Revenue Management
- Revenue management, also called yield management,
is a set of techniques and procedures that use hotel specific data to
manipulate occupancy, ADR, or both for the purpose of maximizing the
revenue yield achieved by a hotel.
- Yield is a term used to describe the percentage of total
potential revenue that is actually realized. Revenue managers are responsible for making decisions regarding the
pricing and selling of guest rooms in order to maximize yield.
Go
Figure!
A hotel’s yield would be
calculated as follows:
Total
Realized Revenue
Total
Potential Revenue = Yield
- RevPAR is a combination of ADR
and occupancy % and is calculated using the following formula:
ADR x Occupancy % = RevPAR
- To increase yield simply means
to increase the hotel’s RevPAR. Therefore, any change (decrease or
increase) in either or both of the factors comprising RevPAR will change
the yield of the hotel’s revenue.
· Because hotel rooms are highly perishable, the
goal of revenue management is to consistently maintain the highest possible
revenue from a given amount of inventory.
· Revenue management techniques are used during
periods of low, as well as high, demand.
· Although the actual revenue management
techniques used by hoteliers vary by property, in their simplest form, all
these techniques are employed to:
· Forecast demand
· Eliminate discounts in high demand periods
· Increase discounts during low demand periods
· Implement “Special Event” rates during periods
of extremely heavy demand
· Sophisticated mathematical programs that help
hoteliers manage revenues are built into most property management systems (PMS)
used in the industry today. Using information gleaned from the hotel’s
historical sales data, revenue management features in a PMS can:
· Recommend room rates that will optimize the
number of rooms sold
· Recommend room rates that will optimize sales
revenue
· Recommend special room restrictions that serve
to optimize the total revenue generated by the hotel during a specific time
period
· Identify special high consumer demand dates that
deserve special management attention to pricing
- PMS systems can “remember” more
important dates than can an individual hotelier. However, it is hotelier’s
skill and experience that is most critical to the revenue maximization
process. The goal of a talented revenue manager is to increase RevPAR, not
only on a daily basis, but on a long-term basis as well.
· In the hotel industry, a competitive set (comp set) consists of those hotels with whom a specific
hotel competes and to which it compares its own operating performance.
· To fully evaluate RevPAR changes, hoteliers look
to the relative performance of their comp set. They do so to better understand
the room rate economics that affected their own property during a specific time
period, as well as how the hotel’s management responded to the supply and
demand challenges they faced during that period.
· To better understand the shortcomings of an
over-emphasis on RevPAR, it is important to take a closer look at its two
fundamental components, occupancy % and ADR.
Occupancy Percentage
- It might seem that the
occupancy percentage for a hotel would be a straightforward calculation. A
room revenue statistics report generated from the Blue Lagoon Water Park
Resort’s property management system produced the information needed to
calculate their occupancy percentage (refer to Figure 8.6).
Go
Figure!
Exactly how should Paige
at the Blue Lagoon Water Park Resort compute her occupancy percentage? Should
she:
1. Include only sold rooms in her computation? If
so, her formula would be:
Rooms
Sold
Total
Rooms in
Hotel =
Occupancy %
2. Include complimentary rooms as well as sold
rooms in her computation? If so, her formula would be:
Rooms Sold + Comp Rooms Occupied
Total
Rooms in
Hotel =
Occupancy %
3. Subtract non-sellable out-of-order rooms from
her rooms available count? If so, her formula would be:
Rooms
Sold
Total Rooms in Hotel – OOO
Rooms = Occupancy %
4. Subtract non-sellable on change rooms from her
rooms available count? If so, her formula would be:
Rooms
Sold
Total Rooms in Hotel – On-Change Rooms = Occupancy %
ADR
- Average daily rate (ADR) is
also a critical component of RevPAR. Generally, hotel managers calculate
ADR using one of the two following formulas:
Total
Rooms
Revenue
Total
Number of Rooms Sold =
ADR
or
Total
Rooms
Revenue
Total
Number of Rooms Occupied =
ADR
- Notice that the only difference
in the two formulas are the words sold and occupied.
See Go Figure! in the text for further illustration of the difference
between these two formulas for calculating ADR.
- Despite the slight differences
in these two ADR computations, neither is as useful to the hotel’s owners
and managers as the computation of the net ADR yield.
Net ADR Yield
- Net ADR Yield is the percentage of ADR actually received by a hotel after subtracting the cost of fees and
assessments associated with the room’s sale. For a single room it is computed as:
Room Rate - Reservation Generation Fees
Room
Rate Paid =
Net ADR Yield
- To really understand net ADR
yield, you must first understand how hotel rooms were sold in the past as
well as how they are sold in today’s competitive marketing environment. In
the distant past, hotels clearly preferred that guests arrive with a
previously made reservation. Of course, if the hotel had vacant rooms, the
front office agent would quote a rate (often higher than that quoted to
other guests) to the non-reserved guest and the room would be sold.
- Today, most hotel guests
already have a room reservation prior to arrival, and the reservation distribution channels (sources of reservations) used to make their
reservations will charge the hotel widely varying fees for making them.
- When a guest makes a reservation
via the Internet, no less than three reservation-generation fees are
typically charged to the hotel, including fees from:
· Internet Travel Sites - websites for booking travel to end-users
· Global Distribution System (GDS) - system that books and sells rooms for multiple
companies
· Central Reservation System (CRS) – system used by companies to centrally book
reservations
- Consider the information in
Figure 8.7. As you can see, the hotel pays “zero” reservation fees on a walk
in reservation and pays several fees for the reservation made by the
Internet user.
- If the reservation is made by a
travel agent, additional fees are charged.
- With increased usage of high
priced distribution channels, a room’s selling price (quoted) and the ADR
the hotel actually receives can be radically different.
- For a further illustration of
net ADR yield, see Go Figure! in the text.
- Clearly, it is the ADR after the cost of reservation generation fees that should be
most important to hoteliers and their attempts to increase RevPAR. If net
ADR yield is not used, hotel owners and managers run the risk of
significantly over inflated RevPARs accompanied by significantly reduced
profits as well.
Flow-Through
- Flow-through is a measure of the ability of a hotel to convert
increased revenue dollars to increased gross operating profit dollars.
Consider the simplified income statements detailing revenue and expenses
for January 2010 and for the same month of the prior year for the Blue
Lagoon Water Park Resort (see Figure 8.8).
Go
Figure!
From Figure 8.8, the
Blue Lagoon’s flow-through for January 2010 is calculated as the change in
gross operating profit (GOP) from the prior year divided by the change in total
revenues from the prior year as follows:
GOP
This Year- GOP Last
Year
Total
Revenues This Year – Total Revenues Last Year =
Flow-Through
- Gross operating profit (GOP)
is, in effect, total hotel revenue less those expenses that are considered
directly controllable by management. Flow-through was created by
managerial accountants to measure the ability of a hotel to covert
increases in revenue directly to increases in GOP.
- When flow-through is high (over
50%), it reflects efficiency on the part of management in converting
additional revenues into additional profits. For most hotels,
flow-throughs that are less than 50% indicate inefficiency in converting
additional revenues into additional profits.
GOPPAR
- Gross operating profit per
available room (GOPPAR) is defined as a hotel’s total revenue minus its
management’s controllable expenses per available room. For example, the
costs of a hotel’s lawn care services, utility bills, and even food and
beverage expenses are considered when computing GOPPAR. These same
expenses are not, of course, considered when computing RevPAR.
- In most cases, those managers
directly responsible for revenue generation do not control the majority of
costs used to compute GOPPAR. How did it become popular to suggest GOPPAR
as a method of evaluating the decision making of those revenue managers?
· For a simple example of why this is so, consider
a hotel that elects to launch a major advertising campaign in its local market,
which costs $100,000 per month, and increases RevPAR by $15,000 per month.
Despite the fact that RevPAR certainly did increase, the amount of money spent
by the hotel to increase RevPAR exceeded, by far, the actual amount of the
revenue increase. Clearly, the short-term effect on hotel profitability will be
a negative one.
· Thus, there are still some pitfalls to be aware
of when analyzing a hotel's performance based solely on RevPAR. For example, in
those cases where room revenue accounts for only 50 to 60% of total revenue (as
is the case in large convention hotels), RevPAR represents only half of the
hotel’s revenues and neglects to consider all other sources of incremental
revenues.
· It is for shortcomings such as these that
hoteliers now consider an analysis of a hotel’s GOPPAR to be of such
importance.
Go
Figure!
GOPPAR is calculated as
follows:
Gross
Operating Profit
Total
Rooms Available to Be Sold = GOPPAR
- GOPPAR, because it reflects the
gross operating profits (not revenue) of a hotel, actually provides a
clearer indication of overall performance than does RevPAR. RevPAR
indicates the performance of a hotel in terms of rooms inventory sales and
marketing, however, it provides no indication of how much money the hotel
actually is, or should be, making.
- GOPPAR takes into consideration
the cost containment and management control of the hotel and must be
considered in any effective rooms pricing strategy. The difficulty is not that RevPAR is a poor measurement, but rather it is the
fact that RevPAR should not be the only measurement of a hotel’s revenue manager’s
effectiveness.
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