to price

hotel rooms are examined in detail. Chapter 8 addresses management and evaluation of

the various distribution channels utilized by revenue managers when pricing and selling

lodging products and services. These include both non-electronic and electronic distribution

channels. In Chapter 9, readers will learn the various techniques used by revenue managers

to assess and evaluate the quality of their revenue management decision making.

Part III: Revenue Management for Foodservice Operators

Part III of the text addresses the principles and practices applied by revenue managers

working in the food and beverage segment of the hospitality industry. It includes the

following chapters.

10. Revenue Management for Food and Beverage Services

11. Evaluation of Revenue Management Efforts in Food and Beverage Services

Although they may be applied in unique ways, foodservice professionals can and should

utilize effective revenue management strategies to optimize sales. Many of the strategies they

can use are presented in Chapter 10. In Chapter 11, readers learn the techniques foodservice

operators use for assessing and evaluating the quality of their revenue management decision

making.

Part IV: Revenue Management in Action

In the concluding section of the text readers will learn how they can apply what they have

learned in a variety of professional settings and under varying economic conditions. The

section consists of the following two chapters.

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12. Specialized Applications of Revenue Management in Hospitality-Related

Organizations

13. Building Better Business

In Chapter 12, readers are shown how the revenue optimization principles they have

learned can be utilized by those hospitality-related entities possessing the same organizational

characteristics as hotels and restaurants. Examples include golf courses, cruise ships and

amusement parks. The chapter addresses the role of the multiunit revenue manager as

well as the revenue manager employed by a franchise company and concludes with an

examination of the revenue manager’s role in destination marketing.

Chapter 13 concludes the book by examining how revenue managers can use their de￾tailed knowledge of inventory management and pricing to improve their organizations’ in￾come levels. The chapter’s primary focus is on the customer-centric revenue management

strategies and tactics revenue managers can use to generate more income and improved

profi ts regardless of the economic conditions faced by their businesses.

TEXT FEATURES

From a reader’s perspective the features of a textbook often are as important as its content.

Thoughtfully designed textbook features make the content presented easy to read, easy to

understand, and easy to remember. Readers will fi nd that Revenue Management for the

Hospitality Industry is especially reader friendly. The following features help readers learn

and practice the concepts of revenue management:

Chapter Outline: The outline preceding each chapter shows the listings for each

topic in order of their introduction and provides a simple way to quickly fi nd material

within the chapter.

Chapter Highlights: Each chapter utilizes this three-point feature to explain in short

and clear terms (and before any content is presented), exactly what readers will know

when they have mastered the chapter’s content. This feature makes it easy for readers

to see what the chapter is about and the skills they will acquire by reading it.

RM in Action: Unlike some other fi elds of study, revenue management-related

issues are frequently described, debated, or clearly exemplifi ed in the current news

articles reported by the hospitality and general press. In this entertaining feature,

students will see how the revenue management principles presented in the book can

be clearly illustrated using real-world examples reported in various news outlets.

RM at Work: Each chapter contains multiple mini-cases designed to make readers think

about how they would personally use the information they have learned to respond to an

on-the-job revenue management-related issue or challenge. These thought-provoking

and realistic cases allow readers to practice the type of revenue management problems

solving methods they will use as professional revenue managers.

RM on the Web: This feature uses sites listed on the Internet to provide readers with

detailed supplemental information about a topic or issue presented in the book.

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This feature identifi es pertinent Web sites to visit and gives readers specifi c instructions

about what they should do, consider, and learn when they visit the site.

Essential RM Terms: As is true with many areas of specialization, revenue managers

often speak their own language. Readers needing help in remembering these key

vocabulary terms and concepts will appreciate this feature because it clearly defi nes

important terms where they are fi rst introduced in the text. The terms are also listed

at the conclusion of each chapter (in the order in which they were presented) to

provide a valuable study aid.

Apply What You Know: This end-of-chapter feature provides opportunities for readers

to solve common revenue management problems using the information presented to

them in the chapter. Some of the questions require a conceptual answer, while others

can be answered only after making appropriate calculations and computations.

Each of the Apply What You Know questions was carefully designed to be fun, to be

challenging, and to reinforce important concepts presented in each chapter.

Key Concept Case Study: This entertaining capstone feature allows readers to follow,

via a running case study, the actions of Damario. Damario is the newly appointed

revenue manager at the fi ctitious Barcena Resort. He reports directly to Sofi a

Davidson, the resort’s general manager. Each case was designed to illustrate a key

chapter concept and allows readers to see how revenue managers actually apply the

concepts presented in the chapter in their everyday work activities.

INSTRUCTOR RESOURCES

To help instructors effectively manage their time and to enhance student learning

opportunities, an on-line Instructor’s Manual as well as several signifi cant educational

tools have been developed. The Instructor’s Manual includes:

Lecture outlines for each chapter

Suggested answers for RM at Work case study questions

Correct answers for Apply What You Have Learned end-of-chapter questions

Suggested answers to all chapter-ending Key Concept Case Study questions

A Test Bank including exam questions and answers

The Test Bank has been specifi cally formatted for Respondus, an easy-to-use software

program for creating and managing exams that can be printed to paper or published directly

to Blackboard, WebCT, Desire2Learn, eCollege, ANGEL, and other e-Learning systems.

Instructors who adopt Revenue Management for the Hospitality Industry can download

the test bank for free. Additional Wiley resources also can be uploaded into your LMS

course at no charge.

A password-protected Wiley Companion Instructor’s Web site devoted entirely to this

book (www.wiley.com/college/hayes) provides access to the Instructor’s Manual and the

text-specifi c teaching resources. PowerPoint lecture slides are also available on the Web site

for download.

PREFACE xiii

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