Yield/Revenue Management 14 November

INTRODUCTION

Florence Le Louette-

Brainstorming Optimization decreases the costs & increase the revenue- increase the profitability- target segments- economies of scales reduce the cost. Definitions: Revenue Management is the process of understanding anticipating and reacting to consumer behavior in order to maximize the revenue and the profitability. Yield management concerns more the techniques. Revenue management is a strategic approach to optimize the revenue Yield = productivity Revenue = Resources Challenge is to sell: y y y y y The right resources At the right time At the right price To the right customer Through the right distribution channel

When was revenue/yield management created = between 1970-1980 Why = Deregulation, mass production, opening of the market. The deregulation has the following effect = new companies = new competition = low cost companies. At that time Bob Cross (American airline) decided to develop revenue management, with the model Ultimate Super Saver fares Where = USA Elasticity of prices

29 Nov 2011-

Evolution of hotel organization

A hotel room seen by the financial manager = fixed cost + variable costs + margin By the revenue manager = Revenue = quantity x room rate the demand) RevPAR & other indicators (selection of

By the client = price, quality & confort, location, other services By the marketing manager = long term goals, Selection of the customers, adequacy offer/demand By a regular customer = rate, choice and upgrade. Personalized service , sign of recognition loyalty.

MAJOR Hotel exercise 3 Potential revenue = 84 000 ( 360 std X 200 + 40 ex X 300) Potential rack = 84 000 / 400 = 210

Weak demand = 75% occupancy RevPAR = 43875 / 400 = 109.69 Yield % = 43875 / 84 000 X 100 = 52.23% (84000 = potential revenue) Rack efficiency = 43875 / 300 = 146.25 (146.25/210) x 100 = 69.64% A. 60 x 200 = 12000 + 15x300 = 4500 = 16500 B. 150x200 x 50% = 15000 (50% discount) C. 60 std x 200 x 75% (25% commission) + 15x300 x 75% = 12375 Total : 16500+15000+12375 = 43875

Strong Demand = 100% occupancy RevPAR = 48750 / 400 = 121.87 Yield % = 48750 / 84 000 X 100 = 58.03% Rack Efficiency = 48750 / 400 = 121.87 (121.87/210) X 100 = 58.04% B. 300x 200 x 50% = 30 = 30 000 C. 60 x( 200x 0.75) + 30 x (300 x 0.75) = 15750 A. 10 x 300 = 3000 TOTAL : 48750

The Overbooking
To increase the revenue of a hotel, you can practice the overbooking because you always have last minute cancel (no show). If we really want 100% occupancy we need to overbook. Concept 1 You have to forecast the structure of the demand: really important! The objective is to increase the profit (hotel : revPAR) in short & long term. Potential demand = unconstrained demand / Constrained demand capacity Objective : To increase the profit (hotel : RevPAR) in the short and long term. The most important is to monitor segments in volume & in rates. Concept 2 Objective: To limit fluctuation in hotel attendance and reduce costs Do not think anymore in high and low season. Concentrate on a definition of price based on demand. The objectives are to limit fluctuations in hotel attendance and reduce costs. Concept 3 Objective: Answer the sensitivity of every type of clientele. Sell to micro-market and not mass market, thanks to differential pricing. Concept 4 Booking on the internet, made in real time without immediate flexibility. Objective: to monitor the demand and have the situation under control. Concept 5 Objective: cover at least the fixed costs of the hotel Have the ability to pick up any opportunity of revenue Have you already lost a business in the low season because of the lack of the rate regulation. Have the ability to pick up any opportunity of revenue thanks to differential pricing. The objective is to cover at least the fixed cost of the hotel. Potential Demand Customer Volume Segment

Hotel history

The main Hotel indicators

Occupancy Rate: Total number of sold rooms/ Total number of rooms X 100 RevPAR: 2 Methods RevPAR = Occupancy rate X average room rate (per client) RevPAR = total room revenue/total number of rooms available (for sale) YIELD % = potential: Total room revenue/Potential (or theorical) Revenue X 100 Ex : Yield = 20% Bad pricing, potential too high, concrete prices too low, occupancy pb Gives information about your efficiency Rack efficiency %: Average room rate/potential rack rate X 100

Pour le 9 ou 10 Janvier faire exercice Booklet 3

Training exercise: What is the strategy of the first management? What is the strategy of the management today and what are the results? What are the common weaknesses of these two managements? What are your suggestions for 2012? What is the revenue we can forecast? Concrete suggestions.

How to operate/implement the revenue management?

Before, analysis & diagnostic to elaborate. Competitive information and knowledge of the economic environment in several scales (work, national, local) Analyse of: 1. The pricing policy (elasticity + rates) 2. The business on the books what is the portfolio, what can you book? 3. The booking forecast how they work in the company with those forecast?

Audit & diagnostics of: 1. Product & services relevant business class/ economic class categories? Are the services adapted, can they attract different segments of customers2. The sale process do they work with sales people or with receptionist that try more or less to get reservation when they have time?3. The distribution channels How they work, what are the agreements between the agencies, GDS, reservation engine, website of the hotel? Best is to have a promotion strategy with each distribution channel 4. The communication & promotion & Public relation to stimulate the demand what is done why what are the results?

The construction of the Segmentation

Yield classes are different from marketing segments. They take in count the behavior and the contribution. What are the conditions to build a segment? What shall you feel to know that your segment is relevant? The segments must be substantial and distinctive from the other, otherwise is not relevant enough. They must be measurable and actionable.

Business Volume

Behavior

Contribution

Priority segments

Yield segments or yield Classes

Opportunities and action plans per yield classes.

The difference between market segmentation and a yield class: Market segment Customer segments are categories of customers who use hotels for identical reasons and who have fairly similar customer habits. Ex; Transient, family, couple, senior, junior.

Yield class Classification (or segmentation) of customers is based on the level of revenue contribution and lead time analysis. When we calculate the forecast demand, we evaluate for each levels of yield class the potential bookings. Ex; Full rate, promotional rate discount, negotiated corporate rate, negotiated leisure rate. SEGMENT Disctinctive Substantial Targeted segment Measurable Actionable YIELD CLASS Separate Volume Priority YC Customer behavior (purchasing contribution) Stimulate Stop the demand

The history analysis

Past history of customers = facts & events. A good history of past knowledge, events and demand is one of the key elements of RM. Analyze the history per yield class In this analysis we integrate also Denials & cancellations. We work on past events in order to know what are the events that impact our activity/revenue now. Best way is to check every past event, evaluate what was booking coming through this event. The history includes different types of information: DEBIT: the cancellations, late cancellations, no show, early departure CREDIT: The booking, walk in Analyse de courbe objectifs Vrifier si les courbes se recoupent pour de possibles fusions (simplification du systme). On chercche une complmentarit entre les diffrentes courbes. Si plusieurs classes font des late cancellation ou cancellation, on mise sur le rack rate si l htel a beaucoup de succs. Try to find the best balance between all the booking curves and their level

The demand forecast = potential occupancy

Identify days of reference You work from the Monday 1st April until the Monday 2nd April, the two Mondays are related. Tourists & leisure groups during the week end, congress & business during the week.

OPTIMIZATION OF THE DEMAND:

1/ STRATEGY fix the constrained demand- what is the demand we are going to sell per yield class. 2 / TACTICS define the actions for structuring & monitoring the demand allotment, BAR, restrictions, distribution, and promotion. 3/ RECOMMENDATIONS Translate tactics in easy rules of reservation

The construction of the constrained demand

What kind of clientele to fill the hotel? How to reach this situation? The volume whished by class of yield is determined with the following information: The unconstrained demand by class of yield (the potential) The capacity of the hotel (the constraint) The marketing strategy (the ideal mix of customers)

Management (Voir poly 3)

What are Unconstrained and constrained demands?

Constrained demand By the capacity

Unconstrained The quantity that could be sold if there were no constraints such as in production or delivery.

Describe the various stages of implementation of RM :

1. Define your strategy Audit diagnosis of your company: Your own company -- Decision process -- Business on the books -- Skills basic of segments

Market --Targeted customers (segments) -- Competitors

2. Segmentation =yield class (potential client, how many ) 3. History Client / Events / Days reference Analyze the rhythm of the business to know if we have days of reference. 4. Forecast the business = We re able to know how to control and manage the revenue in the future

Yield Manager Use booking curves to: Analyze consumer behavior (History / Forecast / Actual) Adjust rates Number of rooms 100

Situation A

Situation B 20 10 -21 -14 -7 Time D day

Booklet 3 correction 1st Management: Focus on occupancy rate 2nd Management: Focus on average rate Mistake of both management: don t evaluate properly the unconstrained demand. The 1st manager didn t know that he had so many customer ready to pay 220 , and the 2nd thought that he has a lot to pay 220 but he didn t had as many as expected. Need to care about forecast, customer behavior and history. Suggestions for 2012: 75600 270: Total of days June to September 400: Number of rooms 270*400 = 108 000 = Constrained (capacity)

Optimist forecast:

54000x220 = 11 880 000

54 000 * 175 = 9 450 000 11 880 000 + 9 450 000 = 21 330 000 21 330 000/ 108 000 = 197.5 = Average Price.

MARDI 17 JANVIER BOOKLET 4 EXERCISE

Occupancy Rate: Total number of sold rooms/ Total number of rooms X 100 RevPAR: 2 Methods RevPAR = Occupancy rate X average room rate (per client) RevPAR = total room revenue/total number of rooms available (for sale) YIELD % = potential: Total room revenue/Potential (or theorical) Revenue X 100 Ex : Yield = 20% Bad pricing, potential too high, concrete prices too low, occupancy pb Gives information about your efficiency Rack efficiency %: Average room rate/potential rack rate X 100 Year/ind. 2009 2010 KPMG 2009 KPMG 2010 Room night 52456 58610 Aver.Rev 140 145 154.1 138.6 Oc.rate 71.85% 80.28% 71.6% 80.2% Total revenue 7343840 8498450 RevPar Yield % 100.6 46.8% 116.4 54.1% 110.3 111.1 Rack eff 65.11% 67.44%

Tout bon! As the results of KMPG are quite the same with our hotel, we can say that it is positioned on the trend (compared to Paris 4* hotel market). 80% occupancy means that the hotel is doing very well.

DYNAMIC PRICING
The Main tool of Yield Management RATE MANAGEMENT: To manage a rate means authorizing or not sales at a certain princes. To manage a rate class means: to define, a long time in advance, the allotment to assign to a certain rate in the inventory on a given date. (On dfinit une classe de prix une priode donne pour les allotements) The main role of the yield manager is to monitor the booking curve of each class in the aim of obtaining the ideal mix of the constrained demand.

Without revenue management: reservations are recorded chronologically With revenue management: The demand is controls: It has determined its potential clientele and its ideal mix. So it optimizes its occupation. The Trend is to personalize every stay (personalization: adjustment to consumer) new customer want freedom: elaborate his own stay, share experience, and manage the products. Today in many companies, in hotels car rental companies, we use more and more dynamic prices (BAR). RACK RATE: Highest rate fixed for one year. (devient le prix affich lgal, mais de moins en moins le prix pratiqu) Best available rate (BAR) Intrt : fluctuation et adaptabilit (n obi a aucune restriction)

FLOATING RATES ex: group rates will be BAR 50%. BID PRICE: value below which the hotel should not anymore sell because a potential of clientele with better contribution exists. Every day, every type of room is associated to a BID PRICE. THE PRICING: THE RULES OF OPERATIONS The rule of the flexibility : The structure of rate will have to be the most flexible possible to adapt itself to the price changes of competitors (since 2004, the dynamic pricing and the floating rate appear in the hotel industry). The rule of separation: The price structure should guarantee some degree of separation between the various segments to discourage customers who are less sensitive to price from taking advantage of the lower fares. Identifying natural barriers and imposing special restrictions will make it possible to limit what is known as fare dilution . The rule of comprehensibility: The price structure should be straightforward and clear so that it can be easily communicated to the distribution network and easily understood by customers. The rule of degressivity: the steps in the price levels must be calculated to encourage customers to move up to a higher fare category.

Revision: Rack rate: Highest maximum rate (official and fixed) BID Price: Relative Minimum Value En observant la demande : Analyse externe et interne (veille stratgique permanente) Best Available Rate: You pay different rate for different room. (Flexible) now we are calling it floating rates.

How to fix a simple BAR? 1) Determination of different BARs in % of discount BAR 0 = RR, BAR 1= RR-10%, BAR 2= RR -15% 2) Setting off different BARs at xDay Resa from D to D-20 = BAR 0 Resa from D-20 to D-30 = BAR 1 Resa in more than D-30 = BAR 2 3) Integration of the parameter of booking pick up It fewer 45% of forecasted occupancy rate = BAR2 If between 45% and 70% = BAR1 If more 70% = BAR0

The rule of booking pick up (3) dominates on the rules D-.

Contract Management You need group contracts (meetings, conventions, congresses) with some clauses. For example you need to pay some part of the invoice in you cancel too late. ( after 7 before the arrival) More forecast the fluctuation of allotment and most influence your customers to increase or reduce them reservations. In order to be sure of it. Group Management Cf feuille