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Pricing is one of the two strategic levers used to optimize revenue and is, arguably, the most critical component of Revenue Management suggesting that consumers are prepared to pay more to hotels delivering service excellence. 


For this assignment, you are to write a 3,000 word Case Study Analysis that recommends a Revenue Management strategy for the financial year July 2017 — June 2018. You will prepare your analysis as if you were the Revenue Manager for the Four Seasons Hotel Sydney. The General Manager has already indicated his concern about the transparent nature of pricing and has requested that your strategy specifically addressing this. 


Although this report is based on a real hotel and across a future period, it requires a strong theoretical framework with reference to the literature. It must also account for recent changes and predictable events in the area of revenue management. Current market analysis reports should be included as part of the overall strategy. You can use tables, charts, graphs to support your pricing strategy. Aspects that require critical consideration are:

An analysis of market segmentation

Competitor set Analysis

An analysis of the external environment

Demand Forecasting

Channel Analysis 

Process of revenue management

Revenue management needs the forecasting of various elements like market share, total market, availability of inventory and market demand. The performance of revenue management is depended on the forecasting quality. Further, forecasting is the crucial task for management of revenue and it takes considerable time for developing, implementing and maintaining purpose (Abrate & Viglia, 2016).

 Before implementation of the revenue management system the company must consider the fact that no one strategy is there that can be applicable to all the organization therefore before implementing the revenue management in a particular organization the products, culture, competition, constraints and corporate mission shall be taken into consideration. The process for the revenue management includes the following procedures:

  • Building the business case and analysis of the business – 1ststep of implementation of revenue management is preparing the business case as it is the crucial factor that assists the organization to understand the investment level and taking better decision. During the development period of the business case the implementation can be delayed, if the managers feel so. Therefore the business case shall be presented in a clear and concise manner that will mention the expected costs and expected profits from implementation of revenue management (Fiig et al., 2014).
  • Estimation of the product price – price of the product plays an important role in implementation of the system of revenue management. It is crucial for the organization to understand the fact that how much products will be purchased by the consumer at what price level. Pricing is a crucial segment of business that is the effective variables that are used by the organizations to promote or demote their products. Price is important from both financial as well as operational aspects. Minimum length for stay states the length of stay that represents the obligation that is based on the price of ticket for the minimum length of stay for the passengers at the destination and is regarded as the most useful for the product pricing. The probability of return in sooner period is allowed under these circumstances (Heo et al., 2013).
  • Building or buying the system of revenue management – the organization can decide upon buying the system of revenue management from any specials organization or alternatively can decide to build the software within the organization. Buying the system means the external professional will come to the company and before implementation they will have to understand the client’s business, its prices and products. Likelihood is there that the company will not feel comfortable to share its crucial information with the outsiders. On the contrary, if the organizations decide to build the system on its own the revenue management system will hav eto be implemented in three levels. These are:
  • At strategic level, the system requires recognizing the segments of customers and generating different prices
  • At the next level, that is booking-control level, the organization is required to determine the real-time to decide whether the booking request shall be accepted or not.
  • At the final level that is the intermediate level, the strategic revenue management updates and recalculates the limits that are utilised for the purpose of controlling the bookings (Kimes & Beard, 2013).
  • Data forecasting and storing – the system of revenue management requires inputs of various data for making the forecast of future data. Thus, it requires efficient collection and storage of data in the system for making good forecast. Various data shall be stored, corrected and collected within the system. This is the most time consuming and difficult process in the implementation. The collected data shall be reviewed and analysed cautiously and the wrong data shall be eliminated (Denizci Guillet et al., 2015).

The organizations often face the problems regarding they have the products that have a fixed capacity and they have to sell the product within a specific period of time. If there customers for the product includes those who are sensitive to price as well as those who are insensitive to price it enable the organization to sell the same product at different price to different customers. The role and function of the automated system of revenue management are as follows:

  • Segmentation – it is the procedure of segmenting the customers into various groups based on their unique characteristics. The main objective of segmentation is to recognize the buyers who are purchasing their product, which product they are purchasing, how and when they are purchasing and their preferable attributes. In order to implement a successful revenue management system, it is crucial for the organization to segment their customers into various groups (Sierag et al., 2017). Few of them can be considered as sensitive to price while others are considered as sensitive to time. Segmentation is applicable to various industries as follows:

Industry

Segmentation of customers

Energy

Restaurants, office, school, grocery, retail, controlled lighting and guaranteed

Airline

Military, students, business, children, seniors, youth, groups and seniors.

Hotels

Double or single occupancy, leisure, location, meetings, facilities and contract accounts

Freight

Large, medium and small volumes

(Source: hospa.org)

  • Management of price – revenue management are considered as a price discrimination tool for some if the researcher. Charging different price for the same product from different customers, the organization expects to increase and diversify their revenue or maintain the revenue at the same level, if not increased. Moreover, the price management is considered as a systematic offering for various price to various customers with regard to respond to the alteration in the demand and the demand characteristics (Wang et al., 2015).
  • Forecasting of demand –

(Source: hospa.org)

The revenue management system assists in forecasting the demand. Based on the past data related to sales, the future forecasting are prepared. Through the system the organization is able to forecast the target market segment’s size as well as the price that each segment will likely to pay.

  • Availability – shifting or limiting the availability of specific product based on the demands of the customer during a particular period of time are managed through the system of revenue management. For example, in a hotel if there no demand for the deluxe room, however, the demand for the standard room exceeds supply then the hotel management may decide to offer the deluxe room at the same price of standards room (Sigala, 2015).

Most of the businesses face the complex decisions with respect to the selling and pricing strategies. For example, which products are to be sold, the target customer for the product, the suitable time to sell, how much of the product is to be sold and finding the best route for the marketing of the product.

 

(Source: hospa.org)

The major components of the revenue management are shown in the above figure. It is a complex interrelationship among the variables that are required to be understood for taking various decisions regarding pricing of the product and the required yield for generating the revenue. Customers remain at the heart of the revenue management system; therefore, understanding the attitudes and behaviours of the customer towards purchasing and pricing is the core component of the organization’s revenue management system. With the main objective of maximization of revenue and managing the variables under the complex situation depends on the understanding of the variable and their alteration over time. While forecasting the demand, the understanding of the economic environment and the trend play an important role. Revenue management play a significant role where fixed cost proportion is more as compared to the proportion of variable cost. However, the variable cost forms only 10 to 20% of the selling prices. The remaining part is contributed by the fixed cost and then by profit. Therefore, the revenue management can be used in selling of the hotel bedrooms and other areas of the hospitality industry such as the banqueting, food and beverages and conference hall where fix resource management is required to maximise the profit. However, revenue management that are used in the service sectors are more complex and distinct from any other sectors (Choi, Jeong & Mattila, 2015).

Role and function of automated revenue management system

Revenue management budget for Four Seasons Hotels accommodation

Particulars

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Number of rooms occupied

Deluxe

20

18

20

17

20

19

15

16

14

19

18

16

Standard

28

30

29

25

17

30

22

24

20

25

27

25

Classic

42

40

49

42

44

50

41

44

40

45

42

44

Rate of the room

Deluxe

 $            2,000.00

 $            2,000.00

 $            2,000.00

 $            2,000.00

 $            2,000.00

 $            2,000.00

 $            1,900.00

 $            1,900.00

 $            1,900.00

 $            2,000.00

 $            2,000.00

 $            1,900.00

Standard

 $            1,500.00

 $            1,500.00

 $            1,500.00

 $            1,500.00

 $            1,500.00

 $            1,500.00

 $            1,300.00

 $            1,300.00

 $            1,300.00

 $            1,300.00

 $            1,300.00

 $            1,500.00

Classic

 $            1,200.00

 $            1,200.00

 $            1,200.00

 $            1,200.00

 $            1,200.00

 $            1,200.00

 $            1,000.00

 $            1,000.00

 $            1,000.00

 $            1,000.00

 $            1,000.00

 $            1,200.00

Total cost

Deluxe

 $     1,240,000.00

 $     1,116,000.00

 $     1,240,000.00

 $     1,054,000.00

 $     1,200,000.00

 $     1,178,000.00

 $        883,500.00

 $        851,200.00

 $        824,600.00

 $     1,140,000.00

 $     1,116,000.00

 $        912,000.00

Standard

 $     1,302,000.00

 $     1,395,000.00

 $     1,305,000.00

 $     1,162,500.00

 $        765,000.00

 $     1,395,000.00

 $        886,600.00

 $        873,600.00

 $        806,000.00

 $        975,000.00

 $     1,088,100.00

 $     1,125,000.00

Classic

 $     1,562,400.00

 $     1,488,000.00

 $     1,764,000.00

 $     1,562,400.00

 $     1,584,000.00

 $     1,860,000.00

 $     1,271,000.00

 $     1,232,000.00

 $     1,240,000.00

 $     1,350,000.00

 $     1,302,000.00

 $     1,584,000.00

Total revenue

 $ 4,104,400.00

 $ 3,999,000.00

 $ 4,309,000.00

 $ 3,778,900.00

 $ 3,549,000.00

 $ 4,433,000.00

 $ 3,041,100.00

 $ 2,956,800.00

 $ 2,870,600.00

 $ 3,465,000.00

 $ 3,506,100.00

 $ 3,621,000.00

Expenses

Food and beverages

 $        900,000.00

 $        920,000.00

 $        890,000.00

 $        910,000.00

 $        920,000.00

 $        900,000.00

 $        820,000.00

 $        790,000.00

 $        810,000.00

 $        820,000.00

 $        810,000.00

 $        880,000.00

Spa and health

 $        300,000.00

 $        250,000.00

 $        320,000.00

 $        310,000.00

 $        290,000.00

 $        280,000.00

 $        250,000.00

 $        220,000.00

 $        290,000.00

 $        270,000.00

 $        230,000.00

 $        250,000.00

Energy cost

 $        400,000.00

 $        410,000.00

 $        420,000.00

 $        430,000.00

 $        410,000.00

 $        420,000.00

 $        350,000.00

 $        370,000.00

 $        320,000.00

 $        310,000.00

 $        300,000.00

 $        320,000.00

Electricity

 $        500,000.00

 $        550,000.00

 $        600,000.00

 $        580,000.00

 $        520,000.00

 $        510,000.00

 $        450,000.00

 $        420,000.00

 $        410,000.00

 $        430,000.00

 $        410,000.00

 $        450,000.00

Salaries to the staff

 $     1,400,000.00

 $     1,400,000.00

 $     1,400,000.00

 $     1,400,000.00

 $     1,400,000.00

 $     1,400,000.00

 $     1,200,000.00

 $     1,200,000.00

 $     1,200,000.00

 $     1,200,000.00

 $     1,200,000.00

 $     1,400,000.00

Other

 $        120,000.00

 $        110,000.00

 $        130,000.00

 $     1,000,000.00

 $                      -   

 $          80,000.00

 $                      -   

 $                      -   

 $        700,000.00

 $        900,000.00

 $                      -   

 $        120,000.00

Total expenses

 $     3,620,000.00

 $     3,640,000.00

 $     3,760,000.00

 $     4,630,000.00

 $     3,540,000.00

 $     3,590,000.00

 $     3,070,000.00

 $     3,000,000.00

 $     3,730,000.00

 $     3,930,000.00

 $     2,950,000.00

 $     3,420,000.00

Profit

 $     484,400.00

 $     359,000.00

 $     549,000.00

 $   (851,100.00)

 $         9,000.00

 $     843,000.00

 $     (28,900.00)

 $     (43,200.00)

 $   (859,400.00)

 $   (465,000.00)

 $     556,100.00

 $     201,000.00

Net profit margin

12%

9%

13%

-23%

0%

19%

-1%

-1%

-30%

-13%

16%

6%

From the above forecast it is identified that till September 2017, the hotel was able to generate profits ranging from 9% to 13%. However, from October 2017, it is expected to lose revenue as it is off season and due to winter there is low rate of occupancy in the hotel. However, during December 2017, owing to the Christmas and closure of schools, people will came for holidaying and the hotel is expecting to achieve the highest profit margin that is 19% during that period. However, after that the company will start losing profit due to less number of visitors and will only be able to earn revenue again from May 2018. Therefore, they are recommended to cut-off their unnecessary expenses during the off-season to at least cover up their expenses.

Displacement analysis is the approach of calculating the value of the group booking as compared to the walk-in bookings. The hotel can compute the value of the group booking through the displacement analysis and then the decision can be made regarding whether the group business is to be accepted or not (Arenoe, van der Rest & Kattuman, 2015). With regard to the hotel booking, various factors are there to consider apart from the room rent. For example, food and beverages, rent of meeting room and any additional expenses. These all calculations can be done with the calculation of displacement analysis. However, if the booking under displaced transient is less as compared to the booking of group business, then it will be viable to accept the offer of group booking (Bayoumi et al., 2013).

Dear Revenue Manager,

The major aspect for leading your position is that the strategies must be complied by the hotel. The main objective of the meeting is to focussing in maximizing the revenue through high demand and more occupancy during off-season also. However, you should also focus on the following factors –

  • Actual revenues from room vs. budget vs. forecast
  • Segmentation of actual market for revenues and room nights vs. budget vs. forecast
  • Discuss the performance of market share and how to plan about gaining the position of market leader
  • Terms of cancellation as compared to reservation and the adjustments of inventories
  • Review the bookings based on 30-60-90 days
  • Analysis of trends with the pick-up reports. It is advisable to present the report in details so that the recommendations can be proposed
  • Preparation of pricing analysis vs. competitors
  • Analysis of competitor based on the positioning, room types, room charges and facilities provided
  • The revenue manager will take the lead in meeting, will provide the analysis, confront challenges, plan the actions and foster the decisions of the team.
  • The revenue manager shall assure that the reservation department have the ideas regarding the occupancy requirements and the strategies of sales
  • General manager shall push for revenue culture, when available
  • Financial controller will provide the overall performance and profitability and its impact on the revenue management

If you need any further assistance for implementation of the best strategies for revenue management and the monthly revenue meeting you can contact us at [email protected] and we shall assist you in one of the revenue management and will deliver you our feedback, free of charge.

Cheers,

John Stewart,

Founder

Four Seasons Hotel

Reference

Abrate, G., & Viglia, G. (2016). Strategic and tactical price decisions in hotel revenue management. Tourism Management, 55, 123-132.

Arenoe, B., van der Rest, J. P. I., & Kattuman, P. (2015). Game theoretic pricing models in hotel revenue management: An equilibrium choice-based conjoint analysis approach. Tourism Management, 51, 96-102.

Bayoumi, A. E. M., Saleh, M., Atiya, A. F., & Aziz, H. A. (2013). Dynamic pricing for hotel revenue management using price multipliers. Journal of Revenue and Pricing Management, 12(3), 271-285.

Bujisic, M., Hutchinson, J., & Bilgihan, A. (2014). The application of revenue management in beverage operations. Journal of Foodservice Business Research, 17(4), 336-352.

Choi, C., Jeong, M., & Mattila, A. S. (2015). Revenue management in the context of movie theaters: Is it fair?. Journal of Revenue and Pricing Management, 14(2), 72-83.

Denizci Guillet, B., Denizci Guillet, B., Mohammed, I., & Mohammed, I. (2015). Revenue management research in hospitality and tourism: A critical review of current literature and suggestions for future research. International Journal of Contemporary Hospitality Management, 27(4), 526-560.

Fiig, T., Härdling, R., Pölt, S., & Hopperstad, C. (2014). Demand forecasting and measuring forecast accuracy in general fare structures. Journal of Revenue and Pricing Management, 13(6), 413-439.

Heo, C. Y., Lee, S., Mattila, A., & Hu, C. (2013). Restaurant revenue management: do perceived capacity scarcity and price differences matter?. International Journal of Hospitality Management, 35, 316-326.

Kimes, S. E., & Beard, J. (2013). The future of restaurant revenue management. Journal of Revenue and Pricing Management, 12(5), 464-469.

Sierag, D., Rest, J. P. V. D., Koole, G., Mei, R. V. D., & Zwart, B. (2017). A call for exploratory data analysis in revenue management forecasting: a case study of a small and independent hotel in The Netherlands. International Journal of Revenue Management, 10(1), 28-51.

Sigala, M. (2015). From demand elasticity to market plasticity: A market approach for developing revenue management strategies in tourism. Journal of Travel & Tourism Marketing, 32(7), 812-834.

Wang, X. L., Yoonjoung Heo, C., Schwartz, Z., Legohérel, P., & Specklin, F. (2015). Revenue management: Progress, challenges, and research prospects. Journal of Travel & Tourism Marketing, 32(7), 797-811.

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