Summary Revenue Management (Operations
Design)
General information:
History of Revenue Management
A highly regulated market started to deregulate, starting in 1978 with airplanes. It soon affected
hotels. The internet highly influences revenue management.
Why is Revenue Management important?
Revenue Management is very important to hotels because it allows a hotel to anticipate demand and
optimize availability and pricing, in order to achieve the best possible financial results.
Implementing Revenue Management
Revenue management: is about selling, the right product, to the right customer, at the right price, at
the right time, in the right place
The right product: Differentiation and rate/price fencing
The right customer: Segmentation market.
The right price: Optimal balance between price and quality / cost and value based
The right time: Forecasting and displacement analysis
The right place: Distribution management and inventory management per channel + PUP (Pricing,
Unit Availability, Purchasing Rules and Restrictions)
Revenue Management Strategies:
Conditions for Effective Revenue Management:
- Perishable goods (a good you cannot store again, which is gone forever, e.g a hotel room that
has not been sold for one night)
- High fixed cost
- Low variable cost
- Limited and fixed capacity/inventory
- Time critical-large fluctuation in demand
- Highly segmented
, Price:
What is a right price and how does this increase revenue?
Optimal price: Depends on a lot of influencing factors. Sometimes it is best to wait for the right
moment to determine a price.
Price and demand relation:
Dynamic Pricing
Multiple prices lead to an increase of revenue: Set multiple prices for various market segments. This
is called dynamic pricing.
Open Pricing
Open Pricing is pricing in a social world; everyone knows what is going on.
Value Based Pricing vs Cost Based Pricing
Value Based Pricing Cost Based Pricing
Value Based Pricing creates a scenario Cost Based Pricing uses manufacturing or
where the organization needs to focus production costs as its basis for pricing.
upon the value placed by the customer on The cost based pricing company uses its
the product or service. Next, the costs to find a price floor and price ceiling
organization needs to equate that value to (the minimum and maximum price for a
a specific price. A price/value relationship specific product). These serve as the price
then develops in which the price must be range. Ideally, the price should be
equal to or less than the value placed somewhere between the floor and ceiling.
upon that product. How close or far the price is from either
depends on the market.
Customer Willingness to Pay
Customer Willingness to Pay is the maximum price which a customer will definitely pay for a product.
For example, a customer is usually more willing to pay more for a drink in a luxury resort than in a
local retail store.
Price Elasticity; the absolute value of percentage change in the quantity of a good demand divided
by percentage change in the price of that good.
The price elasticity is determined by four factors: 1) Is the service considered a luxury or necessity. 2)
The availability of substitutes. 3) Time factor, the longer the period the more elastic the demand. 4)
The price relative to a consumers budget. Small household necessities are often price inelastic,
whereas the price increase in gasoline shows the price of gasoline is more elastic. Good awareness of
price elasticity enables an organization to determine the price sensitivity of their product or service.
Tools to determine price: SWOT, segmentation analysis, benchmarking and/or review report.
Design)
General information:
History of Revenue Management
A highly regulated market started to deregulate, starting in 1978 with airplanes. It soon affected
hotels. The internet highly influences revenue management.
Why is Revenue Management important?
Revenue Management is very important to hotels because it allows a hotel to anticipate demand and
optimize availability and pricing, in order to achieve the best possible financial results.
Implementing Revenue Management
Revenue management: is about selling, the right product, to the right customer, at the right price, at
the right time, in the right place
The right product: Differentiation and rate/price fencing
The right customer: Segmentation market.
The right price: Optimal balance between price and quality / cost and value based
The right time: Forecasting and displacement analysis
The right place: Distribution management and inventory management per channel + PUP (Pricing,
Unit Availability, Purchasing Rules and Restrictions)
Revenue Management Strategies:
Conditions for Effective Revenue Management:
- Perishable goods (a good you cannot store again, which is gone forever, e.g a hotel room that
has not been sold for one night)
- High fixed cost
- Low variable cost
- Limited and fixed capacity/inventory
- Time critical-large fluctuation in demand
- Highly segmented
, Price:
What is a right price and how does this increase revenue?
Optimal price: Depends on a lot of influencing factors. Sometimes it is best to wait for the right
moment to determine a price.
Price and demand relation:
Dynamic Pricing
Multiple prices lead to an increase of revenue: Set multiple prices for various market segments. This
is called dynamic pricing.
Open Pricing
Open Pricing is pricing in a social world; everyone knows what is going on.
Value Based Pricing vs Cost Based Pricing
Value Based Pricing Cost Based Pricing
Value Based Pricing creates a scenario Cost Based Pricing uses manufacturing or
where the organization needs to focus production costs as its basis for pricing.
upon the value placed by the customer on The cost based pricing company uses its
the product or service. Next, the costs to find a price floor and price ceiling
organization needs to equate that value to (the minimum and maximum price for a
a specific price. A price/value relationship specific product). These serve as the price
then develops in which the price must be range. Ideally, the price should be
equal to or less than the value placed somewhere between the floor and ceiling.
upon that product. How close or far the price is from either
depends on the market.
Customer Willingness to Pay
Customer Willingness to Pay is the maximum price which a customer will definitely pay for a product.
For example, a customer is usually more willing to pay more for a drink in a luxury resort than in a
local retail store.
Price Elasticity; the absolute value of percentage change in the quantity of a good demand divided
by percentage change in the price of that good.
The price elasticity is determined by four factors: 1) Is the service considered a luxury or necessity. 2)
The availability of substitutes. 3) Time factor, the longer the period the more elastic the demand. 4)
The price relative to a consumers budget. Small household necessities are often price inelastic,
whereas the price increase in gasoline shows the price of gasoline is more elastic. Good awareness of
price elasticity enables an organization to determine the price sensitivity of their product or service.
Tools to determine price: SWOT, segmentation analysis, benchmarking and/or review report.
