Revenue Management for the Hospitality Industry

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  • 0:03 Revenue Management
  • 1:26 Revenue Management Pillars
  • 4:04 Implementing Strategy
  • 5:18 Lesson Summary
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Lesson Transcript
Instructor: Elizabeth Wamicha

Elizabeth teaches undergraduate courses in Business and Information Technology for the last 7 years. She is currently on course to completing a Doctorate in Information Systems

This lesson provides a definition of revenue management, a tool that is used to predict customer demand for a given product, and explores its application and importance in the hospitality industry.

Revenue Management

Since complex societies and trade based economies have existed, the main reason that businesses exist is to make money, or in more formal terms, to generate revenue. The way in which this revenue generation process is controlled by a business is also known as revenue management.

Many industries in the world today do have several strategies that they use to manage the revenue that they generate. The hospitality industry is a clear example of this. Revenue management in the hospitality industry is a useful approach to ensuring optimization of product availability and growth of revenue. In order to illustrate this better, let us use a hypothetical hotel called Holiday Resort.

Jane is a customer of Holiday Resort, who would like to book a room in her favorite hotel during Christmas. She's been spending her Christmas holidays over the last few years at this hotel. Holiday Resort should be able to ensure that Jane, and all their other customers, get what services are of value to them as accurately and efficiently as possible. In order for Holiday Resort to do this for their customers, they would be required to implement a revenue management strategy.

How would Holiday Resort do this you might ask? Well, there are four fundamental pillars that Holiday Resort would have to consider as they implement their revenue management strategy. We discuss more about these pillars, or objectives, in the next section.

Revenue Management Pillars

1. Pricing Strategy

Holiday Resort's revenue management strategy would need to consider four fundamental aspects. The first one would be their pricing strategy. Pricing strategy within the context of the hospitality industry implies placing a price on a product or service that is closely aligned to the customer's needs.

For example, high-end customers coming in to Holiday resort would not mind paying a premium in order to get a service that they felt was of value to them. Frequent customers such as Jane would be encouraged to join loyalty programs that could provide discounts on prices at certain times of the year. All these are examples of pricing strategies that Holiday Resort can use to entice different customer groups. These different customer groups will often have different requirements.

2. Distribution Mechanisms

The second pillar of a revenue management strategy is distribution mechanisms. Holiday Resort can incorporate a number of distribution mechanisms, such as a website where it can reach out to potential customers hoping to book a room online. The hotel can also have dealers who sell bookings to customers in a physical location, such as a booking office.

It is important to note that in most cases, different distribution channels will have customers with different price sensitivities. Price sensitivity means that, customers who book for rooms using Holiday Resort's online platform are more likely to be attracted to cheaper offerings than those who visit a physical booking office to book a room.

3. Marketing Strategy

The question then remains, how can Holiday Resort market its products and services in order to drive sales? For us to answer this question, it is important to note that any revenue management strategy needs to align with the hotel's marketing strategy. The main aim of a marketing strategy would be to drive sales for the business. For example, Holiday Resort can consider temporarily decreasing the price of a room, even for a few hours, in order to drive sales. The goal here would be to balance between increasing sales volumes and the breakeven point, or the point at which the hotel achieves profitability.

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