Current Issues Facing Revenue Management

Current Issues Facing receipts ManagementThis dissertation bequeaths an analysis on how tax c ar genuine by dint of out(p) the years in dispa position industries with more focus on hotels. It discusses the different receipts worry strategies including determine, capability control, overbooking and forecasting. Related issues such as economic concerns, node perception, competition, and common techniques and approaches used for solving receipts steering chores ar excessively discussed. Finally, I give my suggestion on some important areas that warrant pass on research.IntroductionTradditionally the main purpose of tax receipts heed has been to maximise r scourue.It is the business practice with aim to see the right memorial to the right customer at the right equipment casualty at the right fourth dimension in order to maximise total tax income. (B.C Smith, J.F Leimkuhler and R.M.Darrow Vol 22). The concept of right in this definition means achieving the supr eme revenue for the sellers, and gaining maximum measure out for the buyers(S.E Kimes Vol 40). The basic of revenue prudence is to offer give noticeed pass judgment to stimulate conduct for inventory that would differentwise go unsold, firearm trammel the availability of the discounts to customers who are willing to pay a laster price. Hotel companies reported revenue join ons of 2 to 5% as a result of using revenue focal point (Ibid)The Brief History of Revenue ManagementAccording to Carroll and Grimes 1995 Hanks, Noland, and Cross 1992 Smith, Leimkuhler, and Darrow1992) Revenue focussing, also known as yield management, has been widely adopted in the air passage, hotel, and rental car industries, but has only recently gained attention in other industries (Kimes 2000 Kimes et al. 1998). Companies using revenue management sport reported revenue increases of 2% to 5% (Hanks, Noland, and Cross 1992 Smith, Leimkuhler, and Darrow 1992).In 1980s The airline industry launche d revenue management practices. During that time yield management techniques became a common practice among airlines. On January 17, 1985 Ameri loafer sky moods launched its Ultimate Super Saver fares in an effort to compete with the low address carrier People Express. ( www.ehotelier.com )The affect to fill at to the lowest degree minimum number of seats without selling every seat at discounted was the main reason that triggered the born by revenue management. ( www.ehotelier.com)As new Airline companies started to enter the market in the 1980s, Airline companies were eager to sell enough seats to cover fixed operating expenses. Then once fixed expenses were covered, and on that point were now fewer remaining seats to sell, the remaining seats could be sold at high prices in order to maximise on revenue and profits.According to (Boyd,1998), the application of correct revenue techniques by US Airlines and Delta Airlines resulted of an increase in revenue of US$500 and $300 mill ion abide byively, on the other hand Cross (1997) reports that revenue management helps Marriott Hotel to gainUS$100 million additional annual revenue Elliott (2003) make ups how revenue management throne contribute substantially to cost savings and revenue maximisation while helping maintain pure tone.Research on revenue management has extended to some(prenominal) industries, with three major streams of investigating descriptive (whether revenue management will work for a particular industry), pricing control, and inventory control. Industries that can use revenue management can be classified further by their relative ability to exercise pricing- and implore-control levers. An important aspect of implementing revenue management is to ascertain the extent to which customers will view pricing controls as being fair. While customers may initially view nearly any manipulation as potentially unfair, research on perceived candour has found that customers generally will accept pr ice manipulations as long as they believe they are gaining a benefit at the same time the business is receiving a benefit from pricing changes. Duration control involves some combination of manipulating customer arrivals and managing actual duration of use, depending on the industry in question.Revenue management uses the basic principles of deliver and demand economics, in a tactical way, to generate incremental revenues. There are three essential conditions for revenue management to be applicableThere is a fixed amount of resources available for sale.The resources to sell are very perishable. nodes are willing to pay a different price for using the same resources.The hotel industry fits these criteria passing well. Obviously, hotels defy a fixed inventory of retinue to sell these board are also extremely perishable. Hotel meanss perish every day, any room that is unsold tonight is gone forever. There is also no question that different segments of business are willing to pay different rates under various circumstances.Revenue management is of especially high relevance in cases where fixed costs are high as compared to variable costs. The less variable costs there are, the more added revenue will contribute to overall profit. This makes revenue management faultless for the hotel industry.Effective market segmentation is the key to successful revenue management for hotels. Market segmentation begins with seasonal demand. For years, hoteliers recognized that almost all hotels experience periods of high and dismantle demand. This is even more obvious in hotels, located in resort and dragion areas.Hotels quickly recognized that consumers would also pay more for rooms with a superior view, such as ocean or mountain views and other unique features of their location larger or un mutual rooms and rooms with unique features.Hotel revenue management hit its stride when hoteliers examined airline RM and realized that the factors of supply and demand, beyond natu ral seasonal demand, present opportunities to generate higher revenue. As room demand increases and room supply decreases, hotel rate opportunities also increase.The airlines earn taught us that supply demand opportunities appear all year long because of conventions, assort bookings, room production through web site marketing, special events and local attractions all execute revenue management opportunities.( Ehotelier )This dissertation address the way revenue management is utilise in hotels in UK and discusses the latest issues that faced revenue managers during the economic down turn last yearThis dissertation Study has been undertaken through detailed analysis on how revenue management is applied in hotels and then discuss the issues facing Revenue managers today through the analysis of responses to a survey that was sent to revenue managers working at hotels in UK.The research also include several working papers, conference proceedings and case studies that I believe are semiprecious in this study. Overall, 20 articles have been examined.Several review papers have provided an overview of research on revenue management. A hear of these papers is in Table 1. In This dissertation will focus on the progress of revenue management in recent years, especially afterwards 1999.Literature reviewHow Revenue Management is AppliedGallego and Phillips (2004) introduce the concept of flexible products for revenue management. They define a flexible product as a menu of both or more alternative, typically substitute, products offered by a constrained supplier using a sales or booking process. In this context, products include not only physical products but also work offerings. Researchers have applied revenue management object lessons in a wide physique of industries where suppliers offer flexible products. Airlines, hotels and rental car industries represent three major conventional applications of revenue management. These industries share some similar char acteristics. All of their products are perishable, the demand for their products vary significantly over time, and they have large fixed costs while variable costs are small in the short run. Because of revenue managements success in these industries, researchers and practitioners have begun trying to adopt it in a wide come in of miscellaneous industries such as restaurants, casinos, cargo, Internet services and apartment renting. These industries share some similar characteristics with the traditional industries. Some of these practices have acquired great success. In fact, all service providers can take advantage of revenue management theory. Just as ( Berman 2005) says, revenue management is an effective mechanism to allocate a service providers relatively fixed aptitude and to provide discounts on a much broader scale. The table below provides examples of revenue management application in different industries. We are not going to discuss the application of revenue management in every industry. In the following section, we provide a brief overview and examples of revenue management research in three non-traditional industriesRevenue management practices in different industries (Berman (2005)IndustriesExample of practicesHospitality IndustriesHotels nominate special rate packages for periods of low occupancyuse overbooking policy to compensate for cancellation, no-shows.RestaurantsMove customers to off-peak periods by offering discountcoupons, or charging reservation fees and higher mealprices on Friday and Saturday nights.AttractionsSet different admission charge levels, provide joint-entrytickets, group discounts, coupons, membership rates.Cruise lines and ferry linesProvide luxury class, economy class change prices oft according to demand sell more tickets than seatsto avoid cancellation and no show.CasinosCustomize offers such as complimentary room, tickets,gifts, discounts, etc., found on customers profitability.SaunasDetermine price found upon fa ctors such as room type, duration, and service type. fixProvide different resort packages to attract differentcustomers.GolfUse different prices to reflect the value of different times ofthe golf course.Sports events and distributionDetermine ticket price for an event based on based onfactors such as customer tastes and area of s ingestdetermine the price of season tickets determine the numberof tickets sold for apiece seat segment.ConferenceProvide different packages and rates to satisfy differentcustomers requirements.Transportation related industriesAirlinesProvide business class, economy class adjust pricesfrequently according to demand provide more tickets thanseats to avoid cancellation and no-show.Rental carsAdjust prices frequently according to demand serve highvaluedfleet utilisation with priority accept or rejectbooking requests based on length-of-rent controls.RailwaysDivide customers into standard class and first class providedifferent prices based on the day of travel and the time ofthe day.Subscription servicesIT assists and Internet ServicesAllocate resources such as gentleman resource, deliberation capableness, storage and network efficiency among segments ofcustomers and determine appropriate price for eachsegment, high class customers will be served with priority.Cellular network servicesControl call admission based on customer priority, higherclass customers will be served with priority.Major revenue management problemsRevenue management problems can be categorized into several different, but related, areas pricing, auctions, depicted object control (or inventory control), overbooking, and forecasting. In the following subsections, we will review each of these areas, but before we start, there are two points that need to be mentioned. First, although we categorize revenue management into several areas, this does not mean that these areas are completely isolated. In fact, these areas are highly correlated and need to be considered joint ly when solving practical problems and some researchers are indeed trying to solve these problems jointly. For instance, Feng and Xiao (2006) present a comprehensive mould to integrate pricing and capacity allocation. Second, auction is a specific type of pricing strategy. Here we separate auctions from pricing, because we want to emphasise the importance of auctions in the future application of revenue management. In addition, in this section, we also discuss other related issues regarding revenue management, including economic theory, the impact of competition and consolidation, customer perception and behaviour, the development and implementation of revenue management, feat evaluation of revenue management and techniques used for solving revenue management problemsManaging Seasonal versus Daily DemandRevenue management principles apply to all levels of demand. Resort hotels with seasonal rates have been using a form of revenue management for years by posting higher or lower rat es based upon seasonal demand this is the essence of revenue or yield management. If these hotels thought they could get in-season rates all year long, they certainly would. They are adjusting for supply and demand. ( ehotelier)Yield management provides the ability to build a base of business by posting a wide range of rates, low to high, to appeal to the broadest range of consumers. For hotels which are capable of handling group business, this is the theory behind quoting lower rates for groups getting the business on-the-books. Once this base business is booked, either by groups or transient individuals, lower rates can then be closed for sale. This is daily demand.Its important to understand that yield management is the process of closing-out lower rates when there are fewer rooms to sell leaving only higher rates as occupancy increases. Rates are not increased lower rates are closed for sale. There is an important distinction between the two.As demand increases, there are more m ethods of fall higher revenue the use of restrictions. Many hotels use restrictions very effectively. E.g. hotels with high weekend demand often restrict weekend reservations to a minimum of two nights by placing a minimum of two nights stay on Saturday, the more popular night. This limits stays to Friday/Saturday or Saturday/Sunday, the two weaker nights. The same can be applied to holiday periods.The key to successful revenue or yield management is to review advance reservations and make rate close-out decisions as often as expertness be necessary generally, three times per week. Hotels practicing revenue management gain an insight into the ebb and flow of business, knowledge of reservations booking pace, and a true apprehension of factors which impact occupancy and average rate.Capacity controlKoide and Ishii (2005) consider the hotel room allocation policies with earlydiscount, cancellations, and overbooking, but without no-shows. The presented modelcan provide the optimal et ymon under certain conditions. They also derive an optimalallocation for a simplified problem, which considers early discount but ignorescancellations and overbooking. McGill and van Ryzin (1999) consider the allocation of capacity for rental businesses with two classes of customers. Their research suggests that the capacity reductions enabled by allocation schemes can help to lift profit margins significantly.Zhang and Cooper (2005) address the simultaneous seat inventory control of a set ofparallel flights between a common origin and destination with dynamic customer choiceamong the flights. They solve this stochastic optimization problem through simulation basedtechniques. Most of the current capacity control practices are based on forecasting. However,forecasting is difficult, costly and the results are sometimes unsatisfactory. Therefore,researchers are trying to expose alternative approaches. van Ryzin and McGill (2000)present a simple adaptive approach to optimize seat prote ction levels in airline revenuemanagement. Instead of using the traditional method that combines a censoredforecasting method with a seat allocation heuristic (EMSR-b), this approach uses historical observations of the relative frequencies of certain seat-filling events to guidedirect adjustments of the seat protection levels. Their preliminary numerical studiessuggest that this method can be used to augment traditional forecasting and optimisationapproaches.Overbooking controlA number of researchers have developed dynamic optimization approaches to the airline overbooking problem and the related problem in the hotel/motel industry. The usual objective in these formulations is to determine a booking limit for each time period before flight departure that maximizes expected revenue, where allowance is do for the dynamics of cancellations and reservations in subsequent time periods and for penalties for oversold seats. KOSTEN (1960) develops a continuous time approach to this problem , but this approach requires solution of a set of simultaneous first derivative equations that make implementation impractical. Rothstein (1968), in his Ph.D. thesis, describes the first dynamic programming (DP) model for overbooking and reviews the results of test runs of the model at American Airlines. ALSTRUP et al. (1986) describe a DP treatment of overbooking for a two-class, nonstop flight and describe computational experience with the approach at Scandinavian Airlines. A DP analysis similar to Rothsteins but developed for the hotel/motelindustry and extended to two fare classes is described in LADANY (1976, 1977) and LADANY and ARBEL (1991). A control-limit type structural solution to the (one class) hotel overbooking problem is described in LIBERMAN and YECHIALI (1977, 1978Since McGill and van Ryzin (1999) had already presented a list of publications inoverbooking, we will only discuss the new publications. Zhang and Cooper (2005)focus on the overbooking problem for hotels with multiple tour-operators and concludethat an overbooking policy that treats the capacity of the hotel as a whole gives better costsavings than an overbooking policy that allocates the capacity to each tour-operatorseparately. Zhang and Cooper (2005) proposes two models (stationary-fares model andnonstationary-fares model) to deal with a multi-period airline-overbooking problem for asingle-leg flight with a single service class and use the model to calculate the optimalbooking limits. Coughlan (1999) presents an airline revenue maximisation-overbookingmodel at a fare class level for one service compartment-cabin where class level demand isused to determine the number of bookings for each class. He concludes that this modelshows significant improvement over previous methods by testing the model with data ofIrelands national airline, Aer Lingus. Biyalogorsky et al. (1999) propose that a strategyusing overbooking with opportunistic cancellations can increase expected profits andimp rove allocation efficiency, then derive a rule of how to allocate capacity to consumersoptimally. Under their strategy, the seller can oversell capacity when high-payingconsumers show up, even if capacity has already been fully booked, then the seller willcancel the sale to some low-paying customers while providing them with appropriatecompensation. Toh and Dekay (2002) create an overbooking model for hotels to find theoptimal level of overbooking considering customer service level, unexpected stayovers, and cost of walking displaced guest. predictionForecasting is a critical part of revenue management. The quality of revenue managementdecisions, such as pricing, capacity control, or overbooking, depends on an accurateforecast. Plt (1998) estimates that a 20% reduction of forecast error can translate into a1% incremental increase in revenue generated from the revenue management system.Revenue management forecasting includes demand forecasting, capacity forecasting, andprice forecast ing, each of which has its specific requirements. All forecasting tasks needto address issues such as what to forecast, the type of forecasting method, the aggregationlevel, the data to use and the accuracy of forecast. Forecasting can have differentaggregation levels, from full mass forecasting to semi-aggregated forecasting andto fully disaggregated forecasting. The data used in forecasting can be based on historicalarrivals or bookings. In addition, forecasting must be adjusted according to specialAn overview of research on revenue management 111 events, for example, holidays. Zaki (2000) gives a summary of forecasting for airline revenue management.Weatherland et al. (2001) discuss different ways to forecast demand for hotel revenuemanagement systems and assess the effectiveness of aggregated approach anddesegregated forecast. Furthermore, Weatherford and Kimes (2003) use data from ChoiceHotels and Marriott Hotels to conduct a comparative test on a variety of forecastingmethods for hotel revenue management systems to find the most accurate method. Theirresearch suggests that exponential smoothing, pickup method and moving averagemodels provide the most robust forecasts.Despite the mounting forecasting methods, human judgment is still indispensable inforecasting demand. Schwartz and Cohen (2004) make a study on 57 experiencedrevenue managers to evaluate the bias of this benignant of subjective judgment. They find thatthe nature of the user interface can influence the way the revenue managers adjust thecomputers forecasts, although the managers are given the same predictions. Themanagers with a flip computer and no chart made the smallest volume ofadjustments to the computers forecast, while the managers with a slow computer and an interactive chart made the highest volume of adjustments.How to develop revenue managementHow to develop and implement revenue management systems is another key issue.Kimes (1999) and Kimes et al. (1999) present a 5-step approac h for implementingrestaurant revenue management and provide insights from the implementation.Secomandi et al. (2002) present a case of how PROS Revenue Management Inc. workedwith three non-airline companies to determine the applicability of revenue management,and to design, develop, and implement Revenue Management systems. Skugge (2002)discusses issues that need to be considered when implementing a revenue managementsystem. He presents risks associated with development and implementation and ways toreduce these risks, and then proposes a two-step process to maximise the likelihood of asuccessful put completed on time and within budget. Okumuss (2004) researchreveals the complexity and difficulty of evolution and implementing a centralisedrevenue management project. He argues that this is because revenue managementimplementation is often viewed as a tactical activity, but this is not correct. He suggeststhat researchers and practitioners should view the implementation from the per spectivesof strategic management, and they should change management fields.Revenue managers count a crucial role in implementing revenue management. Skugge(2004) finds that one of the reasons why some companies enjoy much greater successwith revenue management is they have more effective revenue managers and suggestsseveral methods to improve revenue management education and training programs. Zeni(2003) presents a study performed at US Airways to measure the value of revenuemanagers contributions to a revenue management system and concludes that analystscan add up to 3 percent in incremental revenue. Parker (2003) presents that airlines needto establish and provide permit for a community of practice, which is a group ofrevenue management related people who interact on an ongoing basis. This group takesresponsibilities of establishing protocols and standard procedures with respect to revenuemanagement. The implementation of revenue management requires management to make a series o f business decisions. Yeoman and Ingold (2000) discuss the decision-making processes using examples from airlines and hotels. All business decisions have risks, as do revenue management decisions. Therefore, every company must evaluate the potential risks of revenue management. Lancaster (2003) focuses on the risk incurred in the revenuemanagement policies and analyses how risk management measurements and methods canbe applied to the revenue management practices.In addition, companies want to make sure that their investment on revenuemanagement can achieve the expected return. Delain and OMeara (2004) illustrate howa company can build a business case to estimate the incremental revenues and costsassociated with developing or enhancing a revenue management programmeIT service and internet serviceRevenue management also has application opportunities in subscription services, such ason-demand information technology service and Internet service. Internet service is, infact, a special ca se of on-demand information technology service.Nair and Bapna (2001) find that Internet Service Providers (ISP) have perishablecapacity for users to log on, a fixed number of units, and the possibility of segmentingprice-sensitive customers. These three characteristics are common with industries whererevenue management is traditionally applied. They also identify that revenuemanagement in Internet service is different than traditional applications. The Internetservice is continuous in state and time, the request and the service happensimultaneously, and overbooking is impossible for ISP. Furthermore, they formulate therevenue management problem for ISP as a continuous time Markov Decision Process tomaximize the discounted value while improving service levels for higher class customers.Wynter et al. (2004) introduce a revenue management model for a specific informationtechnology service on-demand computing service. Dube et al. (2005) make a furtheranalysis on the model of Wynter et al. (2004) both analytically and numerically, andconclude that the application of revenue management can significantly increase revenue of on-demand computing service providersEconomic concernsTo better apply revenue management in the industry, practitioners must have a thoroughunderstanding of be economic theory, such as supply and demand, opportunitycost, competition, consolidation, etc. Dana (1999) presents how revenue managementtechniques, such as price dispersion, can shift demand even when the peak time isunknown. Firms must compete with each other to get customers, so revenue managementdecisions of one firm unavoidably affect the demand for other firms in the same industry.The sudden reversal in the lodging industrys fortunes from 2008 to 2009 made the focus on customer rate resistance, contract renegotiations, competition, and price wars as top priorities for revenue managers. This contrasts with a 2008 study by Cornell university , where human resources and technology issu es were ahead of economic concerns. The recent bad economic situation made it for revenue managers to maintain price positioning, because the drop in demand has shifted considerable pricing power to the customer. Although many hotels can compete effectively on price (and others may have little choice), revenue managers may also draw on numerous non-price competitive techniques, including adding value. One pricing approach might be to create a set of targeted rate promotions that are protected by rate fences and designed to attract price-conscious guests. Another technique is to bundle services into packages that disguise room rates. Non-price techniques include competing on the basis of quality, creating strategic partnerships, taking advantage of your loyalty program, developing additional revenue sources, and developing additional market segmentsEven as they agreed that customers have gained considerable negotiating power, a research by Cornell university see a larger role for RM as the economy recovers. In the meantime, revenue managers have a key responsibility to determine ways to offset the loss of business by creating special rates that are protected by rate fences to attract different market segments or to augment existing packages to retain current businessLooking ahead, revenue managers should be aware that customers will be strongly focused on price and less so on brand loyalty. The common thread in this view of hotels future is that RM is a valuable tool for hotel marketers and managers as they consider tactical price setting and strategic price positioning. The managers are well aware that revenue management cannot help in all cases. Also revenue managers should broaden the perspective on revenue management to include as many customer touch points as is appropriate. In a sense, this represents a combination of marketing principles with revenue management tactics. As demand returns, application of RM approaches will be able to help hotels find the way back to rate integrity. Based on that idea, now is the time to set price strategies and be ready with revenue management tactics when the recovery comes.Customer perceptionAccording to Cornell University research many managers have been reluctant to adopt revenue management practices because of possible customer dissatisfaction. They may well find support for their fears in the fairness literature, which has shown that customers will refuse to patronize companies perceived as unfair.Customers from different cultures and nationalities often have different service expectations (Donthu and Yoo 1998). For example, Lee and Ulgado (1997) found that American fast-food customers considered low prices to be of paramount importance when evaluating satisfaction, whereas Korean consumers were more concerned about service dimensions such as reliability and empathy. Also, Asians often see eating out as more of a social or family activity than do Americans or Europeans (Hall 1966)