INTRODUCTION to

REVENUE
MANAGEMENT November 2019
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Objectives
v Explanation of why an excessive internal focus on profits
or owner’s return on investment is detrimental to the
long-term success of a hospitality business.
v Explanation of why businesses exist to create wealth for
their customers and how effective RM helps them do
that.
v Overview of the RM-related information contained in the
remaining chapters of this book.

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 Funny example
v A husband and wife are travelling by car from Melbourne to Sydney. After almost twenty-
four hours on the road, they're too tired to continue, and they decide to stop for a rest.
They stop at a nice hotel and take a room, but they only plan to sleep for four hours and
then get back on the road.
v When they check out four hours later, the desk clerk hands them a bill for $350. The man
explodes and demands to know why the charge is so high. He tells the clerk that although
it's a nice hotel, the rooms certainly aren't worth $350. When the clerk tells him $350 is
the standard rate, the man insists on speaking to the manager.
v The manager listens to the man and then explains the hotel has an Olympic-size pool and
a huge health club that were available for the husband and wife to use. He also explains
they could have used the tennis courts, jogging track, mini-golf, and bowling alley.
v No matter what facility the manager mentions, the man replies, "But we didn't use it!" The
manager is unmoved and eventually the man gives up and agrees to pay. He writes a
check and gives it to the manager. The manager is surprised when he looks at the check.
v "But sir," he says, "this check is only made out for $100."
"That's right," says the man, "I charged you $250 for sleeping with my wife." "But I didn't!"
exclaims the manager.
“Well," the man replies, "she was here, and you could have."

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What is Revenue?

Revenue
The total amount of sales achieved in a specified
time period. Revenue is calculated as:

Number of units sold x Unit Price =Revenue

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The Purpose of Business

vAchieving Profits
vGenerating returns on investment

For whom?

Company-centric ⟶Customer-centric

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The Profit Fallacy

The Profit Fallacy

Accountant’s Profit Formula

Sales = Cost + Profit

Applying basic algebra, the accountant’s formula

becomes:

Profit = Revenue - Expense

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Buyers also seek profits

Three Business Propositions Related to

a Ten-dollar Buyer/ Seller Transaction
Informed Buyer’s
Willingness to Accept
Seller’s Proposition Resulting Profit and Repeat the Trade
#1. Trade nine $1.00 $1.00 to the seller Zero
bills for the buyer’s
$10.00 bill.
#2. Trade ten $1.00 bills $ 0.00 to seller and Possible, but unlikely
for the buyer’s $10.00 buyer
bill.
#3. Trade eleven $1.00 $1.00 to the buyer Highly likely
bills for the buyer’s
$10.00 bill.
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The Profit Fallacy
In any rational business transaction, both the
buyer and the seller seek a profit.

Dual Entitlement Theory

= consumers believe that (1) they are entitled

to a reasonable price, and business are
entitled to a reasonable profit.

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The ROI Fallacy

The Return on Investment Fallacy

Economist’s Profit Formula

Profit = The reward for risk

Return on investment (ROI)

Owner’s return
Owner’s original = Return on Investment
investment

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The ROI Fallacy

The Return on Investment Fallacy

If an owner invests $ 800,000 in a business, and

achieves $200,000 in investment returns
(defined as revenue in excess of all expense),
that owner’s ROI would be 25 percent.

$200,000 investment return

= 25% ROI
$800,000 original investment

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The ROI Fallacy

The Return on Investment Fallacy

The purpose of business is to create and

keep a customer.
~Drucker
Businesses do so by ensuring that each
customer transaction results in an increase in
wealth for the customer.
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What is Revenue Management?

To provide profits to its customers along with sellers

and to increase customers’ wealth in addition to the
business’ wealth

Revenue Management (≈Yield MGMT)

The application of disciplined tactics that predict buyer
response to prices, optimize product availability, and yield
the greatest business income.

(Selling the RIGHT product to the RIGHT customer at the RIGHT time for the RIGHT price)

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The Purpose of Revenue Management
Customer-centric revenue management
A revenue management philosophy that places
customer gain ahead of short-term revenue
maximization in revenue management decision making.

Revenue Manager
Using customer-needs driven techniques, RM is
responsible for ensuring that a company’s prices
match a customer’s willingness to pay.
=> To make your company, its owners, and you prosper
by FIRST making your customers prosper
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Why RM matters in service
business?
Goods
§ Tangible
§ Homogeneous
§ Production/distribution
consumption different
§ Can be kept in stock
Services
§ Intangibility
§ Heterogeneous (variability)
§ Production/distribution
consumption the same
(Inseparability)
§ Can’t be kept in stock
(Perishability)

RM works in service biz because:

v Capacity is fixed (constrained supply)
v Inventory is perishable
v Demand varies by day of the week, months, seasons; or
leisure vs. business )
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Services (vs. Products)

“I” of Service Characteristic

Intangibility A service cannot be touched or seen before it is
purchased.
Variability Uneven performance results from variations
between the skills of those who are actually
delivering the service.
Inseparability It is often impossible to make a distinction
between the individual delivering the service
and the service itself.
Perishability Unsold inventory vanishes if not sold.

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 Constraint management

Hotel/Resort example

v # of rooms each day cannot vary (=constrained

supply)

v Demand for rooms varies, based on time of year

(demand fluctuation)

v Any room night not sold on a given day disappears

forever at the end of that day (perishability)

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RM Matrix

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RM in service businesses

Airline industry

• RM initially started (results of Deregulation Act of

1978)
• “Pay more when demand is higher”
– not pay more for first class than coach
• How many seats to make available at each of
the listed fares, depending on time of year/week,
remaining seats available, remaining time until
departure
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 RM in service businesses

Seat (Capacity) Price/seat Revenue Fare type

Without
Yield M

100 $ 100 $ 10,000 60days discount

20 $ 100 $ 2,000 60days discount

20 $ 200 $ 4,000 30days discount

Yield M
With

20 $ 300 $ 6,000 15days discount

40 $ 400 $ 16,000 Full fare (Biz traveler)
100 (Total) $ 28,000 (Total revenue)
n Assuming that all seats sold out
n Better job!!!! not YM($10,000) vs. YM ($28,000)
n Separating four segments (20, 20, 20, 40) by demands
n Business traveler = promising segment
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RM in service businesses

Hotel industry
• How much to charge for a room depending on the location,
type of room, time of year, time of week, duration of stay
Restaurant industry
• How much to charge for lunch vs. dinner

Golf industry
• Variable pricing: time of day, day of week, season of year
Cruise industry
• Variable pricing: time of year, type of cabin…

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Misuse of RM

• Fall 2000, Amazon conducted experiment to try to determine

price sensitivity of demand for DVDs
• Depending on previous purchases, discounts between 20-40%
offered ($33.97, $27.97 or $25.29) – thanks to Cookies!
• Customers who went back to Amazon saw the price
had jumped!
• Furious response by customers and press,
suspecting Amazon varied price by loyalty
“Amazon apparently offers good discounts to new users,
then once they get the person hooked and coming back
to their site again and again, they play with the prices to make more
money”

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The Revenue Management Process

Step 1 Step 2
Establish Forecast
Prices Demand

Step 5 Step 3
Evaluate Manage
Results Inventory

Step 4
Manage
Distribution

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BASIC TERM

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v Hard constraint: A supply constraint that cannot be
removed regardless of product demand. Examples
include hotel rooms and the capacity of natural gas
pipelines.
v Soft constraint: A supply constraint that can, with
sufficient lead time, and/or a reasonable expense, be
removed or lessened.
v Examples include the commercial airline and car rental
industries, as well as the taxi business and many
foodservice operations.

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QUESTIONS?

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