Revenue for Hospitality Industy
The most important factor affecting the demand is the price. With respect to this, before starting my writing, I’d like to describe the price flexibility. The price flexibility is changing of the demand as a result of the changes taken place in the price of the product or service. Let’s have a bottle of lemonade, we sell 100 units monthly when the price of this bottle of lemonade is 1 TL; then let’s the price of our lemonade raises and we start to sell it for 2 TL. We started to sell 75 units monthly after the price increase but the revenue we obtained from lemonade increased 50%. In such cases, if the consumers react intensively, it can be described that the price flexibility of demand is high.
Let’s calculate this situation through mathematics, we have to use the formula of “percentage change in demand / percentage change in price”. The percentage changes can be calculated with the formulas of last amount – first amount or amount/first total or amount.
Percentage change in demand = (75-100)/100=-0,25
Percentage change in price = (2-1)/1 = 1
The price flexibility of the demand = -0,25/1= -0,25
The price flexibility of demand is always interpreted as absolute.
It is critical that the flexibility equals to 1. The percentage the price increases, the amount sold decreases with that percentage.
Being over one can be described as there is flexibility. The users immediately quit the product against price increase. The luxury products are included in this class.
In case that it is under one, it can be said that there is no flexibility. They are the products which the reaction is not given immediately even if the price raises. The vital necessaries are included in this group.
The factors affecting pricing are divided into two as the factors that can be controlled and not.
The factors that can be controlled:
- Financial status of the enterprise,
- Pricing policy.
The factors that cannot be controlled:
There are 8 pricing techniques for the accommodation enterprises. These are:
- Cost oriented pricing: it is the pricing technique which is performed by taking the cost information of the enterprise into account. The enterprises preferring this technique should prefer one of the methods below:
- They may add profit margin on the unit cost.
- They may determine the breakeven point and do pricing based on this point.
- The pricing which is performed usually for food is performed as below: the sales are predicted, all costs except food are deduced from the predicted sales and the menu is designed with the cost per food.
- Profit oriented pricing: for profit oriented pricing, the capital is also taken into account. The enterprises preferring this technique should prefer one of the methods below:
- The pricing can be performed upon the taking out of the cost of the investment in determined time.
- This method is usually applied to the food and beverage pricing. First of all, the profit amount and sales price is calculated; the costs except food are deduced; the menu es designed with the difference between sales amount and profit.
- Marginal pricing: the price flexibility of the demand is the basis in this method. It is predicted how much the sales decrease in the unit price increase depending on the statistics of the previous years as well as the experience of the sales and general managers and it is targeted that the enterprise performs the most profit.
- Competition oriented pricing: in this method, cost, profit and sales are not important at all. The enterprise monitors the prices of the competitors. The reason for preferring this method is that the enterprise doesn’t need any forecast, experience or calculation.
- Marketing oriented pricing: the target market is determined; the position in this market and distribution channels of the accommodation enterprise are determined. The pricing is performed depending on the market position and distribution channel.
- Prestige oriented pricing: there is the belief that the high priced products have high prestige. The accommodation enterprises which want that their prestige is perceived as high launch the prices high. When preferring this method, the expectations of the guests who pay high amount would be high too. Bad comment, scoring and opinion will be formed about the accommodation enterprises remaining under the expectation.
- Leader pricing: it is the pricing method emerged with the market leader followed by the other enterprises. The enterprises which are not the market leader can’t perform the sales in case that they do pricing over the market leader; they would be in a difficult situation in case that they perform a pricing very below. Therefore, the method where the market leader is followed and the optimum pricing is performed is called leader pricing method.
- Psychological pricing: it is the pricing endeavor for changing the perception of guest through price.
The accommodation enterprises have methods specific for room pricing. These are:
- Investment cost method: according to this method, the room amount should be one thousandth of the investment cost.
- Hubbard method: according to this method, after forecasting all of the costs and revenues of the enterprise, the price and overnights required to be sold are determined to reach this target.
- Pricing method with the cost revenue forecast:
According to this method, this formula is used:
Daily room sales price = (the targeted profit amount + annual average operation cost)/365 * annual average occupancy ratio.
- Pricing with the weighted cost method: it is the pricing method where which room type has how much weight in the total cost has the weight with the same ratio in the total revenue to be obtained by taking the targeted total sales amount and number of overnight into account.
- Pricing based on room size: the rooms are prices per square meter.
Revenue management in the accommodation enterprises
Revenue management in the accommodation enterprises is ensuring revenue optimization by ensuring that the correct product is sold to the correct guests with the correct price. For this purpose, decisions should be taken at three levels. These decisions are strategical, tactical and reservation decisions.
All of the decisions on with which ways the hotel revenue is to be maximized can be gathered under this title.
The guests are separated into markets and segments; their profiles are drawn. Statistics and information is revealed as much as possible. (ADR, revpar, number of reservations taken, reservation taking speed, prices of the competitors, revpac, bar, the activity calendar present in the region). The strategical decisions are taken at the end of all these.
It is the entirety of the decisions taken about how much reservations are to be made under which conditions from which market and segment. In addition to this, a forecast should be done for the cancellation policies, the ones not coming even though they have reservation and the ones cancelling the reservation during the time for cancellation without payment and these situations should be taken into account and, if required excess reservation should be taken and it should be planned with which price and the other conditions the guests coming are to be directed to which accommodation facilities in case that excess reservation is taken.
It covers the decisions about how the strategy determined is to be applied. It covers the anticipations on which ones of the promotional activities should be brought into forefront, how many nights can be sold with which price and the decisions about benefiting through which channels and from which sales improvement activities would be better. These decisions taken would indicate difference depending on the dates required to be accommodated.
Revenue management process
- The total capacity and costs are individually determined.
- Market segmentation,
- Demand forecast and analysis,
- Determination of the capacity levels (how much quota would be opened to which class),
- Determination of the price,
- The reservation decisions are taken.
- Tactical price adjustments are made.
- This strategy is planned for the situation as much as possible. (Bomb explosion, outbreak of war, economic crises, and epidemics etc.)