Introduction
Revenue management is a tool that maximizes and increases income through the manipulation of prices of fixed products such as hotel rooms. The primary objective of revenue management could be vending the proper commodity to the relevant customers at the best time at the right price. Such an approach helps to discover the significance of product perception. Additionally, it helps the seller to understand the alignment of prices and also the availability of the product to consumers.
Most hotels use centralization and decentralization models to manage and generate revenue. This essay enhances the understanding of revenue management through the centralized and decentralized models applied. Additionally, revenue management in the hotel helps to predict customer demand. Also, it challenges the use of resources in the aim of obtaining information about the market. Moreover, several models used in hotels have benefits and disadvantages. Some of them increase customer demand, thus increasing the market. The components of revenue management are discussed below.
Components of revenue management
Pricing
It is a variable with a critical operational role in the hotel. Pricing needs to correspond to marketing choices, including placement or adaptation to customer segments (Ivanov, 2014). Besides, the positioning of these segments is done irrespective of price fluctuations that occur at diverse marketing stages of the products and services offered. Furthermore, pricing plays a crucial role in revenue management. Firstly, it facilitates the adaptation of services presented in market environments with changing demand. The need for a full understanding of demand becomes significant in determining the best price and pertinent pricing variations to generate revenue. Pricing determines the profit and maximum revenue attainable in the hotel.
Besides, understanding the client’s actions and attitudes concerning price and purchasing becomes a principal determinant in the success of revenue generation in the hotel. Also, value analysis is another component.
Value Analysis
Pricing is analyzed as a financial sacrifice made by clients and also as one of the elements in the analysis of value. The way customers determine value may be private and subjective (Wang et al., 2015). Additionally, the cost resembles what one obtains for what one gives. Yoonjoung et al. (2015) used the expression net value, which is the sum of total perceived benefits minus the sum of all commodity costs. The greater the positive difference between the two, the greater the net value. Therefore, the more customers are willing to purchase the product, the greater the positive difference and the higher the final price. For one to determine the selling price, one needs to contemplate the entire situation. Also, one needs to know about market segmentation as an essential component of revenue management.
Market Segmentation
It is grounded in the entire set of fundamentals that indicate clients’ expectations concerning commodities and variables that show consumption patterns. It is the practice of dividing or subdividing customers into clusters with related behavior. However, it indicates the capability to scan larger economic surroundings and understand trends in purchasing activity. Besides, managers should incorporate selling prices into the overall analysis of costs and benefits. Further, in instances where the amount of variable cost becomes lower, the revenue adds to the total profit. For instance, in the case where a room in a hotel costs $3 a night, a specific portion of the selling price is paid to cover variables including cleaning and some guest amenities, among others.
Forecasting demand
Revenue management experts consider this approach a core component. Different types of forecasts are used; for instance, in a hotel, a demand forecast takes into account the actual number of reservations on hand (rooms booked) and adds the expected number of rooms that will be booked (Denizci et al., 2015). The demand forecast is used to apply pricing and yield strategies and understand demand. Additionally, demand changes over a period and becomes variable. The flexibility of demand in creating an optimum price point becomes significant in maximizing revenue. The other component of revenue management is yield.
Yield
It is a stage that involves the application of inventory controls. Besides, it has a considerable effect on the ability of a corporation to raise income and profit potential. Yield tactics enable a business to increase revenue during high-demand periods. Furthermore, they enhance the occupancy prospect in low-demand times.
Revenue growth
The other component of revenue management is revenue growth. It primarily occurs by increasing the chances of income through understanding demand, flexibility, relationships, sources, and pricing tactics. When a particular product is finished in the market, less flexibility and inconsistency occur in pricing. However, during a change in demand, it becomes critical to adjust the forecast and implement variable pricing quickly to respond to the market and maximize returns. Besides, several requirements are adopted and developed in the hotel for revenue management.
Requirements Needed for Centralization of Revenue Management to be Implemented
Information and technology system
Digital systems include telecommunication tools, computers, and software applications used in storing, conveying, receiving, and manipulating information within the business context (Abrate and Viglia, 2016). The hotel industry needs access to information to deliver good services. The hotel uses information technology in several ways: to access customer profile records, booking and registration data, occupancy rates, price forecasts, data collection, and analysis. Therefore, to appropriately manage all of this information, the managers of the hotel need updated information technology systems. These systems help ease the work of hotel employees. For instance, computers reduce the workload by enabling the calculation of the number of guests arriving at the hotel and the profits obtained.
Business Intelligence
Business intelligence is the process of converting data into useful facts and even knowledge. According to Abrate and Viglia (2016), business intelligence includes the skills and processes that allow individuals in an organization to acquire and analyze data. It is a requirement that facilitates businesses in discovering and exploiting the information at hand and turning it into knowledge that impacts the performance of the enterprise. Business intelligence includes software like enterprise resource planning, customer relationship management, and decision-support systems.
Characteristics of the Hotel Adopting Revenue Management
Some hotels are associated with very high profitability. Moreover, features such as the degree of seasonality, ownership, and some market segments of the hotel determine the revenue management implemented. The main influential factor is the identified number of hotel segments. Further, hotels that contain more than six segments become adopters of revenue management. Besides, the type of demand is another characteristic. Hotels that have steady and stable demand all year round show that they are adopters of revenue management.
Organizational culture
Organizational factors determine and contribute to the success of information technology. Corporate culture influences software superiority in projects more than other aspects. Organizational beliefs set the standards and morals that facilitate the appropriate decision-making process. Moreover, they have substantial consequences for technology accomplishment. Bodea and Ferguson (2014) review evidence that shows organizational culture as a fundamental element in shaping a company’s ability to influence its information system resources to enhance company performance.
Performance Metrics
The primary performance metrics in the hotel include occupancy rate, average daily rate, returns per available room, and gross operating profit per room. Further, each of these parameters offers a means for a manager to comprehend the revenue and occupancy of the hotel. Gross operating profit per available room considers both revenue and operating costs to offer correct profit accounting.
Finance Management
Revenue management is a guide used by managers or anyone in the hotel industry. Revenue management is a complicated approach to demand and supply that assists an enterprise in maximizing revenue. It is achieved through balancing pricing and inventory controls (Mauri, 2013). Besides, revenue management with respect to the hospitality industry defines the selling of the right opportunity to the appropriate consumer at the proper time.
Prediction and optimization are the crucial functions of revenue management.
When management focuses on hotel financial administration, managers try to evaluate demand by using the current reservation approach and previously collected data (Mauri, 2013).
Professionals divide forecasting approaches into three major types: historical, combined forecast, and advanced models. Additionally, hotel revenue administration uses a range of forecasting models. Furthermore, exponential smoothing, moving average models, and pickup models provide strong forecasts. Mauri (2013) indicates that excellent forecasting needs to be followed to maximize revenue potential. Nevertheless, the optimization of demand in the industry is critical to the revenue administration scheme. After the generation of the forecast, pricing and inventory management strategies are produced via optimization systems. The systems allow for room allocations created within different rate classes and discount levels to increase total projected revenue.
Finance Management Systems
These systems involve computer software essential for managing industry revenue. Revenue management techniques are becoming more sophisticated. Consequently, revenue managers face a challenge in pricing rooms when the channels of distribution are numerous and competition is high. Therefore, revenue management systems help hotel managers. They provide proposals on inventory control, channel management, and even pricing.
The two different types of Revenue Management Systems used in hotels include a property-based system that embraces all software and hardware in the locations that the system serves. Additionally, it is owned and managed by the hotel. Historically, such systems used to be the norm; however, advances in technology facilitated the development of new types of RMS that utilize the cloud. Besides, Software as a Service is a cloud computing platform where data are stored and computation commands are delivered to consumers through a network (Laudon and Laudon, 2016). Additionally, the modern generation of revenue management systems currently uses Software as a Service to provide software to customers. When using cloud-based applications, a client does not need to purchase external tools except ordinary computers in the office. Further, another kind of Revenue Management System uses Application Service Provider systems (ASP), which offer the right to use the seller’s software and hardware. The difference between an Application Service Provider and Software as a Service is that ASP provides old-style client-server applications. Besides, the software is installed on the client’s personal computer. In contrast, Software as a Service utilizes the internet, and one accesses it through a web browser. Additionally, hotel managers use ASP (application service provider) with older software. ASP is a more scalable tool than the Software as a Service tool.
For decentralization of revenue management to be implemented, hotel managers need to meet some requirements. These include strong statistical and analytical skills that offer fundamental value. Robust interpersonal and persuasive abilities among revenue managers encourage other areas of operation to work effectively. Further, the functional, emotional, and behavioral characteristics assimilated into revenue management lead to its success. The client needs to maintain a feeling of choice in the hotel. Therefore, intelligent barriers and packaging of commodities should enable consumers to segment themselves.
The models explained above have different benefits and drawbacks for revenue management in the hotel. Several disadvantages exist.
The benefits and drawbacks of the models include:
Firstly, there is a limited amount of supply in hotels, explained as hard supply. The hotel contains a fixed number of rooms that can accommodate all the guests. Therefore, a hotel will be forced to increase supply to meet demand. For instance, a hotel or restaurant increases the number of seats in the room, but until clients come and spend money, no revenue is collected. Another disadvantage is the high fixed cost. The increased cost of providing commodities, products, or services becomes a drawback. Besides, the cost of operating a hotel is always high regardless of the number of guests who use it.
The demand forecast model facilitates the understanding of unconstrained demand. The financial forecast enables managers to understand future revenue and other costs, together with identifying losses incurred. Moreover, the operating forecast is needed to complete operational tasks. Also, the hotel manager understands long-term income performance and market conditions. However, inadequate and incorrect forecasting can generate high expectations in the hotel, which may not be met. The expectations lead to losses of revenue incurred due to improper budgeting (Laudon and Laudon, 2016). When the hotel business does not understand or know the people coming to the hotel, forecasting remains a challenge. Additionally, inaccurate forecasting leads to increased operational difficulties if the enterprise fails to anticipate clients’ wants.
Additionally, in the business, inaccurate and incorrect pricing of products and services leads to loss of revenue. Also, higher pricing of products in the hotel makes customers move to other competitors who probably offer cheaper services. This has an important impact on operating efficiencies and revenue. Price discrimination augments the development of adverse attitudes by consumers towards a particular product. All these factors increase the decline and loss of revenue generated. Besides, pricing offers some benefits to the industry. Firstly, the tactics involved during pricing determine how the hotel industry capitalizes upon perceived value. Strategies such as ranking prices against the company’s competitors make the manager aware of the competitive environment. Therefore, hotel managers gain knowledge and know how to cope with competitors. Secondly, through pricing, the hotel can account for the maximum profit and income gained after selling a particular product or service.
Additionally, several drawbacks arise during market segmentation. Predicting the needs of people so that a manager can group them into segments remains a greater challenge. Also, understanding customers’ potential buying behavior is increasingly difficult. Therefore, it causes revenue management not to work efficiently (Mvondo et al., 2014). However, accurate market segmentation lets a hotel aim at developing the desired market segments, emphasize subordinate sections arising during distressed times, and even move away from segments that don’t bring profits. Furthermore, another benefit includes understanding the net success of every section and ensuring that the focus of deals and selling efforts is on attracting the right enterprise at the necessary time.
Further, incorrect marketing and sales activity can reduce hotel revenue. The hotel may waste essential resources in the process of enticing new business that does not meet its needs. Therefore, individuals in the sales and marketing area need to focus on sections that help the hotel meet its goals.
Some other benefits of using and implementing Revenue Management Systems include maximizing overall profit and revenue. According to Sofian et al. (2015), the primary benefit of RMS is to maintain occupancy levels and lead to improvements in hotel performance. Besides, it leads to an increase in occupancy rates, especially during the low season. Also, the revenue management system offers an advantage over stiff competitors. Through the use of a revenue management system, a hotel focuses on optimizing features such as price and market segments, which are tools needed to outdo its competitors. Besides, a revenue management system contains elements that have the capability to process huge databases due to the software in it. Saeidi et al. (2015) note that the revenue management system assists in the easy examination of the performance of promotions to enable future decision-making in the hotel. Furthermore, changes in the marketplace are identified very quickly.
Conclusion
The assessment focused on discussing the concepts that concern revenue management, its components, and system selection. The models help in shaping the topic of revenue management to enable managers to understand the process of selecting a system. Revenue management forms part of the above discussions, including most of its critical aspects, such as benefits and drawbacks. Therefore, through this, managers are guided in implementing the best revenue management system that allows them to make more profits in the firm.
References
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