Hospitality Revenue Management Concepts and Practices

HOSPITALITY REVENUE
MANAGEMENT
Concepts and Practices
HOSPITALITY REVENUE
MANAGEMENT
Concepts and Practices
Edited by
Peter Szende
First edition published 2021
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Library and Archives Canada Cataloguing in Publication
Title: Hospitality revenue management : concepts and practices / edited by Peter Szende.
Names: Szende, Peter, editor.
Description: Includes bibliographical references and index.
Identifers: Canadiana (print) 20200153501 | Canadiana (ebook) 20200153552 | ISBN 9781771888882 (hardcover) |
ISBN 9781003019923 (ebook)
Subjects: LCSH: Revenue management. | LCSH: Hotel management. | LCSH: Hospitality industry—Management.
Classifcation: LCC HD60.7 .H67 2020 | DDC 647.940681—dc23 | 658.15/54—dc23
Library of Congress Cataloging-in-Publication Data
Names: Szende, Peter, editor.
Title: Hospitality revenue management : concepts and practices / edited by Pete Szende.
Description: Palm Bay, Florida : Apple Academic Press, [2020] | Includes bibliographical references and index.
| Summary: “Tis new textbook, Hospitality Revenue Management: Concepts and Practices, provides a
comprehensive, in-depth introduction to the basic concepts and best practices of hospitality revenue management.
With a real-world, hands-on approach, the book places students in the role of a revenue manager striving to
succeed in an ever-changing hospitality business environment. Te book takes a unique multi-author, collaborative
approach, with chapters from outstanding industry leaders who share their experience and provide the information
necessary to arm students with the most up-to-date tools and methods they to be efective in the hospitality revenue
management feld. Te chapters cover the important topics in hospitality revenue management, including hotel
pricing, hotel segmentation, distribution channels, competitive analysis, hotel forecasting, performance analysis,
market data, supply and demand management, and more. Tis comprehensive and contemporary textbook
efectively meets the curricular requirements of undergraduate and graduate courses. Te book can also be used
as a reference for practitioners and as a text for executive education programs. Each chapter includes features to
keep students interested and engaged. Tese include case studies, internet activities, team projects, spreadsheet
assignments, brief histories, and more”-- Provided by publisher.
Identifers: LCCN 2019057617 (print) | LCCN 2019057618 (ebook) | ISBN 9781771888882 (hardcover) |
ISBN 9781003019923 (ebook)
Subjects: LCSH: Hospitality industry--Finance. | Hospitality industry--Management. | Revenue management.
Classifcation: LCC TX911.3.F5 H66 2020 (print) | LCC TX911.3.F5 (ebook) | DDC 910.68/1--dc23
LC record available at https://lccn.loc.gov/2019057617
LC ebook record available at https://lccn.loc.gov/2019057618
ISBN: 978-1-77188-888-2 (hbk)
ISBN: 978-1-00301-992-3 (ebk)
ABOUT THE EDITOR
Dr. Peter Szende has over 25 years of management experience in the

hospitality industry in both Europe and North America. He joined the Boston
University School of Hospitality Administration as Assistant Professor in
2003. He was promoted to Associate Professor of the Practice in 2010. He
was promoted again in 2017 to Professor of the Practice. Between 2016 and
2019, he served as Associate Dean of Academic Afairs.
Dr. Szende received a Fulbright U.S. Scholar Grant in 2014. He was pre-
sented with the Chef Herman Breithaupt Award from International CHRIE
in 2017.
Currently, Dr. Szende is Programme Lead in Hospitality Management at

Oxford Brookes Business School, Oxford Brookes University, UK.
CONTENTS
Meet the Contributing Authors......................................................................... ix

Foreword .......................................................................................................... xv
Editor’s Preface ................................................................................................ xix
Acknowledgments..........................................................................................xxiii
1. Hotel Revenue Management: An Introduction ................................1

Carolyn Fredey and Roy Madhok
2. The Fundamentals of Pricing Hotel Guest Rooms .........................31
Raul Moronta and Carolyn Fredey
3. Evolving Hotel Segmentation..........................................................61
Roy Madhok and Theresa Doherty
4. Key Hotel Distribution Channels ...................................................85
Elyana Falk and Calvin Anderson
5. Competitive Analysis in Hotel Revenue Management .................115
Theresa Doherty and Leslie Lew
6. Hotel Revenue Management: Forecasting and Budgeting ...........139
Theresa Doherty and Carolyn Fredey
7. Performance Analysis in Hotel Revenue Management ................165
Roy Madhok and Leslie Lew
8. Market Data for Hotel Revenue Management ..............................193
Calvin Anderson, Elyana Falk, and Nicholas Catalfamo
9. Restaurant Revenue Management: Basic Concepts......................231
Kristin V. Rohlfs
viii  Contents
10. Restaurant Revenue Management: Advanced Demand

Management Concepts..................................................................261
Kristin V. Rohlfs
11. Restaurant Revenue Management: Advanced Supply
Management Concepts..................................................................295
Kristin V. Rohlfs
12. Function Space Optimization .......................................................331
Marianna B. Accomando and Bob Chamberlin
13. Cruise Line Revenue Management ...............................................367
Adam Snitzer
14. Total Revenue Management ..........................................................403
Gabor Fenyves
15. Revenue Management: A Hotel Owner’s Perspective...................437
Jonathan Jaeger and Lambis Pahiyiannakis
Glossary .............................................................................................. 469

Index................................................................................................... 485
MEET THE CONTRIBUTING AUTHORS
Marianna B. Accomando
As both Vice President of Sales & Marketing and Assistant General Manager for
the Four Diamond Seaport Hotel and World Trade Center in Boston, Marianna
holds multiple responsibilities. She is responsible for leading all sales and market-
ing efforts to all key customer-facing business segments. Her role includes leading
several teams, such as group, exhibition, transient, revenue management, reserva-
tions, catering, and weddings for the property. In addition, she manages the guest
service experience for one of Boston’s leading and consistently in the top 5 Trip
Advisor Boston rated hotels.
A graduate of the University of New Hampshire, Ms. Accomando brings over
35 years of hospitality experience to this position.
Calvin Anderson
Calvin serves as Chief Commercial Officer at Domio, a luxury apartment-hotels
company that offers the amenities of a hotel, with the footprint and features of fully
equipped apartments in every room. Prior to Domio, Anderson led all commer-
cial verticals for OYO North America including data science, brand and revenue
channels as the company scaled from zero to more than 300 hotels in its first year.
Additionally, Calvin served as CRO of RLHC overseeing top line of a 1,400-hotel
portfolio and carried senior revenue strategy rolls at Duetto, Hilton and Highgate
before that. Anderson also taught grad school courses at the NYU Tisch Center for
Hospitality and Tourism, serves on the HSMAI Americas Board, was named 20
Next-Gen Leaders by Hotel Magin 2018 and was also named one of 10 Technology
Rock Stars by Hospitality Upgrade in 2020.
Nicholas Catalfamo
Nicholas is the Director of Revenue Management at the Courtyard by Marriott
Boston Cambridge with Highgate. He previously served as the Revenue Analyst
at the Boston Park Plaza, where he began his vocation in revenue management.
A graduate of Boston University’s School of Hospitality Administration, Nicholas
co-authored a study published in the Journal of Hospitality and Tourism Education
in 2018.
x  Meet the Contributing Authors
Bob Chamberlin
A graduate of Boston University with a BS in Hotel and Food Administration and
an MBA with a concentration in Marketing from Bentley College, Bob has 25 years
of hospitality experience with Sheraton, Westin, Starwood, Hilton, and Vista Inter-
national. Bob is a Senior Business Analyst with Liberty Mutual, working with the
Meeting and Event Strategy team, and Opening Revenue Manager for the Encore
Boston Harbor, the first urban resort casino in the United States. As Manager of
Strategic Analysis and Business Optimization at the Seaport Hotel & World Trade
Center Boston, he developed the space optimization principles for the 200,000 sq.
ft. of meeting space, boosting banquet revenue by 41% over a 10-year period.
Theresa Doherty
Theresa Doherty is a graduate of the Cornell University School of Hotel Admin-
istration. She has served as an Adjunct Professor at Boston University’s School of
Hospitality Administration, teaching several courses in revenue management. The-
resa has spent the majority of her revenue management career with Marriott where
she is currently an Area Director of Revenue Management.
Elyana Falk
Elyana Falk has a passion for hospitality and currently leads the Expedia lodging
team in the Pacific Northwest as Area Manager. Elyana and her team work closely
with more than 1,000 properties throughout the Pacific Northwest US, helping
partners to build their visibility, increase guest interest, and drive bookings through
the many brands of Expedia, Inc. Elyana has worked in three varying territories
with Expedia, including Newport, Rhode Island; New York City; and currently
Seattle, Washington. Prior to Expedia, Elyana worked at a variety of hotels with
roles ranging from housekeeping to revenue, giving her a unique perspective of
combining operations with the online travel market. Elyana is an active member of
HSMAI and is a board member of the Cornell Hotel Society.
Gabor Fenyves
Gabor Fenyves is currently the Vice President of Revenue Management for Cres-
cent Hotels and Resorts, based in Toronto, Canada. Prior to joining Crescent, he
worked at the Westmont Hospitality Group as Corporate Director of Revenue Man-
agement. Gabor graduated from Cornell University with a Master’s of Management
in Hospitality. He holds a BA from École Hôtelière de Lausanne in Switzerland and
has traveled the world extensively, working for multiple hotel brands, including
IHG, Marriott, Fairmont, and Hilton. His expertise lies with independent proper-
ties and incorporating out-of-the-box revenue management strategies in the day-
to-day hotel operations.
Meet the Contributing Authors  xi
Carolyn Fredey
Carolyn Fredey is a hospitality revenue management professional and adjunct pro-
fessor based in New York, New York. She holds a MMH degree from the School of
Hotel Administration at Cornell University, as well a BA from Florida State Uni-
versity. She enjoys teaching her students and employees the importance of pric-
ing and having a revenue management strategy that considers brand integrity and
profitability.
Jonathan Jaeger
Jonathan Jaeger currently serves as a Senior Managing Director with LW Hospital-
ity Advisors, based in New York City. During his tenure at LWHA, Mr. Jaeger has
been responsible for the management and execution of over 1000 lodging/gam-
ing consulting and valuation assignments throughout the United States, Canada,
Mexico, and the Caribbean on an annual basis. From February of 2014 through
August of 2019, Jonathan was a Managing Director with the firm. Prior to joining
LWHA, Mr. Jaeger had been with Pinnacle Advisory Group from January of 2008
through January of 2014. He graduated with a Bachelor of Science from the Boston
University School of Hospitality Administration in addition to earning a minor in
Business Administration from the Boston University School of Management. Mr.
Jaeger also serves as a member of the Adjunct Faculty at New York University and
at Boston University.
Leslie Lew
Leslie Lew is an entrepreneur, hotel executive and Founder of Public Boardroom
Inc. Lew has over 20 years of experience in the hospitality industry starting his
career at a five-diamond resort gift shop to leading the revenue management, dis-
tribution and e-commerce organization as Vice President of Revenue at Provenance
Hotels. He graduated with honors from Boston University School of Hospitality
Administration, guest lectured at New York University Tisch Center for Hospitality
and served on the board of National Society of Minorities in Hospitality. Lew cre-
ates economic opportunity and mobility through education.
Roy Madhok
Roy Madhok is the Vice President of Revenue Management for Real Hospitality
Group, Roy Madhok, CRME, CHIA, where he oversees revenue management and
distribution for the RHG portfolio of over 100 hotels. Prior to joining the Real
Hospitality Group, Roy was a Regional Director of Revenue for Highgate and also
served as an Adjunct Professor at Boston University’s School of Hospitality Admin-
istration, teaching both introductory and advanced revenue management courses.
Roy has been a speaker at various panels and conferences such as the HSMAI Rev-
enue Optimization Conference, the Expedia Partner Conference, Cornell Hotel
xii  Meet the Contributing Authors
Society’s Lodging Pulse, and others. In addition to speaking at events, he sat on

New York City’s HSMAI Board and Revenue Management Committee.
Raul Moronta
Raul Moronta is a passionate hotel revenue management leader responsible for
overseeing revenue strategy for Crescent Hotels & Resorts. Prior to this role, he
was responsible for franchise revenue management operations for the full-service
portfolio at Starwood Hotels & Resorts. He holds a BS from the Pontificia Univer-
sidad Catolica Madre & Maestra in the Dominican Republic and an MBA from the
University of New Haven, Connecticut. He has a Certificate in Hotel Real Estate
Investment and Asset Management from Cornell University and is a past board
member of the HSMAI Boston Chapter.
Lambis Pahiyiannakis
Lambis Pahiyiannakis is responsible for underwriting acquisition opportuni-
ties and assisting Asset Management with quarterly and yearly reporting at Cor-
nerstone Real Estate Advisers. He also plays a critical role in underwriting and
reviewing lending opportunities for the core mortgage and alternative investments
group. Prior to joining Cornerstone in 2013, Mr. Pahiyiannakis was a Business
Development and Acquisitions Analyst for Pyramid Hotel Group in Boston for
over two years. There, he was actively engaged with business development efforts
and assisted with adding and retaining more than 20 management contracts to
the existing portfolio of approximately 50 hotels. Mr. Pahiyiannakis earned a BS
degree from Boston University with a double major in Economics and Hospitality
Administration.
Kristin V. Rohlfs
Kristin V. Rohlfs is an independent consultant and researcher based in Rochester,
New York. She holds a PhD in Revenue Management and an MMH degree from
the School of Hotel Administration at Cornell University, as well as a BBA degree
from The University of Texas at Austin. Her research interests focus on small-busi-
ness application of operations management and revenue management and cus-
tomer reactions to revenue management practices. Her authored works include a
dissertation, “The Role of Space in Revenue Management” (2009), and an article,
“Best Available Rate Pricing,” published in the Cornell Quarterly (2005). A 2011
article co-authored with Breffni Noone and Kelly McGuire, “Social Media Meets
Hotel Revenue Management: Opportunities, Issues, and Unanswered Questions,” can
be found in the Journal of Revenue and Pricing Management.
Meet the Contributing Authors  xiii
Adam Snitzer
Adam Snitzer is President of Peak Revenue Performance, Inc., an international
pricing and revenue strategy consulting firm with expertise in consumer products,
financial services, and travel, particularly cruise lines, riverboat companies, and
tour operators. For sixteen years, he occupied senior revenue management posi-
tions at cruise lines such as Royal Caribbean, NCL, Cunard, Costa, and Seabourn.
He lectures on cruise line revenue management and writes frequently on pricing
and revenue management topics.
FOREWORD
It is hard to believe that both Dr. Peter Szende and I got our starts in the
hotel and restaurant business before revenue management was “invented”
in the industry and certainly before the term was coined. As the notion of
yield management has given way to the larger concept of revenue manage-
ment and as terms such as “opaque rates,” “rate parity,” “dynamic pricing,”
“BAR,” and “LRA” have entered the hospitality lexicon, it has become more
and more important for students, professionals, and academics to become
experts in this still-emerging feld.
When I joined the Boston University faculty in 2011, Dr. Szende was
working hard on developing a series of hospitality management learning
modules centered around food and beverage management. He and I com-
muted to home from work together nearly every night; the one-mile walk
and conversation was interrupted only by a stop at the grocery store for
the daily samples, and we would remark on how and why they could price
bananas at only 19 cents each (29 cents for organic)—an interesting revenue
management question!
Our conversation on this walk usually focused on the progress of his

module project and what major project he would pursue next. As a then
25-year industry, practitioner who had just made the transition to academia,
I was keenly interested in identifying areas that were important to practi-
tioners but had not yet been fully explored by scholars. I had a particular
interest in those topics that were not necessarily taught (or taught well) to
students in hospitality programs. Dr. Szende’s mind was, as usual, working at
a feverish pace, looking to apply his many years of direct operational expe-
rience to solving hospitality-related problems.
xvi  Foreword
He described for me, many times, what ultimately became this textbook,
which brilliantly combines, as the title indicates, both concepts and practices,
making this a single-source resource for practitioners, faculty members, and
students. He has identifed, hounded, and, in some cases, harassed many
leading experts in their respective subject areas to deliver their expertise
in a manner that expands their reach far beyond their current roles. Tese
experts include seasoned industry professionals as well as relative newcom-
ers to the revenue management feld, including many of whom were Dr.
Szende’s students, others who are adjunct faculty members at a number of
leading institutions, and others who are bringing to light, for the frst time
formally, revenue management insight from additional allied hospitality
segments.
Chapter 1 begins with a broad introduction to hotel revenue manage-

ment. From this very frst chapter, care is taken to include the numerous
pedagogical elements outlined in the Editor’s Preface and which should be
of tremendous beneft to students learning from this textbook.
Te various fundamentals of hotel revenue management are then pre-

sented in a logical sequence, although each chapter serves as a self-con-
tained presentation of a given topic. Tis sequence begins with Chapter 2
on the most fundamental revenue management concept, pricing hotel guest
rooms. As we have learned over time, the way hotels mix and stack business
is critically important; hence, Chapter 3 introduces the concept of hotel seg-
mentation.
Further investigation into hotel segmentation leads to distribution chan-

nels in Chapter 4 as optimal building of each segment and the overall hotel
is dependent on reaching the right audience in the most efective manner.
Tis then transitions into Chapter 5 with the evolution of competitive anal-
ysis and the creation and use of STR reports, which, coming from someone
who recalls counting cars in the parking lots of roadside motels for feasi-
bility studies in the mid-1980s, have been a most welcome addition to the
industry.
With the current environment in mind, there is likely no chapter more

useful than Chapter 6, which details how to translate the voluminous
data produced by revenue management systems and its focus on revenue
Foreword  xvii
forecasting and budgeting. Chapter 7, which provides the tools for both pre-
hoc and post-hoc performance analysis, contains novel material that can be
readily applied to real-life scenarios. Chapter 8 then concludes the hotel rev-
enue management portion of the text with practical ideas on how to bench-
mark performance.
Among the unique features of this textbook is the inclusion of a compre-

hensive series of chapters on restaurant revenue management. Tis section
of the text begins with basic concepts in Chapter 9 and then walks through
advanced concepts related to demand in Chapter 10 and supply in Chapter
11.Tese chapters provide the most comprehensive overview of restaurant
revenue management to appear in print to date, and the chapters included
provide this in a logical and thoughtful progression that can add a current
view to any restaurant management curriculum.
Te fnal chapters of the text expose the reader to additional areas of

revenue management that have only recently been codifed. Te presenta-
tion in Chapter 12 of how best to optimize function space has become a
critically important tool in an environment where group demand growth is
ofen exceeding transient demand growth, and where properties are either
functionally or economically limited in their ability to expand their meeting
space.
Signifcant ancillary spend, fxed embarkation and debarkation dates,

and the ability to physically move the product have resulted in revenue
management in the cruise industry developing its own unique systems and
vernacular as explained in Chapter 13. Chapter 14 moves on to present both
a framework for applying revenue management concepts to new areas as
well as identifying opportunities for applying these principles to golf and
spa operations.
Finally, Chapter 15 brings everything full circle and provides the hotel
owner’s perspective on the revenue management process. Afer all, what use
is maximizing revenue if it does not ultimately improve proft?
When I made the decision to return to the industry in 2013 afer a six-
year absence, one of the areas where I knew my skills had fallen behind
was understanding the dramatic evolution that was occurring in the revenue
xviii  Foreword
management area. Quite frankly, it’s been a challenge to keep up with it,
and I had never identifed quite the right resource to learn from and use to
teach within my own organization. Fortunately, Dr. Szende has recruited
outstanding industry leaders as authors and gathered the information nec-
essary to prepare and produce this exemplary textbook on the topic that
will undoubtedly be utilized by students of all varieties in universities and
companies throughout our great industry.
—Barry A.N. Bloom, PhD

President and Chief Operating Officer
Xenia Hotels & Resorts, Inc.
EDITOR’S PREFACE
Hospitality Revenue Management: Concepts and Practices provides an

in-depth review of basic concepts and best practices of hospitality revenue
management. Unlike standard textbook construction, in which chapters
build upon the knowledge gained from previous chapters, each chapter of
this book is a self-contained view of a specifc aspect within hospitality rev-
enue management. Our aim is to ofer a comprehensive and contemporary
textbook to efectively meet the curricular requirement of undergraduate
and graduate students. Te book can also be used as a reference for practi-
tioners and as a text for executive education programs.
Trough its real-world approach, students are placed in the role of a

revenue manager striving to succeed in an ever-changing business environ-
ment.
Tis book has been designed with distinctive features:
• A self-contained structure that allows for greater teaching

fexibility
Because each chapter is self-contained, the sequence of chapters can be

altered to ft any class timeline, and the material can be used in a variety of
formats to ft personal teaching preferences or time constraints of individual
courses. Although chapters are standalone, our goal has been to develop a
product that follows a logical fow of ideas both within each chapter and
from one chapter to the next.
• Multi-author, collaborative approach
Given the constant changes in the feld of revenue management and to

ensure that the book content would be relevant and include the most updated
xx  Editor’s Preface
information, multiple authors contributed to this textbook. Te purpose of

this was to capture the collective expertise of contributors in the hospital-
ity revenue management feld yet remain cohesive in content and style. By
engaging a number of topic experts, the expertise each contributor brings
surpasses what any single author could have achieved.
Once we identifed the contributors, we established the emphasis of each

chapter and the overall organization of the book. Te uniform orientation of
the text refects the ideas and styles of individual contributors, but we have
also been able to integrate the chapters into a coherent whole.
• Pedagogical features that keep students engaged and

challenged
Distinguishing pedagogical features defne the overall tone of any textbook.

Although the chapters in this book are standalone, a uniform pattern of
pedagogical aids across all chapters has been designed to create a consistent
learning experience, while accommodating a variety of teaching styles.
Learning Objectives: Each chapter opens with a list of learning objectives

that serve to focus the reader’s attention on key concepts.
Key Terms: Key terms are emphasized in bold when frst used in the text and
listed at the end of each chapter in the glossary.
Boxed Features: Each chapter includes fve standard, boxed pedagogical fea-
tures. Tese boxes are intended to briefy depart from the fow of the chapter
in order to expand upon the concepts presented and enliven the discussion.
• So What?—An opener designed to draw the student into the chapter

and stimulate them with a critical-thinking question
• ˜ink Historically—A refection on historical events intended to

promote a deeper understanding of the material and demonstrate
ways in which past events relate to current management issues.
• Real People—A presentation of difficult situations that real manag-

ers have faced, which helps students understand and relate chapter
content to managerial practices.
Editor’s Preface  xxi
• Pros/Cons—Features that present opposing views on a relevant issue

and prompt debate or discussion.
• Seeing Further—A theme that refect the latest hot topics or profes-
sional concerns related to the topics discussed.
Spreadsheet Exercises: Profciency with spreadsheets is a great advantage to

revenue managers. In order to develop students’ computational skills, each
chapter includes two practical problems that can be solved using Excel.
Discussion Questions: Questions challenge students to think critically about

the material.
Applications: Short case studies allow students to analyze and dissect chap-
ter concepts through real-life scenarios.
Team Activity: Each chapter includes an experiential activity that will assist
learners in the practical application of the chapter’s concepts.
Internet Activity: Designated internet activities link the chapter and the
Internet to create a dynamic learning environment.
Glossary: Te glossaries provide students with an accessible reference tool

and a list of key concepts that they should master.
Te password protected instructor area is available for qualifed instructors

only. It includes:
• Instructor’s Manual: Te comprehensive instructor’s manual con-

tains answers/solutions for all discussion questions, problems,
spreadsheet exercises, and applications.
• Test Bank: Te exam test bank contains 20 multiple choice questions

for each chapter (10 easy and 10 advanced).
ACKNOWLEDGMENTS
We must frst thank each of the contributing authors, who graciously agreed
to share their knowledge.
I would also like to express my gratitude to the following undergraduate

students at Boston University School of Hospitality Administration: Emily
Stewart and Namrata Sridhar, who selfessly supported every step of the
book’s development. I would like to acknowledge Allyson Rung, also a Bos-
ton University student, for her valuable contribution to the cruise revenue
management chapter.
We are especially grateful to Nicholas Catalfamo, Director of Revenue

Management at Highgate, for serving as our editorial assistant throughout
the publication process.
We owe special thanks to Timothy Kenney, Director of Revenue Man-

agement at Kimpton Hotels & Restaurants, who served as an early reviewer
of the manuscript.
CHAPTER 1
Hotel Revenue Management:

An Introduction
Carolyn Fredey and Roy Madhok
OVERVIEW
Revenue management is the art of selling the right inventory to the right
customer at the right price at the right time to yield optimal proÿt. The
practice of revenue management can be applied to a multitude of industries
that share similar characteristics, including high ÿxed costs, ÿxed capacity,
perishable inventory, variable demand, price sensitivity, and segmentation.
In this chapter, we will speciÿcally discuss the management of hotel room
inventory, but the same principles can be applied to other hospitality
sectors such as airlines, cruise lines, rental cars, catering, and restaurants.
LEARNING OBJECTIVES
After studying this module, you should be able to:
Underline the fundamental concepts of revenue management in order to
optimize hotel revenues and proÿt
Identify the components of the revenue cycle in order to recall the eco-
nomic relationships at play
Deÿne segmentation, channel mix, and the di°erences in buying behav-
ior
Calculate basic room statistics, market share, and proÿt measurements
Demonstrate a clear understanding of organizational structure as it
relates to revenue management
Articulate revenue management strategy with various industry
stakeholders
1
2  Hospitality Revenue Management: Concepts and Practices
OUTLINE
Introduction
Qualifcations for Applying Revenue Management
Segmentation
• Buying Behavior
• Optimal Mix of Sales
• Channel Management
Performance Metrics
• Room Statistics
• Occupancy
• Average Daily Rate (ADR)
• Proÿtability
• Market Share
• Forecasting and Budgeting
Inventory Management
Communication
Daily Interaction with Property Operations and Sales
Discussion Questions and Applications
INTRODUCTION
Hotel revenue management (HRM) focuses on how a hotel can produce

the highest amount of “proÿtable” revenue given its ÿxed number of rooms
to sell and varying levels of demand. Traditional yield management would
suggest that HRM is only necessary when demand exceeds capacity and
is limited to the practice of inventory allocation of already established
price points and the “opening and closing” of qualiÿed rates (rates that
a guest must qualify for, such as corporate negotiated rates). However, in
the last two decades, with escalating rate transparency and the tools avail-
able, the practice of HRM has evolved into a more comprehensive profes-
sion with more involvement beyond traditional yield management. HRM
is now fully integrated with all sales and marketing disciplines to opti-
mize pricing level, segmentation, and distribution channel mix in several
Hotel Revenue Management: An Introduction  3
organizations. Proper communication of the HRM strategy throughout

the organization is paramount, with clear and concise reporting and reg-
ular strategy meetings.
Mastering the basic principles and components of HRM is critical in

building a strong foundation to later apply to more advanced revenue man-
agement applications, such as demand forecasting, segment speciÿc pric-
ing, channel management, and strategic inventory management. Obtaining
a clear picture of the hotel revenue management discipline and gaining the
necessary tools to perform the basic and widely adopted performance met-
rics will be the focus of this chapter.
°e goal of any business is to create a valuable product or service and

to maximize proÿts through revenue generation and cost control. Revenue
generation can be accelerated with the skillful combination of guest
satisfaction, demand creation, and optimization commonly referred to as
the revenue cycle. Revenue management is primarily tasked with generating
the strategies and tactics that will optimize demand.
Figure 1.1: The Revenue Cycle

HRM optimizes demand by selling the right room to the right customer
at the right price at the right time to yield optimal proÿt.
°e revenue manager (RM) is not directly responsible for executing

against guest satisfaction or creating demand but is reliant on these func-
tions and therefore must be involved in business development and stay
informed.
QUALIFICATIONS FOR APPLYING REVENUE MANAGEMENT
°ere are several characteristics that exist in hotels and other industries that
make it necessary to apply revenue management in its operations:
Fixed Costs versus Variable Costs
• Hotels generally have high ÿxed costs in proportion to their vari-

able costs (mainly labor). °e hotel must absorb these ÿxed costs
regardless of the occupancy level. Fixed costs may include mort-
gage, insurance, property taxes, management salaries, and beneÿts.
In addition, ÿxed costs include any hourly wages, administrative
expenses, and utilities expenses that must be maintained even if the
hotel is empty. Variable costs for guestrooms include the expense
of labor and supplies to service the room a˛er use, the expense of
the utilities associated with the guest’s occupancy, and a designated
cash reserve toward a capital budget for replacing furniture, gener-
ally every 3-7 years, as part of a regularly scheduled refurbishment
(Lesure, 1983).
Fixed Capacity
• A hotel has a ÿxed number of rooms or “keys” that are sold on a

nightly basis. Building new rooms may not be feasible, and construc-
tion takes considerable time, so for all intended purposes, the RM
can only sell the limited amount of product available.
Perishable Inventory
• If a hotel room goes empty on any given night, the hotel has lost
the sale. Given the relatively low variable cost, it is very compelling
to sell a room rather than let it go empty, even at a price discount.

Each unsold room is considered spoilage, and each room sold for
less than what could have been gained is lost revenue.
Variable Demand
• In most cases, a hotel has ˝uctuating demand by day of week and

season, resulting in the need of the revenue management applica-
tion. In Chart 1, it is clear that this hotel has more demand on certain
days of the weeks. °e total demand including excess demand above
capacity is o˛en referred to as unconstrained demand. For example,
Sunday and Monday lag the demand on Tuesday and Wednesday.
To manage the variable demand, a revenue manager may apply rev-
enue management tactics such as price di˙erentials and length-of-
stay restrictions. Without strategies in place, the hotel risks selling
out the rooms on Tuesday and Wednesday too quickly and will not
be able to accommodate all the reservations requests for arrivals on
Sunday and Monday.
Chart 1
THINK HISTORICALLY
°is ad for the Hotel Boswell appeared in the Tulsa Daily World news-
paper in 1917.
Source: Tulsa Daily Dorld, June 17, 1917, p.8.
Questions to Consider:
What are your initial impressions of °e Hotel Boswell’s revenue man-

agement e˙orts?
How would you compare this listing to current hotel price listings?
SEGMENTATION
Since di˙erent guests are willing to pay a di˙erent price for the same prod-
uct, hotels have to create ways to provide their rooms at di˙erent prices. °is
practice, known as segmentation, is where revenue managers classify and
target customers in speciÿc groups based upon their characteristics, behav-

iors, and preferences (Talluri & van Ryzin, 2004). Segments are in all indus-
tries: economy and luxury cars, student discounts at museums, wholesale
discounts for food, corporate discounts for airlines, and others.
Segmenting customers allows a revenue manager to take advantage of

variable demand by targeting multiple groups of people. Price segmenta-
tion ultimately allows a revenue manager to lower the entry price to buy
a room while also o˙ering the same room to other guests for a higher rate
(Smith, 2012).
SO WHAT?
What are some other businesses that could use revenue management
that currently do not?
What characteristics exist that would make revenue management ÿt
those business models?
Hotels track and target three major segments in order to fully capture
demand: Transient, Group, and Contract.
• Group: Rooms sold in minimum blocks of ten or more
• Contract: Rooms guaranteed as deemed by a signed contract such as
airlines
• Transient guests however, are considered to be anything not a part
of group or contract sale (Hayes & Miller, 2011) and are those guests
that are traveling independently and their decision for which hotel
to book are ultimately up to them.
Group and contracted rooms are, however, decided in bulk, for the most
part not taking the unanimous decision of all people staying within the
negotiated blocks.
Hotels as a whole are tasked with achieving the optimal amount of each
segment at the right price, known as the optimal mix. For example, in an
airport area, hotels will likely have signiÿcant airline contract volume; in a
suburban area where there is little transient demand, there will likely be sig-
niÿcant group volume; and in high-demand areas for individual travel, there
is likely mostly transient occupancy.
Revenue managers work with sales and marketing to shape the segmen-
tation of the hotel, where revenue management sets prices and guides the
sales team on how much of each segment would be best for the hotel.
As hotel revenue management has become more sophisticated, so has

price segmentation. Hotels have identiÿed the need to break out Transient,
Group, and Contract into sub-segments in order to have a targeted pricing
strategy.
Table 1.1: Examples of Transient and Group Sub-Segments

Segment Sub-Segment Description
Transient Retail Standard rates being offered through the hotel directly to all
guests
Transient Online Travel Agent Standard rates being offered through online travel agents
(OTA) such as Expedia, Booking.com, Priceline.com, etc.
Transient Government Guests traveling for business but who work for the
government and can show valid government identification
Transient Opaque Guests who book through websites such as Priceline and
Hotwire, where hotels offer steeply discounted rates without
disclosing the hotel prior to sale
Group SMERF Groups booked that fit into the following classifications:
Social, Military, Education, Religious, Fraternal
Group Preferred Corporate Corporations book groups for meetings and events
Group Government Different governments will often travel to host meetings and
events
BUYING BEHAVIOR WITHIN SEGMENTS
Every segment of customers behaves di˙erently, and all have varying levels
of price sensitivity. °erefore, revenue managers need to understand buy-
ing behavior within segments to make sure they are not discounting those
guests willing to pay the most. °e ability to charge di˙erent customers dif-
ferent rates comes through being able to create rate fences or segmentation
hedges. Rate fences take ÿve basic forms: physical, controlled availability,
customer characteristics, transaction characteristics, and product line

(Dolan & Simon, 1996).
Table 1.2: Rate Fence Basic Forms

Fence Description
Physical Offering varying room types: King Bedded Rooms, Suites, Two
Beds, etc.
Controlled Availability Setting an advance purchase window of 90+ days with a 20%
discount to entice early bookers looking for a discount
Customer Characteristics Offering discounts to leisure guests through AAA and senior
discounts
Transaction Characteristics Making a reservation fully non-refundable upon booking
Product Line Offering different versions of the same product, i.e. King Room
with butler service versus without
Source: The table is based on Dolan & Simon, 1997.
For example, hotels understand that corporate guests are not as price
sensitive as other guests, given that their company o˛en pays for their stay.
Hotel teams are therefore tasked with ÿnding a way to make corporate guests
pay more than others for the same inventory. Revenue management and
sales therefore work together to price corporate guests higher by o˙ering
business travelers free internet, turndown service, and breakfast.
PROS & CONS
While applying rate fences helps revenue man-

agement drive RevPAR, there are challenges associated with imple-
menting each type of rate fence. What are the pros and cons of each
fence used within revenue management?
°is process of including additional services within a rate is called

bundling and is a key tool used to help revenue managers price particular
guests higher than what would be charged to other, less proÿtable market
segments (Kimes, 2010). Similarly, revenue managers take advantage
of o˙ering AAA and senior citizen discounts to target leisure customers,
o˙ering advance purchase discounts for those looking to secure their room
very far out, or o˙ering discounts for those traveling in large groups. Groups
typically agree to book a certain number of rooms at an agreed-upon rate.
°e contractual basis of group rooms allows hotel revenue management to

build a base of rooms that they know will materialize. A group booked on
any set of dates is referred to as a “group base” and is an integral segment
within hotels, providing stability within the hotel and allowing revenue
managers to cut back on other lower rated and more unreliable transient
segments. Group business for full service hotels in companies such as
Marriott International as a whole can represent over half of the hotel’s
revenue (Hormby et al., 2010).
OPTIMAL MIX OF SALES
°e composition of the various segments staying in a hotel on any particu-

lar day, week, month, or year is called mix of sales or market segmentation.
Two similar hotels can run the same occupancy percentage, but their mix of
sales can determine which hotel had a higher ADR and therefore RevPAR.
Revenue managers consistently look backward at their mix of sales and cri-
tique where they could have cut back on lower rated segments and con-
versely look and see if there was opportunity to sell more rooms via discount
channels to gain RevPAR.
In order to achieve an optimal mix of segments to maximize both

RevPAR and proÿt, hotels have to understand booking patterns, season-
ality, customer preferences, and more. Hotel revenue managers know, for
example, that corporate clientele are willing to pay the most and typically
book closer to arrival because of last minute travel plans. °e revenue man-
ager has to understand how many high rated corporate rooms it will sell in
the future and therefore has to understand how many low rated rooms to
sell to leisure guests in advance. Limiting early leisure bookings and pro-
tecting too many rooms for high rated guests can result in discounting last
minute high rated guests and leaving rooms empty (See Bodea & Ferguson,
2014, p. 84).
CHANNEL MANAGEMENT
Mix of business can only be considered optimal if channel management plays

a key role in shaping the segmentation. Segments should not be treated equally
given that each segment books through a di˙erent source and because each
reservation has a di˙erent cost of booking, or cost of acquisition. For exam-

ple, online travel agents charge a commission as a percentage of each room
sold. Whereas if a hotel sells rooms through their own website, the cost of
selling is signiÿcantly less (Table 1.3).
Table 1.3: Sample Channel Costs

Channel Room Rate Sample Cost/Commission Net Rate
Brand.com $249.00 3.00% $241.53
Reservation Center $249.00 6.00% $234.06
GDS (Global Distribution System) $249.00 11.00% $221.61
OTA (Online Travel Agency) $249.00 15.00% $211.65
In Table 1.4, both Hotels A and B earn the same amount of revenue,
but Hotel B produced more through the OTA channels. With higher costs
compared to the retail segment, the OTA segment and channel makes an
immediate impact on the proÿtability of Hotel B.
Table 1.4: Segment and Channel Relationship

Hotel A Hotel B
Segment Rooms ADR Revenue Segment Rooms ADR Revenue Segment Hotel A Hotel B
Cost %
Retail 50 $210.00 $10,500.00 Retail 30 $210.00 $6,300.00 5.00% $525.00 $315.00
OTA 30 $210.00 $6,300.00 OTA 50 $210.00 $10,500.00 20.00% $1,260.00 $2,100.00
Total 80 $210.00 $16,800.00 Total 80 $210.00 $16,800.00 $1,785.00 $2,415.00
A hotel that optimizes both segmentation and channel mix will be a

hotel that drives occupancy, ADR, RevPAR, and most importantly, proÿt. In
recent years this segment and channel relationship has been a bone of con-
tention to ownership groups as there has been a visible escalation of overall
distribution costs for the hotel industry as the channel mix of OTAs has
increased. °e diˆculty in managing channel mix is the existence of rate
parity agreements, where hotels are forced to o˙er the same pricing and, in
nearly all cases, the same availability. While the revenue manager would like
to drive more mix into brand.com (the brand or hotel’s own website), there
is a compelling case that providing rate parity across channels increases
good will and brand equity.
QUESTIONS TO CONSIDER
What are some strategies to increase production on brand.com?

Is rate parity a good thing across all channels?
What are some arguments for and against rate parity?
PERFORMANCE METRICS
Hotels as a business have metrics that are important to the overall business
performance. Revenue managers must identify, track, and improve those
metrics that matter most in terms of revenue management, including room
statistics, house proÿt, market share, and forecast accuracy.
Room Statistics
In hotel revenue management there are a growing number of key

performance indicators (KPIs) that help revenue managers measure their
e˙ectiveness. °e core of hotel revenue management revolves around ÿve
indicators: occupancy, average daily rate (ADR), revenue per available
room (RevPAR), revenue, and of course, proÿt.
°e hotel typically will benchmark against itself and its competitive set
in terms of overall numbers and segment. Market share is best described by
how the hotel’s room statistics stack up against the competitive set.
Occupancy
As discussed earlier, perishability in the hospitality industry dissolves

prospective revenue once an available room goes unsold. Hotels measure
occupancy levels by using occupancy percentage, deÿned as the number of
rooms occupied of the available inventory. For hotel and market reporting,
typically only occupancy that is paid (which removes occupied rooms that
do not have any revenue associated, otherwise known as compensatory or
simply, “comps”). °erefore we can simplify paid occupied rooms as “sold
rooms.”
Occupancy Percentage = Sold Rooms / Available Rooms
Example:
200 sold rooms / 250 available rooms = 80 percent occupancy
Occupancy levels also dictate various room statistics that impact cost.
• Arrivals: °e amount of rooms set to arrive

• Departures: °e amount of rooms that will or have checked out
• Stayovers: Rooms that occupy the room overnight and for subse-
quent nights
Revenue managers not only control occupancy percentages by selling

rooms but also control the length of stay (LOS) by restricting reservations
to a minimum number of nights. For two hotels with the same overall occu-
pancy percentage, the hotel with a signiÿcantly longer LOS can beneÿt from
reduced costs associated with not having to clean the room each day, hav-
ing to purchase fewer amenities, and the ability to control other variable
expenses associated with occupancy.
Average Daily Rate (ADR)
Average daily rate (ADR) is the average price that rooms are sold for during
any time period. °e importance of ADR is the theoretical absence of a ceil-
ing on how high this metric can climb. In some cases, it is the only way a
hotel can improve revenue, especially a˛er reaching stabilized occupancy
levels. In simpler terms, if a hotel ran 100 percent occupancy on a full year
basis, there would be only one way to increase its room revenue: by increas-
ing ADR.
Average Daily Rate = Total Room Revenue / Total Rooms Sold
Example:
$45,000 Room Revenue / 200 Rooms Sold = $225 Average Daily Rate
Revenue per available room (RevPAR) is simply the combination of

occupancy and ADR, or revenue generated by each available guest room
over a period of time. Another way to consider the metric, RevPAR is the
output of balancing the two inputs, occupancy and ADR, to maximize
revenue.
Calculation 1 to calculate RevPAR:
RevPAR = Average Daily Rate × Occupancy Percentage
Example:
$220 ADR × 86% Occupancy Percentage = $189.20 RevPAR
Calculation 2 to calculate RevPAR:
RevPAR = Room Revenue / Available Rooms
Example:
$37,840 Revenue / 200 Available Rooms = $189.20 RevPAR
Proftability
°e goal of any business is to accumulate as much proÿt as possible. In

hotels, room revenue is what the hotel receives for the sale for all sales gen-
erated relative to rooms. Total revenue in a hotel would consist of room
revenue plus any revenue coming from food and beverage, non-room fees,
or other outlets.
At the expense of proÿt, companies or hotels can spend on marketing,

advertising, and sales in order to increase revenue. Successful companies
and hotels, however, are those that can keep costs low in order to see a proÿt
while still maintaining high revenue levels.
Being an e˙ective revenue manager requires understanding of cost as

much as the understanding of revenue. A revenue manager’s responsibility
is to develop strategies to gather as much revenue as possible while limiting
cost and therefore increasing proÿts.
House proÿt is deÿned as the di˙erence in the amount earned and the
amount spent, or revenue minus operating cost. °e costs used to calcu-
late house proÿt only consider the variable costs mentioned earlier and any
other costs that are managed by the hotel operators.
House Proÿt = Revenue – Operating Costs
Example:
$100,000 revenue – $60,000 cost = $40,000 proÿt
Proÿt margin is deÿned as the percentage of house proÿt compared to the

revenue source. It is o˛en a key performance goal for a general manager and
other key personnel at a hotel. Revenue managers are o˛en incentivized by
house proÿt or proÿt margin because it ensures that decisions are made to
drive proÿtability.
Proÿt Margin = House Proÿt/Revenue
Example:
$40,000 proÿt/$100,000 revenue = 40% Proÿt Margin
Refer to Table 1.5 below, which revenue manager was more effec-
tive? Both Revenue Managers generated the same amount of revenue.
However, a hotel that sells fewer rooms at a higher ADR likely can drive
extra profit because there are more variable costs with selling additional
rooms.
Table 1.5: Revenue Manager Comparison

Revenue Managers A & B with Identical Products and Identical Services
Room Statistic Revenue Manager A Revenue Manager B

Rooms Sold 150 120
Average Daily Rate $285.00 $356.25
Revenue $42,750 $42,750
Table 1.6: Examples of Room Statistics in a Profit & Loss Statement

Year to Budget Last Year Variance Variance to
Date to Budget Last Year
Available Rooms 54,750 54,750 54,750 0 0
Rooms Sold 46,720 45,990 45,260 730 1,460
Rooms Revenue $ 6 ,572,500 $ 7,245,063 $ 6,545,910 ($672,563) $26,590
House Profit $ 3 ,943,500 $ 4,419,488 $ 3,993,005 ($475,988) ($49,505)
House Profit Margin 60% 61% 61% -1.0% -1.0%
Occupancy 85% 84% 83% 1.3% 2.7%
Average Daily Rate $140.68 $157.54 $144.63 ($16.86) ($3.95)
RevPAR $120.05 $132.33 $119.56 ($12.28) $0.49
QUESTIONS TO CONSIDER (Refer to Table 1.6)
The Case of Being “Out of Balance”
Review the proft and loss statement for the hotel. Ask the questions:
1. Did the hotel meet or exceed budget in any categories?

2. Did the hotel meet or exceed prior year performance in any of the categories?
3. What would you contribute to the increase in rooms revenue?
4. Which metric did not improve over the prior year? What are the likely focus
areas for the revenue manager?
5. What other data or market intelligence would you like in order to understand
the performance?
MARKET SHARE
Market share is the performance metric used to measure how a hotel

does compared to a deÿned competitive set. A competitive set is a list of
competitors that the hotel ownership and management select in order to
measure their results against based upon which hotels are believed to be
direct competitors for sales and bookings. Reports are generated by a neu-
tral party and distributed daily, weekly, and monthly. Market share reports
go beyond explaining how external factors such as the economy, citywide
activity, unusual weather, and more a˙ect the hotel and competitors. Exter-
nal factors may increase or decrease revenue for both the hotel and the
competitive set, but market share assists us in determining if the hotel’s
success or failure is better or worse than the competitive set and better illus-
trates whether the revenue strategies employed were successful.
Refer to the sample market share report for examples.
Table 1.7: Sample Market Share Report

Sample Market Share Report
% Change
Occupancy Property 87.1% 0.0%
Comp Set 91.8% 2.0%
Index 94.9% -2.0%
Rank 3 out of 4
Rate Property $306.87 2.0%
Comp Set $260.62 0.0%
Index 117.7% 2.0%
Rank 1 out of 4
RevPAR Property $267.28 2.0%
Comp Set $239.25 2.0%
Index 111.7% 0.0%
Rank 3 out of 4
In the sample market share report in Table 1.7, you will ÿnd the key
statistics that most market share reports show. In the occupancy section, the
property had an occupancy percentage of 87.1 percent this year compared
to the competitive set occupancy of 91.8 percent.
Occupancy Index (Market Penetration Index or MPI) =

Hotel Occupancy Percentage / Competitive Set Occupancy Percentage
Example: .87 / .92 = 95.0 percent
°e hotel had no change year over year (0.0 percent) while the compet-
itive set gained 2 percent year over year. °is then means that the hotel lost
-2 percent in share, as they did 2 percent worse versus the competitive set in
occupancy compared to last year.
Rate (ADR) and RevPAR read the same way. °e property posted an
ADR of $306.87 and the competitive set posted $260.62. °e property was
able to grow 2 percent while the competitive set was ˝at year over year.
Overall, this resulted in a gain in share of 2 percent, an ADR ranking this

year of 1 out of 4, and an index of 117.7 percent.
• ADR Index (Average Rate Index or ARI) = Hotel ADR / Competitive Set ADR
Example: $306.87 / $260.62 = 117.7 percent
• RevPAR Index (Revenue Generation Index or RGI) = Hotel RevPAR / Competitive
Set RevPAR
Example: $267.41 / $239.03 = 111.9 percent

• Percentage Change = (Current Value / Previous Value) – 1
°e increase or decrease in year over year performance (YoY). °e

market share report will not include last year numbers but rather show the
change YoY.
Example: 117.7 percent Hotel ARI in current year / 115.3 percent Hotel
ARI prior year = 2.0 percent
SPREADSHEET EXERCISE 1-1
To Do: Calculate the blue cells in the market share report.
% Change
Occupancy Property 88.00% -2.22%
Comp Set w% 0.00%
Index 97.78% -2.22%
Rate Property $x 4.58%

Comp Set $225.00 0.00%
Index y% 4.58%
RevPAR Property $220.88 2.26%

Comp Set $202.50 v%
Index %z 2.26%
A hotel’s pricing, strategy, and marketing all dictate the occupancy, ADR,
and RevPAR share they garner. Pricing too high will turn away guests, lead-
ing to low market penetration. Selling too few rooms instead forfeits mar-
ket traction, potentially ruining investor expectations on ÿnancial return
(Smith, 2012).
A hotel that artiÿcially prices itself too low will likely gain market pen-
etration and lose ADR index; this can result in a low RevPAR index and
can also perpetuate the image of a low quality product and tarnish brand
integrity.
°e concept of gaining or losing share is key in hotels and measures

the progress a revenue manager is making using strategies to shi˛ demand.
Gaining share is when a hotel’s occupancy, ADR, or RevPAR percentage
change over a period of time is greater than its competitor’s percentage
change over the same period of time. Conversely, a hotel has lost share in
occupancy, ADR, or RevPAR when their percentage change is less than that
of the competitive set’s percentage change.
REAL PEOPLE
Michael Lopez*, revenue manager in a high occupancy
market, shared instances where the market share report
was deceiving and required either understanding of real
success/failure and how market share data can be misleading.
My hotel has sometimes lost share in occupancy as my occupancy has no room
for growth; how can I use the market share report to understand my successes
and failures given my inability to grow occupancy share?
Sometimes, my competitive set shows signiÿcant gains in occupancy, therefore
creating a large loss in my occupancy index over last year and ultimately a
large loss in RevPAR index share. What could have happened in the competi-
tive set that the occupancy could gain by so much year over year?
On occasion my competitive set will show an unusually low ADR, causing my
RevPAR index to look signiÿcantly better than usual. What could have hap-
pened out of the norm amongst my competitors?
My results on particular days are o°en questioned despite strong weekly and
monthly performance. Is there credence to the questioning I receive and what
should my response be to these questions?
*Name has been concealed
FORECASTING AND BUDGETING
Forecasting and budgeting is a primary task of the revenue manager. Fore-

casting impacts both the revenue maximization process and the hotel oper-
ations team.
°e ÿrst objective of forecasting is to predict unconstrained demand by

segment and day level to enable a revenue optimization process. °e revenue
manager generally relies heavily on systems for the development of the
unconstrained demand forecast. °e system forecast uses a combination of
historical data, user inputs, and statistical modeling to predict future demand.
Secondly, forecasting must communicate to the hotel operations team

how many rooms will be sold on a daily basis and the projected revenue.
Preparing the revenue forecast allows the ÿnance department to complete
the expense-and-proÿt forecast, generally done on a monthly basis for the
next several months. On an annual basis, the projection process is done
in a rigorous manner and includes detailed segmentation so that the hotel
can set goals for the following year to present to key stakeholders. °is is
generally referred to as the rooms budget.
Forecasts and budgets are used as benchmarks for how well the hotel
performed. Revenue managers are responsible for critiquing performance
against the forecast and the budget. Declines in key metrics versus forecast
and budget need to be explained, and strategies are put into place to rectify
results going forward.
INVENTORY MANAGEMENT
Inventory management is generally considered the art of “selling the right

product at the right time for the right price to the right customer.” It is com-
plex, with the reality of variable demand throughout the year and across a
given week of time, as we learned earlier.
With a limited amount of inventory, hotels have no choice but to make

the most of what they have. For this reason, it is imperative that each room,
and each room type, be sold for the appropriate amount. O˙ering discounts
for rooms with multiple beds when demand in high can be costly for any
hotel. Times of the year such as summer weekends or holidays are popular
SEEING FURTHER
With the importance of forecasting, given the direct rela-
tionship of the unconstrained demand projection with the
revenue strategy, accuracy is critical. Both the system fore-
cast error and the revenue manager’s forecast should be measured to track progress.
If the forecast error increases, there may be a change in the trend, incorrect data, or
human error. As the system forecast plays such an important role and relies on user
inputs and overrides, it is recommended that goals be established and managers held
accountable.
Mean absolute percentage error (MAPE) expresses accuracy as the average percent-
age of error across a number of instances. It can be easier to understand than other
statistics. For example, if the MAPE is 7 percent, on average, the forecast is o° by 7
percent.
The MAPE equation:
˜ 1 | Actual − Forecast |°
˙ˇ n ˝ | Actual | ˆ˘ *100
Example:
DOW Forecast Actual Absolute Absolute

Rooms Rooms Difference Error %
Sold Sold
Sunday 100 110 10 9%
Monday 150 160 10 6%
Tuesday 165 165 - 0%
Wednesday 165 165 - 0%
Thursday 145 140 5 4%
Friday 115 100 15 15%
Saturday 145 165 20 12%
Total 985 1,005 20 2%
MAPE 7%
It is important to note that in this example that the combined rooms forecast error is
2 percent but the MAPE calculation measures the average error for each instance (n),
which is 7 percent.
for family travel and therefore make it important to maximize ADR oppor-
tunity for double bedded rooms or suites.
SPREADSHEET EXERCISE 1-2

To Do: Two hotels are listed below with same amount of total
rooms and have the same rate for each of the room types. Using
spreadsheet software, calculate the total revenue for each hotel.
Room Type Hotel A Hotel B

Rate Rooms Revenue Rooms Revenue
Sold Sold
Queen @ $x Rate 20 $3,180.00 20
King @ $169 $169.00 40 20 $3,380.00
King @ $179 $179.00 $7,160.00 $10,740.00
DBDB @ $199 $199.00 20 10
DBDB @ $x Rate 40 $9,160.00 $11,450.00
Suite Tier 1 $349.00 20 $6,980.00 5
Suite Tier 2 $399.00 20 35
Total 200 200
1. Which hotel had better inventory management?

2. What could Hotel A have done better? Hotel B?
Revenue managers are tasked with creating a strategy that will set the
hotel up for success in the short and long term. Granular details such as room
type availability and macro concepts like contractual inventory restraints can
have a signiÿcant impact on the long-term success of a property. A hotel that
allows each account the ability to book the last room available will su˙er
as last minute high rated demand will repeatedly be lost. In the short term,
revenue management also has to understand when to overbook the hotel
and by how many rooms. Cancellations, no-shows, and early departures all
take away from what would have been an occupied room and therefore need
to be tracked to determine the overbooking limit.
COMMUNICATION
It the responsibility of revenue management to articulate the hotel’s strat-
egies and results to all stakeholders, including the sales team, front oˆce,
ownership, and executive leadership. An e˙ective revenue manager is as well

versed in communication as strategy.
Sales Strategy Meeting
°e sales strategy meeting, typically a weekly call or meeting, is a revenue

management strategy discussion conducted by revenue leadership. A sales
strategy meeting consists of critiquing past performance with a variety of
reports, analyzing data and strategy for the upcoming 12 months, and com-
ing up with both micro and macro level strategies that will be executed in
the near and long term.
Ownership Meetings
Revenue management over time has become the function of the hotel
responsible for communicating strategies to improve RevPAR and proÿt for
the hotel. Industry professionals and educators collectively agree that com-
munication skills are the most important skill a recent hotel school graduate
can have followed by the ability to improve revenue (Mayo, 2013).
Ownership involvement in hotels can be daily, and therefore it is critical

for the revenue manager to understand what the ownership group is looking
for and to gauge the level of detail they are looking for. Ownership groups are
typically most focused on their return on investment (ROI), revenue, pro-
curement and development (Cullen & Helsel, 2010). Revenue managers have
to identify ownership expectations and knowledge level. Some hotel owners
may not understand segmentation or unconstrained demand, and it is the
responsibility of revenue management to articulate key ideas to ownership.
While ownership understanding and involvement varies, ownership

groups typically revolve around performance versus expectations (budget,
forecast, and last year) as well as performance versus competitors and the
market. Revenue management is also responsible for communicating short-
and long-term forecasts that ultimately guide the owners’ future business
plans (Law, 2004).
Daily Interaction with Property Operations and Sales
As with ownership, the hotel operations and sales team have a varying level
of revenue management understanding and have their incentives laid out in
directions that may be contrary to the goals of revenue management. Since

sales members are o˛en measured on volume instead of proÿt, it is the job of
the revenue management professionals to stress short-term and long-term
strategy focused on proÿtability (Cullen & Helsel, 2010). °is daily inter-
action ensures that group rates, group contracts, corporate rates, wholesale
contracts, and other types of business are all in the best interest of the hotel.
°e revenue management team also has to convey need areas in terms of
e-commerce and marketing, whereas the sales and marketing team needs
to focus their e˙orts so that the channel management e˙orts can be fully
realized.
°e interaction with operations is arguably the most overseen portion

of revenue management in hotels. Most revenue managers create an oper-
ations forecast that is used by operations leaders to appropriately sta˙ the
hotel. However, beyond the operations forecast, revenue management has
little involvement with the operations team.
DISCUSSION QUESTIONS
Question 1: How does the reality of perishability impact pricing?
Question 2: Why is market share utilized in the hotel industry?

Is it foolproof? What other metrics would you use to critique
performance from an owner’s perspective?
Question 3: What is unconstrained demand and why is it more meaningful than an

occupancy forecast? If a forecast changes, what strategies must be reviewed?
Question 4: Brainstorm market segments that are targeted in various industries.

What new market segments should the hotel industry start to target? Which, if any,
market segments in any industry do you see as cannibalizing one another?
Question 5: What would be the process you would go through to forecast a hotel’s
revenue for the next month? What data would you need and what would you be
looking to ÿnd out?
Question 6: Given various costs of distribution, would you as the leader of a company
decide to eliminate any distribution channels? If not, how would you reduce cost
using revenue management?
APPLICATIONS
Case #1:
Please generate room statistics and a market share report
based on the following information showing full year
results compared to prior year full year:
Property Size: 200 rooms
Comp Set Size – 800 rooms
°is Year Data:
Property Rooms Sold – 64,240
Comp Set Rooms Sold – 262,800
Property Rooms Revenue °is Year – $16,124,240
Comp Set Rooms Revenue Last Year – $59,130,000
Last Year Data:
Property Rooms Sold – 65,700
Comp Set Rooms Sold – 262,800
Property Rooms Revenue °is Year – $15,768,000
Comp Set Rooms Revenue Last Year – $59,130,000
Please answer the following questions:
1. Is the hotel getting its fair share of occupancy?
2. Did the property gain or lose RevPAR index ?
3. What room statistic drove the results?
4. Would you expect the property to be more or less proÿtable than last
year?
5. What strategies should be employed to grow RevPAR index the fol-
lowing year?
Case #2:
°e revenue manager of Hotel Calhawk, a hotel in the downtown area of a
major market, has noticed that each year the Sunday, Monday, and Tuesday
prior to °anksgiving have the following problems:
• Guests cancel last minute
• Rooms with multiple beds sell out ahead of time
• Prices for single beds erode as the day of arrival approaches
1. What 3 di˙erent segments would you target to achieve success in occu-
pancy and ADR over these dates?
2. What rate fences would you put in place to avoid the 3 problems that the
revenue manager has faced?
INTERNET ACTIVITY
You are getting married and you are planning your honeymoon.
Please shop for rates for a 1-bedroom suite with an ocean view
for one resort.
Select one week (Saturday arrival for 7 nights) and compare rates on at
least 5 websites and/or search engines, including the resort’s website and
TripAdvisor.com.
1. Is the resort’s pricing and content consistent across all sources?
2. Were the reviews at TripAdvisor.com and various other sites similar?
3. Which provided the most information for the honeymoon couple?
4. What site would you prefer to book?
5. As a revenue manager, what did you learn and what did you take
away from this assignment?
TEAM ACTIVITY
As a team, identify the high and low seasons for a hotel in your
area. Contact local hotels, research when conventions are, and do a
general search to see when hotel rates are highest and when they are lowest.
1. Pick two seasons as a team.
2. Identify your pricing, inventory, and segmentation strategy for each
season. Tie in what you forecast the occupancy to be for that season
and what the ADR would be for that time period.
3. Present to another team or the class your strategy as though they are
the ownership group.
Be prepared to answer questions regarding:

• How will you limit high cost channels?
• If you are forecasting low occupancy, what strategies can you put in
place or what can the hotel do to garner more occupancy?
• If you are forecasting high occupancy, how can you drive more aver-
age rate or shi˛ your mix of business to capture more proÿt?
• What are you doing to take advantage of the di˙erent room types in
each season?
• Why did you not choose to target particular segments and choose to
target other segments?
GLOSSARY
Arrivals – amount of rooms set to arrive.
Brand.com – main reservation booking website for the hotel or chain.
Bundling – inclusion of additional services to a room o˙ering.
Channel/source – platform or engine responsible for delivering a
booking transaction. °is could range from the hotel/brand call cen-
ter, the hotel website, an online travel agency (OTA), a global distri-
bution service (GDS), or the internal hotel sales team.
Channel management – where the sources of reservations are controlled
for purposes of revenue and proÿt enhancement.
Citywide – event in the market that results in lodging demand adequate to
ÿll the vast majority of all hotels
Commission – cost associated with booking a room where a percentage of
revenue is due to the OTA or travel agent
Competitive benchmarking – Conducting an analysis to understand the
position of a hotel against that of its competitors.
Competitive set (comp set) – a group of similar and directly competing
lodging properties to which an individual hotel’s operating perfor-
mance is comparable and compete for the same business.
Cost of acquisition – fees, commissions, and expenses attributed to each
booking from third party distributors or internal payroll including
GDS commissions, OTA commissions, direct marketing expenses
and all customer acquisition payroll.
Departures – amount of rooms that will or have checked out.
Early departures – rooms that are scheduled to depart on a later date but
have checked out earlier than expected.
Fixed costs – costs maintained even if the hotel was empty.
House proÿt – the di˙erence in the amount earned and the amount spent,
or revenue minus operating cost.
LRA (last room availability) – a condition granted to special corporate

accounts where the negotiated rate is automatically available if the
hotel is selling standard inventory.
LOS (length of stay) – duration of a guest’s stay beginning with arrival date.
Revenue managers must manage revenue by adjusting strategies by
arrival pattern as this is the control point.
Market segment – a subset of a customer group that can be easily identiÿ-
able by one or more common characteristics such as demographics,
purpose of travel, and buying behavior.
No-shows – rooms that are scheduled to arrive but do not before a new date
arrives.
OTA (online travel agent) – travel website allowing customers to plan and
book travel.
Operations forecast – forecast utilized by operations leaders to appropri-
ately sta˙ the hotel.
Overbook – selling hotel rooms beyond the hotel’s capacity.
Proÿt – total revenue minus costs.
Proÿt margin – percentage of proÿt out of total revenue.
Rate fences or segmentation hedges – restrictions put in place to change
the price point o˙ered to a guest. Fences consist of 5 basic forms:
physical form, controlled availability, customer characteristics,
transactions characteristics, or product line.
Rate parity –identical retail rate is quoted across all channels.
Retail rate / best available rate (BAR) - the rate a customer pays “o˙ the
shelf ”, o˛en referred to as “best available”
Revenue cycle –the ability of a hotel to drive and optimize demand while
maintaining guest satisfaction.
Revenue manager (RM) – °e individual or team responsible for maximiz-
ing revenue within the constraints of available capacity and uncon-
strained demand through e˙ective yield management.
RevPAR (revenue per available room) – Total rooms-related revenue per
the number of available rooms in the hotel over a period of time:
[rooms revenue / (rooms available * number of days)].
Rooms revenue – what a hotel receives for the sale of its rooms
Sales strategy meeting – revenue management strategy meeting consisting

of all members of the revenue management committee
Segmentation/mix of sales – how revenue managers and marketers classify
and target customers in speciÿc groups based upon their character-
istics, behaviors, and preferences.
SMERF – groups booked that ÿt into the following classiÿcations: social,
military, education, religious, and fraternal
Spoilage – each unsold room at the end of a period.
Stayovers – rooms that occupy the room overnight and for subsequent
nights.
Unconstrained demand – total demand in a segment or overall in the
absence of any constraints
Variable costs – expenses from labor and supplies to service the room a˛er
use, the expense of the utilities associated with the guest’s occupancy,
and a designated cash reserve toward a capital budget for replacing
furniture, generally every 3–7 years, as part of a regularly scheduled
refurbishment
Yield management – a variable pricing strategy, based on understanding,
anticipating and in˝uencing consumer behavior in order to max-
imize revenue or proÿts from a ÿxed, perishable resource (such as
airline seats or hotel room reservations).
REFERENCES
Bodea, T. & Ferguson, M. (2014). Segmentation, Revenue Management, and Pricing
Analytics. New York, NY: Routledge.
Cullen, K & Helsel, C. (2010). ˛e Evolving Dynamics of Revenue Management: A
Comprehensive Revenue Optimization Road Map for Hotel Owners, Operators
and Practitioners. Maclean, VA: HSMAI Foundation.
Dolan, R. J. & Simon, H. (1997). Power Pricing: How Managing Price Transforms the
Bottom Line. New York, NY: °e Free Press.
Hayes, D. K. & Miller, A. (2011). Revenue Management for Hospitality Industry.
Hoboken, NJ: John Wiley & Sons, Inc.
Hormby, S., Morrison, J., Dave, P., Meyers, M. & Tenca, T. (2010, January-Feb-
ruary). Marriott International Increases Revenue by Implementing a Group
Pricing Optimizer. Interfaces, 40(1), 47-57.
Kimes, S. E. (2010). Strategic Pricing through Revenue Management. Retrieved from

Cornell University, School of Hospitality Administration site: http://scholar-
ship.sha.cornell.edu/articles/346.
Lesure, J. D. (1983). Break-even analysis — a useful management tool in the lodg-
ing industry. International Journal of Hospitality Management, 2(3), 115-120.
Smith, T. J. (2012). Pricing Strategy: Setting Price Levels, Managing Price Discounts,
& Establishing Price Structures. Mason, OH: South-Western Cengage Learn-
ing.
Tallury, K.T. & van Ryzin, G.J. (2004). ˛e ˛eory and Practice of Revenue Manage-
ment. New York, NY: Springer Science + Business Media.
CHAPTER 2
The Fundamentals of Pricing

Hotel Guest Rooms
Raul Moronta and Carolyn Fredey
OVERVIEW
Hotel room pricing is one of the most complex areas of revenue management.
At its core, the role of a revenue manager is to maximize a hotel’s performance
by selling rooms, proÿtably, better than the competitive set. These factors
may include available inventory, projected hotel occupancy, competitors’
pricing, and much more. Total hotel revenue maximization includes other
revenue streams such as meeting space, food and beverage outlets, golf,
spa, and gaming in some locations. In most cases the room revenue is the
most proÿtable segment for the hotel; hence it tends to be one of the main
focuses when determining the price of a room.
LEARNING OBJECTIVES
Describe the fundamentals that make it imperative to practice strategic
hotel revenue management (HRM) and dynamic hotel rooms pricing
(HRP)
Evaluate a hotel’s segmentation, or mix of customers, and assess each
segment’s desired experience and willingness to pay for each room’s
product
Practice strategies to elevate a customer’s perceived value
Interpret price positioning for a hotel against a competitive set with
similar brand, location, service, and product o°erings
31
Discuss the di°erences in pricing amongst the various segments and

tactics that allow a hotel to maximize revenue while maintaining brand
equity
Assess the e°ectiveness of the retail pricing strategy with both metrics
and tools, including a comprehensive segmentation analysis
OUTLINE
Introduction
Rooms Pricing Fundamentals
Value Creation
Retail Pricing Evaluation
• Setting Your Benchmark Rate
Pricing Tactics
SO WHAT?
Hotel room pricing and positioning are some of the most complex
areas of the hospitality industry, which involve numerous factors.
How is the pricing of hotel rooms di°erent from other industries?
Why do hotel room rates change (often daily) versus other prod-
ucts that have more price stability?
From a customer perspective, when do you think pricing volatility
is helpful or hurtful? Has this changed over time and why?
INTRODUCTION
Hotel rooms pricing (HRP) requires detailed rate analysis, and the “art of
pricing” has become far more sophisticated in recent years with increased
The Fundamentals of Pricing Hotel Guest Rooms  33
technology and higher expectations from all stakeholders to “get the pric-
ing right.” Furthermore, in today’s digital marketplace, with the advent of
smartphones, mobile apps, and social media, pricing is more transparent
to both the customer and the competitor. A pricing adjustment to a hotel’s
retail rate is only a piece in the pricing puzzle. O˜en, there does not seem to
be a deÿnitive solution, only a better and easier ÿt. Let us get busy in putting
this together!
THINK HISTORICALLY
˛e original principles of hotel pricing are o˜en attributed to the

deregulation of the airline industry in 1978. ˛is meant that the Civil
Aeronautics Authority was no longer setting fares, which allowed for
new competition to enter into the market as well as an increase in pas-
sengers. More speciÿcally American Airlines was one of the pioneers
of what at the time they called yield management, as stated on the 1987
annual report.
Since then, however, the competitive and distribution landscape has

signiÿcantly changed. ˛e Internet, new technology, and the rise of
big data analytics (large quantities of consumer-related information
used in strategic decision-making) have further enhanced the hos-
pitality industry’s ability to ÿnd the optimal pricing for hotels. Other
worldwide events have also shaped revenue management practices and
increase in distribution channels.
• How you think the evolution of the Internet has a˝ected hotel
distribution?
• What about the mobile revolution?
Source: Smith et al, 1992.
PRICING FUNDAMENTALS
Perishable products and services, such as hotels that utilize revenue manage-
ment, will most likely have more dynamic pricing strategies than consumer
products that can be stored and be sold at a later time. ˛e hotel aims to
sell every room, every night, at the maximum price possible, based on mar-
ket conditions and property demand. Revenue managers must use di˝erent
tactics based on some core pricing concepts, outlined below, to manage the
rooms inventory as each individual stay date approaches.
Segmentation
Hotels o˝er a variety of rates to a variety of di˝erent groups or segments to

ensure that a hotel has every chance to sell out on any given night. Hotels
organize into three major buckets: transient, group, and contract. ˛e tran-
sient bucket is the most complex, and rates are o˝ered to attract both the
business traveler segment and the more price-sensitive leisure travel seg-
ment. ˛e revenue manager must not only determine the price of the retail
rate (sometimes referred to as the BAR—best available rate) but must also
evaluate the additional transient rates that are o˝ered to attract other seg-
ments. Some of the rates o˝ered are heavily discounted and may be yielded
out during busy times. In addition, some of the segments may ˙ex in price
or discount and must be carefully maintained. We will discuss this in more
detail in a later part of the chapter.
Variable Demand and Seasonality
In most cases, a hotel has ˙uctuating demand by day of week, time of year,
and dates of holidays and special events, resulting in the need for variable
pricing throughout the year. ˛is can be forecasted with the hotel’s his-
torical booking data, and daily pricing and mix strategies can be set one
year out. Most hotels utilize a demand forecasting system and validation
process managed by the revenue manager to accurately predict the remain-
ing unconstrained demand and determine when there is a surplus of
rooms that warrant a price increase or need to ÿlter out discounts. ˛e
pricing power for a hotel escalates when there is more remaining demand
than remaining supply (rooms). For example, pricing over Tuesdays and
Wednesdays is typically set higher than weekends for a hotel near a cor-
porate oˆce park. A family ski resort will o˝er higher rates during peak
school vacations.
Figure 2.1: Levers to Increase Price
Booking Pace
˛e demand forecasting system and revenue manager will utilize booking

pace trends and competitive pricing to predict remaining demand and
pricing power as a stay date approaches. While a more generic strategy may
be set one year out, as booking data materializes, adjustments are made con-
stantly until the day of arrival. Booking pace can be deÿned as how fast
rooms are being sold compared to a prior time period (i.e., same time last
year, rolling average of the last 6 weeks, etc.). For example, if a hotel in the
prior year had 90 out of the 100 rooms sold 5 days prior to arrival and the
hotel sold out, then the hotel picked up 10 rooms in the last 5 days of book-
ing. If this year the hotel has 92 rooms sold 5 days prior to arrival on a com-
parable stay date, it can be predicted that the hotel is “ahead of pace” and
will sell out. ˛e hotel will likely employ a pricing technique to maximize
the additional property demand. In the opposite scenario, when the hotel
has not sold as many rooms as in the past for a comparable time period, the
revenue manager might have to use additional tactics to speed up the sale
of those rooms as the hotel is “behind pace.” ˛is might include revising the
price, opening discounts for speciÿc customers, or utilizing opaque product
strategies in order to stimulate demand and maximize revenue.
Revenue managers rely on the system’s forecasted unconstrained tran-
sient demand to be accurate as calculations that compare remaining
demand with remaining capacity drive its pricing recommendations.
The system does require user input to identify outliers such as unusual
weather or special events.
• What other outliers do you think would be di˛cult for a system to
detect?
• What strategies, outside of price, could be utilized in very high or
very low demand?
• In unusually high demand, do you think it is fair to price a product
more than twice the average price? Why or why not? When can a
high rate be considered price gouging?
VALUE CREATION
Economic Value
˛e expected price of a hotel room will vary greatly based on the property and
market demand of the speciÿc time frame requested by the customer, combined
with the perceived experience that will be delivered. ˛e concept of economic
value can useful to illustrate the customer’s willingness to pay for a hotel room.
˛e total economic value is the reference price (best alternative o˝er) plus the
net di˝erential value of the speciÿc product or service as illustrated in Figure 2.2.
Simply put, economic value is the sum of all the beneÿts and features that
a product or service o˝ers a customer. If a product o˝ers a beneÿt or feature
that is unique, the economic value is higher. In the case of a hotel room, the
rate a prospective guest is willing to pay is based on the price of similar hotels
and the perceived experience premium (or deÿcit) o˝ered at a speciÿc hotel.
For example, in the case of a family resort, a pool with slides and other water
features is worth more to a customer than a resort that does not o˝er this fea-
ture. ˛e prospective guest searches for the best option based on the desired
beneÿts and features that are o˝ered for each similar hotel option. ˛en she
or he will compare prices. At times, the price may be less or more than the
perceived economic value. ˛e traveler will choose the hotel that o˝ers him
personally the most economic value or utility for the price paid. Value can
also be described as the relationship between total price and total experience.
Figure 2.2: Economic Value.

Source: Nagel, et al., 2016, p20.
PROS & CONS
The role of a revenue manager is to maximize

revenues for the hotel. This means that often times there will be
con˝icts with the sales team, who is very focused on meeting their
selling goals and making sure their clients are happy. Also, the rev-
enue managers can be in con˝ict with the front o˛ce team when
they oversell the hotel or have very high rates that are not in line
with the customer’s experience or expectations.
• What do you think is the best way to balance these con˝icting hotel
priorities?
• Who is the most important customer—a repeat guest, the highest
paying, or the most satisÿed?
• How can regular sales strategy meetings involving Sales, Revenue
Management, and Operations contribute to the process?
Segmentation
Segmentation is best described as the practice of dividing a market into

smaller segments that share similar characteristics, such as buying behavior
and the level of importance placed on attributes that make up a product
and/or service. It is generally necessary for a hotel to market to more than
one segment to ÿll all the hotel’s rooms, especially given the di˝erences in
customers over weekday and weekend time frames.
˛e revenue manager must not only determine the price of the retail
rate (sometimes referred to as the BAR (best available rate) but also evalu-
ate the additional transient rates that are o˝ered to attract other segments.
Some of the rates o˝ered are heavily discounted and may be yielded out
during busy times. In addition, some of the segments may ˙ex in price or
discount and must be carefully maintained.
Segments
 Group
˛ere are also negotiated rates for a group of rooms for a speciÿc date and
o˜en non-repeating. ˛ese groups have di˝erent proÿles, such as a corpo-
rate meeting, an association, family reunion, or a tour. O˜en these rooms
also include meetings and events at the hotel with meals. Given that the
client is spending additional dollars on other areas of the hotel and may
require meeting rooms and audiovisual services, the price of the rooms tend
to be negotiated based on the entire value of the event, day of the week, sea-
son, etc. Generally, pricing for group rooms is done through a combination
of a set discount o˝ the retail rate with consideration of transient displace-
ment and the ancillary revenues and proÿts generated. Over the past few
years some hotels have also transitioned to dynamic pricing, where the rate
is set as a percentage o˝ the rate of the day.
 Contract
˛e contract room segment mainly consists of airline crews that require a

ÿxed number of rooms per night, 365 days a year. Generally, the segment
is only relevant in hotels that are located near an airport. Determining the
correct price for this segment is dependent on the arrival and departure
times of the crew and the amount of transient displacement that will occur by
taking the business. In addition, the segment is generally price sensitive and
highly competitive as it provides occupancy throughout the year, including
so˜ time frames. In most markets, there is a reciprocal agreement that either
party can exit a contract with a 60-day notice period.
 Transient
 Transient Sub-Segments
 Retail
˛e predominant segment in your hotel’s mix is the portion of rooms that

are purchased for general sale or “o˝ the shelf.” Rooms sold through the
hotel’s distribution channels for general sale are commonly referred to as the
retail rate or best available rate (BAR). Both transient and leisure travelers
will book into the retail segment. In this next section we will review the
components of retail rate pricing and the process required to position your
retail rate against your competitive set.
 Special Corporate
˛ese are negotiated rates between a business (such as banks, law ÿrms,
consulting ÿrms, retailers, etc.) and hotels in order to accommodate the
business’s out-of-town employees and clients. ˛ese rates tend to be nego-
tiated for a ÿxed priced for one year or for a seasonal period, though other
contracting terms might also be negotiated, such as set percent discount o˝
retail rate, number of blackout dates, provisions for upgraded rooms, and
guaranteed inventory in case of tight availability in the market. Generally,
the revenue manager will set thresholds for the amount of discount based on
the volume commitment and stay pattern of the account. In most cases, the
discounts range from 10 to 25 percent o˝ retail.
 Government
˛e number one producing segment in the United States is the US gov-

ernment. ˛is segment cannot be overlooked and can be valuable in most
markets, depending on the per diem established for a set geographical area.
While the vast majority of government travelers will not pay a premium over
the set per diem, the rate is yieldable and thus can be turned away during
high demand time frames. ˛erefore, a hotel’s mix of government can be

higher over low demand times.
 Wholesaler
˛ese are contracts similar to special corporate but are instead between a
hotel and a travel merchandiser, commonly referred to as a wholesaler, and
o˜en the source is international arrival. While corporate rates are negotiated
for the company’s internal use, the wholesaler would resell these rooms to
travelers and include other services, such as air, car rental, tours, etc. ˛ese
wholesalers will o˜en have a block or allotment of rooms guaranteed at the
hotel for a period of time, and rates tend to be much lower than other con-
tracted rates. In recent years, some of this business has been shi˜ed to online
travel agencies (OTAs), and the segment has declined with an increase in
bookings on the Internet.
 Packages
Similar to wholesalers, hotels also utilize the room inventory and add other
services to it in order to entice customers to book. In general hotel packages
include other services o˝ered by the hotel, such as meals, spa, and golf, but
these packages can also include services outside of the hotel, such as theater
tickets, museums, etc. Generally the most e˝ective packages are priced less
than all the components priced individually while still providing the hotel
incremental sales and proÿt. For example, a resort may o˝er a spa package
with the intent of driving sales into the spa. To increase conversion of a spa
package, the hotel must price it as a value to the prospective guest. If the spa
was busy all the time, it still may make sense to o˝er the spa package at a dis-
count, but only if the resort was struggling with occupancy. In this scenario,
the resort’s strategy is to increase room sales, rather than spa sales.
 Qualiÿed Rates
˛ere are other public or private rates that are o˝ered to guests based on
speciÿc memberships. ˛e most common ones are AAA and AARP rates,
in which the guest needs to be a member and o˝er proof of membership at
time of check in. Other qualifying rates may include employee and friends &
family rates, where the company o˝ers to its associates a deep discount price
and o˜en o˝ers “distressed inventory” when the hotel is not expected to sell
every room for a particular date.
RETAIL PRICING EVALUATION
Setting Your Benchmark Rate
˛e predominant segment in your hotel’s mix is the portion of rooms that

are purchased for general sale or “o˝ the shelf.” Rooms sold through the
hotel’s distribution channels for general sale are commonly referred to as the
retail rate or best available rate (BAR). In this next section we will review the
components of retail rate pricing and the process required to position your
retail rate against your competitive set.
˛e retail rate or best available rate is also referred to in this pricing

module as the “benchmark rate” as it provides the foundation of your pric-
ing strategy. It not only communicates to the customer the actual price
point; it also is designed to represent the amount of experience that should
be expected compared to other hotels in a similar location. Value is created
for a customer when the benchmark rate is perceived as fair when evaluating
it against the anticipated experience that the hotel will provide.
 Value Creation
˛e expected price of a hotel room will vary greatly based on the property
and market demand of the speciÿc time frame requested by the customer,
combined with the perceived experience that will be delivered. ˛e concept
of economic value can be useful to illustrate the customer’s willingness to
pay for a hotel room. ˛e total economic value is the reference price (best
alternative o˝er) plus the net di˝erential value of the speciÿc product or
service as illustrated in Figure 2.2.
Value creation occurs when services and products are combined and
priced in a manner that increases the perceived economic value for a unique
set of customers. In this process a business develops the mix of products and
services that will drive the economic value. By satisfying AND communicat-
ing the value drivers better than the competition, a corporation can increase
its price as it elevates the economic value.
 Positioning against the Competitive Set
Positioning against the competitive set is the process of evaluating a hotel’s

experience (the combination of product and services) against other similar
properties and then determining the appropriate rate premium or discount

that will create economic value for a speciÿc segment. In the graph shown
in Figure 2.3, Hyatt (Comp 3) shows more value against the subject hotel
as it is o˝ering the same rate for more experience. ˛e Hilton (Comp 2)
shows the least amount of value as it has a higher room rate and provides
less experience.
Figure 2.3: Competitive Pricing Analysis.
Does the comp set seem reasonable? Are there any hotels that do
not seem to belong with the group? Why or why not?
Is the subject hotel priced appropriately? Are there any hotels that
o°er more value?
How can you increase the value for price paid based on the chart
data?
What hotel investments do you recommend if ÿnancially feasible?
Which hotel seems to be a threat to capturing more guests based
on current positioning?
If the Hyatt is formidable and competes head on with the subject hotel, the
subject hotel should consider positioning its price point lower or adding
services or enhanced product o˝erings. ˛is process can be completed by
following the steps in Figure 2.4.
Price Positioning Process

Step 1 Determine hotel’s most critical segments. A hotel in a city center may choose
leisure, business, and corporate group
Step 2 Select a competitive set (up to five) for each segment by asking guests and
clients for feedback
Step 3 Pinpoint value drivers for each segment (which service and product offers
matter the most)
Step 4 Evaluate subject hotel’s experience level for each value driver
Step 5 Mark each of the subject hotel’s experience score as ZERO for each value
driver
Step 6 Evaluate comp set’s relative experience level against the subject hotels (better
or worse), range of 1-3
Step 7 Shop hotel and comp set and record the most frequently quoted rates for a
specific season
Step 8 Mark price for subject hotel as ZERO and mark the competitors as the
difference from the subject hotel
Step 9 Graph the experienc e differentaila scores on the X axis
Step 10 Graph the room rate diff erentials on the Y axis
Figure 2.4: Price Positioning Process

SPREADSHEET EXERCISE 2.1

TO DO: Review the pricing and experience of a hotel and
its competitive set. Prior to analysis, select a speciÿc market
segment, such as family leisure or individual business traveler. Select
any hotel that caters to the market you selected and determine its comp
set utilizing shop data from various sources. Choose attributes that
contribute to the desired experience for the market segment. Utilize
the Internet for your research. Examine pricing, photos, descriptions,
reviews, and service ratings. Utilize the Excel positioning tool to chart
your results.
Answer the following questions:
1. Does the comp set seem reasonable? Are there any hotels that do
not seem to belong with the group? Why or why not?
2. Is the subject hotel priced appropriately? Are there any hotels that
o°er more value?
3. How can you increase the value for price paid based on the chart
data?
4. What hotel investments do you recommend if ÿnancially feasible?
5. What hotel seems to be a threat to capturing more guests based on
current positioning?
 Pricing Level
While a hotel’s published rack rate (a ÿxed price for the year or per season)
is the highest rate the hotel can legally charge for a room to a guest (and
in some states, it is required to be posted on the back of the door of each
room), in practice the pricing strategy is far more ˙uid. ˛e BAR rate is ini-
tially set based on competitive positioning and season but then is increased
or decreased on an individual date basis depending on the demand.
Pricing changes on a daily basis, in some cases, by the hour, as revenue

managers would update this price point based on a combination of factors,
such as projected hotel occupancy, remaining capacity, competitor’s pric-
ing and availability, changes in price elasticity, and booking window. On a

weekly basis, the hotel should meet and discuss the demand and pricing for
the next 90 days and make strategic changes accordingly.
 Sample Pricing Review Critical Points
Timeframe Review Format

Daily Daily Pick-Up Review pick up trends and competitor pricing
trends with focus on next 4 weeks
Weekly Weekly Pick-Up Lead hotel’s pricing review meeting and
examine next 90 days
Monthly Projections Review Analyze projection changes and shortfall for
next 6 months and adjust pricing
Annual Budget Process Revenue Manager reviews segment pricing for
annual budget and business plan
Figure 2.5: Sample Pricing Review: Critical Points.
 Rooms Mix
Most hotels have a selection of room types to accommodate the di˝er-

ent needs of its customers. Having the right rooms mix can be crucial
in ensuring the hotel is successful. For example, without rooms that can
accommodate four people, the hotel will have a diˆcult time attracting
families and ÿlling up during leisure periods. For a luxury hotel, having
premium suites is necessary to attract the aˇuent traveler. However, pric-
ing multiple room types can be cumbersome and tedious depending on
the systems and the process. Generally, the easiest and most e˝ective way
is to keep it simple. Designating a ÿxed or percent price di˝erential from
the standard room can be e˝ective and relatively easy to implement (see
Table 2.1).
In this manner, the revenue manager can adjust the benchmark rate
(BAR), and then the other room types can be automatically adjusted. In
today’s environment, with the capability of complex data analysis, the ÿxed
or percent di˝erentials can be tweaked based on demand and seasonal
patterns. In addition, the revenue manager can utilize room mix to yield
out less proÿtable business when demand warrants pushing for premium
room sales. O˜en, special corporate accounts will have last room availabil-
ity (LRA) only for the lower/standard rooms. When the revenue manager
restricts the sale of standard rooms, the special corporate accounts will be
forced to purchase a premium room either at a higher negotiated rate or at
retail rate (See Figure 2.6).
Table 2.1: Segmentation Mixes
Segmentation - Rooms
Transient: Rooms Transient Mix
Premium Retail 6,205 5%
Standard Retail 24,820 20%
eChannel Retail 12,410 10%
Special Corporate 18,615 15%
Government 12,410 10%
Wholesaler 6,205 5%
Other Discount 43,435 35%
Total Transient Rooms 124,100 100%
Segmentation - Rooms
Transient: Rate Revenue
Premium Retail $650 $4,033,250
Standard Retail $500 $12,410,000
eChannel Retail $440 $5,460,400
Special Corporate $375 $6,980,625
Government $212 $2,630,920
Wholesaler $300 $1,861,500
Other Discount $200 $8,687,000
Total Transient Rate $339 $42,063,695
Figure 2.6: Seasonal Pricing Chart

PRICING TACTICS
Static versus Dynamic Pricing
Hotels can implement static pricing, or “ÿxed” pricing, for any segment for
consistency and ease of operation. For example, the retail room rate may
be set at one price point and changed infrequently. Or in another segment,
such as special corporate, a static rate may be contracted and the business
travelers would obtain the same rate every night of the year, regardless of
the BAR rate. ˛e trend, however, is increasingly moving towards dynamic
pricing for all segments. In this case, the retail rate of a hotel generally would
change more frequently with a large standard deviation across all dates of
any given year. Another dimension of dynamic pricing is “˙oating” pricing.
In this scenario, a room rate such as a qualiÿed discount or special corporate
account is set up as a percent discount o˝ the BAR rate. Figure 2.7 shows an
example of ˙oating pricing.
Figure 2.7: Floating Prices Example.
Static rates: While room rates may change from time to time and
by season, there are some rates that are guaranteed for a period of
time, known as static rates. ˛is means that regardless of when the
customer is making the reservation, the rate would be the same,

provided there is a room available to accommodate the guest. ˛ese
rates can be either pre-negotiated (such as corporate, wholesaler, or
group rates) or determined by other entities, such as government
rates that are determined by the government based on average cost
of hotel rooms in each county. Other examples of predetermined
rates are branded discounts such as employee rates or other hotel
special discounts.
• Dynamic pricing: More o˜en than not, hotel rates vary by season,
day of week, or even by the hour, depending on multiple factors,
known as dynamic pricing, in which the hotel establishes the best
available rate for the day. ˛is BAR serves as a benchmark on which
other rates are based. For example AAA rates are usually set up as 10
percent o˝ the rate of the day, which means AAA members are guar-
anteed a speciÿc discount on the rate rather than a ÿxed price. ˛is
dynamic pricing model has gained more popularity for both hotels
and corporate partners so that some corporate accounts are now also
based on a percentage basis of the rate of the day. In this scenario,
the client is able to take advantage of discounted rates when the hotel
prices the rooms below the negotiated agreement.
SEEING FURTHER
Dynamic pricing is a concept that has become
a more common practice in recent years, espe-
cially in some markets where high demand has
pushed revenue managers to think creatively.
How do you think this practice will a°ect a hotel in low demand
with a highly price competitive environment?
Who beneÿts the most on high versus low demand?
With increased price transparency in all channels, does decreasing
the rate often lead to an increase in sales and proÿts for a single
hotel? Why or why not?
Differential Pricing through Booking Parameters
˛e booking window for a hotel varies widely by location, property type,

seasonality, etc. Resort and leisure destinations tend to get bookings further
ahead than other non-resort locations because leisure customers plan their
vacations further ahead than, say, a corporate customer. Leisure customers
tend to book rooms outside of 30 days as this is o˜en done in conjunction
with air travel. Corporate customers, on the other hand, tend to book inside
of 21 days as their travel plans tend to change constantly based on their
business needs. Understanding the booking cycle for each market segment
is extremely critical as these segments do not pay the same rates or have the
same tolerance for increase in pricing.
Advanced sales are a pricing modality that has been around for a long
time and is very common in the hospitality industry. O˜en hotels use addi-
tional discounted pricing in order to attract early bookers at traditionally
higher rates than what they would otherwise sell rooms for to other con-
tracted business, corporate accounts, and wholesalers. In this case, the hotels
would o˝er a discount on their current public retail pricing (i.e., 10 to 30
percent o˝) for early bookings outside of the traditional booking window,
for example, more than 21 or 30 days in advance. ˛e tradeo˝, however,
is that the customer o˜en would have to pay for the room in advance and
may not be able to make any changes to the reservation a˜er completing the
booking process.
Transparent versus Opaque Pricing
Unlike the prior modality to sell rooms early as a discount on the public
pricing, this concept is designed to sell rooms at a much lower pricing,
however, through channels that allow for the rate not to be publicly displayed
as such. ˛e reason for this is because hotels would want to preserve their
public pricing but still have unused inventory that they would want to sell.
˛ere are various ways the hotels can do this. Websites such as Hotwire
are perfect examples of this practice, wherein the name of hotel is only
disclosed a˜er the guest has completed the booking process; therefore, the
hotel is opaque and allows the hotel to maintain pricing integrity among
other channels. ˛is practice is also geared toward the shorter booking
window, traditionally less than 3 days to arrival. Hotel rooms are perishable
in that each room that is not sold on a particular day represents lost revenue
opportunities. So, our goal is to sell each room at the highest revenue before
the end of the day (See Figure 2.8).
Figure 2.8: The Reservations Booking Cycle.
Rate Parity and Channel Distribution
In the US most hotel companies have “Best Rate Guarantee” or “Look No

Further” policies, which highlight the company’s commitment to maintain-
ing the best (or equal) price on their website since the channel of distribu-
tion is much lower as opposed to a third-party website that o˜en includes a
commission to be paid to the OTA for the booking transaction. ˛ese poli-
cies may have consequences for the individual hotels that violate the policy,
knowingly or not. When a guest ÿnds a lower rate on a di˝erent website
other than the company’s own website, the guest is able to obtain beneÿts
such as discount on the rate they found on the site, points toward the com-
pany rewards program, or other concessions. In addition, the hotel may have
to pay the company additional penalty fees for guest recovery and/or for vio-
lating the policy. ˛ese policies are in place to discourage hotels from engag-
ing in exclusive deals with online travel partners outside of a brand master
agreement. It is important to highlight that some European countries, such

as France, have recently enacted laws preventing the rate parity clauses that
make it okay for brands to o˝er rates lower than on the OTA sites.
Evaluating Pricing Effectiveness
Pricing the retail rate at the right price point is not 100 percent scientiÿc, and
therefore, measuring the pricing e˝ectiveness can also sometimes be some-
what nebulous. However, there are some industry norms that can direction-
ally infer if the pricing strategy is sound and proÿtable. Certainly, healthy
market share, with a premium in both occupancy and rate, can be indicative
of proper price positioning. In addition, as the retail rate is the foundation of
many segments in a hotel’s transient mix, success also can be inferred with a
strong non-qualiÿed mix. What percentage of transient rooms did the hotel
sell at retail/BAR? If a hotel is overpriced, it is assumed that the conversion
will be low and the hotel will have to sell more discounts to ÿll the hotel.
Related to that is the rate eˆciency metric that compares the overall
transient average daily rate (ADR) with the retail ADR. If a hotel sells a lot
of discounts, it can be assumed that the rate eˆciency would be lower than
optimal. Certainly, as the primary objective is to drive room sales, evaluat-
ing overall retail revenue can be relevant. All of these are more meaningful
when expressed in comparison to prior year, budget, or last month. As size
of hotel, type of hotel, and location of hotel can all yield di˝erent optimal
metrics, o˜en the trend of its own performance and goals is the only rel-
evant indication. ˛e important lesson is that to drive RevPAR, a revenue
manager must balance both occupancy and ADR. Raising retail rates across
the board is not the method to drive ADR. In fact, in some cases, lowering
the retail rate can grow the non-qualiÿed mix and, thus, overall transient
ADR, given that generally the retail rate is the highest rated segment.
Pricing Effectiveness Calculations

Non-Qualiÿed Transient Revenue = Revenue of all Retail Transient Rated Rooms Sold
Non-Qualiÿed Mix = Total Retail Rated Transient Room/Total Transient Rooms
Retail ADR – Revenue of All Retail Transient Rooms/Total Retail Transient Rooms Sold
Rate E˛ciency = Total Transient ADR/ Retail ADR
Individual Exercise:
Please refer to the segmentation (Table 2.1) and calculate each Pricing Metric.
• Do you think the hotel is priced e°ectively? Why?
• What additional analysis may be required? What data is missing for evaluation?
Price Sensitivity
Price sensitivity can also be referred to as the customer’s reaction to pricing

changes. In general, a revenue manager’s role is to maximize revenues for the
hotel, which o˜en comes with a bias for higher prices. On the other hand,
guests would favor lower rates or a perceived high value for the price paid.
However, not all guests have the same price sensitivity. Consider this: a fam-
ily of four going to visit friends for a weekend might choose the hotel based
on the lowest rate available in the area even if they have to drive a bit more
since they are paying for their room themselves. A business traveler, on the
other hand, might choose the hotel for its proximity to the oˆce or to his
clients, and since the company will eventually reimburse travel expenses, the
price of the room is less relevant to the traveler making the decision to book.
Now consider what would happen if the hotel decided to increase the rates
by $10–$20 for the same room the same day. What is the likelihood that the
family would continue shopping for a cheaper room or that the business
traveler would book the same room?
Similar to the examples above, each guest, market segment, and time
frame has a di˝erent tolerance for price increases. In general, the higher the
rate, the more likelihood that the guest would not book the room. Revenue
managers o˜en test these reactions to rate changes through price testing in
that the rates are increased or decreased at di˝erent times of the booking
cycle in order to ÿgure out customer behavior. ˛e percentage of customers
booking versus not is o˜en referred to as the conversion ratio, or the num-
ber of guests that were converted to sales as opposed to no sales.
Another factor in price sensitivity and conversion is availability. As

referred to before, hotels o˜en price their rooms based on their competitors.
While higher prices tend to have a negative reaction to conversion ratios,
this also depends on the available inventory. In periods of high demand,
such as conventions in town, sporting events, graduation weekends, etc., the
dynamic between supply and demand chain changes, which means there
are more guests who want to stay in the area than there are hotel rooms
available. In this case increase in demand would cause hotel room rates to
temporarily increase for this time period. ˛is also means that guests would
be competing with each other for the available rooms. ˛ose willing to pay
more and book early would be able to reserve the rooms.

TO DO: Your ownership has asked you to increase revenues
and proÿt by at least 5 percent for the following year. Based
on pricing principles in this chapter and price sensitivity for di°erent
market segments, you will have the opportunity to make strategic
changes to rates or increase production to key market segments. Find
the best combination of strategic changes to achieve the best possible
proÿtable outcome.
Exercise: On the next tab, you will see di°erent market segments.
Columns F & G will allow you to make strategic changes for speciÿc
market segments. Corporate Accounts & Social Meetings will allow
changing production through the sales e°orts, positive or negative.
For RACK, Opaque, and Corporate Meetings, you will be able to change
rates up or down. As you make strategic changes, you will notice it will
have an e°ect on either the production or the rate for each segment.
Notes: The changes also take into consideration ÿxed versus dynamic
rates based on real-life practice. There are some market segments that
have a relationship to each other, such as the BAR rate will also impact
Brand.com, OTA, and packages. Other market segments might have a
relationship on production, whereby increasing one, they would also
decrease the other based on available inventory.
Goal: Your goal is to ÿnd the optimal combination of rate changes
(positive or negative) as well as production between the market
segments. Once you ÿnd the optimal revenue and proÿt growth, make
a summary of your decisions and the rationale behind your decisions...
Computer-Generated Sensitivity Models
As you can see, the explosion of big data and the proliferation of di˝erent
channels of distribution make these computer-generated models more
and more common each day. Over the past few years the modern revenue
manager has evolved and is quickly transitioning into a strategic statistician.
However, at the same time, it becomes more important to place more
emphasis on interpreting the information and acting upon the demand of
their market, rather than only gathering facts and reporting against them.
Given the complexity of the retail pricing, over the past few years there
has been a proliferation of computer-generated pricing models that have
been created to assist a revenue manager in determining the optimal pricing
for the hotel. Most of these pricing models are built into more elaborate rev-
enue management systems since they integrate hotel demand, historical per-
formance, available inventory, etc. One of the most commonly used systems
is Duetto, which is an independent revenue strategy system that focuses on
independent and small brands and which connects to the central reservation
system (CRS) or property management system (PMS). Major hotel brands
also utilize these pricing models that have been developed speciÿcally to
work with their systems and have been embedded to other existing tools.
REAL PEOPLE
Calvin Anderson is the Vice President of Man-

aged Services for Duetto, and he explains that
these sophisticated pricing response models are
designed by providing a statistically relevant for-
mula for determining optimal pricing at hotels and involves a vast amount
of calculations that a human brain might not be able to compute as e˝ec-
tively and in the time required to make an impact. Duetto, in particular,
is built on an open pricing model that focuses on the principle that all
channels should be open and ˙owing at all times. ˛is means there are no
capacity restraints on any channel, but rather the pricing, room type, or
the length of stay is adjusted based on the elasticity and demand for that
speciÿc channel or market segment, said Anderson.
Duetto also uses other nontraditional sources of data to determine the

optimal price point, such as weather forecast, ˙ight and train forward-
looking aggregate data, reviews and reputation scores from di˝erent
websites, as well as competitor pricing from online travel agent sites.
˛e seamless integration of all these data points allows the system to
suggest price positioning where the revenue manager can trust and
push out the recommendation or make overrides to the recommended
strategy. Another key to their success is their business analytics
platform, which provides the revenue manager with the transparency
on how and why the system is making recommendations. ˛is allows
the revenue manager to look at all the facts and make an informed
decision, which improves their eˆciency.
Question 1:
While the system-generated forecast is sophisticated, are there any

instances that may require user intervention? What market or property
data may be hard for the system to recognize?
Question 2:
Describe how an unexpected increase in the conÿrmed group forecast
may impact the total hotel rooms forecast. What processes should be
evaluated to minimize the frequency or large variances?.
Question 1: How is value created? Think of a speciÿc hotel or
restaurant that you have experienced. How could it add more
value for you? Do you think your list of enhancements would be
the same for your mother or father? Why?
Question 2: Describe two distinct market segments and describe any di°erences in
buying behavior.
Question 3: Assume you are the opening revenue manager for a new resort. List the
steps that you would take to deÿne a comp set and determine its benchmark rate.
Question 4: If a hotel has more demand than supply for a given time frame, what
pricing strategies can be considered to increase proÿts?
TEAM ACTIVITY
NEW BUILD HOTEL—˛e Courtyard by Marriott Brand
Courtyard by Marriott is one of the most successful lodging brands

in the hotel industry. It o˝ers an a˝ordable price for a mix of prod-
ucts and services that cater to the business traveler “road warrior.” So who
thought of the concept?
Marriott International actually used conjoint analysis to determine

which o˝erings would provide the biggest bang for its buck for this new
brand. ˛e process involves consumers expressing satisfaction levels for
numerous combinations of o˝erings or “proÿles” at di˝erent price points.
˛e process allows the marketing research analyst to identify that services
and features are worth the most to the customer. In the case of Courtyard,
the exercise was so successful that the brand is o˜en referred to a as “the
hotel designed by the business traveler.”
As a group, discuss a new product or service that would cater to students on

campus.
Brainstorm on the di˝erent attributes (or features) that may increase the
preference of the product or service, understanding that it is likely that you
cannot include all of them.
Without research, ask each other the following questions:
1. What features do you think are most important to the student?

2. What price range do you think is appropriate to capture the most
sales and proÿt?
Generate ÿve di˝erent combinations of attributes at three di˝erent price

points (for a total of 15 proÿles).
Send out a survey to at least 25 students that asks him or her to rate each
proÿle (1 lowest, 7 highest).
Analyze the results and ask the following questions:
1. What features are most important for the students? Does this match
up with your hypothesis prior to research?
2. Is there price sensitivity for any of the features?
3. Are you certain that you have identiÿed the correct proÿles? Why not?
4. What will your product or service include and what price will you
charge?
Source: Wind et al., 1989.
INTERNET ACTIVITY
Select an upcoming high demand date in your city, such as a grad-

uation weekend, citywide conference, sports event, or celebration.
Now select 3 hotels near the event and shop their rates for 1-, 2-,
and 3-night stays during their peak dates. Now do the same exer-
cise for the date one month a˜er the event and compare the rates.
• Is there a signiÿcant di˝erence in rates between the two dates?

• How much premium has the hotel applied for these high demand dates?
• Why do you think that is?
• Are there any other dates you can think of that would apply to these
concepts?
APPLICATIONS
Case 1
Examine the spreadsheet represented below to answer the

following questions:
1. Are there trends in the data by day of week?
2. What price increases would you recommend for
the revenue manager to implement immediately?
Hotel Capacity 295

Date DOW Projected Rooms on Rooms Left Remaining
Occupancy the Books to Sell Demand
May 1 Sunday 72% 175 120 40
May 2 Monday 92% 225 70 50
May 3 Tuesday 98% 250 45 75
May 4 Wednesday 98% 275 20 75
May 5 Thursday 92% 225 70 45
May 6 Friday 86% 200 95 55
May 7 Saturday 98% 225 70 75
May 8 Sunday 80% 175 120 65
Hotel Capacity 295

Date DOW Projected Rooms on Rooms Left Remaining
Occupancy the Books to Sell Demand
May 9 Monday 92% 175 120 100
May 10 Tuesday 98% 200 95 135
May 11 Wednesday 98% 225 70 115
May 12 Thursday 82% 175 120 70
May 13 Friday 80% 145 150 94
May 14 Saturday 98% 195 100 124
Case 2
Examine the spreadsheet represented below to answer the following questions:

1. Is the subject hotel being consistent on its pricing strategies weekday
vs weekend?
2. Competitors A & B show the same di˝erential weekday vs weekend.
What are the advantages and disadvantages of this strategy?
3. What recommendations might you have for the focus hotel to imple-
ment moving forward regarding its pricing di˝erential?
WEEKDAY Traditional Premium Premium View Suite
Standard View Suite Differential Differential
View vs Suite vs
Standard Standard
Focus Hotel $ 100.00 $ 125.00 $ 140.00 $ 25.00 $ 40.00
Competitor A $ 120.00 $ 145.00 $ 175.00 $ 25.00 $ 55.00
Competitor B $ 110.00 $ 120.00 $ 150.00 $ 10.00 $ 40.00
Competitor C $ 115.00 $ 135.00 $ 190.00 $ 20.00 $ 75.00
Competitor D $ 125.00 $ 150.00 $ 185.00 $ 25.00 $ 60.00
Average $ 114.00 $ 135.00 $ 168.00 $ 21.00 $ 54.00
WEEKEND
Focus Hotel $ 95.00 $ 120.00 $ 130.00 $ 25.00 $ 35.00
Competitor A $ 119.00 $ 144.00 $ 174.00 $ 25.00 $ 55.00
Competitor B $ 89.00 $ 99.00 $ 129.00 $ 10.00 $ 40.00
Competitor C $ 109.00 $ 119.00 $ 159.00 $ 10.00 $ 50.00
Competitor D $ 99.00 $ 119.00 $ 149.00 $ 20.00 $ 50.00
Average $ 102.20 $ 120.20 $ 148.20 $ 18.00 $ 46.00
GLOSSARY
Brand.com – ˛e main reservation booking website for the hotel
or chain.
Channel/source – Platform or engine responsible for delivering a
booking transaction. ˛is could range from the hotel/brand
call center, the hotel website, an online travel agency (OTA),
a global distribution service (GDS), or the internal hotel sales team.
Competitive set (comp set) – A group of similar and directly competing
Last room availability (LRA) – A condition granted to special corporate
accounts in which their negotiated rate is automatically available if
the hotel is selling standard inventory.
Rate parity – ˛e identical retail rate is quoted across all channels.
Remaining demand – Number of rooms the hotel can expect to sell with
unlimited physical capacity.
Remaining supply – Number of rooms available for sale.
Retail rate/best available rate (BAR) – ˛e rate a customer pays “o˝ the
shelf,” o˜en referred to as “best available.”
Unconstrained demand – Total demand in a segment or overall in the
absence of any constraints.
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CHAPTER 3
Evolving Hotel Segmentation

Roy Madhok and Theresa Doherty
OVERVIEW
Establishing segmentation strategy allows revenue managers to deÿne
and optimize the composition of travelers coming to the hotel. Revenue
managers must understand their hotel’s mix of business as well as the
competition’s mix of business. They must also understand the role and
proÿtability of all distribution channels in the hotel’s revenue strategy.
This module also investigates the current and future trends in hotel
segmentation.
LEARNING OBJECTIVES
Deÿne major segments used by hotels
Outline the progression and future of segmentation
Explain the role of fencing discounts
Rank segments by their price sensitivity
Determine proÿtability of di°erent segments
Identify the importance of group, contract, and special corporate
evaluation
Analyze a hotel’s mix of business
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OUTLINE
Evolving Hotel Segmentation
• Deÿning Segmentation
• Evolution of Segmentation
• Littlewood’s Rule
Fencing Segments
• Methods of Fencing Segmentation
• Ethical Issues with Fencing
• Varying Levels of Price Sensitivity
• Proÿtability within Segments
Contract Segment
• Special Corporate/Negotiated Segment
• Analyzing Mix of Sales
EVOLVING HOTEL SEGMENTATION

Defning Segmentation
Market segmentation or mix of sales is inherently a marketing function,

wherein marketers classify and target customers in speciÿc groups based
upon their characteristics, behaviors, and preferences (Tallury & van Ryzin,
2004). For market segmentation to exist, it needs to be clear that the market
for the product is not homogeneous, that the market can be divided into
groups, and that not all customers for the product are the same (McDonald
& Dunbar, 2012).
Revenue managers go to great lengths to accurately segment or

categorize their customer base. More importantly, market segmentation
allows hotels to lower the purchase price for particular guests and also
helps revenue managers identify which groups of consumers are worth
targeting at di°erent times. In Figure 3.1 below, you can see that o°ering
Evolving Hotel Segmentation  63
one price point is simple, but having multiple segments allows revenue
managers to o°er rates at di°ering levels, therefore increasing occupancy
because of lower paying guests, increasing ADR (average daily rate) because
of capturing guests that would pay more, and therefore increasing overall
revenue and proÿt.
Figure 3.1: One-Segment Proft versus Two-Segment Proft.
SO WHAT?
What are the beneÿts of o°ering di°erent price points to di°erent
guests? Why would it be a bad idea to o°er one price point to all
guests?
EVOLUTION OF SEGMENTATION
In 1956, Wendell R. Smith published an article introducing the idea

of market segmentation for all industries. Smith argued that the cur-
rent marketing method of product differentiation, where marketers
would modify or add supply/products to better adapt to demand, was
only enough to skim the surface of how much of the market could be
penetrated. Smith made the claim that expanding the number of con-
sumers for a product would produce depth of “market position in the
segments that are effectively defined and penetrated,” or market pene-
tration (Smith, 1956).
THINK HISTORICALLY
In 1956, most industries that used market segmentation strategies did

not realize that they were in fact utilizing market segmentation. J. W.
“Bill” Marriott, the founder of Marriott International, was working at
his family’s hotel in 1957, the Twin Bridges Motor Hotel, later known
as the Twin Bridges Marriott. He sold his hotel rooms from a drive-up
window and charged extra for each additional guest in each room. If
his hotel was going to sell out, he would assess which cars had the most
guests and then proceeded to turn away cars with one guest (Kotler,
Bowen, & Makens, 2010).
Bill Marriott was using segmentation by understanding that turning

away his lowest-rated segment, one occupant, would allow him to gain
more revenue for the night.
Question:
• List other ways that segmentation has been put to use in various
industries.
˛e o˝cial advent of segmentation in the travel industry was in 1972

when Ken Littlewood of British Overseas Airways Corporation created
Littlewood’s rule, arguably the ÿrst revenue management model.
Littlewood’s rule stipulated that a discounted segment should only

be accepted if the revenue from the discounted segment would exceed
the expected revenue of future bookings from the higher-rated segment
(McGill, 1999).
LITTLEWOOD’S RULE
Accept a discount reservation if:
S2 ˛ S1 x Probability (D1 > x)
S1: High-rated segment
S2: Low-rated segment
D1: Demand for high-rated segment
X: Remaining inventory to sell
Littlewood’s rule shows that a hotel should accept a low-rated segment

if the expected revenue from a higher-rated segment would be less
than if the hotel were to keep the lower-rated segment open.
Littlewood’s rule is still in use today; as the question of “do we want to
take this piece of business?” still comes up when evaluating whether to
accept a discount segment, channel, or group over a particular set of
dates.
How would you measure the probability that the demand for a lower-
rated segment is greater than the amount of inventory remaining?
What are problems with this method?
Hotel segmentation uno˝cially started when hotels would ask their

guests upon check-in whether the guest was traveling for business or pleasure.
˛e practice of tracking and actually segmenting guests began with the three
fundamental segments still in use today: Transient, Group, and Contract. In
order to more precisely target segments, hotels narrow down the these funda-
mental segments to Retail, Government, Opaque, SMERF (Social, Military,
Education, Religious, Fraternal), Groups, Corporate Groups, etc.
Table 3.1: Various Market Segment Examples

Market Segment Description
Retail The rate a customer pays “off the shelf,” often referred to as “best
available”
Special Corporate/Business Corporate travelers booking their negotiated rate with a hotel
Transient (BT)/Negotiated
Qualifed Discount Any discount that a consumer must be qualifed for, such as senior
discount, AAA discount, student discount, etc.
Online Travel Agent (OTA) Rooms booked via online travel agents, such as Expedia and
Booking.com
Government Group Discounted group rates for government offcials on either the local,
state, or federal level.
Government Transient Individual government travel for offcials on the local, state, or
federal level
Rewards or Points Those guests who accumulate enough points with their preferred
brand to redeem a room night
˛ese market segment examples have continued to evolve, moving from

macro-segments and then becoming more granular as time progressed. In
Figure 3.2 Transient Segments, AAA and OTA can be broken out further into
micro-segments that can be considered as groups of consumers who share
a similar level of interest in a set of features (McDonald & Dunbar, 2012).
In the Online Travel Agent (OTA) segment for example, a consumer may
fall into the segment of those people who are looking for bundled travel, or
reservations where multiple travel services are combined, such as ˙ight and
hotel. Revenue managers continue to create and identify micro-segments as
the addition of a new micro-segment may increase the amount of reserva-
tions booked, and the subtraction of a micro-segment may allow room for
higher-rated segments.
Figure 3.2: Macro- to Micro-Segmentation.
As market segmentation becomes more complicated, it becomes

increasingly challenging to segment guests accurately. ˛e current method
of segmenting consumers is called clustering, in which a heterogeneous
consumer market is divided into homogenous groups. One problem is that
oên times the natural groupings do not exist and information is then lost
because the segments containing those consumers do not accurately ÿt. ˛is
problem arises when a guest booking a retail rate may be a business guest,
a leisure guest, or both. Similarly, a guest booking via opaque, in which the
hotel is not disclosed until the nonnefundable reservation is made, also may
be traveling for either business or leisure.
SEEING FURTHER
It has recently been suggested that hotels
should move past segmenting via transactional
characteristics, such as lead time, but instead
move towards behavioral segmentation, where the consumer’s
behavior and lifestyle is categorized (Kimes, 2010). Hotel revenue
managers can price more accurately once they understand the value
proposition the guest is looking for. For example, understanding a
guest’s spending patterns can help a revenue manager ascertain how
to target that particular segment.
What are some behavioral and lifestyle characteristics that revenue
managers should track in order to understand, price, and target
their consumer?
As revenue managers learn to accurately segment guests, the task

becomes optimizing segment levels in the hotel. Revenue management
focuses its e°orts on creating value and increasing those segments that have
the highest ADR and proÿtability. As segmentation evolves, we understand
that e-commerce and marketing initiatives are necessary to target the appro-
priate guests depending on levels of demand. For example, hotels go to great
lengths to target periods like Valentine’s Day with display marketing featur-
ing packages that attract higher-rated guests.
In the same light, revenue managers identify times where discount res-
ervations will help grow occupancy and will therefore spend marketing dol-
lars on OTA Pay per Click (PPC) ads or o°er discounted rates to Frequent
Independent Traveler (FIT) partners. ˛erefore, the evolution of segmen-
tation has gone from identifying segments to developing and optimizing
those segments that will help hotels during both high-demand and low-de-
mand dates.
FENCING SEGMENTS
˛e purpose of segmentation is to be able to charge di°erent consumers

di°erent prices for essentially the same product. However, it is impossible to
o°er a lower rate to di°erent consumers without restrictions, or fences, on

the purchase.
METHODS OF FENCING SEGMENTATION
˛ere are multiple methods of fencing, or segmentation hedges that allow

hoteliers to control the reservations they are willing to accept based upon
the price being paid. Price discrimination, o°ering various prices to vari-
ous consumers, can only exist when practical fences are in place.
˛ere are ÿve basic forms of rate fences; these include physical, con-
trolled availability, customer characteristics, transaction characteristics, and
product line (Dolan & Simon, 1996).
Table 3.2: Five Basic Forms of Rate Fences
Fence Description
Physical Offering varying room types, such as king-bedded rooms, suites,
two beds, etc.
Controlled Setting an advance purchase window of 90+ days with a 20 percent
Availability discount to entice early bookers looking for a discount
Customer Offering discounts to leisure guests through qualifed affliations or
Characteristics status
Transaction Making a reservation fully nonrefundable upon booking
Characteristics
Product Line Offering different versions of the same product, i.e. king room with
breakfast versus without
Source: Based on Dolan & Simon, 1996.
For a rate fence to be considered strong, there are four key requirements
(Smith, 2012):
1. Correlation: ˛e fence must correlate with the consumer’s perceived

value proposition. Rate fences that e°ectively sort guests by their
level of price sensitivity are the most e°ective as they make the mix
of sales better deÿned and allow strict price discrimination.
2. Information: ˛e information conveyed in the rate fence should be
clear to both the consumers and employees. A rate fence without
clarity results in confusion, lack of enforceability, and acceptability
on the part of the consumer. Additionally, too much information

required is a deterrent on the ability to capture a booking.
3. Enforceability: ˛e rate fence must be easy to enforce. If a rate fence
is open to interpretation the rate fence is then rendered useless and
fails to achieve its purpose of enabling price discrimination.
4. Acceptability: ˛e consumer has to understand and perceive the
fence as fair. A rate fence that is perceived as unfair could also be
perceived as illegal or unethical.
• What are some rate fences that you have come by when purchas-
ing items, hotel rooms, ˝ight tickets, etc.?
• What are some risks that organizations face when using various rate
fences?
ETHICAL ISSUES WITH FENCING
˛e four requirements for creating e°ective rate fences all can bring upon
ethics issues. During high-demand periods, such as nearby sporting events
or concerts, hotels oên will raise rates and keep a 100 percent nonrefund-
able policy. For example, Travel magazine highlights the 2015 Superbowl as
a period where “some hotels in the region are price-gouging even more as
the big game day approaches” (Kehrli, 2015). ˛e nonrefundable rate fence
tied to the higher rate alters the perceived fairness of rate fencing. Hotels and
airlines alike oên have customers who talk to each other about the price
they paid and can potentially disagree with the fence instituted. For exam-
ple, if a lower price point is relegated to bookings made on mobile devices
only, customers can complain about the price they paid because it is not fair
to those who booked via traditional means.
VARYING LEVELS OF PRICE SENSITIVITY
In economics, price discrimination or the idea of segmentation can only

exist when appropriate fences are in place and when an organization (or
hotel) can charge di°erent prices to di°erent customers for a similar product
(Smith, 2012). Since hotel guests are all willing to pay di°erent prices, rev-
enue managers set fences to lower the rate of entry into the hotel for some
guests while raising the rate for others. ˛e economical idea is that by o°er-
ing one price point, there is only one proÿt margin involved, but o°ering
various price points allows a hotel to proÿt from the volume of lower-priced
rooms and from customers who purchased the higher-priced room.
Within each segment there is an obvious level of price sensitivity

whereby the leisure AAA traveler is more price-sensitive than the retail
guest but less price-sensitive than most corporate guests. Economists
naturally suggest determining price elasticity of each market segment, or
the market segment’s willingness to purchase a room depending on the rate
amount. Once the price elasticity has been determined, one would then set
the rate accordingly (Pigou, 1932). In practice this is di˝cult because of the
dynamism in revenue management, where each day has di°erent travelers
and each of these travelers has a di°erent reason for traveling (Elmaghraby
& Keskinocak, 2003).
Figure 3.3: Price-Inelastic Segment versus Price-Elastic Segment.
Instead, demand for any given segment is seasonal and contains forecast
error. Revenue managers look historically and assess competitor mix of
sales to understand which of their segments are most price inelastic, or less
sensitive to rate changes. Figure 3.3 shows that in a price inelastic segment,
dramatic price drops will not result in signiÿcantly more volume but may
dilute price to the point where the rate drop only hurts overall revenue.
A dramatic price drop in the price-elastic segment, however, could yield
signiÿcantly more volume of rooms sold and therefore more revenue.
REAL PEOPLE
Heather Ra°etto*, Director of Revenue Manage-

ment, works in New York City and looks to indus-
try tools to measure how well she priced particular
segments over dates that have passed. ˛e industry
tool she uses show a hotel’s occupancy percent versus that of the market
over a span of dates. To better understand price sensitivity, look at the
segments in Figure 3.4 showing ADR for both Heather’s hotel and the
market’s segment ADR. ˛e relationship is shown below:
Figure 3.4: Discount Segment Price Sensitivity.

*Name has been protected
QUESTION
• Over what set of dates would you suggest that the discount seg-
ment price sensitivity is high? Why? How else could you mea-
sure price sensitivity within segments?
PROFITABILITY WITHIN SEGMENTS
Revenue managers are involved in many decisions that impact the

segmentation of the hotel. ˛ese decisions occur based upon the booking
window of the various segments. For example, Group and Contract decisions
can be made anywhere from one year to ÿve years prior to the date of arrival.
Decisions regarding contracts for Special Corporate/Negotiated rates are
normally made in the fourth quarter of the prior year. Understanding the
proÿtability of each segment is therefore critical when making decisions that
commit the hotel to volume in these segments well in advance. Segment costs
need to be understood as each segment has a cost associated with booking.
All segments incur di°erent costs, and those segments that discount and have
high costs pose a double-whammy on a hotel’s proÿtability. For example,
Group business more oên than not requires labor because sales managers sell
group business; OTA rooms come with commission costs; breakfast packages
incur the cost of serving breakfast at the hotel; and all other segments have
di°erent costs because of the cost it takes to acquire any particular segment.
Earlier in this chapter, Littlewood’s rule was introduced. Littlewood’s

rule stipulated that a discounted segment should only be accepted if the
discount segment revenue exceeds the expected revenue of future bookings
from the higher-rated segment. ˛is concept is central to decision-making
around the Group, Contract, and Negotiated/Special Corporate segments
to ensure the most proÿtable business is booked for the hotel. “˛e cur-
rent generation of revenue management systems in the lodging industry
performs demand forecasting and optimization for the individual customer
segment of the hotel business” (Hormby, Morrison, Dave, Meyers & Tenca,
2010). ˛is allows the revenue manager to apply restrictions to ensure avail-
ability for the most proÿtable business for dates in the future.
“˛e next generation, referred to as total hotel revenue management

systems, will span the entire hotel, including both meeting space and guest
rooms, and will optimize both individual and group demand segments”
(Hormby et al. 2010).
˛ere are two pieces to evaluating a piece of Group business: the proÿt
the group will deliver to the hotel and the displacement cost. ˛e displace-
ment cost is the value of other business that will be turned away if the group
is given the necessary inventory. ˛e role of revenue management in the
sales process is to ensure that the proÿt a group delivers is greater than the
displacement cost of the opportunity.
QUESTION TO CONSIDER
• Under what circumstances would it make business sense to con-
ÿrm a Group booking where the proÿt from the group is less than
the displacement cost?

TO DO: The hotel has received a new Group opportunity.
Use the Group Evaluation worksheet to determine the
proÿtability of this potential group:
The group would like to conÿrm 150 guest rooms arriving on Monday,
May 09 for 3 nights
• The group will spend $10,000 per day in food and beverage associ-
ated with this meeting.
• Their budget is $275 per night.
• The transient rate that would be displaced on those nights would
be $350.
Fill in the data in the yellow highlighted boxes with the information above.
• Would this group be proÿtable for the hotel?
• What recommendations do you have for the sales manager to pro-
pose to the group to make the group more attractive for the hotel?
There are several factors that must be taken into consideration when
evaluating the proÿt contribution of a Group opportunity:
• How much will the group spend in addition to rooms?
• What is the proÿt on the additional amount spent? Catering dollars
deliver signiÿcantly less proÿt than room revenue, so this must be
calculated at a much lower proÿt percentage.
• Is there meeting room rental or audio visual revenue with the group?
• Are there rebates or commissions to be paid to the group?
Spreadsheet Exercise 3.1
CONTRACT SEGMENT
˛e Contract segment for hotels is business that guarantees room nights on

a contracted basis over an extended period of time. ˛is segment is typically
comprised of airline crew rooms but could also include college dorm rooms
or extended project business.
Analysis of Contract opportunities also involves comparing the proÿt

opportunity to the displacement cost. Due to the extended nature of a con-
tract (normally covering 6 months to a full year or more), the hotel revenue
forecast is used as a basis for determining displacement over the duration

of the contract. ˛e revenue gained from the opportunity is compared to
the displaced revenue for the nights that the hotel is forecasting to have
high demand.
A contract piece of business, such as an airline crew, can provide a liˆ

in incremental occupancy and appear lucrative from a revenue perspective.
It is critical to incorporate the CPOR, or cost per occupied room, for the
Contract segment to the incremental room nights to ensure that the proÿt
picture is appropriately represented. While the airline crew will deliver addi-
tional rooms to the hotel, there is a cost associated with occupying the addi-
tional rooms that would not otherwise have been occupied.
PROS & CONS

What are the various pros and cons of taking
Contract business from a revenue and proÿt per-
spective in addition to those already mentioned?
SPECIAL CORPORATE/NEGOTIATED SEGMENT
˛ere are a number of terms used to describe the segment that includes
the Negotiated rates that companies receive in exchange for volume. ˛ese
include Special Corporate, Business Transient (BT), Corporate, and Nego-
tiated, to name a few. Careful analysis must be done within this segment
to ensure that companies are not given special discounts at the expense of
higher-rated segments.
˛e factors to consider in this type of analysis are:
• Day of week pattern: Tuesday and Wednesday are the highest

demand nights in many business transient markets. If accounts
are only producing business on the strong demand nights, they
are likely not providing incremental value to the hotel. If they are
producing on shoulder nights, their business is more valuable to
the hotel.
• Monthly/seasonal production: Similar to the day of week pattern,

the seasonal pattern of an account is an important consideration. If
the account produces in the slower season where the hotel does not
sell out as oên, it is likely producing incremental revenue for the
hotel.
• Last room availability: An account that has been granted last room
availability (LRA) is able to book their discounted rate as long as the
hotel is selling standard rooms, regardless of how strong demand is
for a given date. ˛is impacts the proÿtability of the segment because
it allows the account to displace higher-rated business competing for
the same inventory on sold-out nights.
(Additionally the concept of “non-last room availability” status
allows the hotel to restrict availability as needed to yield out demand
from this discounted segment and preserve availability for high-
er-rated business.ˇ Availability can be used as a negotiation tool to
drive higher rates in this segment. In high-demand markets, last
room availability will command higher rates because greater avail-
ability will be a°orded to the account’s travelers. Price-sensitive
accounts can get more favorable rate terms in exchange for allowing
their rate to be restricted during times of high demand.)
In what situation would you accept an account with last room avail-
ability?
ANALYZING MIX OF SALES
In an ideal world, a hotel would ÿll with the most proÿtable segments pos-
sible to drive the most revenue potential available to the hotel. Hotels can
model the optimal mix of sales based upon demand trends by segment to
establish a strategy that pursues this optimal mix.

TO DO: Review the mix of business trends at the hotel (see
Table 3.3). Use the following assumptions to model the
proposed segmentation for next year:
Goal is to achieve 6% revenue growth.
Occupancy will not exceed 80% due to seasonality constraints.
Market will support 5% retail rate lift with comparable volume.
Reduction in Contract rooms will translate into 60% lift for other
segments (if you reduce Contract by 1000 rooms, it will translate
into 600 rooms shifted into another segmentation due to the incre-
mentalism).
QUESTIONS
Goal is to achieve 6% revenue growth.
Outline the mix strategy changes the hotel should make in order to
achieve the 6% revenue growth goal.
Which market segments will be most important for the hotel’s suc-
cess?
Table 3.3: Mix of Sales, This Year versus Last Year

Roomnights Mix of Total Average Revenue
Roomnights Rate
Segment TY LY % Chg TY LY % TY LY % TY LY % Chg
Chg Chg
Retail 11000 13000 –15.4% 15.1% 18.3% $300 $280 7.1% $3,300,000 $3,640,000 –9.3%
Business 15000 12000 25.0% 20.5% 16.9% $225 $220 2.3% $3,375,000 $2,640,000 27.8%
Transient
Government 8000 7000 14.3% 11.0% 9.9% $180 $175 2.9% $1,440,000 $1,225,000 17.6%
OTA 9000 8000 12.5% 12.3% 11.3% $215 $210 2.4% $1,935,000 $1,680,000 15.2%
Advance 6000 5000 20.0% 8.2% 7.0% $199 $189 5.3% $1,194,000 $945,000 26.3%
Purchase
AAA 5000 5000 0.0% 6.8% 7.0% $179 $175 2.3% $895,000 $875,000 2.3%
Group 12000 14000 –14.3% 16.4% 19.7% $215 $215 0.0% $2,580,000 $3,010,000 –14.3%
Contract 7000 7000 0.0% 9.6% 9.9% $159 $159 0.0% $1,113,000 $1,113,000 0.0%
TOTAL 73000 71000 2.8% $216.88 $213.07 1.8% $15,832,000 $15,128,000 4.7%
Occupancy 80.0% 77.8%
Optimal mix is a dynamic concept because no day, month, week or year

is alike. During low seasons, it is important to build upon e°orts to drive
proÿtable segments, but it is equally important to understand that while
Business Transient plays into the optimal mix on most weekdays, on a Fri-
day during the coldest time of the year the optimal mix will be di°erent.
Revenue management professionals therefore identify their optimal mix for
all periods of the year and then communicate that information so that the
hotel can strategize to optimize their mix of sales at all times.
Hotels therefore emphasize a particular segment’s percentage contri-

bution, or a segment’s room volume, as a percentage of total rooms sold.
Revenue managers who focus their e°orts on increasing the percentage
contribution of proÿtable segments can therefore help increase the hotel’s
overall proÿt margin.
What factors could have contributed to the decline in Retail mix
versus the prior year? Which segment saw the largest % growth in
room nights versus the prior year? What strategic decisions were
behind this change in mix? (Refer to Table 3.3.)
Question 1: Of the ÿve varieties of rate fences, which do you
think are the easiest and hardest to enforce? Why? What kind of
problems may arise with a weak rate fence?
Question 2: Knowing that every minute there are reservations being made, how
would you measure price elasticity for each market segment? How would you
measure price sensitivity of guests who have not yet made a reservation? Are there
any challenges with your method?
Question 3: There are industry tools available to measure the segmentation in the
market or in the competitive set. What are other ways that you can identify potential
segments of business?
Question 4: How can you use the internet to help obtain your optimal mix of sales?
Question 5: What are the costs associated with various segments? Is it worth taking
in high-cost segments? What costs could be associated with low-cost segments that
are not apparent, such as Retail, AAA, Government, etc.?
Question 6: What are potential ways to make a Group opportunity more proÿtable if
the displacement cost exceeds the proÿt generated by the group?
APPLICATIONS
1. The Minneapolis City Center Hotel
˛e Minneapolis City Center hotel has been under-

performing the comp set in occupancy over the last 6
months. ˛e hotel executive team is discussing the poten-
tial to gain business from the Mall of America, a major
demand generator in the market.
• What segments(s) of business would come from the mall?
• What type of discounts or promotions would you recommend they
use to generate room nights?
• What fencing considerations would you use in order to minimize
trade down from existing business?
2. Revenue Manager Comparison
Revenue managers A & B manage competing hotels with identical products

and services. Using the information below, calculate the rooms, ADR, and
revenue of each segment and the total rooms occupied, ADR, and revenue
for the day for each hotel.
(˛is exercise should preferably be completed in spreadsheet soˆware.)
Revenue Manager A
• Retail: 50 rooms, $12,500 revenue
• Business Transient: $200 ADR, $8,000 revenue
• Government: 25 rooms, $170 ADR
• OTA: 40 rooms, $6,400 revenue
• Group: 35 rooms, $180 ADR
• Contract: 20 rooms, $120
Revenue Manager B
• Retail: 70 rooms, $240 ADR
• Business Transient: 50 rooms, $9,750 revenue
• Government: 5 rooms, $850 revenue
• OTA: $9,100 revenue, $130 ADR
• Group: 40 rooms, $160 ADR
• Contract: ˛e revenue manager decided not to pursue any contract
business
Which hotel managed their mix of sales better?
What could manager A have done better? What could manager B have done
better?
Which manager likely materialized the most proÿt? Why?
TEAM ACTIVITY
Your hotel’s sales team is in the process of negotiating several Spe-

cial Corporate deals with the top producing accounts in the neigh-
borhood. Your budget for next year is to keep volume ˙at in the
segment YOY but grow the average rate by 5 percent. ˛e sales manager has
presented the following scenarios from your top two accounts:
Company ABC is your top account, producing a third of your total Spe-
cial Corporate segment volume. ˛eir RFP (request for proposal) indicates
that they wish to remain ˙at in rate YOY (year over year). ˛eir negotiated
rate was $175 this year. ˛ey expect that their business needs to remain ˙at
for the following year. Fiêen percent of their volume falls on shoulder nights.
Company XYZ is your next highest volume account, producing just over
25 percent of your total Special Corporate volume. ˛eir RFP does not have
any indication of their rate expectations at this point. ˛eir negotiated rate
was $180 this year. ˛ey expect their business volume to grow by 20 percent
next year because a new division is moving into the market. ˛ey expect
to have relocation business in addition to their normal midweek business
demand. Twenty-ÿve percent of their volume falls on shoulder nights.
As a team, develop a strategy for the rates and conditions your hotel will
o°er to these accounts. Outline the strategy behind your o°er and any risks
you have identiÿed in your approach.
INTERNET ACTIVITY
Visit the online pages of two independent hotels (hotels without

any brand a˝liation) and the websites of two branded hotels in
major markets. Be sure to check the Facebook, Twitter, Instagram,
and Pinterest pages of each hotel in addition to their regular web-
site.
• What segments are being targeted at each hotel?
• What strategies are being employed by each hotel to appeal to the
various segments?
• Based upon what you see, is the hotel missing out on any particular
segment? Why?
• How could the hotel do a better job of targeting various segments?
• Do the hotels do a good job of targeting discount segments during
times of need? Do they do a good job of targeting segments during
peak periods?
GLOSSARY
Booking window – ˛e time horizon prior to arrival that a segment
typically makes reservations.
Bundled travel – Reservations in which multiple travel services are
combined, such as ˙ight and hotel.
Clustering – Where a homogenous consumer market is divided into homog-
enous groups based upon?
Cost per occupied room (CPOR) – ˛is cost represents the expenses asso-
ciated with occupying and servicing a room for one night. It includes
costs such as labor (front o˝ce and housekeeping), cleaning sup-
plies, linen, and utilities.
Displacement cost – ˛e value of the business that will be turned away
because the inventory has been committed to another segment
(group, contract, etc.).
Fencing/segmentation hedges – Methods of control used by revenue man-
agers to manage which reservations they are willing to accept based
upon the price being paid.
Frequent independent traveler or foreign independent tour (FIT) –
Prepaid packaged tours for individual travel.
Last room availability (LRA) – A condition granted to Special Corporate

accounts wherein their negotiated rate is automatically available if
the hotel is selling standard inventory.
Micro-segments – Segments that can be further broken out in order to more
precisely group together those that share a similar level of interest in
a set of features.
Opaque – Where a guest books and is unaware of which hotel they are
booking until the non-refundable reservation is made.
Pay per click (PPC) – Ads that are placed on websites that cost a certain
amount per each click on the ad itself.
Price discrimination – O°ering various prices to various consumers.
Price elasticity – A consumer’s willingness to purchase a product depend-
ing on the level of price.
Price-inelasticity – Where a customer is less sensitive to a change in price.
Product di˜erentiation – How marketers modify or add supply in order to
better adapt to demand.
Qualiÿed discount – Any discount that a consumer must be qualiÿed for
such as senior discount, AAA discount, student discount, etc.
Retail rate/best available rate (BAR) – the rate a customer pays “o° the
shelf ”, oên referred to as “best available”
Segmentation/mix of sales – How revenue managers and marketers classify
istics, behaviors, and preferences.
Shoulder night – A night before or aêr the peak arrival date, where total
hotel demand is not strong enough to reach capacity.
SMERF groups – Any form of Group business relating to Social, Military,
Education, Religion, or Fraternity.
REFERENCES
Dolan, R. J. & Simon, H. (1996). Power Pricing: How Managing Price Transforms the
Bottom Line. New York, NY: ˛e Free Press.
Elmaghraby, W. & Keskinocak, P. (2003). Dynamic Pricing in the Presence of
Inventory Considerations: Research Overview, Current Practices, and Future
Directions. Management Science, 49(10), 1287-1309.
Hormby, S., Morrison, J., Dave, P., Meyers, M. & Tenca, T. (2010, January-February).
Marriott International Increases Revenue by Implementing a Group Pricing
Optimizer. Interfaces, 40(1), 47-57.
Kehrli, K. (2015, January 26). Phoenix Hotel Rates Soar for Super Bowl 2015.
Travelmag.com. Retrieved from https://www.travelmag.com/articles/hotels-
super-bowl-2015/
Kimes, S. E. (2010). Strategic Pricing through Revenue Management. Retrieved from
Cornell University, School of Hospitality Administration site: http://scholarship.
sha.cornell.edu/articles/346.
Kotler, P., Bowen, J.T. & Makens, J. C. (2010). Marketing for Hospitality and Tourism
(6th ed.). Upper Saddle River, NJ: Pearson, 2010.
McDonald, M. & Dunbar, I. (2012). Market Segmentation: How to Do It and How to
Proÿt from It (4th ed.). Chichester, UK: John Wiley & Son Ltd.
Mcgill, J. I & van Ryzin, G.J. (1999, May). Revenue Management: Research Overview
and Prospects. Transportation Science 33(2), 233-256.
Pigou, A. C. (1932). °e Economics of Welfare (4th ed.). London: Macmillan and Co.
Smith, T. J. (2012). Pricing Strategy: Setting Price Levels, Managing Price Discounts, &
Establishing Price Structures. Mason, OH: South-Western Cengage Learning.
Smith, W. R. (1956, July). Product Di°erentiation and Market Segmentation as
Alternative Marketing Strategies. Journal of Marketing, 21(1), 3-8.
Talluri, Kalyan T., and Garrett Van Ryzin. ˛e ˛eory and Practice of Revenue
Management. New York, NY: Springer, 2005.
CHAPTER 4
Key Hotel Distribution Channels
Elyana Falk and Calvin Anderson
OVERVIEW
Channel distribution is one of the fastest changing segments in the
hotel industry, with no stagnation in sight. This chapter will discuss
channel distributions at length, but in short, channel distributions are
the methods and/or platforms to book a hotel room.
LEARNING OBJECTIVES
Recognize the key hotel distribution channels
Di˜erentiate the beneÿts and detriments for the various distribution chan-
nels
Formulate the booking process
Explain what drives the evolving changes in distribution channels
OUTLINE
Introduction
Future of Distribution Channels

• ˜ink Historically: Edgemere Hotel
85
Closer Look: Distribution Channel

• Drive Direct Practices
• Distribution Channel Challenges
Closer Look: Online Travel Agencies (OTAs)
Closer Look: Rate Parity and Best Rate Guarantee

• Rate Parity Legal Problems
• Real People: Director of Revenue Re°ection of Rate Parity
Closer Look: Connectivity among Distribution Channels
Future of Channel Distributions

• Continued Mergers and Acquisitions among Key Players
• Increased Involvement of Social Media
• Cross Device Sharing Platforms
• Sharing Economy
Closing
INTRODUCTION
˜ere are many ways to book hotel rooms, and the landscape has changed
dramatically in the past 20 years. For example, the ÿrst online travel web-
site with real-time reservations launched in 1994 (Warner, Quadri-Felitti,
Chandnani, 2010), and by 2014 the average customer visits 6.5 websites
through various devices before booking their hotel room (Vivion, 2014).
Revenue managers must understand the distribution channel network and
create a distribution strategy based on their hotel’s needs.
An easier way to understand distribution channels is to relate them to

clothing stores. Customers have the choice of Bloomingdales, TJ Maxx, a
Levi’s storefront, Amazon mobile app, Levi’s sales phone line, etc. In each
of these places they can buy the same exact pair of jeans—or in the hotel
industry, a hotel room. But because customer preferences vary widely, peo-
ple choose di˝erent booking methods.
Key Hotel Distribution Channels  87
Customers are the greatest in°uence on distribution channels, and the

changes in technology, competition, and devices continue to impact distri-
bution channels. A revenue manager must understand all distribution chan-
nels and the exciting changes that are happening to continue to be relevant.
A distribution channel is the chain of businesses or intermediaries

through which a good or service passes until it reaches the end consumer;
in the hotel industry distribution channels are the methods through which a
customer can purchase a hotel room. ˜ere are many places where custom-
ers can purchase hotel rooms—from calling the hotel front desk to booking
online through a third-party website. A revenue manager creates a success-
ful distribution strategy by ÿrst understanding the distribution channel
landscape and evaluating each channel’s beneÿts, costs, and implications.
Having a solid knowledge of distribution channels can lead to a successful
distribution strategy that balances the costs of distribution channels by max-
imizing the booking sales at the hotel’s ideal average daily rate (ADR).
SO WHAT?
Understanding distribution channels is a foundational element
of hotel revenue management. A hotel can have one distribution
channel or over twenty. Knowing and understanding the various
distribution channels leads a revenue manager to optimize their
mix and make the most revenue.
What do you think are the primary distribution channels? How
do they vary? Do you think a hotel should use every possible
distribution channel? Why or why not?
˜ere are six primary distribution channels that require understanding

and strategies. ˜ese channels can be °uid to the customer, and a hotel’s dis-
tribution mix can vary greatly based on the strategies used.
1. Hotel website, or brand.com: ˜e hotel’s or parent chain’s website

where customers can directly book their hotel rooms.
2. Voice: Call center or 800 numbers where customers call to book

their hotel room via the hotel’s central reservation system (CRS).
3. Direct to hotel: Any booking handled on property, including walk-
ins, calls directly to the property, groups, contract, etc.
4. Global distribution channel (GDS): A worldwide computerized
reservation network that provides transactions to travel agents,
online reservation sites, and large corporations.
5. Online travel agency (OTA): ˜ird-party travel website that allows
customers to easily compare hotels and book their hotel.
6. Meta websites: A search engine that aggregates hotel inventory from
several sources (OTAs, hotel websites) and presents the compiled
results in one list.
Customers do not di˝erentiate between the various distribution chan-

nels, and many times use multiple methods during their booking process.
For example, a customer may start their research on an OTA, then visit the
hotel’s website for more information, and actually book the room via an 800
number. ˜erefore, while it is important for hoteliers to understand each
channel and their di˝erences, they must also consider customer dynamics
and see how the channels are woven together.
In addition to looking at the interconnectivity of distribution channels,

it is important to know that the distribution mix can look very di˝erent
at each hotel. Distribution mix di˝erences can be due to the nature of the
speciÿc hotel. For example, a roadside motel o˝ the freeway will likely index
higher on direct to hotel due to a higher likelihood of walk-ins. ˜e mix can
also vary due to speciÿc strategies hotels put in place to increase or decrease
speciÿc channels. When building a smart distribution strategy or mix, Kelly
McGuire notes to “replace less-proÿtable business.” By this McGuire refers
to a hotel reducing airline crew contracts (direct-to-hotel channel category)
due to the low price and typical add-ons of breakfast with OTAs, which can
yield higher proÿtability (McGuire, 2016).
Now, with an understanding of exactly what the primary channel distri-

butions are, let’s review how we got to today and how the industry morphed
and evolved to these distribution channels.
EVOLUTION OF DISTRIBUTION CHANNELS
As noted at the start of the chapter, distribution channels have changed dra-
matically in the past 20 years. However, for the longest time, hotel distribu-
tion was rather simple: the majority of bookings came directly from guests
either walking through the front door or calling the hotel. From the 1950s to
1990, the foundation for technology was being created that enabled the dis-
tribution boom that started in the mid-1990s. Below are highlights of what
changed from 1950 to 1990 (Warner et al., 2010):
• 1958: Sheraton introduced the ÿrst automated electronic reserva-

tions system and toll-free number.
• 1959: A global distribution system (GDS) created for American Air-
lines to track airline reservations (American Airlines Inc, 2015).
• 1970: Westin Hotels developed Westron, ÿrst hotel reservation
system.
• 1976: ˜e Sabre Corporation (a travel technology company) was
introduced for the ÿrst time to travel agencies. It took until the mid-
1980s for its widespread implementation (over 10,000 travel agency
o˙ces).
• 1980: ˜e central reservation system (CRS) was developed.
• 1987: Hilton HHonors®, a guest reward program, is introduced as
the ÿrst hotel rewards program.
• 1994: ˜e ÿrst online website for real-time hotel reservations
launched, TravelWeb.com.
1995 was the start of the “dot-com” boom—or the rapid growth the
internet sector (Cassidy, 2002). During this time there was also immediate
acceleration of distribution channels. Choice Hotels International led the
way to be the ÿrst company to o˝er “real-time” access to its CRS (Warner
et al., 2010). ˜e ÿrst OTA, Travelocity.com, was introduced in 1996, which
was quickly followed by Expedia, a Microsoˆ brainchild. By 1997, 42 per-
cent of all hotel reservations were booked by travel agents or corporate travel
departments (Use Our Lodging, 2010).
THINK HISTORICALLY
Newspapers, including the New York Daily Tribune, previously were a

hotel distribution channel. As seen below, the Edgemere Hotel adver-
tised that they are open for the season and gave instructions on how to
book their hotel.
Source: New-York Tribune, July 5, 1903.
QUESTIONS
• Do you think newspapers could be an e˝ective distribution
channel today? Why or why not?
• ˜ere are many distribution channels that have come and gone.
Why do you think that is?
• What are potential future distribution channels you can inva-
sion?
• What do you think the role of travel agencies will be in the
future?
A CLOSER LOOK AT DISTRIBUTION CHANNELS
With the historical background known, let’s review the key distribution
channels again. ˜ere are many di˝erent ways hoteliers can further catego-
rize distribution channels. For example, online versus oˇine, direct (voice,
brand.com, property direct) versus indirect (OTA, GDS). It is also helpful to
categorize distribution channels by their cost and beneÿts.
Let’s review the associated costs of each distribution channel. ˜ese costs
estimates are from a TravelClick®’s data launched in May 2015 (Mahmoud,
2015). Some of the costs are easier to identify, such as, for example, a fee per
booking, while others are not as easy to track, such as the associated cost of
a sales team. It is very important to understand all costs of channels because
although shiîng share to increase occupancy is positive, it may not yield
to higher proÿts. It is paramount to focus channel mix to maximize proÿts,
rather than revenue.
Table 4.1: Distribution Channel Analysis
Channel Defnition Pros Cons and Estimated Cost

Distribution
Hotel Website/ A hotel’s own Once created, a hotel Hotel brand websites:
brand.com website or parent website is very cost-effective. $2 – $5 per booking.
chain’s website Startup costs are much more Independent hotels and resorts:
For example, expensive for independent $8.50 – $12.50 per booking.
Marriott.com, hotels v. branded websites There are many other costs that
Choice.com, or since they are creating their are included in this channel but
Hilton.com site from start. not refected in the per-booking
Flexibility: The hotel is in cost. Independent hotels face
full control of its website. website fees, maintenance fees,
Therefore a hotel can create and website analytics. Brands
a website that is the best face management, royalty, and/
refection of the hotel. or licensing fees.
Hotel brands invest huge
amounts in marketing.
Voice Channel Call centers and/ Call centers have to engage Hotel brands: $6 – $10 per
or 800 numbers the customer and can use the booking.
booked via the opportunity to upsell more Independent hotels and resorts:
hotel’s CRS. effectively. $10 – $15 per booking.
CRS is a CRS pros: Basic tool to Bookings directly through the
computerized help manage a hotel’s CRS have declined in recent
backend system of ever-changing rates and years as consumers shift to
a hotel’s booking availability. digital channels. (Green &
engine. Lomanno, 2015).
Table 4.1: (Continued)

Distribution
A CRS is very
conventional
and is almost a
necessary system
if a hotel wants
to have an online
profle.
Property Direct Any booking The direct channel is the most $3.25 – $13
handled on cost-effective. Diffcult to compare to other
property, The customer satisfaction of distribution segments because
including walk-ins, property direct is completely it is a mixture of multiple
calls directly to the driven by the hotel. bookings.
property, groups, Many times because property
contract, etc. direct is the most cost-effective,
hoteliers drastically decrease
their ADR on this channel, which
can lend it to be less proftable.
The customer acquisition cost
continues to rise, so that while
the per-transition cost is the
lowest, it is very expensive to
drive property direct overall.
Global A worldwide Many OTAs and other $4.50 – $6 PLUS 10% travel
Distribution computerized internet-based travel services agent commission
System (GDS) reservation are connected to the GDS. There is no content editing by
network that So if a hotel does not want to the GDS, and content is driven
provides directly partner with an OTA, only by the hotel.
transactions to for example, they still may be The hotel does not have control
travel agents, able to be listed via the GDS over the customer booking
online reservation and typically at a lower cost. experience.
sites, and large GDS channels specialize
corporations. in corporate rates and
The GDS is complex leisure packages
dominated by (travel including air, hotel,
transient business attractions, car)
travelers. This segment continues to
grow.
Online Travel OTAs are a OTAs have a broad reach The price varies by contract,
Agent (OTA) third-party travel of customers in varying OTA, and model but typically
website allowing countries, with multiple ~20%
customers to languages, and differented As OTAs revenues grow, they
Table 4.1: (Continued)

Distribution
easily compare buying preferences. Hotels have larger budgets and better
hotels and book are able to tap into this technology platforms to fnd
their hotel. There huge customer base without new ways to reach customers
are three basic making the huge investments and gain market share away
OTA models: necessary. from hotels.
1) merchant; OTAs spend huge dollars Hotel has limited control
2) agency; marketing their channels and over the customer booking
3) opaque. travel overall. experience.
(OTAs are Signifcant access to smart
outlined further data and market trends. OTAs
later in this can provide this data directly
chapter.) to hotels to help make smarter
pricing strategies and targeted
promotions (McGuire, 2016).
Metasearch Search engine Meta sites deliver on the Cost is defned by the website
Engine that aggregates customer desire of price channel the customer chooses
hotel inventory transparency and clarity and on the meta.
from several have grown in popularity in In defnition, a meta site
sources (OTAs, recent years. incorporates multiple parts that
hotel website) and Reinforce the idea behind rate allows for a greater chance
presents as one parity. (Rate parity is further of problems (i.e., if one of the
compiled result. discussed later in this chapter.) search sites the meta site is
pulling from is down, and the
customer will see that).
Customer base is price-sensitive;
the primary differentiating factor
between the aggregated sites is
price.
The hotel does not have control
over the customer booking
experience.
Source: Based on Mahmoud, 2015.
Can you think of an additional distribution channel cost that was
not listed in the above chart?
Categorize each of the distribution channels as direct versus non-di-
rect and online versus o˛ine.
DRIVE DIRECT PRACTICES
By deÿnition, property direct distribution has the least amount of asso-

ciated costs for a hotel. ˜erefore, there has been a longstanding goal to
drive more direct business. A hotel “drives direct” by focusing strategies to
increase their direct channel mix; Duetto Research notes a comprehensive
revenue strategy is anchored by “driving as much direct business as possible”
(Duetto Research 2016). To help encourage revenue managers to focus on
drive direct, many hotel management companies include hotel direct mix
share as a part of the hotel’s goals.
˜ere are various methods hotels can use to drive direct business, includ-
ing (but not limited to) targeted discounts, television advertising, targeted
o˝ers, upgrades, mobile investments, responding to online reviews, and
even general guest encouragement to join the loyalty program.
In February 2016, Hilton launched its largest global marketing campaign

ever, called “Stop Clicking Around,” encouraging guests, via a 10 percent dis-
count, to become a Hilton HHonors loyalty member. Early results were very
positive—including HHonors members representing 56 percent occupancy,
which was a 400 bps (basis points) year over year increase (Hilton World-
wide Holdings, Inc., 2017). Many other brands, including Marriott, Hyatt,
and Wyndham were quick to follow with their own drive direct campaigns.
However, driving direct business has an associated cost. Hilton’s “Stop

Clicking Around” campaign Hilton will not disclose the total advertising and/
or associated cost of the campaign), but it was noted as their most expensive
campaign in their history (Hilton Worldwide Holdings, Inc., 2017). Addi-
tionally, a 2014 study revealed that hotels’ costs to acquire a guest consistently
have risen more than their revenues have increased (HAMA Study, 2014).
Drive direct costs can also include free internet, discounted rates, free nights,
etc. ˜erefore, it is important to evaluate the full costs of a suggested drive
direct platform. But as property direct is the most cost-e˝ective segment, it
will be an inherent goal of hotels to drive more business through this channel.
DISTRIBUTION CHANNEL CHALLENGES
As seen, there is a wide diversity of travel ‘parts’ that work together to appear
to be one experience for the customer. One constant problem hoteliers face
is that if one of the parts fail (i.e. the CRS is down for 2 hours), the customer
experience fails. Another theme you may have noticed in Table 4.1 are the
multiple costs a hotel can incur for one reservation. For example, when a
reservation is booked on an OTA, a hotel can pay 20 percent of the total rate,
plus $10 to the CRS system.
Other major challenges of distribution channels include:
• Big data: All of these online distribution systems and channels are
able to provide an enormous amount of data. However, big data is
not helpful. It is important to change big data to smart data. Smart
data is digestible and actionable.
• Proliferation: ˜e rapid growth of distribution channels leads to
some negative implications. First, hotels need to decipher which
channels they should use, and there is not always not a clear choice.
It is important for hotels to base their choice on the channel’s return
on investment (ROI). Second, the multiple distribution channels
lead to more overhead of managing the various channels. While
there are systems that can help with management, these come at a
cost. ˜ird, paradox of choice. As customers continue to have more
choices of where to book, it can cause more confusion and actually
interfere with a customer’s booking.
• Fragmented distribution network: ˜ere are many moving parts that
are not connected in distribution channels. While there are systems in
place to provide a connection to the various parts (at a cost to the hotel),
it does not always work smoothly. For example, a hotel’s CRS may con-
nect to two OTAs but not to a third. If a hotel works with all three
OTAs, they need to consider if they would want to manage the third
OTA by 1) additional connectivity system, 2) manage online directly
with the third OTA, or 3) decide to not work with the third OTA.
• How would you research a new distribution channel? What are the
important aspects a hotelier would need to know before adding a
new distribution channel?

TO DO: Review the provided spreadsheet and answer the
following:
1. Calculate the total revenue the hotel would collect.
2. Calculate the net proÿt the hotel would receive.
3. As a business executive focused on proÿt, would you modify
the segmentation for this hotel? How would you change your
segmentation strategy and how would that a˜ect your distribution
strategy?
CLOSER LOOK: ONLINE TRAVEL AGENCIES (OTAs)
OTAs have seen signiÿcant growth since their start in 1996, and their prom-
inence has exploded since the 2000s. For example, OTAs’ share of guest-paid
room revenue in economy and midscale hotels jumped 7.8 percent in 2011
to 15.8 percent in 2014; this means a 108 percent growth for OTAs in the
economy to midscale in less than four years (Mahmoud, 2015). When talking
with customers, we ÿnd that OTAs like Expedia and Priceline are considered
the primary ways to book their hotel rooms (Duetto Research, 2016).
˜ere are two major beneÿts of OTAs that many times are not heavily
considered. First is the access to the data that OTAs can provide. OTAs have
huge access to big data. For example, OTAs can easily see marketwide trends,
leisure compression, and booking trends, etc. OTAs can provide this data to
hotels to help suggest data-driven strategies and opportunities for the hotel.
˜e second beneÿt is access to customers. Not only do OTAs have a wide net
of customers who likely would not ÿnd the hotel otherwise, some OTAs are
very prominent in speciÿc areas or countries. For example, Wotif is the larg-
est online hotel website in Australia (Expedia Inc., 2015), and if a hotel wants
to target the Asia Paciÿc market, the hotel manager can work with Expedia
(who owns Wotif) to increase their share very quickly and relatively cheaply.
However, while these are two beneÿts, these beneÿts are not the same
among di˝erent OTAs, and OTAs are not created equal. ˜erefore, hoteliers
will ÿnd some OTAs work better for their hotel than others. For example,
a hotel may evaluate the four di˝erent OTAs they work with and realize
90 percent of their business comes from one of the OTAs, and therefore
the hotel may choose to only work with that one OTA for simplicity. Other
examples include if an OTA does not have a large hotel management team
and therefore a hotel may have an ongoing distribution challenge with the
speciÿc OTA that goes unÿxed – this could cause a hotel to no longer work
with an OTA. Conversely, a hotel may choose to focus strategy to a speciÿc
OTA due to date they can provide or that they are easy to work with.
For general grouping of OTAs, there are three basic models OTAs can
work with hotels, outlined below.
• Merchant: ˜e OTA collects payment from the customer directly,

and the hotel receives the net rate aêr the intermediary is compen-
sated, based on the pre-negotiated deal. ˜e hotel records the net
room rate.
• Agency: ˜e hotel collects payment directly from the customer,
and the intermediary (the OTA) is compensated aêr, based on the
pre-negotiated deal. ˜e hotel records the gross or total room rate.
• Opaque: In the bidding method, the customer does not know the
hotel until aêr the sale. ˜e hotel receives a pre-negotiated rate, and
the OTA keeps the di˝erence between what the guest pays and the
pre-negotiated room rate.
• What are the impacts to a hotel when they record the net rate (mer-
chant model) or the gross rate (agency model)?
A controversial beneÿt of OTAs is the billboard e˜ect. In 2009 the Cor-

nell Center for Hospitality Research published an article ÿnding that “hotels
that are listed on third-party distributors’ websites, commonly known as
online travel agents, gain a reservation beneÿt in addition to direct sales”
(Anderson, 2009). ˜e study found that hotels had between a 7.5 percent to
26 percent upliˆ in direct bookings when listed in Expedia. However, Kalibri
Labs found that this billboard e˝ect is also enjoyed by other channels as well,
not just OTAs (O’Neill, 2014). While many hoteliers may see the billboard
e˝ect at their property, there is the question if it is diminishing. Metasearch
websites clearly diminish the billboard e˝ect since customers are beginning
their booking process at a meta site rather than at the OTA. Additionally, the
rise of customers booking on mobile apps lends to a di˝erent booking trend.
Anderson at Cornell contemplates this:
“As phone/tablet usage grows, we may see a di˝erent story. Let’s say
consumers switch to having higher conversion ratios on mobile devices.
˜en they probably won’t shop in an app and then call the hotel directly.
˜ey will instead shop and purchase via the app. So the billboard e˝ect
may be reduced.” (O’Neill, 2014).
Do you think the billboard e˜ect still exists?

You work at an OTA and are pitching to a hotel to sign
up. You will ÿnd general stats of a similar comp hotel that
currently works with your OTA.
To Do: Create or complete the Excel spreadsheet based on the data of
the comp hotel and answer the questions that follow. When creating
the Excel spreadsheet, use formulas and reference cells in the ‘Facts’ tab
(do not hardcode the spreadsheet). This will allow you to continue to
reuse the spreadsheet for future hotels of various sizes.
1. How much revenue will your OTA bring the hotel?
2. What will be the costs of the OTA?
3. As a business executive focused on proÿt, would you modify
the segmentation for this hotel? How would you change your
segmentation strategy and how would that a˜ect your distribution
strategy?
CLOSER LOOK: WHOLESALE/FIT (FREE INDEPENDENT

TRAVEL)
Wholesalers and FIT companies (oên used interchangeably) existed

long before the OTA model and oên served as a discounted alternative
to booking retail rates directly through brand or GDS channels. To the
hotelier, FIT and wholesale companies brought incremental rooms by
selling bundled deals (i.e. packaged air, dining, rental car, sightseeing)
to individual customers or through small tour groups. Because FIT rates
(net + markup) were not publically available, there was no maximum or
minimal competition with the merchant’s standard distribution channels.
Using the merchant model, FIT companies such as Tourico, Hotel Beds,
or Gulliver’s would negotiate discounts such as 20 percent to 30 percent
o˝ a property’s average retail rate in exchange for a commitment to ÿll a
prenegotiated daily allotment of rooms. Wholesalers would then launch
large marketing campaigns to sell hotel packages in order to re-sell room
nights for more than the negotiated discount and pocket the di˝erence as
compensation.
As OTAs began to move into the discount space, wholesalers were forced
to evolve in order to sustain their business model and eventually created rate
and inventory direct-connections in order to source retail rates right into
wholesaler websites, much like an OTA. Today, FIT companies still bundle
and package deeply discounted rates using the merchant model, but they
have added additional hidden rate channels to their repertoire of bookings
streams, such as discounted o˝erings made to various fenced loyalty groups
and airline or credit card point redemption merchandise. Pre-sold allotments
have become rare in the industry, and instead hoteliers have been given the
ability to restrict and loosen inventory and discount levels more dynamically
through direct internet connections. One of the challenges with many
wholesalers that exist today is the ability to regulate public pricing parity. Most
FIT contracts state that the wholesaler cannot underprice the hotel, but as the
same block of hotel rooms can oên be sold from one wholesaler to the next
with small commissions taken o˝ the top with each trade, the origin of the
initial contractor can become di˙cult to track down should a public rate be
found at a lower price than the brand o˝ering. Oên times, a hotelier will have
to book the miscellaneous rate themselves in order to track the rate code on
the reservation back to the primary FIT company in order to prove a breach
has occurred. In many ways, today’s traditional FIT companies have had to
expand beyond their initial business models and beyond traditional wholesale
methods and have grown to emulate modern OTAs more than anything else.
CLOSER LOOK: RATE PARITY AND BEST RATE GUARANTEE
˜e rise of multiple distribution channels, OTAs, and the transparency of

rates on the internet have caused a larger focus of rate parity. Rate parity
is deÿned as maintaining the same rate for the same product on all distri-
bution channels. While rate parity existed long before OTAs and the inter-
net because it made management of distribution channels much easier, it
became an industry standard in 2004 (Aggarwal, 2013). ˜ere are reasons
why a hotel may be in favor for or against rate parity.
PROS: Rate parity agreements allow hotels to remain in control of their
pricing and ability to set a minimum rate for bookings; rate
parity removes price when customers are choosing distribution
channel; rate parity avoids customer confusion; rate parity sim-
pliÿes prices for revenue managers.
CONS: Hotels are paying various commissions based on distribution
channel but have the same rate across all channels, therefore
generating less proÿt than if the customer h booked on their
direct site; all customers are treated the same way, although cus-
tomer behavior may be di˝erent between distribution channels;
a hotel may want to reward or further incentivize a strong dis-
tribution channel but are unable to.
Additionally, even if a hotel is hoping to maintain rate parity, there can be

roadblocks. ˜ese roadblocks can include 1) human error—such as a hotel
accidentally loading lower rates on a distribution channel; 2) technology
lag/caching—rate and/or inventory updates sent to distribution channels
are delayed, causing rate discrepancies among channels; 3) third-party sites
o˝ering a self-funded discount that makes a hotel appear less expensive.
RATE PARITY LEGAL PROBLEMS
Rate parity faced legal challenges in the United States in 2014 and Europe in
2014 and 2015 (Freed, 2016). Rate parity came into legal scrutiny because of
alleged violation of antitrust laws and consumer protection statuses.
While rate parity has survived in the United States so far, Europe has
stricter antitrust laws. On July 9, 2015, the French National Assembly came
to a ÿnal vote to remove rate parity clauses from contracts between hoteliers
and OTAs. ˜is law had been named the “Macron Law” aêr France’s then
Minister of Economy, Industry, and Digital A˝airs, Emmanuel Macron.
˜e Macron Law was designed to eliminate barriers to free competition in
the hotel industry (Freed 2016). ˜e results of rate parity removal are still
unknown, but it will foster a more collaborative relationship between OTAs
and hoteliers as rate parity is no longer a given in Europe.
How do you think the removal of rate parity will a˜ect hotels and
their success in Europe? How do you think it will a˜ect the OTAs?
REAL PEOPLE
Director of Revenue Re°ection of Rate Parity
Rachel Cole,* a self-taught director of revenue,
has worked in hospitality since 2004 and found
her place in revenue in 2008. She has worked for
multiple hotels, ranging from a 170–room hotel in New York City to
a Starwood hotel in Long Beach, California. Her view on rate parity
might surprise you and make you consider less obvious pros and cons.
What are your thoughts of rate parity among distribution channels?
Rate parity is a great idea in theory. But there are some channels and
some customers you can pretty much predict their behavior. A brand
loyal customer will always go to westin.com (or whatever brand.com
website they are a member of). ˜e same can be said on OTAs. ˜e
reason why they are booking on those channels is because they are
that type of customer, they do not care about a hotel’s brand; they are
looking for the best price.
Because people shopping on Expedia (or any OTA) are not going to
buy me on my website and they are shopping on Expedia because they
are not loyal, and they want a good price. I need to be competitive
in that market place. If I have a rate parity on all channels, I cannot

sway the OTA customer to choose my hotel. I need to market myself
towards to customer di˝erently than the customer booking on my site.
I am competitive on Expedia when I o˝er an exclusive deal. ˜is helps
my sort, and the customer’s book when they see the tag.
˜en compared to my brand site. õse customers are not a casual
shopper. ˜ey want to have their preferences saved and they want their
points. ˜e customers will not behave the same. Given the choice, I
would just throw it [rate parity] out the window.
Do you think rate parity is important to a hotel’s success?
It is kind of not. Rate parity in the markets I have been in, no, it has
not been important to the hotel’s success. Varied pricing has been
my success. For the larger markets, I think varied prices are really
important, and it has led to a lot of the success I have created in the
markets I’ve been in.
˜e thing that pushes rate parity is the brand. ˜ey have the ÿnes,
guarantees. ˜ey are slowly but surely making it more restrictive and
making it worse when getting caught out of parity. But in the end, not
enough customers know about BRG [Best Rate Guarantee] for it to
really make an impact the brand wants to see. ˜e amount of revenue
you gain for being out of parity totally outweighs the ÿnes you get for
being out of parity. ˜e positives signiÿcantly outweigh the ding. I
know the brands don’t like it; it is just way more too beneÿcial to have
your rates be competitive.
Has anyone ever challenged your beliefs on rate parity?
Of course, many times ownership or asset managers have questioned
me. One time I ran an exclusive deal on Expedia that booked over 200
room nights. To prove my point, I personally looked up each person
in Marriott’s system to see if they had an account. None of them did.
˜ese were all new customers. If anything, maybe there is a 2 percent
overlap. But that’s it. Customers that are brand loyal are not shopping
on these sites. And to get those customers you need to target and price
to them.
Consider the time that Rachel was not hitting her monthly budget, for
the second month in a row. She was feeling a lot of pressure to hit her
budget, as she was getting nervous about hitting her annual budget
with her current gap.
Her general manager wants her to maintain rate parity, although her
asset manager continues to pressure her about the budget. What should
Rachel do? How would you convince the general manager that doing a
special sale might help the hotel?
*Name changed
CLOSER LOOK: CONNECTIVITY AMONG DISTRIBUTION

CHANNELS
With the proliferation of distribution channels and rate parity still in play
(at least in the United States and most other countries), hotels are faced with
how to easily send their rates and availability to distribution channels. ˜e
most basic simple/basic method a hotel can deploy to send their rates and
inventory to a distribution channel is managing it directly via an extranet.
Connectivity via an extranet is very manual and means the hotelier is
logging into each distribution channel’s extranet, loading their availability
and rates. When the hotel receives a reservation, the distribution channels
send over the reservation (typically via fax or email) and the hotel must
manually input into their CRS. ˜is works well for some hotels, especially
if they are smaller and/or do not work with many distribution channels.
But even with a smaller hotel this can be a very manual process that can
lead to human error. Let’s consider an eight-room bed and breakfast for
example. ˜e bed and breakfast likely has a di˝erent room type for each of
their rooms. Managing so many room types can be very time consuming
and leave too much room for error (double booking, for example).
˜erefore, for the majority of hotels, direct connectivity systems have

been created to solve for this manual process. While connectivity, the ability
to connect two systems together (distribution system and hotel’s CRS) for
the purpose of conducting business and delivering reservations, seems sim-
ple, a lot more goes into it.
˜ere are two overarching types of how systems are connected: push
versus pull. Push is when a hotel reservation system pushes their availabil-
ity, rates, and inventory (ARI) data out to their distribution channels. Pull
is when the distribution channel requests (or pulls) the ARI from the hotel
reservation system as consumers are shopping. A good analogy of the push
versus pull comparison is the di˝erence between a text message and a phone
call. A text message is a push transaction, where someone is pushing a mes-
sage (or data) to a recipient. In contrast, a phone call is a pull transaction,
the caller (recipient of data, or distribution channel) is requesting the call (or
data) (Barnby et al., 2011). Pull systems are typically employed by large hotel
portfolios (or brands) with substantial volumes of data to maintain.
PROS: Push: Data workload with search requests is reduced many
times, alleviating the need for further IT investment.
Pull: ARI data is accurate at the time of booking and allows
for more granular control over factors that include last room
availability and yield management restrictions.
CONS: Push: Data may not be as accurate.
Pull: Hotel reservation system must account for high volumes of
shopping messages; typically can be more expensive.
Deciding between push versus pull is just the ÿrst step in connectivity.
˜ere are many of these third-party connection systems that all account for
other variables. ˜ird-party connectivity systems have di˝erent mapping
requirements and ability of pricing strategies (i.e., if a hotel prices by length
of stay, they will want a connectivity system that allows for that). ˜ese are
both things hoteliers need to consider when choosing a connectivity system
(also referred to as channel manager). Other considerations for mapping
are extra person fees, tax calculations, currency di˝erences, etc. Once all of
these items are considered, a hotelier can ÿnd the right connectivity system
and/or channel manager for their hotel. With the ever-growing distribution
landscape, the right connectivity system for a hotel is vital.
PROS & CONS

• What are the pros and cons of directly connecting
to your distribution channels?
FUTURE OF CHANNEL DISTRIBUTION
˜ere a few themes when considering the future of channel distribution;

however, the ultimate goal will continue to be balancing the costs of dis-
tribution channels by maximization of hotel’s RevPAR. Future themes will
continue to transform channel distribution include: 1) continued mergers
and acquisitions among key players; 2) increased involvement of social
media; 3) creation of technologies to decipher beneÿts of varying channels;
4) new distribution channel platforms; 5) sharing economy. ˜ere has been
a huge acceleration in change for distribution systems since the 2000s, and
while these are some of the upcoming disruptors, there will be others.
CONTINUED MERGERS AND ACQUISITIONS AMONG KEY

PLAYERS
2015 was the year of merger frenzy in the hotel industry. In 2015, the
industry saw huge mergers among hotel brands. ˜ere are a few causes of
these mergers. First the hotel industry has had strong performance since
the recession; growth in revenue per available room has been positive since
March 2010 (STR, 2017). But as growth continues, hotels are considering
ways to continue the growth, especially as new players such as the Airbnb
sharing economy enters the game. A clear method of saving costs and
therefore growing revenue is via economies of scale. Second, the mergers
lend to greater brand recognition. As noted previously, the cost of customer
acquisition continues to increase, and expanded loyalty programs and larger
marketing budgets created by mergers help counteract this. ˜ird, the hotel
brand mergers help hoteliers negotiate contracts with other distribution
channels, such as OTAs. Barry Sternlicht, founder and former CEO of
Starwood Hotels & Resorts and current CEO of Starwood Capital, believes
that huge hotel mergers are the best o˝ense against Expedia and Airbnb
because they creates scale (Weissmann, 2016).
Are there other beneÿts of merging hotel brands?
From an OTA standpoint, consolidation has been happening since the

early 2000s; there are now two major players, Expedia Inc. and ˜e Priceline
Group. ˜roughout 2014 and 2015 Expedia Inc. acquired Wotif, Travelocity,
Orbitz, Trivago, and Homeaway (Expedia Inc. 2015). ˜e Priceline Group
includes Booking.com, Priceline.com, Agoda.com, Kayak.com, and OpenT-
able (Priceline Group). A beneÿt of the mergers among OTAs is easier dis-
tribution to multiple sites when contracting with an OTA. However, as they
merge, hoteliers are faced with individual OTAs harnessing more market
share and therefore in°uence.
INCREASED INVOLVEMENT OF SOCIAL MEDIA
When asked about social media, Sternlicht acknowledged it is “critical,”

adding that if social media aren’t used well, a hotel is “in danger of losing a
generation” (Weissmann, 2016).
While social media is an important factor for hotels, there is also the future
potential of social media actually entering the distribution game. George
Corbin, VP eCommerce Strategy & eMarketing at Marriott International,
contemplates the potential of Google, Apple, Facebook or “non-travel-play-
ers leveraging their platforms to drive into travel and hotel space” (Green &
Lomanno, 2015). ˜ese websites already have a huge consumer base, and if we
look at Facebook, for example, they are doing more to adapt their site to keep
consumers there. ˜erefore, it becomes a natural extension when a Facebook
users posts they just booked their °ight for Facebook to recommend hotels.
“When asked if hotels should do social media, my answer usually isn’t just
‘yes,’ it’s ‘Hell, yes!’ says Tim Peter, of Tim Peter Associates (T. Peter, March
2016). Tim acknowledges that social media may work better for certain types
of hotels than others; for boutique properties and resorts versus economy
chain properties, for instance, “social [media] plays an integral role in helping
hotels connect directly with their customers early in their purchase funnel,
during their stay, and post stay. Plenty of hotels see solid and consistent tra˙c
growth and improving conversion rates from content posted on social sites
such as Facebook, Twitter, Pinterest, and Instagram.” (T. Peter, March 2016)
CROSS DEVICE CHANNEL PLATFORMS
Webtrends found that the average customer visits 6.5 devices and/or web-
sites before booking their room (Vivion, 2014). ˜e internet and ability
to research and book hotels is everywhere. ˜ere are about 13.4 billion
internet-connected devices in the word. ˜is means 2 internet-connected
devices for every person on the planet (Hoisington, 2014). As consumers
continue to visit multiple sites before booking and the number of devices
increase, hoteliers need to consider where they want to be shown and how.
˜e highest level for a hotel reservation system to be cross-channel, plat-
form, and functional.
OTAs have invested heavily to ensure their continued presence on

all new channels. For example, Expedia rolled-out Scratchpad in 2014.
Expedia’s Scratchpad allows customers to return to any logged-in device
and instantly see the hotels, °ights, and packages most recently viewed;
Scratchpad creates a seamless cross-device experience (Kim & Bhutani,
2014). ˜is is an inherent beneÿt of working with an OTA. While an indi-
vidual hotel may not have the IT infrastructure to invest in a wearable app
(such as a smartwatch), Expedia Inc. has, and your hotel is now listed on
wearables.
Marketing consultant Tim Peter notes that mobile is not a trend, it is here
to stay; in fact, Peter states, “It’s almost impossible to overstate the impacts
we will continue to see from mobile over the next several years . . . guests
never ‘go online;’ they are online. Everywhere. All the time” (T. Peter, March
2016). A TripAdvisor study in 2015 revealed that 42 percent of travelers use
a smartphone to plan or book their trip (Tripadvisor, 2015). Additionally,
Annalect conducted a six-month study to examine the impact of technology
on millennials’ relationship with brands. Most notable for distribution chan-
nels, smartphone-owning millennials (ages 19–33) are more likely to expect
brands to have mobile-friendly website or app (55 percent) than a social
media presence (39 percent).
When considering mobile further, it is important to consider its impact

to the guest. Peter speculates potential impacts include “guests continually
shopping for lower rates whenever and wherever they happen to be even
aêr they’ve booked their stay; decreased use of concierge services and room
service; and third-parties o˝ering enhancements to the on-property expe-
rience using mobile apps or messaging as a marketing and service delivery
channel” (T. Peter, March 2016).
˜erefore, while hotels may rely on OTAs to be displayed on the cut-

ting-edge channels, a hotel should heavily consider mobile friendly websites
and apps if they want to see continued growth in brand.com business.
SEEING FURTHER
Consider you are a director of revenue manage-
ment (DORM) at a hotel. Your general manager
(GM) does not want to pay to create a mobile-
friendly website.
How would you convince him that it makes sense to invest in
mobile? What would your mobile speciÿc strategy be?
SHARING ECONOMY
˜e sharing economy is another trend of the 21st century with the rise of
companies like Uber, Lyˆ, Airbnb, HomeAway, Couch Surfers, etc. Airbnb
is a very hot topic among hoteliers. Niki Leodakis, CEO of Commune Hotels
+ Resorts said, “I think we better be eyes wide open about Airbnb … It’s
reminiscent of 2001, 2002, 2003 when we were all watching the OTAs and
going ‘holy crap these guys are going to chew up our business’” (Peter, 2015).
While it is unseen if Airbnb will chew up hotel business, there is nothing to
say that it will not.
Peter recommends to “stay nimble, stay humble, stay focused”—and

avoid commoditization. Peter goes further and commands hotels to be clear
on what makes your hotel special and know that a hotelier can o˝er their
guests an experience no one else can (Peter, 2015).
CLOSING
As we look into the future, we can only expect that distribution channels
will continue to grow and morph. ˜e hotelier’s goal is to increase share in
their least expensive channels and partner with channels that provide bene-
ÿts they cannot create on their own.
Question 1: You are the general manager of a 20-room
independent hotel in the remote Rocky Mountains. Right now
you only accept walk-ins and reservations via the phone. What
other distribution channels would make sense for your hotel and why?
Question 2: Why do you think the customer cost of acquisition has increased?
Question 3: You are a hotel located about 5 miles from downtown Hartford, CT. You
are currently independent and are considering ˝agging with a brand. What would be
the distribution beneÿts of using a brand?
APPLICATIONS
Application 1
You are opening a new 60-room hotel in Bend, Oregon.

While Bend, Oregon, is known by outdoor enthusiasts, it
is a relatively small city.
• Go through the process of reviewing the 2 likely
distribution channels and indicate the pros and cons of each.
• Should the hotel use a push or pull connectivity system and why?
• How can the hotel be ahead of its competition?
Application 2
You are a hotelier of an independent hotel in France.

• What are the beneÿts of being independent versus branded?
• Will you have the same prices across all channels?
• What will be the partnership impact to their distribution channels?
TEAM ACTIVITY
A new distribution channel has been created, Geo-Trip. Geo-Trip

allows customers to book adventures bundled with hotels. Geo-
Trip claims to be a game changer by providing a huge millennial
consumer base across the world.
Split up the class into pairs. Each pair will conduct a negotiation—one stu-
dent pitching Geo-Trip and one student representing the hotel.
˜e following questions should guide the negotiation:

• What are the beneÿts to the hotel for signing up?
• What are the costs associated with Geo-Trip?
• How will the hotel connect to Geo-Trip?
• How will Geo-Trip a˝ect the hotel’s other distribution channels?
• Will Geo-Trip a˝ect the operations at the hotel? If so, how?
INTERNET ACTIVITY
Go to http://www.expediaquickconnect.com/content/eqc-pre-
ferred-program.
• Do you think it makes sense to use a preferred connectivity
vendor? Why or why not?
Research three of the preferred vendors.

• Find three unique qualities of each vendor you research.
• Find out what their competitive edge is.
GLOSSARY
Average daily rate (ADR) – Rooms revenue divided by rooms sold,
displayed as the average rental rate for a single room.
Availability, rates, and inventory (ARI) – Referred to by connec-
tivity systems.
Billboard e˜ect – In the Cornell study, the billboard e˝ect is the marketing
and advertising beneÿts experienced by hotels when they’re listed on
online travel agent websites.
Brand.com – ˜e main reservation booking website for the hotel or chain.
Channel manager – A connectivity third-party system that pushes a hotel’s
ARI to a distribution channel.
Central reservation system (CRS) – A computerized backend system of a
hotel’s booking engine.
Distribution channel – ˜e chain of businesses or intermediaries through

which a good or service passes until it reaches the end consumer; in
the hotel industry distribution channels are business or intermediar-
ies through which a customer can purchase a hotel room.
Extranet – A connectivity system website where hotel’s upload their rates
and availability to display on the associated third-party website.
Global distribution system (GDS) – A worldwide computerized reserva-
tion network that provides transactions to travel agents, online res-
ervation sites, and large corporations.
Metasearch engine – Travel website that uses data from multiple search
engines (OTAs and brand.com) to produce a compiled result.
Online travel agent (OTA) – Travel website allowing customers to plan and
book travel.
Rate parity – Identical retail rate is quoted across all channels.
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CHAPTER 5
Competitive Analysis in
Hotel Revenue Management
Theresa Doherty and Leslie Lew
OVERVIEW
Knowing and understanding competition is key to growing revenue and
market share. This chapter will present the processes used to determine
and evaluate the most appropriate competitive set. It will also cover
the tools available to monitor and analyze competitor performance in
order to improve a hotel’s revenue results.
LEARNING OBJECTIVES
Design a competitive set for an individual hotel
Create a SWOT analysis (strength, weaknesses, opportunities, threats) to
compare an individual hotel and its competitors
Prepare a competitive set value o˜ering analysis
Construct a rate value matrix to validate the hotel’s strategy
Identify business opportunities by understanding competitor
performance
Apply competitive assessment methodologies to hotel development
feasibility studies
115
OUTLINE
Introduction
Defning Your Competition
• Validating the Set
• Determine Competitive Positioning within Competition
Inverse SWOT Analysis

Competitive Grid Analysis
Segment Performance
Positioning Statement
Rate Value Matrix
INTRODUCTION
Defning Segmentation
˜e speciÿc objectives of competitive intelligence are basically to manage and

reduce risk, achieve proÿtable knowledge, ensure information security, and
avoid information overload (Myburgh, 2004). ˜is means that managers need
to understand their customers and competitors better to build a competitive
advantage. ˜erefore, a vital component in strategic planning and management
is to gather a variety of information, which allows companies—by analyzing the
strengths and weaknesses of competitors—to anticipate market developments,
as they can predict what will happen in their competitive environment.
SO WHAT?
Hotel managers need to understand their customers and competitors
better to build competitive advantage. Understanding your competi-
tors is key to understanding your market and available opportunities.
• Why is it not enough to understand your own business? Why do
you need to understand your competitive landscape?
Competitive Analysis in Hotel Revenue Management  117
DEFINING YOUR COMPETITION
A competitor can be deÿned as one selling or buying goods or services in

the same market as another. In the hotel world, the deÿnition goes further
than just o˛ering services within the same market. In order to identify a
hotel’s true competitors, the hotel team must determine what other hotels
are targeting the same customers. ˜e group of hotels that are considered
competitors is referred to as the competitive set.
˜e typical considerations for deÿning a competitive set are:
• Location: Location is one of the primary factors that are used to

establish direct competitors. It goes beyond the city. Hotels are con-
sidered competitors depending upon proximity to demand gener-
ators within a city. Demand generators apply to all segments. ˜ey
can include corporate o˝ces, government agencies, tourist/leisure
attractions, and convention centers.
• Hotel Services/Tier: Hotel competitors typically fall within the same
or similar class of service or tier. ˜is holds true because customers
can usually be di˛erentiated by the hotel tier they tend to select. ˜is
can also be a function of the price range that hotels fall into within a
given tier and the budget considerations of the various segments.
• Customer Segmentation: Hotels typically have several main business
segments that drive their success. Understanding the segmentation
of the competitors helps to determine which hotels share the same
segmentation and are true competitors. Segmentation can include
comparable group proÿles, special corporate accounts, government
business, and leisure travelers.
• Market: A market is typically deÿned by geographic proximity. It can
be based upon geographic considerations or market segmentation.
Some hotels look at competitive data through a segmentation lens
without the location parameter. For example, a large convention hotel
may create a competitive set that includes hotels from other cities that
compete for large group business. Another example is a resort location
that competes for leisure customers with other resort destinations.
• Online Information: ˜ere is also plenty of data online, such as
ratings and commentary, to provide insight from a consumer’s
perspective. OTA sites provide information on other hotels that

customers reviewed during their search and other hotels that
customers booked a˙er viewing a given hotel. As hotels assess their
competitors, reading customer reviews can provide critical insight
into the actual customer experience at the other hotels.
VALIDATING THE SET
How do you know if a competitive set is appropriate? O˙entimes there

is disagreement between the property and owners/asset managers on the
appropriate set for a hotel. ˜e key is to have a set where revenue growth
performance is a realistic barometer for comparison purposes.
PROS & CONS

While competitive sets are easily deÿned in theory,
it is oftentimes more di˛cult to establish an ideal set based upon the
makeup of the other hotels in a given market. For example, there could
be a 4-star hotel with only select service competitors in the immediate
vicinity. The next closest 4-star hotel is located 15 miles away, fed by a
di˜erent set of demand generators.
As you consider this situation, is it better to select a select service
competitor or the more distant 4-star hotel as a competitor for per-
formance and opportunity measurement purposes?
Source: Google map showing location of hotels.

THINK HISTORICALLY
History of STR
Smith Travel Research is the leading global provider of competitive
benchmarking, information services, and research to the hotel indus-
try. Randy and Carolyn Smith founded STR from their kitchen table in
1985, and to this day the company remains a privately held family busi-
ness with a long-term vision. From its headquarters outside of Nashville,
Tennessee, the company currently gathers performance data from over
63,000 hotels located in more than 180 countries.
Consider the below example dated September 2002:

• Why would hotels have signed up to participate in this type of
service?
• Explore www.str.com and discuss how its reporting services have
evolved.
Hotel Anywhere Star Summary Report - September 2002
789 East Main Street
Oakland, CA 95071-
4981
United States STR * 1234 Mgt Co: None Operation Franchise 10/24/02
Telephone: (615) Chain ID: OAK 2323 Owner: None Market Oakland Ca e-star_summary
824–8664 Open Date: 198201 Total Rooms: 490 Tract: Oakland-Berkeley 1.01
Segment Occupancy Average Room RevPar Room Rooms Rooms Occupancy Average Room Rate RevPar Room Rooms Rooms
Percent Rate Revenue Available Sold Percent Revenue Available Sold
% % % % Chg % Chg % Chg % % Chg % Chg % Chg % Chg % Chg % Chg
Chg Chg Chg Chg
Monthly Performance Year To Date Performance
Hotel 66.9 17.6 $138.52 1.2 $92.65 19.0 19.8 0.6 18.3 62.2 -13.7 $138.32 -7.0 $86.08 -19.7 -19.0 0.9 -12.9
Anywhere
Market: Oakland, 59.5 -1.2 $89.42 -1.7 $53.20 -2.8 2.6 5.5 4.3 60.5 -12.9 $99.84 -7.9 $54.98 -19.8 -16.4 4.3 -9.2
Ca
Market Lucury 61.3 11.1 $125.44 -4.6 $76.87 5.8 11.9 5.7 17.3 61.7 -5.2 $127.25 -12.7 $78.47 -17.3 -14.4 3.4 -2.0
Price:
Tract: Oakland 62.5 7.8 $104.41 -1.5 $65.28 6.1 11.0 4.6 12.7 60.9 -11.2 $104.50 -7.6 $63.64 -18.0 -13.0 6.1 -5.9
Berkeley
Tract Scale: Upscale 68.3 15.2 $122.23 -3.3 $83.45 11.4 28.8 15.7 33.2 65.3 -6.8 $123.20 -9.8 $80.47 -15.9 -3.4 14.9 7.1
Chains
Competitive Competitors 64.0 11.3 $123.75 -3.6 $79.18 7.2 7.2 0.0 11.2 63.0 -11.4 $125.01 -7.2 $78.71 -17.9 -17.9 0.0 -11.5
Set:
12 Month Performance Census/Sample - Properties & Rooms
Hotel 62.4 -15.6 $139.63 -5.1 $87.10 -19.9 -19.1 1.0 -14.8 Segment Census Sample Sample % (Rooms)
Anywhere
Market: Oakland, 59.9 -15.8 $90.71 -7.4 $54.37 -21.9 -18.5 4.4 -12.0 Properties Rooms Properties Rooms
Ca
Market Luxury 60.1 -10.2 $128.22 -12.3 $77.11 -21.2 -18.9 2.9 -7.5 Market 213 22795 129 18479 81.1
Price:
Tract: Oakland- 60.1 -14.5 $105.03 -5.9 $63.07 -19.6 -13.7 7.2 -8.4 Market Price 29 5778 26 5473 94.7
Berkeley
Tract Scale: Upscale 64.5 -9.3 $124.11 -8.9 $80.07 -17.3 -2.6 17.8 6.9 Tract 56 6633 33 5695 85.9
Chains
Competitive Competitors 61.7 -15.2 $126.40 -6.1 $78.00 -20.4 -20.4 0.0 -15.3 Tract Scale 8 2167 8 2167 100
Set:
Competitive Set 9 2550 9 2550 100
Figure 5.1: Sample STAR Summary Report, Smith Travel Research

The 2016 version of the STAR report includes running 3 month data.
Why do you think STR included running 3 month data? Why do you
think STR added Supply, Demand, and Pipeline data to the modern
version of the report?
2016 STAR Summary
Tab 3 - STAR Summary - My Property vs. Comp Set and Industry Segments
TS Hotel 200W 67h St Austin, TX 78704 Phone: (512) 565-1999
STR # 430 CheinID: None MgtCo: Major Hotel Group Owner TLCP Development
For the Month of March: 2016 Date Created: April 30, 2016 Monthly Competitive Set Data Excludes Subject Property
Occupancy (%) Supply
Current % Year % Running % Running % Chg Month VID Run 3 Run 12
Month Chg of Chg 3 Month Chg 12 % Chg % Mon % Mon %
Date Month Chg Chg Chg
TS Hotel 88.0 -1.5 87.0 31 87.0 3.1 83.0 2.4 0.0 1.1 1.1 0.3
Market Austin. 82.9 1.0 81.6 35 68.7 3.5 75.5 3.3 1.0 1.1 1.1 1.2
TX
Market Class 80.2 0.4 75.2 14 75.2 1.4 80.6 -0.8 11.8 11.8 11.8 9.8
Luxury Class
Tract: Austin. TX 79.1 0.4 74.7 29 74.7 2.9 80.7 0.1 3.1 3.6 3.6 1.4
Tract Scale: 70.0 -0.7 71.4 1.3 71.4 1.3 77.1 -0.3 10.9 10.9 10.9 6.4
Independents
Competitive Set 85.8 9.5 81.7 7.6 81.7 7.6 85.8 0.3 0.0 3.7 3.7 0.9
Competitors
Average Daily Rate Demand
TS Hotel 310.98 4.0 300.84 5.1 300.84 5.1 237.68 17.2 -1.5 4.2 4.2 2.7
Market Austin, 256.45 4.1 252.45 5.4 117.79 5.4 127.58 9.2 2.0 4.6 4.6 4.6
TX
Market Class 187.91 -3.3 182.45 -1.6 182.68 -1.6 214.34 7.0 12.2 13.3 13.3 8.9
Luxury Class
Tract: Austin, TX 162.72 0.2 156.35 2.6 156.35 2.6 177.56 9.9 3.5 6.6 6.6 1.5
Tract Scale: 144.59 -0.6 139.97 2.1 139.97 2.1 163.50 10.3 10.1 12.3 12.3 6.0
Independents
Competitive Set 206.12 -3.3 200.04 -1.5 200.04 -1.5 230.08 7.8 9.5 11.6 11.6 1.2
Competitors
RevPAR Revenue
TS Hotel 273.66 2.4 261.73 8.3 261.73 8.3 197.27 20.0 2.4 9.5 20.4
Market Austin, 88.00 5.1 80.90 9.0 80.90 9.0 96.26 12.9 6.2 10.2 14.2
TX
Market Class 150.70 -2.9 137.38 -0.2 137.38 -0.2 172.79 6.1 8.5 11.5 16.5
Luxury Class
Tract: Austin, TX 126.76 0.6 116.75 5.6 116.75 5.6 143.34 10.0 3.7 9.3 11.5
Tract Scale: 112.85 -1.4 99.91 3.4 99.91 3.4 126.10 9.9 9.4 14.7 16.9
Independents
Competitive Set 176.88 5.9 163.52 6.1 163.52 6.1 197.37 8.1 5.9 10.0 9.1
Competitors
Census/Sample Properties & Rooms Pipeline

Census Sample Sample Market: Austin, TX
%
Properties Rooms Properties Rooms Rooms Under Planning
Construction
Market Austin, 271 26693 206 23880 89.5 Properties Rooms Properties Rooms
TX
Market Class: 12 1596 12 1596 100.0 7 617 22 3684
Luxury Class
Tract: Austin, TX 53 9994 35 8809 88.1 See Help page for pipeline defnitions.
Tract Scale: 26 2340 17 1974 84.4
Independents
Competitive Set 5 1024 5 1024 100.0
Competitors
The STR STAR Report is a publication of STR, Inc. and STR Global, Ltd. and intended solely for use by paid subscribers.
Reproduction or distribution of the STR STAR Repot, in whole or part, without written permission is prohibited and subject to legal
action.
If you have received this report and are NOT a subscriber to the STR STAR report, please contact us immediately. Source: 2016
STR, Inc. / STR Global, Ltd. trading as “STR”.
Figure 5.2. Example STAR Summary Tab, Smith Travel Research
DETERMINE COMPETITIVE POSITIONING WITHIN

COMPETITION
A SWOT analysis is a four-quadrant table organized by your organization’s

greatest strengths, weaknesses, opportunities, and threats. ˜e purpose of
the analysis is to validate your organization’s operating position of strengths
and weaknesses and identify external opportunities and threats to build a
strategy plan.
Strengths are unique internal characteristics of your organization that pro-
vide an advantage over your competition. ˜ese characteristics can be tangi-
ble, like a landmark location that is inimitable or unique, or intangible, like
brand recognition when the positive attributes cannot be measured.
What do you do better than anyone else?
What are the positive unique qualities you o˛er that no one else can replace
or copy?
Weaknesses are negative detractors of your organization that disallows it

from reaching its peak potential. O˙en these detractors are also strengths of
your competition.
What does your business lack in order to reach peak revenue or proÿtability?
Why do consumers buy from your competition instead of your organization?
Opportunities are unrealized potential for your organization to gain/pros-
per in.
Is there a change in business drivers that can increase demand for your
product or market?
Are there existing customers who are buying from the competition who can
be better served by your organization if these potential customers under-
stood your product?
˜reats are negative external factors that impact your organization and that
you have little ability to control or anticipate when these factors will materialize.
Are there transportation regulation changes that can reduce the number of
travelers to a destination?
Is there signiÿcant new supply anticipated for the market a˙er years of strong
performance above the national average growth?
Consideration Strengths Weaknesses Consideration

• Internally infuenced • High repeat guest • High guest amenity costs • Internally infuenced
• Differentiator from rate and satisfaction from ordering local vendors • Can be unfeasible to
competitor from over 30 years of with low economies of scale resolve, i.e. historic
• Competitor cannot operation • High training costs from high building with limited
easily replicate • The tallest hotel with employee turnover scope to change
ocean views in the • Guest satisfaction scores are
market. Local zoning trending negatively in the last
prohibits another high- six months
rise hotel in the city.
Consideration Opportunities Threats Consideration
• Externally • Air Traffc is expected to • New supply to enter market • Externally infuenced
infuenced grow 25% in fve years • Limited in-market talent pool • Outside of the
• Outside of the bringing new travellers due to lack of like product organization’s control
organization’s to the city. • Construction zone near hotel • Can change your
control • New professional sports for new public transit center business plan
• Can change your team stadium will open to open in three years • Unexpected
business plan this year and is located
• Unexpected three blocks from the
hotel.
Figure 5.3: SWOT Analysis Template
If your hotel and its competitors share the same strength, then it is not
unique to your hotel.
How would you di˜erentiate your hotel if the shared strength is an
oceanview location?
A SWOT analysis is structured to assess your organization relative to

the marketplace. By design it is an introspective assessment of your organi-
zation. You can take the SWOT approach further and prepare a SWOT that
compares your organization directly with a speciÿc competitor to identify
the strategy strengths, weaknesses, opportunities, and threats. Refer to Table
5.1. ˜is table examines how a competitor hotel would prepare a SWOT
analysis when compared against the subject hotel.
Table 5.1: Inverse SWOT Analysis
Competitor Hotel # 2: The Grand Hotel, 3 Star 80 Key

What are the key competitive What are your selling strategies
attributes of this competitor? against these attributes?
• Guestrooms have 13 ft high • Grand Hotel rooms have higher ceilings
ceilings vs our 10 ft high ceiling. but are outdated. Last room renovation
• Location is 3 blocks (vs 6 blocks) occurred 12 years ago.
closer to leisure attractions. • Our hotel guest rooms all have windows
• Hotel has 5K sq ft. meeting space, and natural lighting. Grand Hotel has
but can utilize adjacent building rooms with light-well only.
with 10K sq. ft meeting space. • In-house gym, restaurant, coffee bar, bar.
What business segments How will you position yourself
do you compete with this against this competitor to win a
competitor for? customer?
• Transient Leisure • After a $15 million dollar renovation our
• Transient Corporate organization will be repositioned to a full-
service four-star hotel, which is one full star
• Tour & Travel category up from the competition.
• Two award winning F&B outlets vs
Roosevelt’s third-party operated average
restaurant.
• Our guest room size is 25% larger (375 sq
ft. vs 300 sq ft.).
The subject hotel’s guest room size is 25 percent larger than the average
competitor.
How can the hotel promote this compelling product feature?
COMPETITIVE GRID ANALYSIS
A competitive grid analysis is a tactical tool to evaluate the product and

service o˛ering for the hotel and its competitors. ˜is is di˛erent from the
SWOT analysis that is focused on assessing the hotel’s strengths, weaknesses,
opportunities, and threats to determine strategy. ˜e competitive grid
analysis is a quantiÿed comparison of the subject hotel and its competitors
for product, service, facilities, and location. By quantifying the product and
services o˛ered, the hotel can use the competitive grid analysis to identify
entries for the hotel’s SWOT analysis.
Site Location: What is the competitors’ distance to the subject hotel and
major attractions as measured by walking distance in blocks or miles?
Facilities: Food and beverage outlets, meeting space, spa.
Services and Pricing: Valet parking, self-parking, concierge, business center.
Property Condition or Age: Year built, year of last renovation, condition of
product.

Another aspect of positioning relative to the competitive
set is rate positioning. One way of evaluating a hotel’s
pricing is to look at the ratio of the subject hotel to the weighted
average of the competitor’s rates. This determines the rate position
index for the hotel.
Rate position index = subject hotel rate /
weighted average rate for comp set
If the index is greater than one, the hotel is priced at a premium over
the comp set. If the index is less than one, the hotel is priced at a
discount to the comp set. Over time, a hotel can determine what index
is appropriate during various demand times and use this measurement
to determine if retail pricing is appropriate.
In the Excel document, update the hotel’s pricing and comp set’s
pricing based upon the grid below. The weightings for each of the
competitors are also listed in the grid. Once this information has been
entered into the spreadsheet, answer the following questions:
What is the rate position index for each date?
Is the hotel priced at a premium over the competitive set?
What other competitor information would you like to have in

order to validate what the appropriate rate position index is for this
particular hotel?
What are two potential strategy changes the hotel could make
based upon the rate position index alone?
3/2 4/15 5/17 6/20 Weight
Subject Hotel $ 250 $ 269 $ 289 $ 325
Competitor A $ 240 $ 240 $ 275 $ 299 20%
Competitor B $ 250 $ 275 $ 285 $ 305 35%
Competitor C $ 225 $ 225 $ 225 $ 225 15%
Competitor D $ 240 $ 240 $ 280 $ 280 15%
Competitor E $ 250 $ 260 $ 280 $ 300 15%

What are the signiÿcant variances when it comes to location and
why should location matter?
What product or services does your competitor o˜er that is a com-
petitive disadvantage to you and how can you overcome?
SEGMENT PERFORMANCE
˜ere are industry tools that allow revenue managers to evaluate their results
compared to the competition from a segment perspective. ˜is information
sheds valuable light on where there are opportunities relative to the compet-
itive set. It can help you validate the depth of demand in various segments
and aid in modifying segment strategies to improve performance versus the
competitive set.
Some segment information is more general and only goes as far as Group,
Transient, and Contract. ˜is can be beneÿcial in establishing strategies and
sales deployment, particularly in the Group and Contract segments. It can
also be beneÿcial in determining potential transient rate strategies, depend-
ing upon rate performance relative to that of the competitive set.
More detailed segment intelligence is available for purchase from indus-

try vendors in order to determine more speciÿc transient opportunities
and strategies. Below is a sample data set reêcting detailed property and
competitive set segmentation over the course of several months. Review the
information provided and answer the questions below the chart.
Jan Feb Mar Apr May Jun

Total Hotel Occupancy 58.3% 73.7% 90.2% 85.6% 86.4% 88.5%
˛ Comp Set Occupancy 63.3% 59.6% 82.2% 84.5% 90.0% 90.8%
˛ Occupancy Index 92 124 110 101 96 97
˛ Hotel ADR $172 $176 $229 $253 $273 $275
˛ Comp Set ADR $160 $169 $219 $240 $253 $257
˛ ADR Index 107 104 105 105 108 107
Jan Feb Mar Apr May Jun

˛ Hotel RevPAR $100 $130 $207 $217 $236 $244
˛ Comp Set RevPAR $101 $101 $180 $203 $228 $234
˛ RevPAR Index 99 129 115 107 104 104
Group Hotel Occupancy 20.3% 39.5% 52.5% 37.0% 43.2% 46.3%
Comp Set Occupancy 26.4% 17.0% 38.3% 32.9% 42.5% 43.2%
Occupancy Index 77 232 137 112 102 107
Hotel ADR $155 $174 $224 $264 $272 $271
Comp Set ADR $164 $191 $219 $250 $246 $260
ADR Index 95 91 102 106 111 104
Hotel RevPAR $31 $69 $118 $98 $117 $125
Comp Set RevPAR $43 $33 $84 $82 $104 $112
RevPAR Index 72 212 140 119 112 112
Retail Hotel Occupancy 9.4% 9.7% 11.5% 12.0% 10.6% 11.4%
Occupancy Index 145 131 165 141 136 152
Hotel ADR $250 $248 $340 $374 $429 $432
Comp Set ADR $190 $191 $274 $284 $354 $325
ADR Index 131 130 124 132 121 133
Hotel RevPAR $23 $24 $39 $45 $45 $49
Comp Set RevPAR $12 $14 $19 $24 $27 $24
RevPAR Index 191 170 205 186 165 202
Special Hotel Occupancy 5.5% 4.1% 5.3% 6.9% 4.4% 6.3%
Corporate
Occupancy Index 67 46 54 67 50 67
Hotel ADR $226 $214 $270 $293 $301 $298
Comp Set ADR $207 $212 $269 $299 $319 $319
ADR Index 109 101 101 98 95 93
Hotel RevPAR $12 $9 $14 $20 $13 $19
Comp Set RevPAR $17 $19 $26 $31 $28 $30
RevPAR Index 74 46 54 65 48 63
How does the hotel perform overall in occupancy compared to the
comp set during the months of January through June?
In what segments does the hotel outperform the comp set? In what
segments does the hotel underperform the comp set?
What opportunities can you identify for this hotel to improve its
performance relative to the competitive set?

Your hotel is struggling with occupancy index that is causing
the hotel to lose RevPAR index. You have determined that
your shortfall in occupancy is in the Negotiated segment.
NEGOTIATED: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Subject Occ 3.0% 2.6% 3.7% 1.8% 3.4% 2.8% 2.4% 2.3% 2.2% 2.6% 3.2% 3.4%
Comp Set Occ 7.2% 5.9% 9.1% 6.6% 7.9% 7.7% 6.3% 6.5% 6.3% 4.9% 6.6% 6.7%
Occ Index 42 44 41 27 43 36 38 35 35 53 48 51
Subject ADR $150 $150 $152 $154 $141 $150 $161 $151 $138 $154 $156 $151
Comp Set ADR $135 $137 $134 $141 $124 $136 $140 $139 $125 $149 $144 $146
ADR Index 111 109 113 109 114 110 115 109 110 103 108 103
Subject Rev PAR $5 $4 $6 $3 $5 $4 $4 $3 $3 $4 $5 $5
Comp Set Rev PAR $10 $8 $12 $9 $10 $10 $9 $9 $8 $7 $10 $10
Rev PAR Index 46 48 46 30 49 40 44 38 39 55 53 52
Utilizing the monthly data, determine how many additional rooms

your hotel will need to sell in this segment in order to gain your fair
share of occupancy.
In the Excel document, enter the month occupancy levels in the
Negotiated segment for your hotel and for the competitive set. Enter
the supply represented by your hotel (450 rooms). Enter the supply
represented by the competitive set (2100 rooms). Identify the amount
of additional rooms your hotel will need to sell in the Negotiated
segment in order to get to your fair share.
What strategies can you put into place in order to drive additional
occupancy in this segment?
What observations can you make about the competitor’s strategy
that is allowing them to garner more share in this segment?
POSITIONING STATEMENT
A hotel’s positioning statement is a concise proclamation of the hotel’s

product and service o˛ering that fulÿlls consumer demand in the market.
It is generally prepared by a small group of senior leaders of the hotel that
include the general manager, director of sales, and marketing or revenue
manager and may involve corporate o˝ce leadership. ˜e positioning
statement identiÿes the unique opportunity the hotel can serve to meet a
speciÿc market niche. ˜e hotel’s product and service philosophy should
align to deliver the positioning statement.
GUIDELINES FOR AN EFFECTIVE POSITIONING STATEMENT
1. ˜e statement should be concise and limited to one to three sentences.

2. Provide an easy-to-understand message of what the brand stands
for.
3. Address why this brand is di˛erent from other similar businesses.
How to write a positioning statement:
“For [insert Target Market], the [insert Brand] is the [insert Point of Dif-
ferentiation] among all [insert Frame of Reference] because [insert Reason
to Believe].” (Stayman, 2015)
REAL PEOPLE
“˜e ÿrst step in the valuation process is to

perform a market study where the local hotel
demand is quantiÿed and allocated among the existing
and proposed supply of lodging facilities. ˜e allocation of room
night demand is based on the relative competitiveness of all the hotels
in the market. ˜e end result is a projection of demand captured by
the proposed subject hotel, which is then converted into an estimate of
annual occupancy. A similar procedure is used to project the average
room rate.
“˜e second step is to project the hotel’s operating revenue and
expenses based on the previously estimated occupancy and room rate.
˜is results in an estimate of annual net operating income. Most con-

sultants use a ÿve- to 10-year projection period, so this process needs
to be repeated for each year.
“˜e last step is to convert the projected NOI (net operating income) into
an estimate of value using a weighted cost of capital discounted cash ôw
procedure. ˜e end result is an estimate of economic value that can be
compared to the total project cost.” (Rushmore, 2011)
QUESTIONS
• How do you project the occupancy and ADR performance for a
unique hotel concept that is incomparable to the existing hotel
performance metrics in the market?
• How do competitive analysis tools and methodology incorpo-
rate into underwriting a future hotel’s performance?
Figure 5.4: Rate/Value Matrix
RATE VALUE MATRIX
Step 1: A˙er completing the competitive set value o˛erings assessment,

establish a value for each category along the X-axis of the rate/value matrix
relative to the subject hotel. A positive value reêcts that the competitor is
stronger in that measurement. A negative value means the subject hotel is
superior. Fill in all categories for all competitors.
Step 2: Conduct price shops to determine the more representative price

point for each hotel on the same date. is exercise can be done for di erent
segments, such as weekday for business and weekend for leisure. For the
purpose of this assessment, use weekday price shops to evaluate weekday
business positioning. Using the predetermined price-points for each hotel,
calculate variances for each competitor from the subject hotel and position
the result along the corresponding value of the Y-axis. Matching this to the
X-axis designation found in the prior step will provide the ÿnal placement
for each hotel on the matrix.
Step 3: Review the results on the resulting chart. Hotels that fall within the
two diagonal lines are properly positioned based upon price di˛erential
and the relative quality rating. Hotels that fall above the upper diagonal line
are not of concern because they are considered lesser quality but are priced
higher than the subject hotel. ˜e hotels to consider closely are those that
fall below the lower diagonal. ˜ese hotels are considered a greater value
than the subject hotel because they are higher in quality but are priced at or
below the subject hotel.
Question 1: How can you use the rate value matrix to design
your business strategy?
Question 2: How does online reputation in˝uence the percep-

tion of value for price paid?
Question 3: How much in˝uence should the SWOT analysis factor into pricing strategy?
Question 4: Do you assume that all categories on the SWOT analysis are equally
important?
SEEING FURTHER
How do online guest reviews impact com-
petitive analysis?
Historically hotel star ratings and price have been used as an indicator
of hotel quality. The assumption is that a hotel with a 5-star designation
and a rate that is signiÿcantly higher than a 4-star hotel must equate to
the quality and service di˜erential in the experience.
The star rating is at best a general indicator and is used when

comparing one star category to another, but it fails to provide value
when comparing hotels within a similar star category. In addition, star
categories, whether o˛cial accreditation or an uno˛cial appointment,
is also ine˜ective for comparing hotel products given the lack of a
universal delineation on the criteria for a star category.
Online guest reviews have a growing impact on booking, pricing, and
ÿnancial performance of a hotel, and the importance of online guest
reviews is changing the historical approach of competitive analysis
to determine a hotel’s product and service o˜ering. The historical
approach of comparing a hotel’s product and services to determine a
price positioning is being disrupted by the rise of online guest reviews,
providing a quantitative score on the guest experience and real-time
customer feedback on their experience.
Studies have found that guest reviews have a direct impact on hotel
conversion rate; when given equal pricing, customers are 3.9 times
more likely to book the hotel with higher ratings (Mulligan, 2014).
Questions:
How does hotel star ratings educate the consumer on expectations
for product and guest service?
What tools and tactics can a hotel utilize to improve their online
reputation?
If a hotel has high guest satisfaction scores, how can the hotel
merchandise the accolades to outperform its competitors?
Companies increasingly use social media to communicate and interact

with customers. Much information is thereby generated and is available to
everybody, including competitors. Firms need to analyze what their custom-
ers say and interact with them.
APPLICATIONS
Case 1:
You are the new revenue manager at the Anderson Hotel.

You have been asked to reevaluate the competitive set for
the hotel. Your hotel is a 350-room 3-star hotel that is
heavily leisure but also attracts transient business cus-
tomers. You have the following potential hotels to select
from for your competitive set. Select three competitors from this list and
provide your reasons for selecting these as the most appropriate hotels to
benchmark o˛ of:
• Hotel A: 775-room 4-star hotel one block from your hotel. 60%
group hotel with 55,000 square feet of meeting space.
• Hotel B: 125-room 5-star boutique hotel across the street from your
hotel. Strong transient base. Retail rates average $100 to $125 above
your hotel.
• Hotel C: 300-room 3-star hotel 2 miles from your hotel. Similar type
of customer base but di˛erent corporate demand generators.
• Hotel D: 500-room 3-star branded hotel 4 blocks from your location.
Very strong brand loyalty program that gives them a signiÿcant dis-
tribution advantage over your hotel.
• Hotel E: 425-room 3.5-star historic hotel. ˜ree blocks from your
hotel 40% group mix. Also strong in leisure transient.
• Hotel F: 280-room 3-star hotel. One mile from your hotel. In a less
desirable neighborhood than your hotel, more remote from the
major demand generators in the market.
Which 3 hotels would you select for the competitive set? (And why?)
Case 2:
You recently joined a hotel development company and are tasked with creat-
ing a new hotel concept and positioning statement for a new-build hotel in a
secondary city market with an existing convention center that will double in
size from 60,000 sq ˙ to 120,000 sq ˙ in two years. City-wide group conven-
tions account for 125,000 annual room nights or 25% of annual hotel room
nights in this market. To complete this assignment, you are asked to evaluate
the existing ÿve hotels in the market to identify a new hotel concept that ful-
ÿlls a market niche that is not being served today. What hotel concept would
you develop and what is the positioning statement of that hotel?
• Hotel 1: 100-room 4-star branded hotel with 2,000 sq ˙ of meeting

space located next to the convention center.
• Hotel 2: 120-room 3.5-star Upscale independent hotel with 3,000 sq
˙ of meeting space located ÿve blocks from the convention center.
• Hotel 3: 130-room 3-star upper midscale branded hotel with 5,000 sq
˙ meeting space located twenty blocks from the convention center.
• Hotel 4: 80-room 5-star luxury hotel with 1,000 sq ˙ of meeting
space located four blocks from the convention center.
• Hotel 5: 110-room 4-star independent hotel with 2,000 of meeting
space located six blocks from the convention center.
TEAM ACTIVITY
Competitive Research to Produce Competitive Grid Analysis
Formulate a team of four to ÿve students and assign a subject hotel.

˜e student team is to determine 4–6 potential competitor hotels
with consideration to product o˛ering, price position, and star category.
Each student is responsible for conducting individual research and com-
pleting the competitive grid analysis spreadsheet.
INTERNET ACTIVITY
Select three hotels in a similar area in a city or destination. õr-

oughly read the reviews on Trip Advisor and Expedia regarding
the three hotels. Rank the three hotels in terms of product and
service based upon customer feedback.
GLOSSARY
Competitive grid analysis – A tactical tool that evaluates the prod-
uct and service o˛ering for the subject hotel and its com-
petitors.
Competitive set (comp set) – A group of similar and directly competing

Demand generator – Any event, sports area, hospital, military base, or busi-
ness that creates lodging demand for a market.
Fair share – ˜e proportional share of business assuming an even distribu-
tion of supply, revenue, and demand among all properties included
within a competitive set.
Frame of reference – Describes alternative choices in the market today to
set a baseline of existing expectations and further support the point
of di˛erence.
Inverse SWOT analysis – Conducting a SWOT analysis through the lens of
a competitor.
Point of di˜erentiation (POD) – ˜e qualities separate the brand from its
competitors.
Positioning statement – Statement of the hotel’s product and service o˛er-
ing that address the target market it is trying to fulÿl with a point of
di˛erentiation compared to existing substitute and includes a reason
why this organization is able to deliver the promise made.
Reason to believe – Provides the context of how the business is able to
deliver on its positioning statement.
Segmentation/mix of sales – How revenue managers and marketers classify
istics, behaviors, and preferences. ˜e most common customer seg-
mentations are Transient, Group and Contract.
Smith Travel Research (STR) – A global provider of competitive bench-
marking, information services, and research to the hotel industry,
with performance data from over 63,000 hotels and located in 180
countries.
SWOT analysis – A four-quadrant analysis to examine the subjects strengths,
weaknesses, opportunities and threats.
Target market – ˜e segment of customers the business it trying to reach.
REFERENCES
Mulligan, D. (2014). How online hotel reviews a˛ect booking decisions: ˜e
research, stats, viewpoints & strategies. Cvent. Retrieved from http://hospi-
tality.cvent.com/blog/cvb-internet-marketing-2.
Myburgh, S. (2004, March/April). Competitive Intelligence: Bridging Organization
Boundaries. Information Management Journal, 38(2), pp. 46-55.
Rushmore S. (2011, September 26.). How to Test Hotel Feasibility. HVS. Retrieved
from https://www.hvs.com/article/5456/how-to-test-hotel-feasibility/
Stayman, S. (2015, March 201). How to Write Market Positioning Statements.
Cornell Blog. Retrieved from https://blog.ecornell.com/how-to-write-mar-
ket-positioning-statements/
CHAPTER 6
Hotel Revenue Management:

Forecasting and Budgeting
Theresa Doherty and Carolyn Fredey
OVERVIEW
Understanding the principles and components of forecasting and

budgeting is critical for the aspiring revenue manager (RM). A forecast can
be best described as the best estimate of future performance and overall
demand, while a budget is the desired future performance to meet the
hotel’s goals and objectives.
Hotel revenue management (HRM) focuses on how a hotel can produce the
highest amount of “proÿtable” revenue given its ÿxed capacity and variable
demand. The ratio between the demand and the capacity determines the
hotel’s potential for driving revenue for a speciÿc time frame in the horizon.
As demand increases, the expectation is to drive average daily rate. While
there is a physical limit to the amount of rooms sold, average rate has less
of a constraint.
It is the primary objective for the RM to formulate a revenue forecast
for multiple time frames. A secondary goal, but equally important,
is to communicate the forecast to various stakeholders. The forecast
is utilized for both short-term needs and long-term planning and
budgeting.
139
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Explain the importance of the forecast and the impact it has on various
stakeholders
Describe the relationship between forecasting, price, and revenue maxi-
mization
Compare the various mechanics and models behind a system-generated
forecast
Identify the economic indicators and market level information that
impact hotel demand
Interpret the system forecast with available market data to create a user
forecast
Forecast a group block
Measure forecast accuracy
Discuss the annual budget process
OUTLINE
Introduction
Impact of the Forecast
• ˜e Reality of Seasonality and Impact On Operations
• Impact on the Revenue Strategy and Sales Deployment
• Impact on Hotel Valuation
Forecasting Fundamentals
• Di°erent Time Horizons and Frequency
• Unconstrained Forecast vs Constrained Forecast
• Sources of Data for Demand Forecasting
• Building Blocks of the Constrained Forecast
• Calculating Forecast Error
Budgeting
• Internal and External Expectations
• Execution
Hotel Revenue Management: Forecasting and Budgeting  141
• Communication
• Impact on Goal Setting and Compensation
SO WHAT?
Imagine you just graduated from school and are named hotel man-
ager for a busy hotel. You arrive to work on your ÿrst day and realize
you are the only manager on duty and you cannot ÿnd a forecast of
any kind.
As hotel manager, how would you answer these questions without a
forecast?
How much sta° will you require? How much food will you pur-
chase?
How many rooms will need to be cleaned?
How is your sales team’s performance?
A forecast is generated to assist in operational planning and to set
baseline of performance.
INTRODUCTION
Hotel forecasting and budgeting generally falls under the combined respon-
sibility of ÿnance and revenue management. It is necessary for the RM to
prepare the revenue forecast in order for the ÿnance department to complete
the expense and proÿt forecast.
In nearly all cases, the RM may prepare the rooms revenue forecast for
the hotel.
In addition, for some properties, the catering forecast is also completed

by the RM rather than catering sales or operations.
PART ART AND PART SCIENCE—THAT IS THE REALITY
˜e demand forecasting process for a hotel is a combination of both

art and science. While extensive modeling is available and utilized, it is
never enough.
˜ere are several external factors that are nearly impossible for any sys-
tem to completely understand.
For example: severe weather, competitor renovations, special events,
and any shi˝s in holiday placement.
What other di˙cult to forecast factors can you think of?
How would you ÿnd out this information easily and how would you
track?
Conversely, what data would be easier and faster for a system to man-
age?
IMPACT OF THE FORECAST

The Reality of Seasonality and Impact on Operations
Operations rely very heavily on forecast information to maintain expense

and productivity targets. Department proÿtability is a major focus for
department heads and executives. Detailed planning takes place based
upon the projected business volume established by revenue management.
˜is can be particularly impactful with hotels where demand varies sea-
sonally.
˜ink about a hotel that runs 80 percent occupancy annually in a sea-

sonal market. ˜ere will be months/seasons where the hotel runs 65 percent
occupancy and other months/seasons where the hotel will run 90 percent
occupancies. Revenue management must forecast each day/week/month
appropriately in order for the operational departments to plan accordingly
and run their areas e°ectively.
Over forecasting business levels can result in overspending due to over

sta˙ng and purchasing more supplies than necessary. On the îp side, under
forecasting can result in poor guest experience and unnecessary costs such
as overtime.
Figure 6.1: Impact of Demand Forecast on Revenue Strategy
Impact on the Revenue Strategy and Sales Deployment
˜e forecast is central to the revenue strategy for the hotel. ˜e RM estab-

lishes pricing and restriction strategies based upon forecasted demand lev-
els. As forecasted demand increases, rates and restrictions increase and lower
priced business is turned away. As forecasted demand decreases, prices are
reduced and restrictions are relaxed in order to ensure stronger conversion
on lower demand.
˜e forecast is used to determine deployment of sales resources and mar-

keting dollars based upon anticipated business levels and business needs.
In the short term, promotions are developed to impact shoulder and need
times as outlined in the forecast. Longer term, sales resources are deployed
to various business segments and booking windows depending on where
needs are identiÿed.
A CASE IN POINT—GROUP CANCELLATION

Please work with one or two other students and review the following
scenario:
A typically busy resort located near several tourist attractions was nearly
sold out for Memorial Day Weekend, and had been for several weeks.
Less than 3 months to arrival, the revenue manager had increased the
rates and closed out all discounts to allow for the average rate of the
hotel to grow with the sale of its remaining rooms.
However, things changed 1 month out when a group canceled its room
block. Now instead of a handful of rooms left, there were more rooms
left to sell than the hotel can typically pick up.
QUESTIONS TO CONSIDER:
Should the revenue manager adjust the forecast?
What rate and restrictions changes should be made?
What other strategies can be explored and implemented?
Impact on Hotel Valuation
˜e exercise of hotel valuation begins with the estimation of the property’s

operating cash ôw into the future. Market demand and supply trends are
used to establish market occupancy and rate trends which are then applied
to the hotel in question. An optimistic view of current and future market
conditions can lead to an inâted projection of cash ôw and over valuation
of a given hotel or prospective hotel opportunity.
FORECASTING FUNDAMENTALS
In this section, we will review the critical processes, the mechanics, and
the art of forecasting a hotel’s rooms demand. While a RM will heavily rely
on the modeling of a computer generated system, he or she must apply
expertise and make adjustments when necessary. Behind the scenes, there
are a lot of numbers and calculations that a general manager would not
understand completely but expects the RM to distill this information into

a hotel forecast and formulate a strategy to maximize revenue.
Figure 6.2: Forecasting Process
Different Time Horizons and Frequency
˜ere are various types of forecasts to satisfy both short-term and long-term
needs for multiple stakeholders. Usually, the following schedule is followed:
1) Weekly Forecast: Each week the RM will update the current month
(at least 2 weeks) for sta˙ng updates. ˜is is completed based on
current data on the books and expected transient pick up (the addi-
tion number of rooms and revenue). Generally, assumes no group
pick up.
2) Long Range Projections: Each month the RM will update the next
3–6 months for planning purposes and to communicate with various
stakeholders, including ownership. Prior to submission, it is recom-
mended that the projections are reviewed with the general manager
and director of sales to ensure alignment. ˜e long range projections
will include an unconstrained forecast for all three major segments:
contract, group, and transient.
3) Annual Budget: Each year the RM will plan for the following year to
assist in goal setting and resource planning.
Unconstrained Forecast Versus Constrained Forecast
Forecasting is problematic with the reality of variable demand throughout the

year and across a given week of time. Furthermore, it is important to under-
stand that the RM must look beyond the constraints of the hotel capacity and
occupancy history for future demand calculations. Instead, the starting point
to any projection or strategy begins with the unconstrained forecast. If a hotel
had unlimited amount of rooms, how many rooms could be sold? As you can
see in the example below, there is more demand than capacity on Tuesday,
Wednesday, and Saturday. Hence, an unconstrained demand forecast aims to
estimate the total rooms demand, either by arrival date or stay date.
FIGURE 6.3: Unconstrained Demand
Sources of Data for Demand Forecasting
In today’s environment, most RMs will rely on both an automated revenue

management system and their own knowledge and data integration about
the hotel and market. ˜e RM will have to override or adjust the system’s
inputs when necessary, based on the market data and any anomalies in the
historical data. ˜e combined output will generate both an unconstrained
demand forecast to allow for the revenue maximization strategy and the
necessary constrained transient forecast to allow for a revenue forecast for
the hotel operations.
˜e RM has two primary forecasting methodologies to integrate with

the system. ˜e ÿrst method group being based strictly on internal histori-
cal property data such as occupancy history, called endogenous. ˜e second
method group is based on both internal and external variables called exoge-
nous and may include such items as market trends and special events (Based
on Legohérel, 2013, p. 59).
Both groups of data can be divided into three buckets that are easy to
understand. All are critical pieces of information to compile and consider in
the development of the forecast.
Data Sources for Demand Forecasting
Property Data – Property Data – Current Market Data

Historical
Occupancy statistics of hotel The number of rooms Changes or new demand

available to sell generators such as a new
stadium or nearby offce
park
Average Daily Rate (ADR) The number of transient Economic indicators that
statistics of hotel rooms booked and ADR may increase or decrease
travel and rooms demand
Unaccommondated The number of group rooms Unpredictable factors

demand history (denials) reserved and ADR such as a snow storm or
construction
Cancellation and no show Recent improvements in the

history hotel’s services or products
Guest Satisfaction trends Additional sales deployment Planned renovations of

hotels, new hotels, or
closures
Figure 6.4: Data Sources for Demand Forecasting
The system forecast will most likely use a combination of statistical

modeling to predict future demand. Figure 6.5 (Weatherford & Kimes,
2003) illustrates the Various Forecasting Methods used in Revenue Man-
agement.
Revenue management forecasting methods

1. Historical A. Same day, last year
B. Moving average
C. Exponential smoothing
D. Other time series (ARIMA, etc.)
2. Advanced Booking A. Additive
1. Classical pickup
2. Advanced pickup
B. Multiplicative
1. Synthetic booking curve
C. Other time series
3. Combined A. Weighted average of historical and advanced
booking forecasts
B. Regression
C. Full information model (Lee, 1990)
Figure 6.5: Forecasting Methods
Historical models only consider the ÿnal number of rooms or arrivals

on a particular stay night. Advanced Booking models solely include the
buildup of reservations over time for a particular stay night. In practice, it
is typical that a hotel may best utilize a combination of both the historical
forecast and an advanced booking forecast. Generally, this can be imple-
mented using a regression model or a weighted average of a historical fore-
cast and an advanced booking forecast to develop the forecast (Weatherford
and Kimes, 2003).
˜e ôw chart below describes the process of the integration of the sys-
tem and the available market data that enable the revenue forecast and strat-
egy recommendations.
Figure 6.6: Methodology to Forecasting

THINK HISTORICALLY
˜e evolution of distribution channels in has changed dramatically

over the years.
A century ago only mail and phone enquiries (see article) existed for
rooms reservations. However, in the 1960s, technology began to accel-
erate, ÿrst with the airlines’ development of electronic distribution and
eventual migration of the technology to travel agencies via the Global
Distribution System (GDS) in the 1970s. ˜e next step was the devel-
opment of the Centralized Reservation System (CRS) in 1980 that
improved e˙ciencies for hotel chains (Warner, M.; Quadri-Felitti, D.;
Chandnani, P. V.—A History of Travel Distribution: 1915–2009, 2010).
Source: New-York Tribune, June 11, 1922, Graphic Section, Part Seven.
However, it was the 1990s and the advent of the Internet that expo-
nentially changed distribution and subsequently made forecasting
demand a real problem to solve. ˜ink about it. In 1924, rate com-
parison shopping was cumbersome for the consumer. Sales enquiries
tended to be more qualiÿed and buyers more apt to purchase. Today,
there are numerous travel sites and rate comparison shopping is wide-
spread. Consumers are likely to shop several sites before making a pur-
chase. It is more complex to validate how much demand exists and data
assumptions must be made by systems and forecasters.
List all the di°erent ways a hotel room can be booked.

Why would more distribution channels make it more challenging to
forecast demand?
How can systems adapt to the changes in distribution mix?
The Building Blocks of the Constrained Forecast
While the system forecast is extremely valuable in forecasting transient

cancels and demand yet to be realized, it requires the RM to estimate the
number of rooms already committed, and ultimately assemble constrained
forecast for the stakeholders. In this section, we will outline these steps with
concentration on the group forecast which requires the most intervention.
Figure 6.7: Constrained Forecast Process

Step 1: Forecasting Group and Contract Conÿrmed
While the system forecast is extremely valuable in forecasting demand yet

to be realized, it requires user input to estimate the supply of rooms already
committed, and ultimately the published constrained forecast for the stake-
holders. ˜is generally will include out of order rooms (out for renovation
or repair) that cannot be utilized, conÿrmed group, and conÿrmed contract.
In this case of group and contract, a hotel sales manager has negotiated a
room rate for a speciÿed number of rooms called a group or contract block
for a speciÿc time period. Generally, a contract (airline crew most common)
will utilize nearly all the rooms requested as it reserves a ÿxed number of
rooms for each night based on precise needs and schedules. However, a
group’s needs are not as clear at the time of booking, and there are ûctua-
tions between contract and actual pickup.
A cuto° date, the time the reservation details are due to the hotel, is
agreed at the time of booking between the sales manager and the meeting
planner. While there are variances based on type of booking and lead time,
3 weeks prior to arrival is fairly typical and provides the hotel enough notice
of any rooms not ÿlled by the group to sell to transient. However, due to the
knowledge that most groups do not utilize all rooms requested, it is prudent
for the RM to forecast each individual group block with some slippage or fall
o°. Di°erent types of groups will behave di°erently based upon the nature
of the segment (Figure 6.8).
Type of Slippage Behavior

Group
Tour and Travel Typically contracts allow for cancel 60 days out so forecast
conservatively unless there is history with hotel Guidance : 25-50%
slippage
Social The meeting planner (such as a bride) generally will not guarantee
rooms and thus will ask for more rooms than necessary so actual
pick up can be Guidance: 40- 50% slippage
Association While attendees are responsible for payment, generally there is good
history of annual events and attendance is predictable Guidance:
15-20% slippage
Corporate Generally, attendance is expected and rooms are paid by the
corporation so pick up is stronger than most groups. Guidance: 10-
15% slippage
Figure 6.8: Anticipated Slippage by Sub-segment

It is a good practice to use guidance slippage percentages at the time a

group is contracted. ˜e next step is for the event manager to obtain pickup
and intelligence from the meeting planner to update the group projection.
Depending on the source of lead and billing method, the group block will
be either call-in, where the group attendees make their own reservations, a
rooming list, where the meeting planner collects the names of the attendees,
or housing bureau link, where an electronic feed is sent to the hotel with the
reservation details at a set time before arrival.
Group Block Forecast Example
In this example, a simple percent o° peak forecast is used. A˝er a partial

rooming list or call-in block, the event or reservations manager records the
pick up by day for the group. ˜e manager can then determine the peak day
of the block and calculate the percent o° peak for each pre-day and post-
day of the group. ˜en based on the type of group, and the remaining days
before cuto°, and any history, the manager can determine a forecast for the
peak. In this case, the manager is predicting the bookings to grow from 30
peak to 45 peak. ˜e surrounding days are a simple percent o° the peak.
Thursday Friday Saturday Sunday
2-Mar 3-Mar 4-Mar 5-Mar
Contract 50 50 50 50
Reservation Booked 10 20 30 15
Percent off Peak 33% 67% 100% 50%
Forecast 15 30 45 23
Interpreting Property Reservations Data to Generate a

Group Forecast:
Calculate a group room block forecast for the following group. Assume that cutoff
date is already passed and you expect a 10 percent slippage of what is already
booked. In other words, rather than additional pickup, the bookings will actually
decrease.
Sunday Monday Tuesday Wednesday

7-May 8-May 9-May 10-May
Contract 25 25 25 25
Reservation Booked 0 15 25 20
Percent off Peak
Forecast
• Do you think the group was contracted correctly?
• Do you expect your overall rooms forecast to grow or decline since the group
was frst contracted?
• What stipulations would you demand for the group to book again for next
year?
Step 2: Forecasting Group To Be’s
A˝er the existing groups are forecast, the next step is to predict the remain-
ing group rooms to be picked up by sales. ˜is is not a scientiÿc process typ-
ically as historical trends are not as consistent as transient. Whiles systems
may attempt to forecast, most o˝en the RM is responsible for the majority
of the heavy li˝ing of this task. ˜e information used to estimate the to-be’s
is based partially on past history of pick up and the remainder on any group
leads, or prospects that may be in the sales System.
Step 3: Validating Transient Forecast
A˝er the contract and group forecast is complete, the last step is to vali-
date the transient system forecast and make any adjustments. ˜e system
will calculate the transient forecast based on the remaining unconstrained
demand and supply. However, due to market data that may not be inherited
in the system forecast, the RM will adjust. Ideally, this should be done in the
unconstrained transient forecast phase so this task is not necessary. Today it
is more common to override the forecast in the ÿnal phase.
Step 4: Validating Total Hotel Forecast
A˝er Steps 1 through 3, the RM must validate the total hotel forecast to
ensure that it makes sense. O˝en when you forecast the individual parts,
it is easy to overlook the ÿnal result and check for errors in areas of pat-
tern, holiday placement, or unusual booking activity. In addition, the RM
must consider the impact on the stakeholders and ensure that too much
risk or too little risk is in the forecast. Generally, a good strategy to man-
age expectations is to be slightly conservative in the forecast. ˜is allows
the RM to increase the projection at a later date with a positive response
from stakeholders. Compare and report the forecast to budget, last year,
and last projection. Finally, ensure you communicate the forecast to all rele-
vant stakeholders and include notes for any time periods that have changed
dramatically. Explain why the forecast has changed and include any action
items that may be helpful in improving the results.

To Do: Review the market and transient demand information in the
instructions tab of the student supplement spreadsheet. Populate the
transient rooms forecast by day for the month based upon the data provided.
Review the full month projection on the summary tab of the fle.
Answer the following questions:
• How is the hotel forecasted to perform compared to the budgeted expecta-

tions? What factors are affecting the hotel’s performance compared to budget?
How is the hotel forecasted to perform versus last year?
SEEING FURTHER
Assume you are the revenue manager of a large resort in the Paciÿc.
Due to a sharp slowing of the economy in East Asia, booking pace for the hotel is
signiÿcantly down. Prudently, you decide to bring down the revenue projections for
the remainder of the year.
1) What stakeholders need to be notiÿed?

2) What strategies may be adjusted or employed to o°set the decline?
3) Would you expect your system-generated forecast to require adjustments and
why?
CALCULATING FORECAST ERROR
With the importance of forecasting, given the direct relationship of the

unconstrained demand projection and the revenue strategy, accuracy is
critical. Both the system forecast error and the RM’s constrained forecast
should be measured to track progress. Generally, tracking accuracy over long
periods of time is more meaningful as there may be anomalies in shorter
periods of time. If the forecast error increases, there may be a change in the
trend, incorrect data, or human error. As the system forecast plays such an
important role and relies on user inputs and overrides, it is recommended
that goals be established and managers held accountable. In statistics, there
are generally three common measurements used to test the accuracy of
forecasting modeling: MAD, MSE, and MAPE (Minitab, n/d).
Mean Absolute Deviation

MAD = ˇ | Actual – Forecast | / n
Mean Squared Error
MSE = ˇ (Actual – Forecast)2 / n
Mean Absolute Percentage Error
MAPE = (100 ˇni=1 | Actuali – Forecasti | / Actuali) / n
Mean absolute percentage error (MAPE) expresses accuracy as the aver-

age percentage of error across a number of instances. It can be easier to
understand than the other statistics. For example, if the MAPE is 6, on aver-
age, the forecast is o° by 6 percent.
Let us review in a worksheet for ease of understanding (Table below):
Date: DOW Rooms Actual Difference Absolute MAD MAPE MSE
Revenue Rooms
Error
Forecast Revenue
6-Mar Sunday $18,500 $19,140 $640 $640 $640 3% $409,600
7-Mar Monday $33,750 $35,680 $1,930 $1,930 $1,930 5% $3,724,900
8-Mar Tuesday $40,425 $40,095 ($330) $330 $330 1% $108,900
9-Mar Wednesday $40,425 $42,075 $1,650 $1,650 $1,650 $2,722,500
4%
10-Mar Thursday $32,625 $33,180 $555 $555 $555 $308,025
2%
11-Mar Friday $16,675 $14,200 ($2,475) $2,475 $2,475 $6,125,625
17%
12-Mar Saturday $23,925 $25,905 $1,980 $1,980 $1,980 $3,920,400
8%
Total $206,325 $210,275 $3,950 $9,560 $9,560 5% $91,393,600
$2,390 6% $13,589,194
While the revenue di°erence added together for the week is only o° by
2percent, from an absolute error perspective, there is a variance of 5 percent.
˜e negatives do not o°set the positive variances.
PROS & CONS

There is always a margin of error in any forecast. The
goal is to be as accurate as possible, in order to give
the best guidance with the forecast.
Is it better to under forecast or over forecast?
What are the implications of each?
What impact does it have on the operation as well as the proÿtability
of the hotel?
BUDGETING
˜e hotel annual budget is an extension of the forecasting process. ˜e RM

ÿrst forecasts the rooms’ revenue expectations for the following year. Total
hotel sales and proÿt goals are determined based upon this rate and occu-
pancy projection. ˜e budget goals are ultimately spread through every
department of the hotel to give the department leaders the targets they must
achieve for success. Business plans are established to outline how these tar-
gets will be achieved.
REAL PEOPLE
Sloan Dean is the Vice President of Revenue Optimization
for Ashford.
He has provided insight into the impact of budgeting and forecasting from an
owner’s perspective:
Budgets & Forecasts are paramount for public companies like Ashford, especially for
REITs and C Corps that provide forward guidance to the investor community. Rev-
enue Budgets have wide ranging implications such as CAPEX investment, dispo-
sition & hold strategies and management company performance incentive clauses
that impact an owner’s EBITDA.
Regarding CAPEX, budgets in˜uence how much CAPEX owners can allocate for
future years. Most public owners allocate future CAPEX as a percentage of total
revenue; thus, if the Revenue Budget is not accurate, then an owner cannot prop-
erly plan for major renovations, etc. Because large capital spending requires 12–18
months of planning, the spend is typically based on budgets. Currently, most public
lodging REITs are spending 8–11% of their Budgeted Revenues as owner funded
CAPEX to improve their hotels. With less revenue comes less reinvestment.
Regarding disposition strategy, if a hotel’s budget & forecast is bleak, the owner is
going to be more apt to sell the asset than hold it in the interim albeit debt alloca-
tions and where we are in the lodging cycle also play a large in˜uence in the selling
of hotels.
Regarding management contracts with companies like Marriott, Hilton, Interstate,

etc., many of the management incentives paid by the owner to the manager are
driven by performance versus budget. An inaccurate budget can cost either party a
lot of money.
Lastly, and maybe most importantly, many companies provide forward RevPAR
growth performance for future quarters, which is based on Budgets & Forecasts. If
these guidance’s are missed, a company’s stock can get pummeled.
QUESTIONS
Given the issues outlined above, if you were an owner, would you prefer to see an
aggressive budget or a conservative budget? List at least three factors that support
your position.
As an operator, are you better o° with an aggressive budget or a conservative budget

given the perspective of ownership? List at least three factors to support your position.
Internal and External Expectations
In many cases, hotels teams are challenged to establish aggressive goals to

meet corporate and/or ownership growth goals. Revenue expectations for
individual hotels are compared with market expectations established by
market “experts” such as PKF and STR Global. Corporate leaders, owners,
and asset managers want to ensure that the growth target for the hotel will
lead to market share growth based upon these market expectations unless
valid conditions exist where a hotel may not be able to grow share (i.e., ren-
ovations, impact of one time event in the previous year, etc.).
Execution
Creating a budget starts with the same fundamentals as a long range fore-
cast. ˜e forecasted sales for each month or period are estimated based upon
anticipated market conditions and group booking pace information. Tran-
sient segmentation is modeled based upon expected market demand applied
to historical trends along with any strategic changes the hotel plans to make.
˜e end result is a projection that reêcts occupancy and rate expectations
for the following year that will be used as the basis for the total hotel budget.
Revenue management will also typically outline the budget for catering sales
based upon booking pace in group and local catering as well as trends in
pickup within the year of arrival.
Review the sample hotel budget below:

Jan Feb Mar Q1
Budget Occ 51.6% 66.3% 74.7% 64.1%
Last Year 47.9% 61.2% 69.1% 59.4%
Budget Rooms 5600 6500 8100 20200
Last Year 5200 6000 7500 18700
% Chg 7.7% 8.3% 8.0% 8.0%
Budget Rate $165.00 $172.00 $179.00 $172.87
Last Year $167.00 $179.00 $185.00 $178.07
% Chg −1.2% −3.9% −3.2% −2.9%
Budget Revenue $924,000 $1,118,000 $1,449,900 $3,491,900
Last Year $868,400 $1,074,000 $1,387,500 $3,329,900
% Chg 6.4% 4.1% 4.5% 4.9%
How does the hotel expect to increase revenue during the ÿrst quarter
based upon how they have budgeted these months?
List strategy changes that the hotel potentially made versus the prior
year that would lead them to budget the numbers above.
Communication
˜e budget is ÿrst reviewed by the property team to ensure the RM, gen-
eral manager, sales leader, and director of ÿnance are in agreement. ˜e
subsequent review process for the budget will depend upon the company
approach as well as the engagement level of the ownership group in the
budget process. O˝entimes there is a formal meeting with the management
organization and ownership organization to review the assumptions used
to develop the budget to ensure that target is appropriate to achieve market
expectations as well as the expectations of the organizations involved.
Impact on Goal Setting and Compensation
Budgeted sales are typically used as the basis for compensation for sales, rev-
enue management, and the executive leadership in the hotel. ˜e goal could
be top-line sales, or it could also be the bottom line house proÿt driven from
budgeted sales. Sales manager goals are typically derived from the budgeted
sales for the segment targeted by the sales person (group, business transient,
etc.). Establishing unrealistic targets can have a signiÿcant impact on the
compensation of a number of managers within the hotel.
How does the budgeted target impact the behavior of revenue manag-
ers and sales executives?
Question 1: While the system-generated forecast is sophisticated,
are there any instances that may require user intervention? What
market or property data may be hard for the system to recognize?
Question 2: Describe how an unexpected increase in the conÿrmed group forecast

may impact the total hotel rooms forecast. What processes should be evaluated to
minimize the frequency or large variances?
Question 3: Assume you are the RM of a relatively new hotel and rely heavily on
the system-generated forecast due to lack of history and expertise. You have noticed
that in recent weeks that the system-generated forecast accuracy is declining. The
occupancy is coming in much stronger than the forecast.
As a result, you have set up an appointment with the programmers that are responsible
for the system forecast. What questions would you have for the programmer and what
could be negatively impacting the accuracy?
Question 4: Why is the annual budget process critical to a hotel?
Question 5: Describe how a sharp reduction in the forecast impacts the overall value
of the asset?
APPLICATIONS
Case 1: Forecast Accuracy
A busy convention hotel has been struggling with over fore-

casting. Subsequently, the hotel has incurred unnecessary
costs due to oversta˙ng and over purchasing food items.
In addition, the hotel has lost rooms revenue due to the
RM over restricting discounts due to the inâted forecast.
You have been asked to see if there was a trend to the forecast accuracy
shortfalls.
Rooms Forecast Rooms Actual
Sunday 1,050 1,008
Monday 1,400 1,372
Tuesday 1,400 1,372
Wednesday 1,400 1,386
Thursday 1,250 1,138
Friday 1,150 1,047
Saturday 1,350 1,323
Sunday 1,075 1,032
Monday 1,350 1,323
Tuesday 1,350 1,323
Friday 1,175 1,070
Sunday 975 936
Rooms Forecast Rooms Actual

Monday 1,200 1,176
Tuesday 1,300 1,274
Friday 1,200 1,092
Questions:
What is the MAPE for the time frame provided?
Are there trends in the data by day of week?
Case 2: Budgeting
You are the new RM for a hotel in a major city. ˜e hotel team has been
working on their budget for the upcoming year. You have done your research
and found out the following facts about the market conditions for next year:
• Several new hotels will open in the market. One of the new hotels is a
400 room hotel located 2 blocks from your hotel. It is slated to open
in February.
• Two large annual conventions that are held during the shoulder sea-
son are not going to be held next year due to budget constraints.
• An international airline will start new direct service from a major
gateway city to your city starting in April.
• Your hotel’s group booking pace is behind by 3 percent compared to
the same time last year.
• Your hotel had a signiÿcant renovation last year and the owners are
expecting strong returns on their investment.
Questions:
• ˜e owners expect the budget to reêct occupancy performance
equal to the current year. Do you agree with their assertion? Why or
why not?
• How does the impending new supply impact expectations for rate
and occupancy for the hotel?
TEAM ACTIVITY
Work with at least two other students in this team activity. Research
a Citywide event in your local area or a nearby city center. Select one
hotel to analyze and choose four other hotels of similar experience
level. Compare pricing and availability for the peak event dates against a
time period of low demand.
Please discuss the following with your team:
Based on the information available, do you expect the forecasted results

to di°er and why?
Does pricing ûctuate similarly between the two di°erent time frames
for all the hotels or are there exceptions?
When forecasting occupancy and rate for the dates over the Citywide,
what property data would you analyze?
INTERNET ACTIVITIES
Research a market—ÿnd ÿve things that would inûence the

forecasted results for the following year (new supply, change in
demand generators, change in infrastructure, air li˝, investment
in the market, convention center, leisure attractions, etc.).
• Outline the ÿve demand inûencing factors.
• Rank them in order of impact from highest impact to lowest.
• Explain how these factors will impact demand, positively or nega-
tively.
GLOSSARY
Citywide – event in the market that results in lodging demand ade-
quate to ÿll the vast majority of all hotels.
Demand generator – any event, sports area, hospital, military base,
or business that creates lodging demand for a market.
Remaining demand – number of rooms the hotel can expect to sell
with unlimited physical capacity.
Remaining supply – number of rooms available for sale.

REFERENCES
Belobaba, P. P. (1987, May). Airline Yield Management: An Overview of Seat Inven-
tory Control. Transportation Science, 21 (2), 63–73.
Cross, R. G. (1997). Revenue Management: Hard Core Tactics for Market Domina-
tion. New York, NY: Broadway Books. 1997.
Cross, R. G., Higbie, J. A., & Cross, D. Q. (2009). Revenue Management’s Renais-
sance: A Rebirth of the Art and Science of Proÿtable Revenue Generation.
Cornell Hospitality Quarterly, 50 (1), 56–81.
Haley, M. & Inge, J. (2004, Fall) Revenue Management: It Really Should Be Called
Proÿt Management. Hospitality Upgrade Magazine. Retrieved from https://
ishc.com/wp-content/uploads/art_rm04.pdf
Hayes, D. K. & Miller, A. (2011). Revenue Management for Hospitality Industry.
Hoboken, NJ: John Wiley & Sons, Inc.
Legohérel,P., Poutier,E. & Fyall, A. (Eds.). (2013). Revenue Management for Hospi-
tality and Tourism. Woodeaton, Oxford. Good Fellow Publishers Ltd.
Minitab.com (n/d). Retrieved from https://support.minitab.com/en-us/minitab/18/
help-and-how-to/modeling-statistics/time-series/how-to/trend-analysis/
methods-and-formulas/methods-and-formulas/
Warner, M., Qaudri-Felitti D. & Chandnani, P. (2010). A History of Travel Dis-
tribution: 1915–2009. HEDNA. Retrieved from https://corsi.unibo.
it/magistrale/emt/bacheca/2013-05-seminario-in-revenue-manage-
ment-the-distribution-dilemma/5a3e53f2148447caa7b55cf3d80d1f2b
Weatherford, L. R. & Kimes, S. E. (2003/9). A Comparison of Forecasting Methods
for Hotel Revenue Management. ˜e Scholarly Commons. Cornell University
School of Hotel Administration.
CHAPTER 7
Performance Analysis in
Roy Madhok and Leslie Lew
OVERVIEW
Hotel revenue management (HRM) has grown over time as a function of
front o˜ce operations to a highly analytical practice based upon dynamic
data-driven decisions. Hotels operate around the clock, and reservations are
made and cancelled at all times of the day for di°erent days often multiple
years into the future. This wide net of data continues to grow and as it grows
revenue management has had to learn how to appropriately record data,
gain new metrics, establish goals, and ultimately critique performance in
order to grow the business
LEARNING OBJECTIVES
Analyze the depth of key performance indicators for revenue management
Apply performance metrics to create and measure the e°ectiveness of a
strategy
Identify opportunities in pace statistics in order to drive market share results
Practice inventory utilization and common yielding strategies
Examine the impact of customer perception on HRM performance
Recognize the emerging metrics for the hospitality industry (cost of
acquisition, digital marketing, and e-commerce)
Evaluate performance utilizing a strategy critique and establish
measurable goals that can be monitored over time
165
OUTLINE
Key Performance Indicators
• Industry Metrics
• Market Share
• Pace Reports Available within Hotel Revenue Management
• Inventory Management
• Emerging Proÿtability Metrics
• Digital Marketing and e-Commerce
Strategy Planning Utilizing Key Performance Indicators

• Strategy Critique
• Establishing Goals
• Monitor and Evaluation over time
KEY PERFORMANCE INDICATORS
In its most basic form, revenue management involves putting “heads in

beds,” or occupying as many rooms as possible. Basic room statistics have
evolved from there and have since established the core three KPIs: occu-
pancy percentage, average daily rate (ADR), and revenue per available room
(RevPAR)
BASIC KPI CALCULATIONS:
Occupancy percentage = sold rooms/available rooms
Average daily rate = total room revenue/total rooms sold
RevPAR = Average daily rate × occupancy percentage
or
RevPAR = Room revenue/available rooms
RevPAR is the relationship between occupancy and ADR, where alone occu-
pancy and ADR both have signiÿcant limitations. A hotel that runs 100 per-
cent occupancy could be giving away its rooms for very little whereas a hotel
Performance Analysis in Hotel Revenue Management  167
with an extremely high ADR could likely be missing out on the opportunity
to sell more inventory.
RevPAR allows hoteliers to balance ADR and occupancy in order to ulti-

mately capture more revenue. Nonetheless, RevPAR is a KPI with its own
limitations as it does not give a holistic picture of a hotels success.
SO WHAT?
What is the point of introducing new metrics? Why should revenue
management professionals expand their data sets?
RevPAR itself measures room revenue alone; hotels encompass much more
than room revenue and expand into areas such as banquets, conferences,
food and beverage, and so on. Scholars have argued that since RevPAR is
an incomplete picture, hotels should instead focus on Total Revenue per
Available Room, or TrevPAR (Dickens, 2006; Lado-Sestayo et al., 2017).
TrevPOR or Total Revenue per Occupied Room came into existence to
understand how much revenue a hotel makes in total. For example, hotels
evaluate groups and take into consideration more than the room rate. A
group that requests sleeping rooms, meeting rooms, and food could poten-
tially bring in more revenue than a group requesting just sleeping rooms.
Despite the advent of TrevPAR, hotels have not widely adopted this metric
and have instead started to gravitate more toward proÿt-driven metrics.
A hotel or business can spend copious amounts of money on labor,

advertising, marketing, guest/consumer satisfaction, and more in order
to drive revenues, but those hotels would gain revenue at the expense of
Proÿt and Proÿt Margin. °erefore, revenue managers and hoteliers have
increasingly moved focus onto Gross Operating Proÿt per Occupied Room
(GOPPOR) or Gross Operating Proÿt per Available Room (GOPPAR). °e
notion of callously growing revenue without any regard for cost is a relic of
the past. Revenue management professionals have to now measure whether
their e˛orts drive revenue while reducing costs.
Market Share
Despite the addition of new metrics, HRM still has a major focus on grow-
ing market share; the hotels performance against deÿned competitors. Mar-
ket share reports are provided by a variety of companies and are the report
card for revenue managers.
While the reports have started to incorporate new KPIs, they still tend to
center around Occupancy Index (Market Penetration Index or MPI), ADR
Index (Average Rate Index or ARI) and RevPAR Index (Revenue Genera-
tion Index). Revenue managers judge their performance against competi-
tors with these reports and then break into further detail in order to see how
they can further shi˝ market share their way.
Occupancy Index (MPI) = Hotel Occupancy Percentage/Competitive

Set Occupancy Percentage
Example: .87/.92 = 95.0%
ADR Index (ARI) = Hotel ADR/Competitive Set ADR
Example: $306.87/$260.62 = 117.7%
RevPAR Index (RGI) = Hotel RevPAR/Competitive Set RevPAR
Example: $267.41 / $239.03 = 111.9%
Percentage Change = [(Current Value−Previous Value)/Previous Value]
× 100
Rank: Where a hotel falls amongst its deÿned competitive set in any
KPI (i.e., 2 of 8 in ADR)
Percentage change is of relevance because hotels are consistently look-

ing to grow share in Occupancy, ADR, and RevPAR. Market share reports
and tools show daily, weekly, monthly, quarterly, and yearly performance
for hotels that subscribe to the third-party service. °e reports o˝en show
segment performance like the hotel’s group occupancy on a particular day
versus the competitive set.
Table 7.1: Shahawk Hotel Market Share Report March 6th 2016–March 12th
2016
Table 7.1 has a signiÿcant amount of data in the form of a market share
report. °e hotel had an occupancy percentage of 87.1 percent and was ât
year over year. Overall, the hotel underperformed in occupancy (87.1 per-
cent versus competitors at 91.8 percent) while also ranking near the bottom
of the competitive set at 3 of 4.
°e hotel in Table 7.1 achieved success in RevPAR Index, but lost occu-
pancy share and ultimately was ranked 3 of 4 in RevPAR. Revenue managers
look both backward and forward at market share to search for alternative
ways to grow occupancy, ADR, and RevPAR more than their competitors.
°e hotel in Table 7.1 should also understand recurring trends; if they are
consistently losing occupancy the revenue manager has to put strategies into
place and articulate to sales and operations the new points of emphasis in
order to gain back lost share.
THINK HISTORICALLY
Data on market share reports today provide signiÿcantly more detail by
segmentation and day of week compared to a sample market share report
from 2002 that only provided summary data. Without the segmentation
or day of week, hotels had to speculate on market share drivers instead of
analyzing data to prepare a strategy plan to improve results.
170

STAR Summary Report - September 2002

Hotel Anywhere 10/24/02
789 East Main Street STR #: 1234 MgtCo: None Operation: Franchise e-star_summary
Owner: None Market: Oakland, Ca
Oakland, CA 95071-4 Chain ID: Total Rooms: 490 Tract: Oakland-Berkeley 1.01
OAK2323
United States
Open Date:
Telephone: (615) 824 198201
Segment Occupancy Average Room RevPar Room Rooms Rooms Occupancy Percent Average Room Rate RevPar Room Rooms Rooms
Percent Rate Revenue Available Sold Revenue Available Sold
% % Chg % Chg % Chg % Chg % Chg % Chg % Chg % Chg % Chg % Chg % Chg
Chg
Monthly Year To Date Performance
Performance
Hotel Anywhere 66.9 17.6 $138.52 1.2 $92.65 19.0 19.8 0.6 18.3 62.2 -13.7 $138.32 -7.0 $86.08 -19.7 -19.0 0.9 -12.9
Market: Oakland, Ca 59.5 -1.2 $89.42 -1.7 $53.20 -2.8 2.6 5.5 4.3 60.5 -12.9 $90.84 -7.9 $54.98 -19.8 -16.4 4.3 -9.2
Market Price Luxury 61.3 11.1 $125.44 -4.6 $76.87 5.8 11.9 5.7 17.3 61.7 -5.2 $127.25 -12.7 $78.47 -17.3 -14.4 3.4 -2.0
Tract: Oakland-Berkeley 62.5 7.8 $104.41 -1.5 $65.28 6.1 11.0 4.6 12.7 60.9 -11.2 $104.50 -7.6 $63.64 -18.0 -13.0 6.1 -5.9
Tract ScaleUpscale Chains 68.3 15.2 $122.23 -3.3 $83.45 11.4 28.8 15.7 33.2 65.3 -6.8 $123.20 -9.8 $80.47 -15.9 -3.4 14.9 7.1
Competitive Competitors 64.0 11.3 $123.75 -3.6 $79.18 7.2 7.2 0.0 11.2 63.0 -11.4 $125.01 -7.2 $78.71 -17.9 -17.9 0.0 -11.5
12 Month Performance Census/Sample - Properties & Rooms
Segment Census Sample Sample %
(Rooms)
Hotel Anywhere 62.4 -15.6 $139.63 -5.1 $87.10 -19.9 -19.1 1.0 -14.8 Properties Rooms Properties Rooms
Hospitality Revenue Management: Concepts and Practices
Market: Oakland, Ca 59.9 -15.8 $90.71 -7.4 $54.37 -21.9 -18.5 4.4 -12.0 Market 213 22795 129 18479 81.1
Market Price Luxury 60.1 -10.2 $128.22 -12.3 $77.11 -21.2 -18.9 2.9 -7.5 Market Price 29 5778 26 5473 94.7
Figure 7.1: Sample STAR Summary Report, Smith Travel Research

Tract: Oakland-Berkeley 60.1 -14.5 $105.03 -5.9 $63.07 -19.6 -13.7 7.2 -8.4 Tract 56 6633 33 5695 85.9
Tract ScaleUpscale Chains 64.5 -9.3 $124.11 -8.9 $80.07 -17.3 -2.6 17.8 6.9 Tract Scale 8 2167 8 2167 100
Competitive Competitors 61.7 -15.2 $126.40 -6.1 $78.00 -20.4 -20.4 0.0 -15.3 Competitive 9 2550 9 2550 100
Set
QUESTIONS:
How can a revenue manager use segmentation data to create a strategy
plan to improve results?
Why is it important to examine performance by day of week?
Aside from overall Occupancy, ADR, and RevPAR, the revenue manager
needs to look at the market share report along with other data to see where
there is room to gain back share and to improve performance. It is common
for a revenue manager to align their mix of sales or market segmentation
with their market share report to see what changes to segmentation could
have been made to improve results.
Table 7.2: Shahawk Hotel Segmentation March 6th 2016–March 12th 2016
March 03/06/16 03/07/16 03/08/16 03/09/16 03/10/16 03/11/16 03/12/16 TOTAL

Sun Mon Tue Wed Thu Fri Sat
Paid Occupied Rooms 145 190 184 185 180 140 195 1219
Available Rooms 200 200 200 200 200 200 200 1400
Paid Occupancy % 72.5% 95.0% 92.0% 92.5% 90.0% 70.0% 97.5% 87.1%
ADR $269.24 $285.84 $355.09 $354.97 $282.00 $283.14 $304.22 $306.9
REVPAR $195.20 $271.55 $326.68 $328.35 $253.80 $198.20 $296.62 $267.2
Rooms Revenue $39,040 $54,310 $65,336 $65,670 $50,760 $39,640 $59,323 $374,079
TRANSIENT
Retail 65 80 90 90 80 80 98
$280.00 $305.00 $379.00 $379.00 $299.00 $299.00 $335.00
$18,200 $24,400 $34,110 $34,110 $23,920 $23,920 $32,830
Business Transient 10 50 60 60 40 5 2
$269.00 $279.00 $349.00 $349.00 $275.00 $265.00 $329.00
$2,690 $13,950 $20,940 $20,940 $11,000 $1,325 $658
Government 10 10 10 10 10 5 5
$289.00 $289.00 $289.00 $289.00 $289.00 $289.00 $289.00
$2,890 $2,890 $2,890 $2,890 $2,890 $1,445 $1,445
Online Travel Agent 40 30 20 20 40 40 85
$249.00 $259.00 $299.00 $299.00 $255.00 $255.00 $269.00
$9,960 $7,770 $5,980 $5,980 $10,200 $10,200 $22,865
Group 20 20 4 5 10 10 5
$265.00 $265.00 $354.00 $350.00 $275.00 $275.00 $305.00
$5,300 $5,300 $1,416 $1,750 $2,750 $2,750 $1,525
Refer to Tables 7.1 and 7.2 to understand the segmentation of the mar-
ket share week where the hotel was ranked 3 of 4 in RevPAR.
What days did the hotel perform well on? What helped the revenue
manager achieve their 117.7% ADR index? What segments could the
hotel have targeted in order to further build occupancy? Which seg-
ments were discounted too much?
°e weekly market share report tells an abbreviated story of how the

hotel did during the entire week. Revenue managers have a depth of mar-
ket share data and can therefore drill down even further to isolate areas of
opportunity within the day, week, month, or year.
Table 7.3: Sample Market Share Analysis Progression
1. Forward Looking Market Share Reports

• Revenue manager adjusts pricing based upon forward looking market share
reports
2. Weekly Market Share Report

• The hotel lost in occupancy index and lost overall RevPAR share for the week
3. Daily Market Share Analysis

• The hotel looks to see what days of the week underperformed in occupancy
4. Daily Market Segment Analysis

• Revenue manager identifes of occupancy, ADR, and revenue opportunity in
the mix of sales.
• Revenue manager communicates opportunities and need for strategies to fll

gaps
Pace Reports Available within HRM
Each revenue manager looks to perform better than last year, at least in mar-
ket share. In a simple scenario, a market growing 3 percent year over year
for a particular month likely means that a hotel’s competitors are growing
3 percent as well. °e hotel therefore must strategize to grow more than 3
percent in order to gain share. Outgrowing competitors or declining less
than competitors is called gaining share. Similarly, if a hotel has lost more
year-over-year than competitors, it would be referred to as having lost share.
Tracking performance versus last year, called pace, is mostly done in

comparison to the same time last year on a day by day, month by month,
and quarter by quarter basis. For example, a hotel pacing behind same time
last year for a month where competitors are expected to grow is a warning
sign that the property may be underperforming in pricing, segmentation, or
a multitude of areas.
Pace data are used in a variety of ways, but mostly via the overall rooms
occupied, ADR, and revenue over a deÿned period of time (OTB) and via seg-
ment pace to understand which segments are performing well and which ones
are underperforming. Each type of pace data can be dissected to a detailed
level of days versus same time last year to weeks, months, and yearly pace.
Table 7.4: Daily Pace versus Same Time Last Year
DOW March 2016 SDOW March 2015 Variances

Date Rooms ADR Revenue Rooms ADR Revenue Rooms ADR Revenue
Sun 03/06 90 $134.00 $12,060.00 85 $150.00 $12,750.00 5 ($16.00) ($690.00)
Mon 03/07 130 $217.00 $28,210.00 105 $200.00 $21,000.00 25 $17.00 $7,210.00
Tue 03/08 120 $295.00 $35,400.00 100 $250.00 $25,000.00 20 $45.00 $10,400.00
Wed 03/09 110 $295.00 $32,450.00 105 $245.00 $25,725.00 5 $50.00 $6,725.00
Thu 03/10 100 $169.00 $16,900.00 135 $169.00 $22,815.00 -35 $0.00 ($5,915.00)
Fri 03/11 120 $159.00 $19,080.00 145 $150.00 $21,750.00 -25 $9.00 ($2,670.00)
Sat 03/12 130 $159.00 $20,670.00 155 $175.00 $27,125.00 -25 ($16.00) ($6,455.00)
800 $205.96 $164,770.00 830 $188.15 $156,165.00 -30 $17.81 $8,605.00
% Pace -3.61% 9.47% 5.51%
Daily pace is o˝en looked at to see how months are performing and
where areas of opportunity lie. In Table 7.4, a revenue manager would be
able to assess that Monday, Tuesday, and Wednesday are all up in Occu-
pancy and ADR to STLY. However, Sunday, °ursday, Friday, and Saturday
are all areas of opportunity. Similarly, this report can be run for a particular
segment and can also be shown to illustrate a month’s performance by seg-
ment (Table 7.5).
Table 7.5: Monthly Segment Pace

Segment Mar-16 Mar-15 Variances
Rooms ADR Revenue Rooms ADR Revenue Rooms ADR Revenue
Retail 2,480 $199.00 $493,520.00 2,790 $179.00 $499,410.00 -310 $20.00 ($5,890.00)
Business 1,240 $189.00 $234,360.00 620 $179.00 $110,980.00 620 $10.00 $123,380.00
Transient
Government 155 $165.00 $25,575.00 310 $165.00 $51,150.00 -155 $0.00 ($25,575.00)
3,875 $194.44 $753,455.00 3,720 $177.83 $661,540.00 155 $16.61 $91,915.00
% P a c e 4.17% 9.34% 13.89%
While pace statistics have been a core of HRM, new business intelli-
gence so˝ware are pushing the boundaries of what revenue managers look
at. Hotels more and more are able to understand how airfare impacts travel,
whether prices will decline as the arrival date approaches, how long the
booking window is for each week, and more.
SEEING FURTHER
Hotel revenue managers use a conjunction of
reports to understand how e°ective pricing
and discounts are in terms of both occupancy
and ADR. A common combination of the evolving technology in HRM
is the surfacing of rate shops combined with forward looking seg-
ment penetration. In the example below rate shops are shown for
retail and qualiÿed segments, or travel associated with a member-
ship discount. The occupancy penetration is also shown for each of
those dates against the Comp Set. Hotels use these tools along with
others to understand how e°ective their retail pricing and discount-
ing has been.
Rate Shops
Date DOW Retail CS Retail Qualifed CS Qualifed
Rate Rate Rate Rate
3/6/2016 Sun $179.00 $169.00 $143.20 $101.40
3/7/2016 Mon $199.00 $189.00 $189.05 $170.10
3/8/2016 Tue $249.00 $229.00 $236.55 $206.10
3/9/2016 Wed $249.00 $229.00 $224.10 $206.10
Forward Looking Segment Penetration

Date DOW Retail CS Retail Retail Qualifed CS Qualifed
Occ Occ Index Occ Qualifed Index
Occ
3/6/2016 Sun 24.00% 35.00% 68.57% 15.00% 25.00% 60.0%
3/7/2016 Mon 29.00% 40.00% 72.50% 12.00% 15.00% 80.0%
3/8/2016 Tue 37.00% 45.00% 82.22% 12.00% 15.00% 80.0%
3/9/2016 Wed 30.00% 42.00% 71.43% 15.00% 15.00% 100.0%
How can this hotel adjust their retail pricing? Their qualiÿed pricing?
Why could it be ok that the hotel isn’t capturing their fair share in retail/
qualiÿed occupancy?
Where does it appear that the hotel is doing well? What other reports
would you want to see in addition to this?
Inventory Management
In order to increase market share and inûence future dates, hotels need to
be able to price and manage their inventory appropriately. Inventory man-
agement encompasses the total hotel inventory and managing inventory
on the segment level. Strong inventory management skills allow hotels to
limit low rated channels during periods of excess demand and the ability
to open the funnel when the hotel would be willing to take more types of
business.
Hotel revenue managers are therefore responsible for controlling

unconstrained demand, or demand that is in excess of the hotels capacity.
See Table 7.6, where the revenue manager had excess demand of 40 rooms
Tuesday and Wednesday. °e challenge comes into play where the revenue
manager must manage the occupancy pattern and rate to maximize revenue
for the week.
°e hotel in Table 7.6 could have had a number of issues that resulted in
not materializing another 10 percent of occupancy on Monday and °ursday
along with the 20 percent occupancy lost for Friday. °e revenue manager
likely sold out too early for Tuesday, Wednesday, and Saturday, resulting in
the inability to sell more rooms on Monday, °ursday, and Friday.
Table 7.6: Unconstrained Demand and Occupancy Losses at Hotel A

Sunday Monday Tuesday Wednesday Thursday Friday Saturday
Available Rooms 200 200 200 200 200 200 200
Occupied Rooms/ 120 160 200 200 160 140 200
Realized Demand
Occupancy % 60.00% 80.00% 100.00% 100.00% 80.00% 70.00% 100.00%
Unconstrained 120 180 240 240 180 180 200
Demand (Room
Nights)
Occupancy % Lost 0.00% 10.00% 0.00% 0.00% 10.00% 20.00% 0.00%
Also, looking back at market share, hotels sometimes cannot make swi˝
changes to their segmentation in order to increase their performance. It
requires creativity and an understanding of inventory management to cap-
ture all unconstrained demand and additional revenue opportunities.
Table 7.7: Inventory Control Methods
Inventory Control Defnition
Open Accepting reservations or free sell
Closed No longer accepting reservations
Minimum length of stay (MLOS) Requiring particular reservations to stay multiple

nights. Mostly requiring the arriving reservation to
stay multiple nights
Maximum length of stay (MXLOS) Restricting the amount of time to a maximum amount
of dates. Mostly requiring the arriving reservation to
stay a maximum amount of nights
Allotment Allocating the maximum number of rooms sold
Closed to arrival (CTA) Not allowing reservations to arrive on a particular

day but allowing reservations on previous days to
stay through
Each of these basic inventory controls comes into play when manag-
ing unconstrained demand, where the same hotel in Table 7.6 could have
more effectively captured occupancy on shoulder dates, or dates the fall
on the sides of peak demand dates. Take for example the following 7
Day Period (Table 7.8) with varying levels of unconstrained demand at
a hotel with the same number of rooms and same amount of uncon-
strained demand.
Table 7.8: Inventory Controls to Control Demand at Hotel B

Sunday Monday Tuesday Wednesda Tyhursday Friday Saturday
Available Rooms 200 200 200 200 200 200 200
Unconstrained Demand 120 180 240 240 180 180 200
(Room Nights)
Inventory Control Open Open MLOS 3 MLOS 2 Open MXLOS MLOS 2

night night 1 night night
Discounts
Additional Inventory 80 room 20 room 0 room 0 room 20 room 20 room 0 room
Control discount discount discount discount discount discount discount
allotment allotment allotment allotment allotment allotment allotment
Sunday Monday Tuesday Wednesda Tyhursday Friday Saturday

Available Rooms 200 200 200 200 200 200 200
(Room Nights)
Inventory Control Open Open MLOS 3 MLOS 2 Open MXLOS MLOS 2

night night 1 night night
Discounts
Additional Inventory 80 room 20 room 0 room 0 room 20 room 20 room 0 room
Control discount discount discount discount discount discount discount
allotment allotment allotment allotment allotment allotment allotment
°e revenue manager applied minimum lengths of stay on the entire day

for Tuesday, Wednesday, and Saturday. °e purpose of applying a minimum
length of stay to peak demand dates is to make sure that the full amount of
demand is captured on shoulder dates. To more precisely target days where
there is lesser unconstrained demand, the hotel set an allotment on discount
segments in hopes of realizing as much demand as possible. Similarly, excess
demand Tuesday, Wednesday, and Saturday prompted the hotel to not allow
any discount reservations therefore protecting higher rated reservations.
Despite these inventory controls, one can argue that the hotel is turning
away high rated business on Tuesday, Wednesday, and Saturday by not o˛er-
ing one night rates. Many hotels therefore o˛er discounts based upon length
of stay. For example, a hotel can o˛er a discounted rate for any set of nights
it desires in order to allow discounts over so˝ dates and then only o˛er pre-
mium rates touching peak demand dates Table 7.9.
Table 7.9: Length of Stay Pricing to Manage Demand
Sunday Monday Tuesday Wednesday Thursday Friday Saturday

Available Rooms 200 200 200 200 200 200 200
(Room Nights)
Premium Rate 1234567 1234567 1234567 1234567 1234567 1234567 1234567
Discount Rate 1267 14567 34567 34567 124567 134567 234567
To take advantage of unconstrained demand requires utilizing pricing

power, restrictions, and an in-depth knowledge of segmentation.
However, execution of basic inventory management also includes the

necessity of understanding group inventory and short-term inventory can-
cellations, no-shows, and early departures. Revenue managers are responsi-
ble for understanding that a group that contracts 30 rooms will likely only
occupy 10, and they should therefore forecast to sell 20 more rooms that
what the group would be holding.
As a revenue manager, how would you know how to forecast how
many rooms a group will utilize?
What are the implications of over-forecasting how much a group will
pick up?
What are the implications of under-forecasting how much a group will
pick up?
On a day where demand is high, leaving 1 room empty can be very costly
as the ability to sell a room at a high price is gone as a new date rolls in. Hote-
liers must gain a thorough understanding of cancellation, early departure,
and no show history to understand how much to oversell by, or how far to
set their overbooking limit (Phumchusri & Maneesophon, 2014). For exam-
ple, see Table 7.10, a hotel that averages a $300 ADR for all Tuesdays and
Wednesdays in the year and each Tuesday/Wednesday has more demand
than hotel capacity.
Table 7.10: A Case for Overbooking (Assuming no Show Reservations are at the ADR for
the Day)
Hotel Rooms available 200
Tuesdays and Wednesdays in 2016 104
Total rooms sold 20,800
Tuesday/Wednesday ADR 300
Total revenue with zero overbooking $6,240,000.00
Additional rooms sold @ 5 overbooking 520

Additional revenue from overbooking $156,000.00
Total revenue with 5 overbooking $6,396,000.00
When a hotel takes an aggressive stance on overbooking it can see imme-

diate gains in revenue, in this example a gain of 2.5 percent or $156,000!

Assume the hotel only gets the opportunity to overbook
rooms for each Tuesday, Wednesday, and Saturday of May
2016 and that each day of week is consistent in terms of
Occupancy, ADR, and Revenue.
With No Show ADR equal to the ADR of the Day:

With a ÿve room overbooking limit on Tuesday, Wednesday, and Satur-
day, how much more revenue would the hotel gain in no shows for the
month of May 2016 versus no overbooking limit (assuming that each
room overbooked yields a paid no-show)?
What would the hotels new ADR for the month of May be?
What are the added beneÿts of overbooking beyond no-show rev-
enue?
How can setting the overbooking limit too high be detrimental to
the hotel’s success?
May 05/01/16 05/02/16 05/03/16 05/04/16 05/05/16 05/06/16 05/07/16 TOTAL

Paid Occupied 145 190 200 200 180 140 200 1255
Rooms
200 200 200 200 200 200 200 1400
Available Rooms
72.5% 95.0% 100.0% 100.0% 90.0% 70.0% 100.0% 89.6%
Paid Occupancy %
$269.24 $285.84 $357.00 $356.78 $282.00 $283.14 $304.99 $308.8
ADR
$195.20 $271.55 $357.00 $356.78 $253.80 $198.20 $304.99 $276.8
REVPAR
$39,040 $54,310 $71,400 $71,355 $50,760 $39,640 $60,998 $387,503
Rooms Revenue
May 05/01/16 05/02/16 05/03/16 05/04/16 05/05/16 05/06/16 05/07/16 TOTAL

Paid Occupied 145 190 200 200 180 140 200 1255
Rooms
200 200 200 200 200 200 200 1400
Available Rooms
72.5% 95.0% 100.0% 100.0% 90.0% 70.0% 100.0% 89.6%
Paid Occupancy %
$269.24 $285.84 $357.00 $356.78 $282.00 $283.14 $304.99 $308.8
ADR
$195.20 $271.55 $357.00 $356.78 $253.80 $198.20 $304.99 $276.8
REVPAR
$39,040 $54,310 $71,400 $71,355 $50,760 $39,640 $60,998 $387,503
Rooms Revenue
Emerging Proftability Metrics
While market share speaks to a revenue manager’s effectiveness against

competitors, a revenue manger must remain focused on cost effective
ways to drive revenue in addition to increasing profitability. To effec-
tively measure Gross Operating Profit per Available Room (GOPPAR)
revenue managers must understand the major components of cost that
diminishes house profit. Traditional operating costs include guest ser-
vices: labor, food and beverage outlets; room product: amenities, linen,
laundry; administration and general: utilities, insurance. Beyond these
traditional operation costs, revenue managers continue to become more
sophisticated in managing profitability by managing cost of acquisition,
the cost of acquiring the revenue through distribution, marketing and
commission fees.
Distribution fees: costs incurred during the reservation process.

Example: A travel agent makes a reservation in utilizing the Global Dis-
tribution System (GDS). This incurs a GDS pass through fee that is paid
to the GDS company. That reservation is then delivered to the Central
Reservation System (CRS) which may incur a transaction fee with the
CRS company for receiving a new booking. In this case, there are two
layers of fees: (1) GDS (2) CRS transaction.
Marketing fees: The cost of a marketing campaign or a˜liation that
generated the reservation.
Example: Digital pay-per-click banner ad on a website that costs $1.50
per click.
Commission fees: a predetermined fee paid to an agent or business for
completing a reservation booking.
Example: American Automobile Association (AAA) charges 10% of actu-
alized room revenue post guest stay from bookings made by AAA dis-
tribution channels that includes travel agents, call center, or website.
Distribution fees: costs associated with the reservation transaction.
°e cost of acquisition has quickly become a critical topic for the hospi-
tality industry as these costs on an industry average are growing faster than
revenue growth. Between 2009 and 2012, total customer acquisition costs
increased 23 percent, brand allocation fees increased 37 percent, and third-
party commission fees increased 34 percent (HTrends, 2013). Cost of acqui-
sition is changing how hotels are deploying their direct sales, marketing and
distribution strategies in order to yield maximize proÿt.
PROS & CONS

Group segment business can be extremely costly when
you factor in the labor (group sales director, managers,
and coordinators) and administration (legal contract review, billing, reser-
vations) in order to acquire group business. There are hotel companies that
purposely select to forgo the group segment and save on the costs of labor
and administration. Do you think the cost savings outweighs the risks of
not deploying direct sales e°orts to book group? Why?
Hotel Saint Petersburg has an in-house reservation sta° of ÿve agents
that costs $250,000 per year in wages and beneÿts. The hotel averages
82,000 voice bookings a year. Hotel Saint Petersburg is considering
eliminating the in-house operations department and outsource call-in
reservations to a third-party company that charges $3.00 per reserva-
tion transaction.
Do you recommend Hotel Saint Petersburg to eliminate the in-house
reservation department and outsource to a third-party?
What is di°erence in annual cost to keep the reservation in-house
instead of a third-party company?
What is the impact on conversion rate and guest experience by mov-
ing reservation to a third-party company?

Calculate the Mix % of Transaction Volume for each channel
as a percentage of the total.
Calculate RevPAR for each Channel for the 550 room hotel
in a 365-day year.
Calculate the Net RevPAR—Distribution Costs.
Which Channel yields the highest Net RevPAR?
Note: Your instructor will provide the expanded version of the table
illustrated below for calculation.
Channel Transactions Mix % Room ADR Revenue RevPAR Net RevPAR-

Nights Distribution
Costs
GDS 30,000 42,000 $250.00 $10,500,000
Website 50,000 70,000 $280.00 $19,600,000
Call Center 15,000 21,000 $300.00 $6,300,000
OTA 10,000 14,000 $240.00 $3,360,000
Property Direct 25,000 35,000 $260.00 $9,100,000
Total 130,000 100% 182,000 $268.46 $48,860,000 $243.39
QUESTIONS
1. Does the highest ADR channel always yield the highest Net RevPAR?
2. What channel mix changes can the hotel execute to increase Net
RevPAR?
3. How does Net RevPAR change if the hotel decides to take zero
Property Direct reservations?
Digital Marketing and e-Commerce
HRM has begun its transition from simple room and ADR calculations to
understanding how o˝en hotel websites are visited, how well a hotel con-
verts clicks to reservations, and overall how well the hotel does in the e-com-
merce landscape. Digital and e-commerce are integral to moving business
from less proÿtable channels to more proÿtable channels.
In e-commerce, it is well known that ranking at the top of a search engine

results in more visibility and in more website visits. Similarly, hotels ranked
at the top of OTA search results receive, on average, 2.39 times more clicks
than those compared with hotels ranked second and 3.42 times more than
those ranked third (Ghose et al., 2014). Clicks result in more website visits
which in turn result in more reservations and revenue. A hotel with poor
visibility will automatically su˛er in terms of clicks, visits, and ultimately
reservations.
Aside from rank order and the page the hotel falls on, information about
the hotel such as the picture, price, hotel class, rating, and review count all
play a major role in a hotel that receives a click, or a conversion, where the
consumer has completed the payment in the online session (Ghose et al.,
2014).
°e concept of conversion rates and click through rates (CTR) are

integral in understanding whether marketing initiatives, guest satisfaction,
rank, and pricing are e˛ective.
BASIC HOTEL WEB ANALYTICS

Conversion Rate = Bookings/Visits
Click Through Rate (CTR) = Clicks/Impressions
Cost Per Click (CPC) = Total Ad Cost/Clicks
A hotel with a low CTR means that very few consumers are clicking the
hotel despite the hotel accumulating impressions, or times that hotel has
been shown. Likewise, a hotel with a low conversion rate is a hotel that is
o˝en clicked but does not convert well. For luxury hotels, a drop from the
number one rank to the number ÿve rank leads has shown to lead to a 75
percent decline in CTR (Ghose et al., 2014).
REAL PEOPLE
Mika Nayak (name has been protected) works at a

management company in New York City that han-
dles both branded and independent hotels ranging
from 2 to 5 stars. Mika o˝en notices on reports
that many hotels of the same star rating and brand have vastly di˛erent
click through rates.
• Aside from rank, what are some reasons a hotel would have a low click
through rate?
• What are some reasons a hotel would have a low conversion rate?
°e rise of the Internet has increased accessibility to large amounts of

data, with analytics rapidly moving toward its interpretation and practical
use. However, the inûx of excessive information has been found as imprac-
tical and unusable as a source of competent decision making, where addi-
tional data points do not directly relate with a better mathematical answer.
Industry trends are moving away from this earlier idea of Big Data analytics,
toward more practical approaches with comprehensive models (McGuire,
2017).
Strategy Planning Utilizing Key Performance Indicators
Strategy planning requires key performance indicators to determine the

e˛ectiveness of the strategy plan to validate the strategy is yielding the
intended result. Now that we have established the common performance
indicators in revenue management we can apply performance analysis tech-
niques to evaluate strategy e˛ectiveness.
Strategy Critique
°e Strategy Critique is a tool to document a strategy with an intended

result for a deÿned period of time to evaluate the e˛ective of the strategy by
using key performance indicators for revenue management established in
this chapter (Occ, ADR, RevPAR, and market share indices). Documenting
the strategies allows for evaluation over time to track key performance indi-
cators are trending favorably or unfavorably to the goal.
Results Market ADR Occ Strategy to Drive Comments

Segment Focus Focus Performance
Booked 50 RNs ALL x x Pre-Stay Launched
$12.5K Rev from Messaging -50% 01/01/16
Emails YTD Q1 2016. discount on Premium
Resulted in 0.3% upgrade cost
RevPAR Index growth.
Increased upsell ALL x Room Upsell: FD Generated $47K
revenue by 20% vs Agent incentive, in FY 2015.
Same Time Last Year. Select standard room 10% off early
Resulted in 0.15% bookings with high depature or late
RevPAR Index ADR to entice them to check out, 10%
of any
Increased sell-out ALL x x Walk in Incentive: Generated
effciency to 99% FD Agent incentive $363K in FY
fro 98% vs STLY. to sell walkins— 2012 Agents
Occupancy Index help secure +95% receive 10% of
increased by 0.4% Occupancy any walk-in (frst
night
Booked 80 RNs $18K Package X Corner room package New offer.
Rev YTD Q1 2016. loaded, open over Launched
Resulted in 0.4% weekends Corner 01/01/16
RevPAR Index growth. room at the price of a
standard
Establishing Goals
In any organization strategic objectives are set in which goals are based
upon. Revenue management professionals must understand their hotels and
therefore understand realistic goals and expectations that the team can be
uniÿed around. Setting goals typically revolves around a budget; where a
hotel should be accurately assessed in terms of revenue potential, market
penetration capabilities, mix of business, and more.
°e process at arriving at a hotels goals starts with understanding

competitors, the strategic advantages and disadvantages of the hotel, the
previous results, and intentions for the upcoming period. Hotel Revenue
managers set goals for their optimal mix of sales, forecast accuracy, market
share, channel mix, and more.
Monitor and Evaluate Over Time
°e process of establishing goals and key metrics is immediately followed by

monitoring and evaluating the goals over time. In Table 7.11 see that each
goal has corresponding processes for evaluation; hotels set their targets for
market share, if goals are not met, market share reports need to be analyzed
in conjunction with pricing levels, segmentation, inventory management,
and the sales process in order to regain the targeted market share.
TABLE 7.11: Monitoring Process of Goals

°e aforementioned goals are concrete that are written and established;

however, goals can exist in many forms. Some hoteliers set targeted discount
percentages, website contribution percentages, segment contributions, com-
mission levels, and more. Revenue managers must therefore maintain a del-
icate balance of achieving each goal but most of all creating operating proÿt
for the hotel.
Question 1: What are some issues with market share reports?
How can a hotel read a market share report and incorrectly claim
success or declare failure?
Question 2: What kind of reporting do you think would be useful to hotel revenue
managers in the future?
Question 3: How would you measure unconstrained demand using technology and
the Internet?
Question 4: If a hotel has more demand than supply for a given time frame, what
pricing strategies can be considered to increase proÿts?
APPLICATIONS
Case 1:
°e hotel below was able to acquire data on their display

marketing initiatives and total website production.
Display Marketing Totals
Impressions 71,420 Bookings 400

Clicks 110 Property Visits 6,200
Click through Rate (CTR) x Conversion Rate z
Spend $100
Cost per Click (CPC) y
Revenue Booked $2,550
Bookings 17
1. Solve for x, y, and z

2. Based upon this data, is it worthwhile for the hotel to increase the
amount spent on display marketing? Why?
Case 2:
You are a member of a hotel development group that is underwriting °e
CDB Hotel, a new-build luxury ÿve-star hotel with 300 all-suite guest room
with 525 sq. ˝. average. °is hotel is the only all-suite hotel in the luxury
segment with the competitive set guest room 350 sq. ˝. average. As a result
of the new-build guest rooms with a signiÿcant size and ÿnish premium to
the competitive set, °e CDB Hotel is expected to yield a 130 ADR Index in
Year 1 compared to the ÿve existing luxury hotels in the market.
What is the projected ADR for °e CDB Hotel if the comp set is pro-
jected to grow ADR by 4.5 percent in Year 1?
Assume that Occupancy Index is 100, what is the RevPAR Index for °e
CDB Hotel if Occupancy for the comp set stays ât in Year 1?
Comp Set Actual ÿgures for previous year: 88.0 percent Occupancy,
$503.13 ADR, $442.75 RevPAR.
TEAM ACTIVITY
Using data to improve results is a critical skill for revenue managers.
Review the following Pace table that indicates Retail and Govern-
ment segment is behind same period last year that is resulting in
unfavorable pace by $31.5K.
Questions:
How can the hotel improve pace in Retail and Government segments?
What other ways can the hotel improve revenue pace?

Table 7.12: Sample Pace Table
Segment Mar–16 Mar–15 Variances
Rooms ADR Revenue Rooms ADR Revenue Rooms ADR Revenue
Retail 2,480 $199.00 $493,520.00 2,790 $179.00 $499,410.00 -310 $20.00 ($5,890.00)
Business 1,240 $189.00 $234,360.00 620 $179.00 $110,980.00 620 $10.00 $123,380.00
Transient
Government 155 $165.00 $25,575.00 310 $165.00 $51,150.00 -155 $0.00 ($25,575.00)
3,875 $194.44 $753,455.00 3,720 $177.83 $661,540.00 155 $16.61 $91,915.00
% Pace 4.17% 9.34% 13.89%
INTERNET ACTIVITY
New Year’s Eve in the Times Square neighborhood of New York,

NY is one of the best examples of unconstrained demand for a
single night. Many Times Square hotels put a minimum length
of stay restriction to yield longer length of stay on shoulder dates
to maximize RevPAR. In addition to length of stay restrictions, hotels can
enforce prepaid or nonrefundable policies to maximize the high uncon-
strained demand. For this activity, pick a large national chain hotel in Times
Square, New York. Shops for rates and availability for New Year’s Eve for
one-night length of stay.
Questions:
1. Does the hotel allow one-night length of stay? If not, does the web-
site tell you the minimum length of stay or alternative dates you can
stay?
2. Is there a special cancellation, prepaid or nonrefundable policy?
3. If you project high unconstrained demand of 130 percent of the
hotel’s sellable inventory for New Year’s Eve, but project 80 percent
occupancy on the pre and post shoulder dates, what yielding tactics
can you implement to maximize RevPAR?
INTERNET ACTIVITY 2
Find ÿve di˛erent revenue management tools and services with di˛erent
purposes to help revenue managers understand past and future perfor-
mance. Which do you think are the best? What tools or services were you
unable to ÿnd and how would those new tools help revenue managers?
GLOSSARY
Click – when a consumer clicks on a link.
Click through rate (CTR) – percentage of clicks on a link or
advertisement out of the amount of times the link or
advertisement was shown.
Cost of acquisition – fees, commissions, and expenses attributed to each

Conversion – when a consumer has completed the payment in an online
session.
Conversion rate – percentage of visits that resulted in bookings.
Impressions – the amount of times an ad or link has been shown.
Mix of sales/market segmentation – how revenue managers and market-
ers classify and target customers in speciÿc groups based upon their
characteristics, behaviors, and preferences.
Pace – tracking performance versus a previous period, mostly done to com-
pare to the same moment in time as last year. For example, how many
rooms were sold at this point last year for the upcoming month ver-
sus how many are sold today for the upcoming month?
Proÿt margin – percentage of proÿt out of total revenue.
Total revenue per available room (TrevPAR) – total revenue that a hotel
accumulates coming from rooms, F&B, and all other outlets per each
available room in the hotel.
Total revenue per occupied room (TrevPOR) – total revenue that a hotel
accumulates coming from all outlets per the occupied rooms in the
hotel.
Qualiÿed segment – a segment that requires some type of membership
identiÿcation in order to qualify to receive the discount.
Shoulder dates – dates that fall on the sides of peak demand dates.
Visit – a visit is when a consumer accesses and has an interaction with a
website.
REFERENCES
Dickens, M. (2006, June 15). Benchmarking Bugbears. Caterer & Hotelkeeper, 196
(4429), 22.
Ghose, A., Ipeirotis, P. G., & Li, B. (2014). Examining the Impact of Ranking on
Consumer Behavior and Search Engine Revenue. Management Science, 60
(7), 1632–1654.
HTrends. Com (2014, August 20). Hama Study Documents Growing Acquisition
Costs Outpacing Hotel Revenue Growth. Retrieved from https://www.htrends.
com/trends-detail-sid-79384.html
Lado-Sestayo, R., Vivel-Búa, M. & Otero-González, L. (2017). Determinants of
TRevPAR: Hotel, Management and Tourist Destination. International Journal
of Contemporary Hospitality Management, 29 (12), 3138–3156.
Lindt, M. (2006, August 17). RevPAR Needs an Overhaul. Caterer and Hotelkeeper,
196 (4438), 16.
McGuire, K. A. (2017). ˜e Analytic Hospitality Executive: Implementing Data Ana-
lytics in Hotels and Casinos. Hoboken, NJ: Wiley.
Phumchusri, N. & Maneesophon, P. (2014). Optimal Overbooking Decision for
Hotel Rooms Revenue Management. Journal of Hospitality and Tourism Tech-
nology, 5 (3), 261–277.
CHAPTER 8
Market Data for Hotel

Revenue Management
Calvin Anderson, Elyana Falk, and Nicholas Catalfamo
OVERVIEW
Of the many contributing elements to a successful revenue strategy,
there is no single factor more important than market data. This is
because the industry standard for measuring top line success is Revenue
per Available Room (RevPAR) index or revenue per available room as
compared to the average of your nearest competitors. In many instances,
the RevPAR index contest is similar to a NASCAR race. Both scenarios
function in a series of constants: a race car encounters the same turns
as it speeds around the circular track just as the market brings similar
highs and lows year after year. Just as such permanencies exist in our
analogy, so do certain variables: those being external conditions and
competitor position. In a race, external conditions such as temperature,
humidity, and precipitation can dramatically impact speed and traction.
Similarly, in navigating revenue strategy, external conditions such as
customer reviews, weather patterns, and airline flight volume can both
accelerate or decelerate pace to prior year. The final external variable,
and perhaps most important, is competitor position. Visibility into
competitor positioning allows one to measure market elasticity on a far
broader scope than what would be possible individually. Such a vantage
point is key because it is impossible to perfectly navigate the future
markets based merely on one’s running pace and prior year trends alone.
Competitor pace not only signals unusual opportunity to compress
rates and restrict yielding, but also serves as a preliminary warning to
a variance in prior year trends that ultimately will demand a change in
strategy. In many ways, a revenue strategy without market data is much
like racing a car with no windows—if you cannot see the competitors
next to you, you are likely to have an accident.
193
LEARNING OBJECTIVES
Di˜erentiate between the two design purposes of data modeling: reporting
and analysis
Recognize the pitfalls of utilizing only internal pace data and trends
Interpret historic competitive set benchmarking data to explain hotel perfor-
mance
Source forward-looking market benchmarking intelligence to derive sound
revenue strategy
Appreciate the consumer’s growing level of market visibility through tech-
nology and its impact on artiÿcial rate elasticity
Identify the broad array of alternative market data that can and will be used
to improve hotel revenue pricing, yielding and digital marketing eõrts
Communicate data as a story according to your audience
OUTLINE
Introduction
Two Purposes of Data: Reporting and Analysis

• Modeling Internal Booking Data
• ˜e Four Booking Pace Quadrants
• ˜e Four Lenses of Segmentation
Benchmarking Performances as an Industry Standard

• Standards of Benchmarking
• Forward-Looking Benchmarking Data
• OTA Market Data
• Pricing Market Data
Non-Traditional Market Data

• Consumer Sentiment Converted into Data
• Air Tra°c
Market Data for Hotel Revenue Management  195
• Tracking Website Regrets and Denials ˜rough Custom Tags
The Future of Market Analytics

• Speaking to Data
INTRODUCTION
Revenue management exists nowhere more prominently than in a busi-

ness where both supply is static, ÿxed costs are high, variable costs are
low, and demand for goods sold is elastic. No surprise, hotels become the
perfect candidate for this function as neither a hotel’s rooms can be sud-
denly grown to accommodate short-term demand surges nor can they be
reduced to minimize static expenses such as a mortgage or maintenance
when occupancies are low. As a result, the most successful business strat-
egies in the hotel space center is ÿlling as many rooms as possible each
day at the maximum price the market will bear. If demand is less than the
available number of rooms at a given property, pricing will likely drop in
order to garner the additional bookings needed to cover business costs. An
optimized revenue strategy can o˝en keep a full workforce employed over
short downturns to be sure the property is able to quickly turn and service
a sold-out hotel when demand resumes. As demand increases, rates ought
to increase in parallel to obtain the highest rates customers are willing to
pay. While the concept is simple, successfully selling a hotel at the most
optimal combination of occupancy and rate requires tremendous insight
into market demand trends, guest preferences, and price elasticity. ˜e
combined understanding of these elements creates sound revenue strat-
egy that will consistently yield growth and improved market share. In this
chapter, we will further review the importance of market data, discover
industry best practices for both measuring and optimizing demand, and
ÿnally explore what the future holds for predictive analytics as technology
advances our capabilities.
SO WHAT?
Revenue management has been one of the most powerful resources
within the airline, car rental, and hotel industry since the 80s due to
their high ÿxed costs and low variable costs, but are these the only
candidates that could beneÿt from revenue management? If not,
what other industries could adopt the principles of revenue manage-
ment and what sort of market intelligence would they need in order
to be successful?
TWO PURPOSES OF DATA: REPORTING AND ANALYSIS
Before digging into the many modeling formats of market data, it is import-
ant to note that data is commonly structured to solve one of two primary
purposes: reporting or analysis. In the context of this chapter, reporting will
be understood to mean data that is rolled up into a series of metrics to con-
vey a performance trend. Reporting is commonly used in a corporate infra-
structure to measure the health of the business and create informational
awareness. Because reporting is typically macro in nature, its primary func-
tion is to alert as opposed to divulging detailed causation. By contrast, data
formatted to derive analysis is designed to o˙er the user micro-insights that
can be directly leveraged to impact change or relay attribution. Analysis is
action-oriented and compliments the work of the practitioner. While both
reporting and analysis-based models can overlap at times, appropriately
navigating the design purpose of a data model will expedite the delivery of
a desired outcome. Monthly aggregate data o˝en “reports up” to alert the
user of broader trend that will need to be “analyzed down” to solve or opti-
mize. Both models are required to successfully optimize a business. Most
traditional data models relay business intelligence with the primary purpose
of reporting. If a reporting model exists alone, the practitioners can be le˝
guessing at potential solutions for lack of concrete proof of causation; this
meaning that one may understand a trend to exists, but is ill-equipped to
derive how said trend came to be. As access to “big data” has grown, so have
analytical data models, greatly empowering the work of the practitioner.
Modeling Internal Booking Data
In the 80s, while revenue management was introduced to airlines, the hotel
industry was starting to realize the importance of segmenting their busi-
ness. No longer was a room just a room; it was a booking sold to a leisure
guest, a corporate traveler, or a large group of which each category had dis-
tinct buying behaviors. As it became apparent that the behaviors of each
customer segment were predictable, hoteliers utilized ÿnancial engineering
to create a series of top line reports to track internal trends and the behav-
ior within each customer segment to better predict future behaviors. Most
internal booking data falls into one of four quadrants related to booking
pace: monthly pace, monthly pickup pace, daily pace, and daily pickup pace
as illustrated below.
Table 8.1: Four Booking Pace Quadrants.
Source: Provided by Calvin Anderson.
• Monthly Pace: Net bookings and cancellations committed currently for a

given stay month as compared to the net bookings and cancellations com-
mitted same day (by numbered date) prior year.
• Monthly Pickup Pace: Net bookings and cancellations committed within

a set booking period (i.e., last 7 days) for a given stay month as compared
to the same net bookings and cancellations that occurred over the same
booking dates (by day of week) prior year.
• Daily Pace: Net bookings and cancellations committed currently for a

given stay date as compared to the net bookings and cancellations com-
mitted same day (by numbered date) prior year.
• Daily Pickup Pace: Net bookings and cancellations committed within a set
booking period (i.e., last 7 days) for a given stay date as compared to the
same net bookings and cancellations that occurred over the same booking
dates (by day of week) prior year.
˜e four booking pace quadrants all represent booking data ÿltered

di˙erently by stay period and booking period with the intent of answering
two important questions for a subject stay month or date. On the books
pace answers: “How am I positioned versus the same time last year?” while
pickup pace answers: “Am I making my current position better or worse
versus the same time last year?” On the books pace relays a roll up of all
bookings to date versus all bookings at the same time prior year. Because on
the books pace is a bi-product of all actualized booking periods, the rooms
and average daily rate (ADR) achieved are not necessarily indicative of what
the market will bear currently. ˜us, it is important to contrast on the books
pace with pickup pace to gauge customer response to the current pricing
and distribution strategy. In periods of compression, market conditions are
apparent through lower purchasing resistance to higher prices. By contrast,
if a market is decompressing, reservations will trend fewer until pricing is
lowered and matches the markets willingness to pay. In order to continu-
ally improve booking position, a strategist should shape his or her pricing
strategy to current market conditions which are best noted in pickup pace
as opposed to on the books pace. While all four quadrants are insightful,
monthly on the books pace tailors toward a rolled-up reporting model and
monthly pickup pace, daily on the books pace, and daily pickup pace serve a
more actionable analytics-based purpose.
Within the measures of the four booking pace quadrants lie multiple
dimensions that the hotel property management system (PMS) commonly
attributes to each reservation. ˜ese dimensions typically include a market
segment which is linked to the segmentation found on the hotel proÿt and
lost statement (P&L), the booking channel or source, the room type booked,
the guests assigned to each reservation, and many more. With these dimen-
sions in mind, a revenue strategist can begin to view each of the booking
pace quadrants through a di˙erent perspective in order to more fully under-
stand a hotel’s booking behavior through the lens of each unique dimension.
˜ere are four key lenses that a strategist should seek to understand internal
booking through: the channel or source from whence the booking came, the
cost of acquiring the booking, the demand elements surrounding the prod-
uct type sold, and the booking path or patterns taken prior to transacting.
Table 8.2: Four Lenses of Segmentation.
Source: Provided by Calvin Anderson.
• Channel/Source: ˜e platform or engine responsible for delivering a

booking transaction. ˜is could range from the hotel/brand call center, the
hotel website, an online travel agency (OTA), a global distribution service
(GDS), or the internal hotel sales team.
• Cost of Acquisition: ˜e fees, commissions, and expenses attributed to

each booking from third party distributors or internal payroll including
GDS commissions, OTA commissions, direct marketing expenses, and all
customer acquisition payroll.
• Product Type: Deÿned narrowly as the room type, package element, or

booking policy attached to the reservation or more broadly as the length of
stay or lead time dimension. ˜is meaning, that a product can be deÿned
both by the physical attributes, such a premium room type or package ele-
ment, just as much as it can be considered an accommodation available for

purchase at the very last minute in a compressed market.
• Purchasing Behavior: Common purchasing patterns found within a given

group of bookers including price sensitivity, responsiveness to various
types of advertisement, propensity to cancel, and customer loyalty.
˜e four lenses of segmentation are not singular dimensions in them-

selves as much they are perspectives to guide the analytical mind as its
review of the physical booking attributes tracked by the PMS. And just as
one lens may have multiple applicable dimensions, one dimension can speak
to many lenses as well. For example, a booking channel such as a wholesaler
may exhibit a common booking behavior with one commission model (cost
of attribution). Where by contrast, a brand website could deliver bookings
through multiple channels (mobile, web, and app platforms) o˙ering various
product types to a series of buying behaviors (i.e., advanced purchase versus
last-minute). With the four booking pace quadrants analyzed through the
four lenses of segmentation (using booking dimensions), internal booking
data is the ingredient to making a broad array of essential reporting models
that span from simple to complex. ˜e daily booking curve below illustrates
the running total of segmented pickup day-over-day shedding light on how
and when each segment came to be. In analyzing the daily pickup, one is able
to understand where to dynamically yield booking restrictions in order to
create balanced stay patterns as well as price according to internal demand
directly a˙ecting the property.
Figure 8.1: Booking Curve

Author generated booking curve of a 500-room hotel showing internal

buildup of bookings into day of arrival.
Referencing the above graph, which market segment has the longest
booking window? By contrast, which has the shortest window?
While the importance of internal booking data cannot be overestimated,

fundamentally, there is an Achilles’ heel: internal booking data is isolated
to one property within a broader market. If prior year performance is poor
compared to the rest of the market while the hotel is experiencing growth
toward the competition’s current year’s median, then an isolated viewpoint
might conclude that year-over-year (YOY) growth was highly optimized. ˜e
truth, in this case, would be that the property performed at a sub-par level
one out of two years. ˜is one-dimensional viewpoint can result in consis-
tent underachievement to what the market can deliver year-upon-year. In the
same vain, if a market is in recession and the subject hotel understandably
declines to prior year, it could be falsely concluded that revenue strategy was
poorly executed when, in fact, all competitors lost revenues due to downward
market conditions. While internal growth may have been the most important
metrics years ago when hotel ownership was private, today’s publically traded
companies are deemed successful relative to market conditions represented
by aggregate competitive data. ˜us, exclusive use of internal booking data
is no longer su°cient to consistently outmaneuver the market and thus data
that provides visibility into the broader market is required. ˜e goal of reve-
nue a revenue strategist has, thus, transformed from achieving year-over-year
growth to the pursuit of holding a premium revenue index to the aggregate of
one’s competitors whether that amount is more or less than prior year.
REAL PEOPLE
Jane Henderson*, is the brand new Director of

Revenue Management at a four-star hotel in Mid-
town Manhattan and she has just attended her ÿrst
budget meeting. ˜e new owners have asked Jane
to grow the property’s RevPAR 10 percent in the coming year.
Jane feels this is very high compared to the projected market growth for
Midtown Manhattan, which is only expected to increase by 4 percent. Is it
possible that the expectations for Jane’s hotel are, in fact, fair and logical?
If so, what logic would you use to explain to Jane how it is possible that
her goals are set so much higher than most of her competitors?
*Name has been concealed.
Unpacking Big Data

Internal booking data can hold the secrets too many impact-
ful booking behaviors and trends that a revenue manager
would beneÿt from knowing. Most property management systems
(PMS) can export raw booking data into an Excel format, but gaining
insight out of such data is not automatic. Thus, it is important to be able
to format data in order to unlock booking behaviors and trends which
could lead to more informed revenue strategy decision making.
Open the attached booking data extract for a boutique hotel in mid-
town Manhattan for the month of October and use Microsoft Excel
functionalities (i.e., pivot tables and v-look ups) to build a presenta-
tion-worthy dashboard illustrating average customer lengths of stays,
booking lead times, day-of-week patterns and room type preferences.
In your observation of the data, determine two additional elements
that might be useful to note and display the observed trends alongside
the above list.
BENCHMARKING PERFORMANCE AS AN INDUSTRY

STANDARD
With the rapid commercialization of the hotel industry and the rise of major
brands, the need to benchmark competitive performance became unde-
niable. In the mid-1980’s, a company called Smith Travel Research Global
(STR) answered this need and remains one of the industry’s top resources for
historic performance benchmarking. STR provides micro-economic envi-
ronmental scans o˙ering aggregate benchmarking performance metrics of

self-selected competitors. By aggregating the data, STR provides context to
the ups and downs of the market without revealing conÿdential competitor
performance. Jan Freitag, Senior Vice President, Lodging Insights, STR, Inc.,
notes that while STR is not the only company to aggregate competitive data
(there are regional competitors), STR remains one of few GLOBAL bench
markers (J. Freitag, personal communication, January 4, 2016). Regardless
of service provider, almost all hotel feasibility studies include competitor
benchmarking data in support.
Carolyn and Randy Smith of Hendersonville, TN began STR (formerly

known as Smith Travel Research) in the basement of their home in 1985.
Randy had worked for Laventhol and Horwath (L&H), a dominant hospitality
consulting company of the day, where he had been introduced to the idea of
benchmarking. L&H didn’t choose to pursue the business leaving the oppor-
tunity open for the Smith family. Randy and Carolyn saw strong growth a˝er
an endorsement by the American Hotel and Lodging Association shortly a˝er
starting the company (J. Freitag, personal communication, January 4, 2016).
Prior to STR, hotel benchmarking was generally conducted very poorly

and ine˙ectively. Night auditors used to drive to other hotels parking lots
and count cars or perform a “nightly call around” asking if the competitor
was full and inquiring about pricing. Reported data was o˝en incorrect as
people would exaggerate the stats and there was no way to know if the exag-
geration was greater or less than the actual performance. With STR, came
solid numbers, ÿnally. Today STR’s global presence is prominent; there are
few hotel feasibility studies that occur without STR data behind them. Orig-
inally, data processing was managed through reams of print outs with data
collection coming by way of faxes and even letters (methods that are still
used by some properties today). No surprise that data processing has much
improved in domestic hotels and throughout the world due to technology.
As STR expands internationally, and competitor benchmarking with it, the
issue of selling a benchmarking product requires trust, which is o˝en earned
slowly. O˝en branded hotels take STR into a marketplace ÿrst. Additionally,
former employees of branded hotels who move into the independent arena
o˝en become key inûencers when it comes to STR adaptation and it is
through them that private ownership groups become participants (J. Freitag,
personal communication, January 4, 2016).
THINK HISTORICALLY
While the process of counting cars in competitor hotel parking lots or
calling around to ask nightly may have been a bit archaic, it was one
of the few ways to estimate competitor business occupancies prior to
benchmarking services. Can you think of some alternative (legal) meth-
ods you might have used to gauge the level of business your competitors
were experiencing prior to benchmarking technology?
Standards of Benchmarking
˜e most widely known benchmarking report that STR distributes is the

STAR report, which is available for historical data daily, weekly and monthly.
In alignment with industry standards, the reported data points used are the
following:
• Occupancy: Rooms sold divided by rooms available multiplied by 100.

Occupancy is always displayed as a percentage of rooms.
• Average Daily Rate (ADR): Room revenue divided by rooms sold, dis-
played as the average rental rate for a single room.
• Revenue per Available Room (RevPAR): Room revenue divided by rooms
available.
• Segmented Data: Rooms sold and revenue data broken down by source
of business (transient, group, contract) and source of revenue (room, food
and beverage, other).
With the above listed data points, STAR reports benchmarking metrics
according to:
• Index (Occupancy, ADR, RevPAR): Property performance divided by

competitive set performance multiplied by 100. Internationally, indexes
are also referred to as MPI—Market Penetration Index (Occupancy Index),
ARI: Average Rate Index (ADR Index), and RGI—Revenue/RevPAR Gen-
eration Index (RevPAR Index).
• Percentage Change (% Chg.): Amount of growth—up, down, or ât— this
period versus same period last year (day, week, running 28 days, running
month-to-date). Calculated as ((TY-LY)/LY)*100.
• Rank (Occupancy, ADR, RevPAR, % Chg.): Property performance ranked

versus hotels in the competitive set (e.g., a “3 of 6” ADR ranking means the
subject hotel’s absolute ADR is third highest of the six competitors).
In Figure 8.2, the monthly glance tab from a sample STAR report is given.
˜e data in the ÿrst row and ÿrst column begins with the monthly (Febru-
ary, 2013) performance of the subject property; in the second column, the
aggregate performance of the competitive set for the same period (excluding
subject property); and ÿnally, the index of the subscriber to the competitive
set in the third. Indexes can refer to occupancy by Market Penetration Index
(MPI), ADR by Average Rate Index (ARI) or Revenue/RevPAR by Revenue/
RevPAR Generation Index (RGI). An index over 100 represents a perfor-
mance higher than the average or greater than “fair share” to the competitive
set. Preceding rows include performance periods of year-to-date, the most
recent running three months, ending with “current” month, and the same
running 12-month period, also ending with the “current”s month. ˜e sec-
ond subset of rows refer to the percentage change verses same month prior
year allowing the reader to compare the growth of the subject hotel to the
growth achieved by the competitive set over the same period. In this case,
one would refer to MPI, ARI, and RGI followed by “percentage change” or
“% Chg.” MPI, ARI, or RGI % Chg represent the shi˝ in market share to or
away from the subject hotel. While one should aspire to perform at an index
above 100, the growth in share year-over-year (YOY) can also represent a
winning revenue strategy.
Tab 2 - Monthly Performance at a Glance - My Property vs. Competitive Set
Any Hotel 123 Any Street Any City, Any State 99999 (555) 555-5555
STR # 98765 Chain ID: 999999 MgtCo.: None Owner: None
For the Month of: February 2013 Date Created: April 09, 2013 Monthly Competitive Set Data Excludes Subject Property
February 2013
Occupancy (%) ADR RevPAR
My Prop Comp Set Index (MPI) My Prop Comp Set Index (MPI) My Prop Comp Set Index (MPI)
Current 69.0 68.9 100.2 164.66 147.37 111.7 113.59 101.48 111.9
Month
Year To 69.6 63.1 110.3 160.04 145.90 109.7 111.32 92.04 120.9
Date
Running 3 68.9 62.9 109.5 144.43 136.25 106.0 99.53 85.74 116.1
Month
Running 72.5 71.2 101.8 139.09 127.51 109.1 100.78 90.76 111.0
12 Month
February 2013 vs. 2012 Percent Change (%)

Occupancy (%) ADR RevPAR
My Prop Comp Index My Prop Comp Index My Prop Comp Index
Set (MPI) Set (MPI) Set (MPI)
Current 7.0 6.5 0.5 3.7 3.2 0.5 11.0 9.9 1.0
Month
Year To 5.3 6.9 -1.5 3.5 3.3 0.1 9.0 10.4 -1.3
Date
Running 3 7.1 5.1 2.0 5.5 5.8 -0.3 13.0 11.1 1.7
Month
Running 5.5 4.6 0.9 0.4 2.5 -2.0 6.0 7.2 -1.2
12 Month
Smith Travel Research, Inc
Figure 8.2: STAR Monthly Glance Tab
Glance Tab—note how Year to Date RevPAR Index runs a premium to

the competitive set at a 120.9 RGI, but is losing -1.3 RGI % Chg as the set is
growing faster YOY than the subscriber (Courtesy of STR).
Is the subject property in this example achieving positive year to date
results? If so, what is the greatest contributor to this success? Did the
subject in the property before better indexes to the competitive set
this year or last? What element (ADR or occupancy) was responsible for
this shift?
When looking to interpret and action against STAR data, J. Freitag sug-
gests it is imperative to have the correct comp set and understand what that
set represents; to really get a sense of who you’re competing with and in what
arena. One of the best tools STR o˙ers to help clients identify competitors is
a Reverse Comp Set showing who has chosen you as their competitor. ˜is
brings context to one’s decision when understanding their market. Second,
the RevPAR % Chg. number is key because it encompasses both ADR change
and Occupancy change and the other is RevPAR Index Growth % Chg. that
allows one to measure gain or loss in market share relative to the competi-
tor’s gain or loss (J. Freitag, personal communication, January 4, 2016).
While the STAR is most well-known benchmarking product o˙ered

by STR, there are many more o˙erings. For years, STR has been providing
the Hotel Operating Statistics Almanac (HOST Almanac) report that o˙ers
benchmarked full P&L perspective revealing everything from department
expenses, to NOI, to GOP. While STR is able to o˙er this level of detail on a
monthly basis, most clients have not expressed an interest. As STR evolves,
the company is constantly wrestling with the di˙erence between interest-
ing and actionable data and thus products that point to areas of revenue
opportunity and greater proÿtability will take priority. Currently, STR plans
to take the HOST Almanac globally, bring deeper segmentation data to the
market and grow the usage of the F&B STAR in order to give better insights
into outlet, room service & banquets revenues (J. Freitag, personal commu-
nication, January 4, 2016).

STAR Analysis
One of the problems with Big Data is that there is often too
much of it. The most important data points are those that
can be actioned and a˜ected. In order to ÿnd such points, one must
read the data almost like a story, often beginning with the more macro
points and then by following the peculiar trends down the data trail
to discover the source of the behavior. It is then important to be able
to critique (both spoken and written) your ÿndings concisely and con-
vincingly so that your audience can both agree and remember your
analysis.
Using the sample STAR report, determine one positive and one nega-
tive trend within the February 2013 performance. Once you have deter-
mined which two performance indicators best highlight your success
and opportunity, select data points from the many tabs that may help
to explain what happened.
Take your ÿndings and write two paragraphs—one on each point.
Explain the success and the opportunity in your own words while ref-
erencing data points from the report to support your arguments. Your
paragraphs should be easy to read (much like a spoken explanation),
but also concise and well supported.
Forward Looking Benchmarking Data
While the value of historic benchmarking is irreplaceable to the industry

as a whole, the ability to see these same trends as they book into future
dates allows revenue strategists to directly compete with an understand-
ing of trends while they are unfolding. Much like STR’s STAR report is the
industry household name for historical benchmarking, so is TravelClick®’s
Demand360® business intelligence (BI) tool the same for forward-looking
benchmarking. Demand360® allows revenue managers to understand com-
pression in their comp-set or market to make more informed decisions.
Understanding bookings by segment or channel ensures a hotel knows
how to optimize its mix and drive maximum revenues and promotes conÿ-
dence in decision-making. ˜e concept was originally brought to market by
˜e Rubicon Group in 2008 and was distributed reporting via email much
like STR. In 2011, TravelClick® acquired the Rubicon Group and has since
evolved the data into a powerful online suite of dashboards. Katie Moro,
Global Director of Business Intelligence Product, TravelClick®, explains
that Demand data is a collaboration between TravelClick® and the data pro-
viders. ˜e data comes directly from hotel’s PMS or Data Warehouse, thus
ensuring that the data is accurate, reliable and real. It provides a full year
into the future and a full year into the past, broken out by day. ˜e data is
segmented into Group and Transient as well as Retail, Discount Negotiated,
Wholesale, and Qualiÿed rates and is broken into booking channel—Online
Travel Agents, brand websites, Global Distribution Systems, and hotel direct
reservations. One of the reasons there are so few competitors in this space
is because every brand and every hotel does business in a di˙erent way, so
normalizing and making the data consistent is not an easy task (K. Moro,
Prior to demand data, hotels used and continue to use historical data,
internal reporting, convention calendars, and event and airline data to make
smart decisions. While that data is still relevant, Demand360®’s historical
and forward looking data allows hotels to understand the full picture for
future dates, and make decisions that can make a real-time impact, and fur-
ther analyze historical data to see trends (K. Moro, personal communica-
tion, January 15, 2016).
TravelClick and Demand360 are registered trademarks of TravelClick, Inc.

˜e power of converting data into online dashboards is evident in that

the user is no longer restricted to the Excel export and would be forced to
build timely pivot tables in order to pursue perspectives beyond the original
output. Within the application, there are three main areas of focus—tran-
sient by segment, transient by channel, and group. In order to begin auction-
ing the data, revenue managers would ÿrst look at future months to ÿnd key
periods where compression exists in the comp-set and make sure strategy is
in place to account for the situation.
Figure 8.3: TravelClick® Overview Tab
Overview Tab—note how July 2015 runs nearly 10 percent below the
comp set in occupancy indicating an area requiring strategic action. Cour-
tesy of TravelClick®.
Referencing the above graph, which month is the subject lagging
behind the set competitively the most? Which month is ahead the
most?
˜is high-level overview o˝en calls out periods of group need and o˙ers
insight allowing for more conÿdent group pricing, a feature beneÿting both
the sales and revenue team. Good group base business for most hotels is
critical to success.
210

Stay Date Subscriber Subscriber Non-Group Group Group Sold Comp Non-Group Group Group Sold Group Group Group
Total ADR-All Occupancy Committed Occupancy Set Total Occupancy Committed Occupancy Committed Committed Committed
Occupancy Sold Occupancy Occupancy Occupancy Occupancy Index Index
Rooms Index Variance vs. Change vs.
Last Year Last Week
01-May-2016 Sun 0.0% 0.0% 7.1% 0.1% 7.0% (107) 0
02-May-2016 Mon 0.0% 0.0% 8.1% 0.0% 8.1% 0.1% (107) 0
03-May-2016 Tue 0.0% 0.0% 6.4% 0.0% 6.3% 0.1% (456) 0
04-May-2016 Wed 0.0% 0.0% 4.6% 0.0% 4.5% 0.1% (92) 0
05-May-2016 Thu 0.8% 0.0% 0.8% 8.6% 0.0% 8.6% 0.2% 9 (52) (1)
06-May-2016 Fri 3.8% 0.0% 3.8% 10.9% 0.0% 10.8% 0.1% 35 (114) (4)
07-May-2016 Sat 14.6% 0.0% 14.6% 11.3% 0.0% 11.3% 129 115 (11)
08-May-2016 Sun 29.9% 0.0% 29.9% 25.2% 0.1% 25.1% 119 119 (1)
09-May-2016 Mon 29.1% 0.0% 29.1% 28.0% 0.1% 27.9% 104 104 0
10-May-2016 Tue 29.1% 0.0% 29.1% 30.2% 0.1% 30.1% 97 97 0
11-May-2016 Wed 29.1% 0.0% 29.1% 32.1% 0.1% 31.9% 0.1% 91 91 0
12-May-2016 Thu 24.5% 0.0% 24.5% 36.5% 0.1% 36.4% 0.2% 67 49 (1)
13-May-2016 Fri 7.3% 0.0% 7.3% 17.3% 0.2% 17.1% 0.2% 43 (2) (2)
14-May-2016 Sat 0.8% 0.0% 0.8% 9.7% 0.3% 9.5% 0.1% 8 (47) (1)
Figure 8.4: TravelClick® Group Penetration

Courtesy of TravelClick®.
Group Tab—note that the competition is averaging nearly 30 percent

group base over a period where the subscriber property has nothing. ˜is
means that the subscriber might be able to command a higher price on
group business over the shown period knowing that group market is already
saturated in the set.
When it comes to transient strategy over dates closer in (to day of

arrival), there are several options to pursue. One could choose to analyze
channel strategy (the source of the business, i.e., Expedia, Government,
AAA, brand website) in order to understand if there are need-periods that
require marketing support. Without forward-looking aggregate data, hotels
could only see their own position, which may not necessarily be reêctive of
the deÿciencies they may be carrying to the market. Once opportunities are
identiÿed, promotions can be run through the brand, the GDS or individ-
ual OTA channels in order to recover lost territory. A˝er such actions have
been implemented, the results can be measured by observing whether or
not week-over-week share increases to the set in the targeted channel. Again
this sort of analysis is superior to internal data because the subscriber is now
measuring market share shi˝ as opposed to just seeing if gains are made to
historical pace.
Pace Tab—tracks weekly pickup for both the subscriber as well as the
aggregate of the set by day with ÿlters options for both market segments and
contributing source. One can measure if an improvement is being made in
each area and over exactly what period said improvement is occurring.
Referencing the above graph, which day is the subject property best
positioned to the competitive set and why?
From the segmentation side, hotels can ÿnd opportunities where retail
business is compressing and begin to close out discounts in order to shi˝ the
mix of business away from high-cost distribution channels. Similarly, from a
negotiated standpoint, there may be need periods where corporate accounts
can help to ÿll a gap that would otherwise leave rooms empty. For each hotel,
the mix of business will be di˙erent, but thanks to forward looking aggre-
gate market data, revenue managers can make sure they are hand-selecting
212

Hotel Elegance
Booking date updated as of Jun 15, 2015
Booking Performance for committed Room Nights by Stay Date

As of June 15, 2015
Stay Date Subscriber Comp Set Difference Index Occ Subscriber % Comp Occupancy Subscriber Subscriber Comp Occupancy Subscriber ADR Subscriber RevPAR
Occupancy Occupancy Rank Room Nights Growth Set % Index Room Room Set Room Index ADR Rank RevPAR Rank
vs. Last Growth Variance Nights Nights % Night % Change
Year vs. Last vs. Last Pickup Pickup Pickup Since Last
Year Year vs. Last Since Last Since Last Week
Week Week Week
23-Jun-2015 58.6% 57.8% 0.9 101 4 of 9 153 (0.6%) 10.8% (1) 6 4.1% 17.9% (14) $279 5 of 9 $163 5 of 9
Tue
24-Jun-2015 53.3% 59.6% (6.4) 89 5 of 9 139 2.2% 15.7% (1) 1 0.7% 18.1% (16) $276 5 of 9 $147 6 of 9
Wed
25-Jun-2015 53.6% 52.7% 0.9 102 4 of 9 140 13.8% 0.4% 1 (2) (1.4%) 15.4% (17) $237 6 of 9 $127 6 of 9
Thu
26-Jun-2015 52.9% 50.2% 2.7 105 4 of 9 138 7.8% (14.8%) 1 17 14.0% 10.2% 3 $235 2 of 9 $124 5 of 9
Fri
27-Jun-2015 59.0% 52.9% 6.1 111 4 of 9 154 21.3% (3.5%) 2 32 26.2% 7.1% 16 $241 2 of 9 $142 3 of 9
Sat
28-Jun-2015 41.4% 46.5% (5.1) 89 5 of 9 108 54.3% 55.7% 0 27 33.3% 13.8% 13 $184 5 of 9 $76 6 of 9
Sun
29-Jun-2015 46.4% 47.1% (0.7) 99 3 of 9 121 86.2% 68.1% 1 35 40.7% 23.6% 12 $176 5 of 9 $82 6 of 9
Mon
30-Jun-2015 41.4% 35.8% 5.6 115 3 of 9 108 44.0% 38.0% 0 35 47.9% 28.4% 15 $186 5 of 9 $77 3 of 9
Tue
01-Jul-2015 39.8% 32.5% 7.4 123 3 of 9 104 76.3% 31.4% 3 31 42.5% 25.2% 15 $181 6 of 9 $72 3 of 9
Wed
02-Jul-2015 54.4% 50.9% 3.5 107 4 of 9 142 51.1% 35.3% 1 23 19.3% 10.6% 8 $270 5 of 9 $147 5 of 9
Thu
Figure 8.5: TravelClick® Pace
Source: Courtesy of TravelClick®.
the best of what is obtainable before the results are in (K. Moro, personal
communication, January 15, 2016).
OTA Market Data
A secondary resource used by hoteliers to better understand macro-market

trends comes from online travel agencies (OTAs). Because OTAs facilitate
and distribute a strong share of the most leisure markets, their transaction
data carries with it incredible insight into market dynamics of demand and
compression. While such data is never “open source” for private use, most
OTA partners are glad to o˙er insight to hoteliers upon request. It is also
important to note that this data typically varies from both STR and Trav-
elClick®’s resources in that the aggregation of competitors extends across
an entire market as opposed to a smaller 5-10 competitor aggregate.
˜ere are three particular instances where a hotelier may choose to

look to an OTA partner for insight into market trends: (1) estimating
the impact of large ÿrst-time events like as a Super Bowl or the Olympic
games; (2) garnering insight into unusual macro-market changes such as
a burst in supply growth; (3) comparing broader customer trends such as
average booking lead time and country of origin to one’s internal charac-
teristics.
For large ÿrst-time events, OTAs have the ability to show how the mar-
ket is broadly trending in comparison to non-a˙ected historical patterns in
prior years. ˜is is useful because it is o˝en di°cult to price and yield opti-
mally when the scale of demand is unknown. Because the goal of revenue
management is to get the best of what can be gotten within one’s market,
OTA Insight is a company forward-looking buying behaviors and market
pricing is especially necessary when a region enters into “unknown terri-
tory.” In these cases, a strategic meeting with one’s OTA partners helps to
better understand the unique demand characteristics surrounding a special
event allow the revenue manager to posture strategy accordingly. In such
situations, a revenue strategist might request insight into the patterns that
occurred during the same event in other cities, historically. If short-term
cancellations for a particular event were heavy, one might respond by imple-
menting an aggressive overbooking strategy. Understanding whether aver-
age market occupancies run above, below or parallel the city, as a whole,
may bring pricing insight and elicit a change in one’s current hotel strategy
in order ensure competitive indexes.
Much like ÿrst-time events, macro-market changes also become di°cult

to understand without a broader view. If rooms supply grows materially over
a given year, the strategies formerly used to elicit strong performance may
no longer prove successful. In order to adjust to new dynamics, a revenue
strategist would be prudent to elicit macro-behaviors seen by the all-seeing
eye of the OTA. In understanding changes such as slowed booking pace or
lower average ADR’s captured within similar booking windows allows for
strategy correction before the negative impacts are uncorrectable.
Finally, regarding broader customer trends, o˝en times OTAs are the ÿrst
to see when a material shi˝ in customer buying behavior occurs. If short-
term cancellations begin to grow, an OTA partner can conÿrm to individ-
ual hoteliers that the behavior they are seeing exhibited by their own guests
is not a microcosm unique to just one property. When global currencies
change valuations, the OTAs typically notice the corresponding change in
destination-based booking behaviors. Understanding these insights allows
a revenue strategist to more successfully target promotions by destination.
Figure 8.6: Shifts in Star Rating and ADR YoY, Trends Over Rolling 3 Months
Star Rating Shi˝—an example of OTA market data generated by the

authors. ˜is displays room night shi˝ between star ratings in a market.
Notice how 4 star hotels are losing noticeable share from 3.5 and 5 star hotels.
˜is observation should cause a revenue strategist to re-asses his or her true
competitors, understanding that one’s “target customer” may be shi˝ing up
or down a level for various reasons.
Referencing the above graph, do you believe it is more likely that the
3.5 Star set or the 5 Star set is absorbing “share” from the 4 Star set?
Explain.
In addition to serving hotels as a distribution partner, it’s clear that OTAs

can also be used as a strategic partner in the sharing of broad market data.
O˝en times, this contribution is overlooked, but if used appropriately, the
insights can greatly contribute to a hotel’s success.
Pricing Market Data
While shopping and benchmarking competitor pricing is not new to the

hotel industry, how we look at this data is. Historically, competitor pric-
ing was mined by calling competitors’ call centers or front desks and asking
what the rate of the day was (or for any period in question). Because pric-
ing was typically static, a few shops across the market seasons would give a
pretty solid visual as to where the market was priced. As the Internet evolved
and websites, OTAs and meta search became prevalent, so came dynamic
pricing (pricing that ûxes based on booking time and stay period) and a
call around was no longer su°cient. With that came multiple service pro-
viders who o˙ered daily shopping services of competitors for as far out as
the 365-day window, but reporting was delivered in excel workbooks which
could be painful to pull trends from. Today, the most advanced processes
used are live shoppers that output to a digital dashboard. Instead of showing
data in a grid format, pricing typically follows a daily booking curve as is
shown below:
Figure 8.7: OTA Pricing Curve

Source: Author generated sample.
Pricing Curve—one can track the pricing behavior on the above graph
for each competitor noting the pricing behavior leading into day of arrival.
An average trend that grows into day of arrival would suggest that the mar-
ket is ÿlling and compressing while the opposite would lead one to believe
that hoteliers are chasing demand down in order to shi˝ business to them-
selves with more competitive price points.
Referencing the previous graph, do you believe demand is compress-
ing the city (meaning demand is outpacing supply) as day of arrival
grows closer or that the city is decompressing (that demand is falling
below supply)? Explain.
While market pricing is only one of many factors that should a˙ect a
revenue strategy, it is o˝en reêctive of competitor strategy and within a
like-competitive set, should indicate what the range of rates being booked
into your market is currently.
NON-TRADITIONAL MARKET DATA
In this chapter, we’ve discovered the importance of internal data, aggregate

market data and pricing data. Aligned management of all will ensure that a
property outperforms to prior year as well as supersede the market in times
of growth. When demand is so˝, the same principles can guide one to lose
the least in the market. Next, however, we will explore some newer and less
traditional market data resources that promise to drive revenue optimiza-
tion to even higher levels including consumer sentiment, air tra°c, and
website custom tags.
Consumer Sentiment Converted into Data
For years, consumer sentiment has been digitally recorded and displayed by
companies like Yelp and TripAdvisor. Even non-review-centric businesses
have created their own internal platforms from hotel distributors such as
Expedia and Booking.com to those in the restaurant business such as Seam-
less and Open Table. Regardless of the product, reviews are part of our pur-
chasing process; we trust our fellow shoppers and want to vet their opinions
prior to investing personally. Unfortunately, however, the process wherein
a variety of people write static reviews over a vast timeline doesn’t always
lend itself to determining if a service-driven product is a ÿt or not. Unalike
consumers who perceive value di˙erently can skew reviews. Also, outdated
reviews can haunt a business whose management has changed. ˜e con-
sumer isn’t the only one that can be misled by these âws. Revenue manag-
ers struggle to unite all strains of consumer consent into an actual metric
that speaks the price elasticity of demand (PED) for their product at any
given point.
ãt said, there is still tremendous value in extracting general con-

sumer sentiment from the muck of reviews that exist out there and that’s
exactly what RJ Friedlander, CEO and founder of ReviewPro, has done.
RJ believes that intuitive hoteliers understand that revenues are directly
impacted by guest satisfaction and this consumer sentiment impacts the
price they can charge to both repeat and new guests related to online
reviews and word-of-mouth experiences. RJ’s product, ReviewPro, not
only converts multi-platform reviews into data for the hotelier’s own
property(s), but also provides the same for one’s competitors allowing the
ability to analyze and understand the value di˙erentiators and where to
prioritize improvements.
Essentially, ReviewPro produces a real-time guest satisfaction report

card and the global review index score (GRI) that is updated every three
hours. ˜is data is further segmented through multi-language semantic anal-
ysis, department indexes, channel indexes, language, and country indexes.
˜e GRI of a hotel can, and o˝en does, change by day. Data is compiled
from 160 online travel agencies and review sites pulling from 45 languages.
Uniquely, the score is not an average and instead, attempts to closely track
the user-generated content that is impacting both individual and business
travelers at a given point in time. ˜us, the purpose is to o˙er the most com-
prehensive and timely guest review data across the industry (RJ Frielander,
In order to action the data, the product offers tools for hoteliers to
prioritize improvements so they can affectively move the needle where
the needle can be moved. That meaning, a complaint regarding loca-
tion will most likely not be resolved by hotel staff as the location is set,
whereas an issue with room cleanliness can be addressed promptly in
order to turn the tide of guest sentiment. ReviewPro reporting creates
a tangible bridge between direction of revenue strategy and those at a
property level that actually have the possibility of impacting the guest
experience. Daily GRI scores allow revenue managers to cross-analyze
reputation and ADR in order to annotate “optimized” vs. “underper-
forming” segments and source channels in order to charge optimally
according to demand. Ultimately a strong property reputation can be
used to curate more direct bookings valued for their lower cost of acqui-
sition. By contrast, a declining GRI score could be used to bring visibil-
ity to an increased dependency on OTA mix of business (RJ Frielander,
Air Traffc
Especially for primary and secondary markets, air tra°c volume serves as
an excellent indicator of future hotel occupancies because a large percent-
age of arriving guests do not live in the city they are visiting. ˜e notion of
foresight also applies because airline tickets are commonly booked before
hotel reservations are made. ˜us, a spike in airline activity will tie hand-
in-hand to compression surrounding hotel room bookings. ˜e two most
important metrics to the hotel community are arrivals and PAX, or pas-
sengers on the ground. Arrivals are the number of arriving aircra˝s and a
heavy number of them produce a surge in PAX that typically stay multiple
nights. If the number of arrivals in a given period exceeds the number of
departures, a compression bubble can be identiÿed and this bubble will
a˙ect hotel demand positively. By contrast, the opposite scenario (heavy
departures followed by fewer arrivals) o˝en foretells a so˝ening in hotel
demand.
Figure 8.8: Air Travel Arrival Patterns
Air Tra°c Arrivals & PAX On the Ground Chart.
Another perspective when looking to the airlines for market trends is

the variance in arrivals year over year. If arrivals are not directly tied to a
citywide event, this compression can go unnoticed to the hotel economy
until the reservation cycle begins. ˜e beneÿt of alternative market data
such as airline tra°c data is that the subscriber can intuit the trend before it
a˙ects both themselves and the market.
Figure 8.9: Air Curve OTG

Source: Author generated graph.
Air Curve on the ground (OTG)—notice how the example date above
is carrying only half of the PAX OTG as same time last year. ˜is negative
trend ÿrst became apparent 50-days prior to arrival and grew dramatically
worse beginning at the 40-day window where last year arrivals surged, but
this year arrivals virtually plateaued.
PROS & CONS

Alternative market data can serve a valuable purpose
when seeking to understand future demand and price
elasticity, but no single factor can tell the whole picture. Airline data can be
misleading, as there is currently no way to consistently link individual ˛ight
bookings to hotel reservations. Consumer sentiment is relative to the indi-
vidual and does not guarantee that each guest perceives the values your
hotel vs. the competition the same way you do. List one pro and one con of
using both airline and consumer sentiment data to support your revenue
strategy.
Tracking Website Regrets and Denials Through Custom Tags
A ÿnal alternative source of market data that has proven immensely valuable
to revenue strategists is the ability to track regrets and denials. A website
regret occurs when an individual selects and searches a series of dates in
the booking widget, but fails to transact. Essentially, the assumption stands
that something, namely the price, was not attractive enough to compel the
customer to ÿnalize his or her booking. Hence opportunity to covert a shop-
per into a paying customer has failed and the occurrence is registered as a
regret. In the same vein a denial occurs when a shopper similarly selects a
series of dates and searches for rooms, but receives and message stating that
there is no availability over the selected dates. ˜is could be due to a yielding
restriction that is purposefully in place or because the hotel has sold out over
the shopped dates. Regardless, the failed transaction is registered as a denial
to the customer for the shopped dates as the hotel is unable or unwilling to
accommodate the request. ˜e technology that allows one to track regrets
and denials is called a custom tag. Website developers can build these tags
over the booking widget in order to encapsulate recurring tasks. ˜is same
behavior can also be tracked by subscribing one’s website to Google Analyt-
ics with many additional features o˙ered.
Figure 8.10: Lost Business Curve

Source: Author generated graph.
Lost Business Curve: Regrets & Denials—notice that the percentage of

Final Lost business occurring throughout the booking curve for Dec 8th of
2016 virtually mirrors that of same day, 2014 with a small divergence in the
8–35 day window and the 50–75 day window. When trends are similar, it
suggests that both market conditions and hotel yielding/pricing strategy are
likely similar YOY as well.
If the hotel is sold out over a select date and the combination of
regrets and denials spikes, then it is possible that the property sold out
too quickly and could have taken advantage of guests later in the book-
ing curve who may have been willing to pay more than those that booked
earlier.
Figure 8.11: Regret and Denial Booking Curve
Regrets & Denials Lain Over Booking Curve—In the above example, a
multi-graph showing regrets & denials set over the booking curve can eas-
ily illustrate the level of market demand as the property reaches capacity
and regrets and denials similarly spike within the same short-term window.
Content generated by the authors.
Referencing the above graph, if one observed a consistent pattern
where regrets and denials spiked as the hotel sells out, would it be
beneÿcial to have priced higher or lower further out into the booking
window?
If a hotel is not sold out, but determines a yielding restriction to opti-

mize the long-term occupancy potential is necessary, a spike in demand may
validate this strategy assuming the longer length of stay books through as
expected. If, however, the regrets and denials spike over the peak date while
the extended date series fails to book, one could determine that the demand
only centers on the peak date and a strategy of raising rate for the one night
might be more optimal.
THE FUTURE OF MARKET ANALYTICS
While today’s use of market analytics has advanced dramatically over the
last ten years, it is almost certain that the next ten will evolve the industry to
a near-unrecognizable state. ˜is is not to say that the principles of market
analytics will change, only that the level of human interaction with the data
will evolve. More time will be spent prioritizing and auctioning the data vs.
compiling and ÿltering it. Here is a list of predictions to keep an eye out for
and to be sure you are updating your skillset with:
1. Standard excel usage will be replaced by data visualization tools such
as Tableau, Spotÿre, Raw, or Power Editor. If you are skilled in these
tools, your use of data will look like wizardry compared to an Excel
pivot table.
2. All data will be live and two-way. ˜is will close the dark space of
attribution modeling and will clearly link the entire purchasing pro-
cess together.
3. Forward-looking aggregate benchmarking will diversify into many
more channels, it will adapt forecast/regression modeling and will
source live data feeds.
4. Customer sentiment will be segmented in order to connect
like-reviewers with like-customers. It will answer the question:
“What do people like me think of this place?” Reviews will first
become time-sensitive and eventually will begin to forecast user
experience levels. This will bring more weight than ever to cus-
tomer sentiment indexes and may completely upset our current
understanding of price elasticity. Lastly, reviews will span far
beyond the current written format and will source anonymous
location tracking data and alternative crowd sourcing indicators
such as music tagging.
5. ˜rough future mergers in the travel industry, loyalty programs will

connect travel behavior throughout the entire trip greatly increasing
the reliability of air, train, and even automobile tra°c patterns giving
clear indicators of demand and compression.
˜e world of revenue analytics as it relates to market data is in the midst

of an exciting world of change. ˜e core fundamentals covered in this chap-
ter are applicable across any free market and obtaining a solid skillset therein
will make you both relevant and valuable in your career.
SEEING FURTHER
Today many new technologies are in the blos-

soming stage that will become key sources
for mining market data. O˝en times the data is a by-product of the
prime-product. For example, apps like Shazam and SoundHound
initially started as tools to help users discover new music they were
enjoying, but could not identify. ˜e data behind such tools is now
able to spot burgeoning sounds and tracks as they take o˙ and with
the application of predictive modeling, can identify the level of suc-
cess a new track will have even before it hits the market. Name a
product/app/service we use today that may eventually produce data
to serve a completely di˙erent purpose tomorrow?
Speaking to Data
While the primary reason any business should embrace “big data” is to
perceive trends and action the content into perceptive management of
pricing, yielding and marketing strategy, it is also crucial to be able to
clearly speak to the data. ˜is is necessary in order to gain team align-
ment and create buy-in surrounding a proposed process or direction. ˜e
below Data Analytics Flow Cycle illustrates the natural ôw of 1) compil-
ing the numbers 2) shaping context around metrics 3) creating visuals of
the behaviors you are tracking and 4) communicating those trends to a
broader audience. By embracing this cycle, one is sure to purvey the story
behind the data in a way that creates alignment, support and ultimately
inspires action.
Figure 8.12: Data Analytics Flow Cycle
Data Analytics Flow Cycle—four steps to cultivating raw numbers into

actionable team-lead direction. Provided by Chris Chambers.
Question 1: Of all the forms of reporting and market data
covered in the chapter, what do you believe is the most useful
when seeking to create an impactful revenue strategy? Explain
your choice.
Question 2: Are there any forms of market data not covered in this chapter that you
believe would be beneÿcial for hoteliers to incorporate in the future? Explain how you
would use this data to optimize your revenue strategy.
Question 3: Market data is not only integral to revenue strategists attempting to

price and yield a hotel, but it is also valuable to marketing teams. What data source
would you recommend marketers use in and how might they use it to bring more
business to a hotel?
APPLICATIONS
Selecting the Right Data
It is September in New York City and Robert is the newly

hired Director of Revenue Management at a notable Mid-
town Manhattan hotel. Robert has been instructed to
prioritize the implementation of a pricing strategy that
targets the coming slow season of January and February while also prepar-
ing the hotel for the expected compression coming as a result of the Super
Bowl which will be hosted by the city in February.
(1) What sort of data should Robert utilize in order to price the hotel
appropriately for the overall slow season of January and February?
(2) Should Robert be using multiple data sources to understand how the
market will behave?
(3) What resources should Robert use to build out a pricing and yielding
strategy for the one-time compression event, the Super Bowl?
(4) Are there any data sources that will be useful in both situations?
Explain the data sources you have chosen for each event and correlate
their use into actions Robert should take (i.e., reviewing historic Star data
over last year’s Jan and Feb will give Robert a general sense the obtained
ADR’s across the stated season and thus Robert should ensure his rates do
not exceed the observed cap.)
Explaining a Loss
During Emily’s ÿrst week on the job at a popular Miami hotel where she
was recently hired as the Director of Revenue Management, the property
received a terrible weekly STAR report showing a loss in RevPAR to prior
year, with a below 100 percent RevPAR Index (RPI) and a negative shi˝ in
RPI % Chg to the competitive set. While Emily was not employed as the
Director of Revenue Management at the time the losses occurred, she has
been asked to explain what caused the poor performance.
Create a list of the data sources Emily should use in order to understand
how the hotel performed poorly to the average of its competitors. List the
reports in the order Emily should review them in so that the line-up tells a
story.
TEAM ACTIVITY
As a class, identify a major hotel in a primary U.S. hotel market

(NYC, LA, SF, Chicago).
In groups of 3–5, use the maps feature of a search engine to locate simi-
lar hotels within the surrounding area of your subject hotel. Each group is to
propose the most logical competitive set of six competitors which will best
serve as an aggregate bench marker for both an o°cial Star and Demand360®
“comp set.”
Each team is to prepare a power point presentation that will be delivered

to the rest of the class illustrating why their “comp set” is the most relevant.
Students should be prepared to cover the following elements in their

presentation:
1. Minimum of ÿve competitive advantages and ÿve disadvantages of
your subject hotel
2. Minimum of ÿve competitive advantages and ÿve disadvantages of
the selected competitors
3. An analysis showing why the balance of advantages and disadvan-
tages merit competition
4. Minimum of two sources that prove inter-product similarity (e.g.,
Expedia lists “people who stayed at XXX also considered XXX.)
INTERNET ACTIVITY
Go to http://data2go.nyc and review the list of indicators and

the sub-categories listed thereunder describing the geographic
trends and characteristics of New York City. Identify three data
elements that could be helpful in building a revenue strategy for
pricing and marketing a hotel in the popular Times Square neighborhood.
Identify three elements that would prove resourceful in optimizing revenue
and marketing strategies for a hotel in the chic neighborhood of SoHo.
GLOSSARY
Average daily rate (ADR) – rooms revenue divided by rooms sold,
displayed as the average rental rate for a single room.
Cost of acquisition – fees, commissions, and expenses attributed
to each booking from third-party distributors or internal payroll
including GDS commissions, OTA commissions, direct marketing
expenses and all customer acquisition payroll.
Channel/Source – platform or engine responsible for delivering a booking
transaction. ˜is could range from the hotel/brand call center, the
hotel website, an online travel agency (OTA), a global distribution
service (GDS), or the internal hotel sales team.
Custom tags – are user-deÿned JSP language elements that encapsulate
recurring tasks. Custom tags are distributed in a tag library, which
deÿnes a set of related custom tags and contains the objects that
implement the tags.
Daily pace – net bookings and cancellations committed currently for a
given stay date as compared to the net bookings and cancellations
committed same day (by numbered date) prior year.
Daily pickup pace – net bookings and cancellations committed within a set
booking period (i.e., last seven days) for a given stay date as com-
pared to the same net bookings and cancellations that occurred over
the same booking dates (by day of week) prior year.
Index (Occupancy, ADR, RevPAR) – property performance divided by
competitive set performance multiplied by 100. Internationally,
indexes are also referred to as MPI—Market Penetration Index
(Occupancy Index), ARI—Average Rate Index (ADR Index), and
RGI—Revenue/RevPAR Generation Index (RevPAR Index).
Monthly pickup pace – net bookings and cancellations committed within
a set booking period (i.e., last seven days) for a given stay month as
compared to the same net bookings and cancellations that occurred
over the same booking dates (by day of week) prior year.
Monthly pace – net bookings and cancellations committed currently for a
given stay month as compared to the net bookings and cancellations
Price elasticity of demand (PED) – shows the relationship between price

and quantity demanded and provides a precise calculation of the
e˙ect of a change in price on quantity demanded. ˜e following
equation enablesˇPED to be calculated.
% change in quantity demanded
% change in price
Percentage change (% Chg) – amount of growth—up, down, or ât—this
period versus same period last year (day, week, running 28 days,
running month-to-date). Calculated as ((TY-LY)/LY) × 100.
Product type – deÿned narrowly as the room type, package element, or
booking policy attached to the reservation or more broadly as the
length of stay or lead time dimension. ˜is meaning, that a prod-
uct can be deÿned both by the physical attributes such a premium
room type or package element just as much as it can be considered
an accommodation available for purchase at the very last minute in
a compressed market.
Purchasing behavior – common purchasing patterns found within a given
group of bookers including price sensitivity, responsiveness to various
types of advertisement, propensity to cancel, and customer loyalty.
Rank (Occupancy, ADR, RevPAR, % Chg) – property performance ranked
versus hotels in the competitive set (e.g., a “3 of 6” ADR ranking
means the subject hotel’s absolute ADR is third highest of the six
competitors).
Revenue per available room (RevPAR) – total rooms-related revenue per
[Rooms Revenue / (Rooms Available * Number of Days)].
Segmented data – rooms sold and revenue data broken down by source of
business (transient, group, contract) and source of revenue (room,
food and beverage, other).
REFERENCES
Data Analytics Flow Cycle, Chambers, C. (2016, March 26).
Economics Online. (2016) Price Elasticity of Demand. Retrieved from http://www.
economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.
html
Frielander, RJ. (2016, January 6). Telephone interview.

Freitag, J. (2016, January 4). Telephone interview.
Moro, K. (2016, January 15). Email interview.
Oracle. (2010) ˜e Java EE 5 Tutorial. Retrieved from http://docs.oracle.com/
javaee/5/tutorial/doc/bnaiy.html
CHAPTER 9
Restaurant Revenue
Management: Basic Concepts
Kristin V. Rohlfs
OVERVIEW
Restaurant revenue management (RRM) focuses on how a restaurant
can produce the highest amount of revenue possible for a certain time
period. Every transaction includes elements of RRM and the use of many
RRM strategies is most beneficial when a restaurant has demand that
exceeds capacity. This chapter presents an overview of RRM theories and
an introduction to RRM terms, tools, and techniques.
LEARNING OBJECTIVES
After studying this chapter, you should be able to evaluate a
restaurant in the context of RRM. Speciÿcally, you should be
able to:
Apply revenue management principles to restaurants
Explain and calculate RevPASH (revenue per available seat hour)
Analyze a food service operation as a system through which customers õw
Calculate the throughput time and throughput rate for a simple service
system
Perform an RRM analysis for a restaurant by establishing the baseline,
collecting data, and developing and implementing RRM solutions
231
OUTLINE
Introduction
Restaurant Revenue Management

• Conditions Necessary
• Operations Component
• RevPASH
• Duration and Price
RRM Program
• Establish the Baseline
• Collect Data
• Develop RRM Solutions
• Implement and Monitor RRM Solutions
Discussion Questions
Applications
• Tasty Banquets
• Muchacho
Team Activity
Internet Activity
Glossary
References
SO WHAT?
Mario Testa is a well-seasoned restaurant owner and operator of nine
full-service outlets in the greater Philadelphia area. Mario has been
thinking about the short conversation he just had with his son, Arturo,
who grew up working in Mario’s restaurants and recently graduated
from an accredited Hospitality Management program.
Restaurant Revenue Management: Basic Concepts  233
Arturo was telling Mario about something called Revenue Manage-

ment, which Mario recognized in practice (from making airline, car
rental, and hotel reservations throughout his life) but had not heard
of it being used in restaurants. From what Arturo was saying, restau-
rant revenue management (RRM)—the ÿeld of applying RM to restau-
rants—provides restaurant owners and managers with an operating
framework focused on making more money without sacriÿcing cus-
tomer service or satisfaction. Their conversation was interrupted by
the start of a planned meeting but not before Arturo told Mario that
RRM could help boost low demand, better manage high demand,
optimize how Mario’s outlets use space, and even ÿnd out which
menu items should be removed.
What are some questions you think Mario has for Arturo about RRM
and the strategies Arturo described?
INTRODUCTION
Revenue management (RM) principles were ÿrst applied to restaurants

almost 20 years ago. °e goal of using RM in a restaurant is to maximize the
revenue it can generate over a certain time period. In theory and practice,
RRM is a data-driven ÿeld that combines elements of both demand and sup-
ply management. On the demand side, the focus of RRM is on understand-
ing demand and developing ways to proÿtably in˛uence and respond to it.
On the supply side, RRM focuses on how each unit of physical inventory of
a restaurant currently and potentially generates revenue over time.
RRM has slowly gained prominence in the food and beverage industry.
Savvy restaurateurs have realized that utilizing RRM principles and tools
can uncover and capture revenue-enhancing opportunities that do not
necessarily require huge investments. It has been reported that using RRM
increased the revenue of various restaurants by 3–5 percent (Sinclair, 2010).
°is chapter discusses the theory behind RRM and outlines the data and
metrics required to create and use an appropriate RRM program. It also pro-
vides basic tools and techniques for analyzing how the current operations
of a restaurant generate revenue and for identifying areas for improvement.
RESTAURANT REVENUE MANAGEMENT
Because restaurant operations occur in real-time, service providers face the risk
of not capturing all potential revenues if the capacity a restaurant has available
does not match the demand for its service. When a restaurant’s demand is too
low to ÿll available seats, it uses sales and marketing techniques, like coupons
or advertising, to attract additional customers. But when demand exceeds the
capacity of the restaurant, the problem becomes more complicated. RM pro-
fessionals and academics realized that RM could help restaurants solve this
problem. In theory, if the restaurant cannot serve every customer, it would
maximize its revenue by serving the most proÿtable customers—the classic
RM problem—thus beginning the ÿeld of RRM (Kimes et al., 1998).
Although RRM principles can undoubtedly help streamline, refocus,

and strengthen any F&B operation, not every restaurant beneÿts equally
from using RRM. RRM provides the most beneÿt when a restaurant is oper-
ating at, or close to, capacity. °is means that demand is greater than supply
during some time periods.
SEEING FURTHER
As service businesses have realized the advan-
tages of managing revenue and customers have
become familiar with RM practices, the scope of
RM has been transitioning (Cross et al., 2009). The newer approach to RM
has a more strategic, customer-centric focus that is concerned not only
with using existing supply to fulÿll demand but also with creating and
managing new demand. Many aspects of a service operation, including
customer behavior, marketing, operations, technology, and design, can
now be considered part of the RM problem, further demonstrating RM is
an integrative, long-term operating strategy.
Another way RM has been progressing involves the proliferation of the
digital world. The predominance of eCommerce has changed the RM
landscape by creating new and diverse distribution channels, generat-
ing huge amounts of customer data, and opening the door for price
optimization (McGuire, 2016). In addition, customer-generated infor-
mation available through social media and review sites can impact pur-
chase decisions and perceptions of value (Noone & McGuire, 2013b).
1. Your friend’s 50-seat restaurant in Atlanta is operating at 80–90%

capacity all six nights per week it is open. What aspects of RM could
help her?
2. Another friend’s 50-seat restaurant in New York City is only half full
most of the time, including weekend nights. What aspects of RM
could help him?
Conditions Necessary
°e ÿve conditions necessary for RM to be truly e˝ective and successful are

relatively ÿxed capacity, perishable inventory, predictable and time-variable
demand, high ÿxed costs and low variable costs, and segmentable markets
(Kimes, 1989). Restaurants commonly have four of these conditions (Kimes
et al., 1998):
• Relatively ÿxed capacity: °e capacity of a restaurant is substan-

tially ÿxed. °e footprint of the restaurant (the space allocated to
the kitchen, dining room, restrooms, etc.) is not easily altered in a
way that could considerably change the number of customers who
can ÿt at any given time. However, restaurants have a higher level of
˛exibility in their capacity than many other services. If necessary,
a restaurant can add another table or seat to its inventory to fulÿll
demand without incurring a signiÿcant additional cost.
• Perishable inventory: Every seat at a restaurant is capable of
generating revenue for a certain time period—for instance, the pre-
theater seating, the 5:00–6:00 p.m. hour, or the 12:00–12:15 p.m.
quarter-hour. If the seat is not used in that time, the opportunity
for that seat to generate revenue is lost forever. Although perishable
inventory in a restaurant is usually thought of as raw food inventory
in the back-of-house (BOH), RRM deÿnes perishable inventory as
front-of-house (FOH) seat and table inventory.
• Predictable and time-variable demand: Understanding when cus-
tomers arrive at a restaurant and how much time they will occupy
seats is vital to using RRM. °e ability to forecast demand allows a
restaurateur to use the most appropriate strategies to build demand
where it is low and operate more e˝ectively where demand is high.
Restaurant demand is also time-variable. Although customers

generally want to dine at mealtimes (breakfast, lunch, and dinner),
demand di˝ers within meal periods and across days of the week and
even seasons of the year.
• High ÿxed costs and low variable costs: Restaurants require a large
initial outlay of funds and incur an amount of ÿxed costs every day
in operation, regardless of whether any customers arrive. °e variable
cost of serving a restaurant customer is quite low in comparison.
• Segmentable markets: While every restaurant serves di˝erent mar-
ket segments, the nature of restaurants does not easily allow cus-
tomers to be segmented on the basis of purchasing behavior. Unless
a restaurant sells the majority of its seats through reservations or
relies heavily on a prix ÿxe menu, having segmentable markets is
not generally a consideration when applying RM to restaurants.
PROS & CONS

The management team of Go’s, a high-volume sushi
restaurant, in a busy Manhattan transit station is having a lively discus-
sion about capacity. Executive Chef Satoshi suggests that capacity is
determined by the size of the kitchen because, after all, customers can-
not buy food that does not get made. After adding that the sushi bar also
makes food that customers buy, Sushi Chef Mei raises the point that no
matter how big her prep area is, the amount of sushi that can be made is
limited by the number of line cooks at work. If she doesn’t have sta˛, she
can’t make sushi.
At this point, Rai, the Dining Room Manager, brings up the point that
unless they switch to takeout only, the capacity of Go’s is set by the num-
ber of tables on the õor and how many times they can turn those tables
each day. Chef Mei reminds Rai that the sushi bar seats 20, bringing up
the idea that seats are the best measure of capacity at Go’s.
Restaurant capacity can be deÿned by kitchen size, sta˝ng levels, num-
ber of tables, or number of seats. What are the pros and cons for deÿning
capacity in each of these ways? How do you think restaurant capacity
should be deÿned, and why?
Operations Component
Unlike airline and hotel revenue management, restaurant revenue man-

agement has a large operations component. °is is due to the fact that the
duration of the restaurant service—the time interval during which revenue
is generated—is short. For instance, the time it takes for a dirty table to
be bussed and reset impacts when that table can be resold. In a hotel,
however, the 30 min it takes for a dirty room to be cleaned does not usually
mean a revenue opportunity is lost, because rooms are sold by the night.
Like other services that use revenue management, restaurant revenue

management focuses on FOH concerns and maximizing potential top-line
revenue. Undoubtedly, BOH operations, including food cost and sta˙ng,
play a dynamic role in revenue and proÿt generation and must be taken
into account when evaluating RM solutions. °e strategic focus on the FOH
allows operators to manage the FOH supply of physical inventory, plus man-
age and create demand, without having to make a signiÿcant investment in
new kitchen equipment or reconÿguration.
RevPASH
In RRM, a metric that re˛ects both supply and demand management is

RevPASH – revenue per available seat hour (Kimes, 1999). RevPASH measures
how well each individual physical inventory unit generates top-line revenue
each hour. Because the two primary components of a restaurant’s revenue—uti-
lization and price—are incorporated into the RevPASH metric, it allows for an
apples-to-apples comparison across time and/or between di˝erent operations.
RevPASH is a function of occupancy (table or seat) and average check

(per table or per person).
RevPASH = Average check × occupancy
If a restaurant has an average check per person of $18 and a seat occu-
pancy of 50 percent, its RevPASH would be
$18 × 50% = $9.
RevPASH can also be calculated using total revenue.
RevPASH =Revenue/(# of seats × # of hours in operation)
If a 145-seat restaurant is open 360 days a year for 10 h a day and has a
total annual revenue of $4,698,000, its RevPASH would be
$4,698,000/(145 × [360 × 10]) = $9.

°is means that, on average, each seat in the restaurant generates $9 for
every hour the restaurant is open.

You are the owner of Root, a 200-seat restaurant that is
open ÿve nights a week, from 4:00 p.m. to 11:00 p.m. You
recently heard a webinar on restaurant revenue management and
decided to apply some of the concepts to your restaurant. You have
pulled revenue ÿgures from your POS system for last year. Assume
average duration, including seating and bussing processes, is 1 h. A
sample of the Excel data ÿle is
TO DO
1. Use the data in the Excel spreadsheet to calculate RevPASH by hour
for each day of the week at Root. When is RevPASH highest? When
is RevPASH lowest?
2. You estimate that initiating an RRM program at Root will cost $100,000
and would likely increase revenues by 1% in 1 year. Assuming you
would not amortize the program, would you adopt the RRM program
if this were your restaurant? What if revenues increased by 2%?
Duration and Price
A signiÿcant amount of RRM research pertains to two strategic levers—

duration and price—that restaurant operators can manipulate in an e˝ort
to in˛uence demand (Kimes, 1999; Kimes et al., 1999; Kimes et al., 1998).
• Duration: If operators are able to control the time a customer occupies
a seat at a restaurant, they can better manage RevPASH. Duration of
any restaurant experience is unpredictable, although most restaura-
teurs would be able to provide a solid estimate of how long a meal
takes. Duration management starts by analyzing the current duration
and reducing variability. It also involves forecasting arrivals and assess-
ing the procedures used to handle them. In some situations, duration
management techniques could lead to an additional table turn.
• Price: If operators are able to manipulate the price charged to restau-
rant customers, they can also better manage RevPASH. Pricing strat-
egies that restaurants commonly use include two-for-one specials,
happy hour discounts, coupons, and early-bird specials. Demand-
based pricing moves beyond these marketing-based promotions and
instead uses rules, also known as price fences, which allow for more
ongoing control over the prices charged.
THINK HISTORICALLY
Controlling dining duration and price are not new strategies to the res-
taurant business. Consider the following menus from two restaurants:
Which one shows an example from a duration management strategy?

Which one shows how a restaurant used price to in˛uence the behavior
of customers? °ese menus are from 1895 and 1945, respectively; how
could these duration and price strategies be used today?
RRM PROGRAM
An RRM program is a set of analytical and operational tools tailored for

an individual operation. In all RRM programs, historical data are collected
and analyzed in order to develop strategies that will allow the restaurant
to capture the maximum possible revenue over a certain time period
using its existing physical capacity (Kimes, 1999). °e techniques used
to achieve those goals depend on several factors:
• °e scope of the program: Is the RRM initiative for the corner
bistro owned by you and your sister? A portfolio of corporate-owned,
multibrand, multilocation, national restaurants? A quick-service
restaurant you recently franchised? A co˝ee shop? An individually
owned and operated upscale casual steakhouse?
• °e focus of the program: Although RRM is rooted in research-
based principles, it does not disregard the ÿrsthand knowledge
and instincts a manager, maître d’, owner, or chef has regarding her
operation. An RRM program could focus on a speciÿc issue already

detected by an operator, such as why the dining room is only half full
at 6:00 p.m. on Saturday night but over˛owing at 7:00 p.m. Or how
can more VIP customers be served at a casino bu˝et?
• °e budget for the program: °e total cost to initiate and execute
an RRM program depends on whether or not an RM ÿrm or ana-
lyst will be hired, if a new point-of-sale (POS) or RM system will be
purchased, how many tangible items like tables and linens must be
acquired, and how much time and payroll will be spent on training
employees.
Establish the Baseline
°e ÿrst step of any RRM program is to establish the baseline or develop a

data-supported understanding of how a restaurant is currently performing
(Kimes, 1999; Kimes et al., 1999). °is involves the operations manage-
ment area of process analysis, which simply means analyzing the current
way inputs (hungry customers) are turned into outputs (satisÿed custom-
ers).
In RRM, a restaurant operation is viewed as a system of processes

that moves hungry customers through all the stages required to turn
them into satisfied customers. Examples of FOH food service processes
include seating, collecting payment, taking orders, and bussing. Some
process analysis tools useful in establishing the baseline for an RRM pro-
gram are a process flow chart, a process flow diagram, and a fishbone
diagram.
Process Flow Chart
A process ˛ow chart is a visual tool that can help focus attention on how
a customer is moved through a service delivery system—and when that
customer is waiting for and participating in the service. Flowcharts have
long been used in industrial engineering, oên for planning and quality
control purposes and are so widely used that Excel has a built-in ˛ow-
chart function (Gilbreth & Gilbreth, 1921; ASME, 1949). °e symbols and
descriptions for several categories of actions used in a process ˛ow chart
are as follows:
Operation – Activity in the system
Transportation – Movement through the system
Inspection – Pause for evaluation
Storage – Waiting within the system
Decision – Work requires a condition to be met/unmet before it can move on
An interesting aspect of a restaurant setting is that although both a cus-

tomer and a customer’s F&B order move through the service system, they
oên take separate paths. Figure 9.1 gives an example of a simple process
˛ow chart for a service transaction at a co˝ee shop.
Figure 9.1: Simple Example of a Process Flow Chart for a Coffee Shop
A process ˛ow chart can become extremely complex if all possible activ-
ities, processes, and decisions within a service delivery system are included.
To illustrate, the process depicted in Figure 9.1 is considered simple not just
because it only has ÿve steps but also because it makes several signiÿcant
generalizations like process times never vary and every customer orders a
single drink. Although these assumptions are impractical, a simple process
˛ow chart includes enough detail and to serve as a baseline picture of the
core service system; complexity can be added and the simple ˛owchart can
be augmented if needed.
For an RRM baseline analysis, the process ˛ow chart should include at least
every high-level, major activity that directly helps fulÿll the needs of the
customer. Constructing a process ˛ow chart requires ÿrst observing the
service system and recording process times. Robust F&B POS systems and
spreadsheet skills can help estimate process times.
Throughput
In addition to providing a snapshot of how a system runs, the timings

included in a process ˛ow chart are used in determining two basic system
metrics:
• °roughput time: °e time a customer spends in a service system

from enter to exit.
• °roughput rate: °e number of customers that ˛ow through a ser-

vice system per unit of time.
°roughput time measures how long it takes for a pass through the sys-
tem, while throughput rate measures the output of a system. °ese metrics
re˛ect how e˝ectively a service system processes customers.
°roughput time = Total time a customer spends in a system from the

start of the ÿrst process to the end of the last process
In Figure 9.1, the throughput time for a customer who did not order
baked goods = 15 s for order to be taken + 15 s to pay + 3 s waiting for the
barista to get the order + 60 s waiting for drink + 3 s getting drink = 96 s.
°e throughput time for a customer who ordered baked goods = 15 s for

order to be taken + 15 s to pay + 3 s waiting for the barista to get the order
+ 30 s getting baked goods + 30 s waiting for drink (note: 30 of the total 60
s spent on waiting for a drink have already been accounted for in the 30 s
spent getting a baked good) + 3 s getting drink = 96 s.
°roughput rate = 1/throughput time
For Figure 9.1, the throughput rate = 1/96  60 = 0.0104  60 = 0.625

customers/min. °is is the number of customers who can pass through the
system per minute.
Transform this to determine the number of customers who can pass

through the system per hour: °roughput rate (customers per hour) = Aver-
age covers per hour = 0.625 60 min/h = 37.5 customers/h.
A process ˛ow chart is also useful in determining the system’s bottle-

neck—the process that has the lowest throughput rate. °e bottleneck sets
the pace of the throughput rate of the system because it limits the number of
outputs that can be produced. It is the slowest activity, process, or operation
in the system. It sets the pace for the throughput rate of the system. To deter-
mine a bottleneck, calculate the throughput rate for every process.
For Figure 9.1, the throughput rate for each process in the co˝ee shop is
as follows:
Activity >> Take Collect $ Give Make Serve Deliver

order order to drink baked drink
barista goods
Throughput rate 1/15 = 1/15 = 1/3 = 1/60 = 1/30 = 1/3 =
(customers/s) .0667 .0667 .3333 .0167 .0333 .3333
°e bottleneck is the make drink process because it has the lowest

throughput rate. No matter how e˙cient the other steps in the process
are, the system will always be held up at the bottleneck. °erefore, to move
more through the system requires alleviating the bottleneck. °is is done by
increasing its capacity or decreasing its processing time. For the co˝ee shop
example, to increase the number of drinks that can be made per second
could be accomplished by adding another barista or streamlining and stan-
dardizing the make drink process.
For the co˝ee shop example, adding another barista to the make drink
process results in the following:
°roughput rate = (1/throughput time)  # baristas = (1/60)  2 =

0.0333 customers/s.
A throughput rate and bottleneck analysis is recurrent. °is means that

aêr the primary bottleneck is identiÿed and alleviated, the system should
be reexamined to determine what (if any) process is the new bottleneck. °e
co˝ee shop from Figure 9.1 would consequently have two bottlenecks: Make
drink and serve baked goods.
Process Flow Diagram
Like a process ˛ow chart, a process ˛ow diagram is a visual tool that serves
as an abstract of the restaurant system. A process ˛ow diagram is a sketch
of the actual system operations and traces how customers, employees, and
other resources ˛ow through the facility. Process ˛ow diagrams are useful
when movement is a large part of how the restaurant operates, like in a buf-
fet setting, a self-service establishment, or a sequential-step/made-to-order
service model. °ey also can be useful when movement within a restaurant
is impeding e˙cient operation, such as if hosts, servers, and customers all
share a narrow staircase to reach the dining room.
Flow diagrams aid in identifying potential failure points, which are the
places in the system where operations are most likely to break down. Identi-
fying potential failure points in a baseline analysis will ultimately help direct
and prioritize RRM recommendations. Potential failure points oên found
using a process ˛ow diagram include gaps in the service delivery system,
unnecessary steps within processes, and redundancies across processes
(Fitzsimmons and Fitzsimmons, 1999).
Constructing a process ˛ow diagram for an RRM baseline analysis

requires observation and customization, as each restaurant has its own
unique operating characteristics. Figure 9.2 shows a simple process ˛ow dia-
gram for the entrance-to-seated process of a casino bu˝et restaurant.
Figure 9.2: Process Flow Diagram for the Seating Process at a Casino Buffet
Fishbone Diagram
A ÿshbone diagram, also known as a cause-e˝ect diagram, is a tool used to

help identify possible causes for a problem (Ishikawa, 1968). In a ÿshbone
diagram, the problem is put at the head of the ÿsh, signaling that this prob-
lem is the “e˝ect” of many potential “causes.” Likely categories of the root
causes are included on individual bones of the ÿshbone diagram, with pos-
sible sub-causes included as smaller bones.
°e ÿrst step in constructing a ÿshbone diagram is to identify the prob-

lem by observing the situation, interviewing employees and perhaps even
analyzing relevant data. °e problem statement can range in complexity,
from a clear problem of “too many no-show reservations” to a more layered
problem of “better manage the ˛ow of customers through a restaurant.” °e
next step in building a ÿshbone diagram is to brainstorm the likely causes of
the problem. Gather information on possible causes by observing the prob-
lem area if possible and interviewing both the management and the people
closest to the problem (e.g., bussers, servers, cooks).
Figure 9.3 is an example of a ÿshbone diagram for a restaurant. °e

problem at the head of the ÿshbone is that customers experience a long line
at lunch. Several possible causes and sub-causes are included in the branches
of the diagram.
Figure 9.3: Example of a Fishbone Diagram

In addition to these three process analysis tools—process ˛ow chart, pro-

cess ˛ow diagram, and ÿshbone diagram—several other measures should be
calculated and analyzed to establish the baseline in a RRM analysis. °ese
measures—arrivals, duration, occupancy, average check, and RevPASH—
provide indications of how well an operation is using its physical resources
to generate revenue.
Arrivals
°e number of parties or customers arriving to a restaurant in certain time

periods is referred to as arrivals. When graphed, arrival patterns show the
timing of the ˛ow of demand into the restaurant system. Peak demand
periods and shoulder periods—the times of increasing/decreasing demand
before/aêr peak—are generally times that beneÿt the most from RRM.
Arrivals data is easily obtained from newer table management systems. Get-
ting arrivals data from older POS systems is not always straightforward. POS
data oên re˛ects the time a check is opened, which is not necessarily the time a
party arrives to the restaurant. If a check is opened at 7:04 p.m., it is impossible
to know the customer actually arrived at 6:30 p.m. More accurate arrivals infor-
mation can be manually collected, but if no other information is available, POS
check-open data can serve as a proxy for arrivals in an RRM baseline analysis.
Figure 9.4 shows the arrivals graph for Trader G’s, a casual, fami-
ly-run restaurant in Ithaca, New York, for the month of June. °e number
Figure 9.4: Graph of Arrivals for June

of customers arriving to Trader G’s peaks around 6:00 p.m. every night and
is markedly higher on weekend nights. Although a small spike in demand
occurs for lunch, the peak demand period is at 6:00 p.m. and shoulder
times are 5:00 p.m. and 7:00 p.m.
Dining Duration
°e total amount of time a customer occupies a seat in a restaurant is referred

to as dining duration. Total dining duration can be approximated by calcu-
lating the time from when a check is opened to when it is closed. However,
check-open and check-close time measures do not necessarily re˛ect when
a table is seated or when customers vacate the table. A more precise measure
of duration could be obtained by performing a time study but duration data
from a POS system is usually acceptable to use as a proxy for dining dura-
tion.
Once raw dining duration data has been gathered, a spreadsheet analysis
is used to calculate the average and standard deviation of duration. °e stan-
dard deviation measures the amount of variation in a system, so a low stan-
dard deviation indicates a high level of consistency in operations. Common
ways in which dining duration data are examined include by party size, by
steps in a meal, by hour, and by day of week. Figure 9.5 provides an example
of a dining duration analysis.
Figure 9.5: Example of a Duration Analysis
Table Occupancy and Seat Occupancy
Occupancy measures how well the physical inventory of the restaurant is

being used to satisfy demand. Both table and seat occupancies should be
included in a baseline RRM analysis, oên broken down by table size and
time period. Although seats are the smallest physical/FOH inventory unit
in a restaurant system (not considering ancillary operations like take-out
services) that can generate revenue, they are situated at tables, which are the
actual units sold in most restaurants.
Seat occupancy = Customers served/# of seats
If a 36-seat restaurant has 27 covers (customers) from 7:00 p.m. to 8:00

p.m., its seat occupancy for that time period = 27/36 = 75%.
Table occupancy = Parties served/# tables
If the restaurant has nine tables and eight checks (parties) from 7:00 p.m.
to 8:00 p.m., its table occupancy for that time period = 8/9 = 88.9%.
Table occupancy by table type (i.e., two-top, four-top) is more di˙cult

to calculate. A good POS system and an experienced spreadsheet user could
determine table occupancy for table types using transaction-level data such
as a table number/identiÿer, party size, and meal duration. Manual data col-
lection of table occupancies could also be used. Figure 9.6 shows a summary
of a spreadsheet analysis of seat and table occupancy.
Figure 9.6: Example of an Occupancy Analysis
Seat occupancy will almost always be lower than table occupancy. °is is
because restaurants operate with table sizes (e.g., two-top, four-top, six-top,
eight-top) that do not always match the sizes of parties (e.g., party of 1, party
of 3, party of 5, party of 7). However, when table occupancy is much higher
than seat occupancy, the restaurant usually beneÿts from an advanced RRM
analysis of its table mix.
Average Check
Restaurant operators are familiar with the average check metric:
Average check = Revenue/customers
Average check measures not only the amount of money a restaurant

is bringing in but also its price point, which helps in determining its
competitive set and its marketing strategy. Average check is usually
considered on an aggregate level but analyzing it in di˝erent ways can
yield interesting information. For instance, the average check may di˝er
depending on how many people are in a customer’s party. Knowing that
per person spend is higher for parties of 2 than for parties of 7 could help a
restaurant in deciding whether or not to add four two-tops or one eight-top
to its table inventory.
RevPASH
As previously shown, RevPASH can be calculated in two ways:
RevPASH = Average check × seat occupancy or
= Revenue / (# of seats × # of hours in operation)
A good beginning point for a RevPASH baseline analysis is to calculate

hourly RevPASH by each day of the week. Figure 9.7 shows hourly RevPASH
for the dinner period for a 212-seat seafood restaurant in Boston over the
summer months.
Figure 9.7: Hourly RevPASH for Summer
Most restaurants already consider the metrics—number of table turns,

dining duration, and average check—that make up RevPASH. °e beneÿt of
the RevPASH metric is that it provides an easier and more comprehensive
way to evaluate how well the restaurant generates revenue.
1. Calculate the RevPASH for each restaurant below.
2. Which restaurant would you rather manage and why?
Restaurant Seat occupancy Average check RevPASH
per person
A 30% $25
B 40% $21
C 50% $18
D 80% $11
E 90% $10

Ann Li is the general manager of Camellia, a 180-seat
restaurant in Los Angeles hotel that is owned by a private
equity group. Camellia is open from 8 a.m. to 10 p.m. every day of the year,
including holidays. Next week, Ann will be attending the annual meeting
of the investors, where she will be expected to discuss the performance
of Camellia over the past year. Ann asked the assistant manager for a
summary of last year’s gross revenue ÿgures and received the following:
TO DO
Explore the RevPASH Web App, found at http://www.bu.edu/revpash/.
Use the app to calculate and chart monthly RevPASH for the past year.
What are the months with the highest RevPASH? What are the months
with the lowest RevPASH?
Hints for using the app: Work in the Monthly tab, add rows, hours open
is not the same each month.
Collect Data
RRM is a data-heavy discipline, so collecting and analyzing data is funda-

mental to using RRM (Kimes et al., 1999). Di˝erent RRM programs involve
di˝erent amounts and types of data. °ings that should be considered when
determining data requirements include: What is needed? To what level of
detail? How to get it?
Another concern in data collection is how many observations need to

be used to ensure a statistically sound analysis. Much RRM analysis is con-
cerned with the average and standard deviation of data sets. Because of this,
a general guideline for the amount of data that should be used to ensure a
statistically sound analysis is 30 observations, unless more data are available.
For instance, to determine the dining duration for Friday nights from
5:00 p.m. to 8:00 p.m. would require that roughly 30 tables were observed
each hour, preferably over several di˝erent Friday nights, and duration data
were recorded. However, if there is access to thousands of observations (for
instance, through a POS system), much more data should be used. In addi-
tion, all data should also be “scrubbed” of incorrect or duplicate entries to
ensure that only sound data are included in the analysis.
A strong baseline analysis could be conducted with the following data

requirements:
What is Levels of Detail to Consider How to Get It

Needed
Throughput time - Monthly Do a time study and
and - Day of week use covers (# of
throughput rate - Time period (usually hourly or by 15-min customers served)
intervals) from POS
- Party size
- Steps in service delivery system
Arrivals - Monthly Manually or from
- Day of week POS/wait mgt system
- Time period (usually hourly or by 15-min
intervals)
- Party size
Dining duration - Monthly Use check opened
- Day of week from POS or do a
- Time period (usually hourly) time study
- Party size
- Steps in meal
What is Levels of Detail to Consider How to Get It

Needed
Table occupancy - Monthly Use POS or do
- Day of week manual data collection
intervals)
- Table size
Seat occupancy - Monthly Use covers by time
- Day of week interval from POS
intervals)
Average check - Monthly Use revenue and
- Day of week covers from POS
intervals)
- Party size
RevPASH - Monthly Use revenue
- Day of week
- Time period (usually hourly or by
15-minintervals)
- Party size
Develop RRM Solutions
°e ongoing goal of a RRM program is to maximize RevPASH. Solutions for

maximizing RevPASH depend on the issues uncovered during the baseline
analysis, and many RevPASH solutions are time-based. During times that
RevPASH is low, RRM strategies should be aimed at increasing occupancy.
When RevPASH is high, RRM solutions should focus on increasing price
and/or making occupancy more e˝ective (Kimes et al., 1999; Kimes et al.,
1998).
Usually, demand-based RRM solutions revolve around manipulating

duration and price in an e˝ort to in˛uence the demand of a restaurant. Cor-
respondingly, supply-based RRM solutions involve ensuring that a restau-
rant can e˝ectively and proÿtably serve incoming demand.
As with any RM program, the RRM solutions chosen to help manage

RevPASH must work well together. RRM solutions should not only help
increase revenues but also preserve or enhance customer satisfaction. °e
following table shows a variety of RRM solutions:
High RevPASH Low RevPASH

- Manage arrivals and altering the mix of - Make price more variable
reservations, walk-ins, and call-ahead
- Traditional time-based discounting,
seating customers so the most proftable
like early bird weekday specials
ones are served
- Couponing and promotions
- Overbooking, especially if reservations
are not guaranteed or if there is not a - Upsell/suggestive selling
penalty for no-shows
- Create new demand
- Smooth demand from peak periods to
shoulder periods - Marketing tactics
- Reduce dining duration - Use new distribution systems, such as

OpenTable
- Minimize dining options by offering a
limited menu - Use group discounters such as
Groupon
- Consistently use overt, but not aggressive
or obnoxious, cues to move diners - Create new services and products
- Ensure staffng is appropriate - Bundle offerings or group different

items together and sell at a
- Streamline and standardize service discounted price
delivery
- Being a frequent diner club that offers
- Pre-bus tables incentives during off-peak hours
- Ensure check payment process is effective - Cross-train employees to perform
and quick various functions
- Optimize the mix of service inventory
- Install (or develop) a technology system
that has RRM capabilities
One progressive RRM solution that is useful in both high and low
RevPASH scenarios is the use of electronic menus. Electronic menus allow
operators to change menu o˝erings and vary prices in real-time, essentially
enabling a restaurant to respond to almost any demand situation in a reve-
nue-maximizing manner.
RRM solutions can range from tried-and-true RM methods to adaptive

and creative untested ideas. Ultimately, the set of RRM solutions will be
unique to most any operation. °ey will also be unique to a period of time
since the solutions are derived using data from past performance. One thing
every RRM program has in common, though, is that strong analytics serve
as its foundation.
Implement and Monitor RRM Solutions
Aêr establishing a restaurant’s baseline and selecting a RevPASH-maximiz-

ing set of RRM strategies, the next step of an RRM program is to implement
the solutions and make sure they are working appropriately. °ere are no
long-established rules for implementing RRM solutions. Since an RRM pro-
gram is customized for an individual operation, one solution or method of
implementation that works at one facility may have no impact on RevPASH
at another.
Brainstorming creative ideas for implementing an RRM program and

talking with other RRM users can be beneÿcial. Whoever is assigned to lead
the implementation of the RRM initiative—an owner, manager, or RRM
consultant—will be responsible for managing the people and processes
associated with the particular RRM program.
• Managing people: Employees are directly impacted by many RRM

solutions. For example, decreasing dining duration potentially
means that servers and bussers will have added responsibilities and
cooks and dishwashers will have to work harder to produce more
meals. Training helps employees understand their vital role in an
RRM program. Putting the proper incentive and communication
systems in place to ensure that the RRM program works as intended
helps secure their support.
• Managing processes: Depending on the RRM solutions chosen, new
and/or improved processes will need to be established, tested, and
implemented. For instance, streamlining service delivery by retool-
ing the check delivery and payment process requires a careful plan,
good training, and a trial period to work out any problems. °e
process of purchasing and installing a new POS system capable of
capturing RRM data would require a much di˝erent type of manage-
ment.
One more thing every RRM program has in common is the need to
monitor the program and update it when necessary. °is is done by period-
ically recalculating metrics and analyzing processes again—essentially rees-
tablishing the baseline. If RevPASH has not performed as well as anticipated
aêr the last round of RRM updates, a ÿshbone diagram would be helpful in
determining why.
REAL PEOPLE
John Singleton, the manager of a restaurant at a

beachside resort in Panama City Beach, Florida,
was upset when he ÿrst learned that the corporate o˙ce
was beginning an RRM initiative. He insisted that an RRM
program would erode his average check. His yearly bonus was tied to
average check. Even though he heard something about bonuses being
tied to something called RevPASH, he was not convinced that anything
messing with his high average check is a good idea. Convince him that
an RRM program is a good idea.
1. Consider this scenario: The Cat Pub, a bar and restaurant in
Hershey, PA, o˛ers discounts on appetizers and drinks from
5 p.m. to 7 p.m. each night. These happy hour specials are
quite popular, especially on the nights when the local ice
hockey team plays nearby.
Should the happy hour specials be o˛ered every night? Why does o˛ering the
happy hour specials every night of the week represent a suboptimal solution to
an RRM problem?
2. You are trying to determine if the cashier process or the kitchen process is the
bottleneck of dinner service at Crazy Joe’s Chickn n’ Wa˙es Fast Food Truck.
Crazy Joe’s has one cashier who takes orders and payment and also hands out
prepared meals and two cooks who prepare the meals. You know that the cashier
can process 16 customers per hour and that each customer purchases 3 chickn
n’ wa˙es meals on average. You also know that the throughput rate of each cook
is 25 meals per hour. Follow the steps below to gather more information about
what is happening at Crazy Joe’s to help you identify the bottleneck.
• Determine how many meals customers demand in an hour.
• Determine how many meals the kitchen can produce in an hour.
• Calculate how many customers the kitchen can serve in an hour. This is the
throughput rate of the kitchen or the number of customers the kitchen can
serve in an hour.
Compare the throughput rate of the cashier to the throughput rate of the kitchen
and determine the bottleneck. The process with the smaller throughput rate is
the bottleneck, as it limits how many customers can be served in this simple
scenario. Is the bottleneck’s throughput rate signiÿcantly smaller than the other
process? How does the signiÿcance of the di˛erence between throughput
rates of processes impact the solutions you would recommend to alleviate the
bottleneck?
3. Explain why doubling the capacity of a bottleneck would not necessarily double
the capacity of a system.
4. Using restaurant revenue management directly impacts the FOH operations,
especially since RRM solutions often address elements like the types of customers
FOH sta˛ will serve, the busyness of a facility, and the layout of a dining room õor.
Certainly, RRM practices also directly in˜uence kitchen operations. For instance,
a restaurant that issues a two-for-one entrée coupon is trying to build demand,
but its kitchen must be ready with ingredients and sta˛ to accommodate that
greater demand. What are some other ways and scenarios that illustrate how
FOH-centric RRM practices impact BOH operations?
5. For a busy restaurant that frequently has a wait, why would the POS data of time-
check-opened not be a reliable source to determine arrivals?
APPLICATIONS
Tasty Banquets
Tasty Banquets has the following system in place for ser-

vicing banquet tables: Dinner plates are assembled (4 min
per table), plates are loaded onto a tray (2 min per table),
and trays are delivered to tables (5 min per table).
1. What is the throughput time for a table’s food?
What is the throughput rate (tables per hour) for the system?
2. Tasty plans to use two expediters, two helpers, and four servers.
What is the throughput rate (tables per hour) for each task?
3. What is the throughput rate of the entire system now? What is the
bottleneck activity?
Muchacho
°e manager of Muchacho, a casual dining Mexican restaurant, is trying to

reduce the mean time of weekend dinners. Develop a ÿshbone diagram to
identify the possible causes of a long meal.
TEAM ACTIVITY
Imagine your team has been hired by McArdees, a gastropub in

Chicago, as RRM consultants. McArdees has a sit-down, full- ser-
vice restaurant area open from 5:00 p.m. to 10:00 p.m., and all menu
items are also available in the large bar area. McArdees would like to know if it
should expand its restaurant section. You are given the following information:
• McArdees has 15 two-tops, 14 four-tops, 2 six- tops, and 3 eight-tops
• A graph of its arrivals:
• Average dining duration, taken from the POS system and measuring
the time from check-opened to check-closed, of 79 min.
• °roughput time for a table, from seat to ready for reseating, of 86
min.
• Revenue, averaged over 3 months, by day of week
Monday $3,879
Tuesday $3,686
Wednesday $4,721
Thursday $5,476
Friday $6,641
Saturday $7,463
Sunday $4,077
Using all the tools possible from this chapter, what can you tell about the
operations and performance of McArdees? What other information would
you need to perform a baseline analysis?
INTERNET ACTIVITY
Go online and search for a table for a party of two at the most
popular restaurant in your town for a busy Saturday at 7:00 p.m.
Is a table available at the requested time? If not, were other times
o˝ered? Describe the RRM technique of demand smoothing and
discuss if you think it is being used in this scenario.
Imagine that a table for two is only available at either 5:15 p.m. or 10:00
p.m. What are some ways this restaurant could entice you to make a reser-
vation at one of these alternate times instead of choosing a competitor at 7
p.m.?
GLOSSARY
Bottleneck – °e process within a system that limits the operation
and output of the entire system.
Capacity – °e supply of seats a restaurant has available to accom-
modate customers.
Dining duration – °e amount of time a customer spends at a
restaurant, measured from arrival to departure.
Suboptimal solution – An RRM solution that has a positive impact in one
area but a negative impact on the overall service system.
˜roughput rate – °e number of customers that ˛ow through a service
system over a certain time.
˜roughput time – °e time a customer spends in a service system from
enter to exit.
REFERENCES
American Society of Mechanical Engineers. (1947). ASME Standard: Operation
and Flow Process Charts, 1947. New York.
Cross, R. G., Higbie, J. A., & Cross, D.Q. (2009). Revenue Management’s Renais-
sance: A Rebirth of the art and Science of Proÿtable Revenue Generation.
Cornell Hospitality Quarterly, 50 (1), 56-81.
Fitzsimmons, J. A., & Fitzsimmons, M. J. (1999). Service Management – Operations,

Strategy, and Information Technology. (2nd ed.) New York: Irwin/Mc Graw-
Hill.
Gilbreth, F. B., & Gilbreth, L. M. (1921). Process Charts. Paper Presented at the
Annual Meeting of the American Society of Mechanical Engineers, New York.
Ishikawa, K. (1968). Guide to Quality Control. Tokyo: JUSE.
Kimes, S. (1989). Yield Management: A Tool for Capacity-constrained Service
Firms. Journal of Operations Management, 8 (4), 348-363.
Kimes, S. (1999). Implementing Restaurant Revenue Management: A Five-step
Approach. Cornell Hotel and Restaurant Administration Quarterly, 40 (3),
16-21.
Kimes, S., & Chase, R. (1998). °e Strategic Levers of Yield Management. Journal
of Service Research, 1(2): 156-166.
Kimes, S., Barrash, D., & Alexander, J. (1999). Developing a Restaurant Reve-
nue-management Strategy. Cornell Hotel and Restaurant Administration
Quarterly, 40 (5), 18-29.
Kimes, S., Chase, R., Choi, S., Lee, P., & Ngonzi, E. (1998). Restaurant Revenue
Management: Applying Yield Management to the Restaurant Industry. Cor-
nell Hotel and Restaurant Administration Quarterly, 39 (3), 32-39.
McGuire, K. (2016). Hotel Pricing in a Social World. Hoboken, NJ: Wiley.
Noone, B., & McGuire, K. (2013b). Pricing in a Social World: °e In˛uence of Non-
price Information on Hotel Choice. Journal of Revenue and Pricing Manage-
ment, 12, 385-401.
Rohlfs, K. (2009). ˜e Role of Space in Revenue Management (Doctoral Disserta-
tion). Cornell University, Ithaca, NY.
Sinclair, J. (2010, September 19). Restaurant Operators Ignoring RevPASH are
Missing a Trick: Real Revenues. Retrieved May 22, 2011, from http:// www.
foodservice.com.
CHAPTER 10
Restaurant Revenue Management:

Advanced Demand Management
Concepts
Kristin V. Rohlfs
OVERVIEW
The field of restaurant revenue management (RRM) combines elements
of demand management with concepts of supply management to
provide both a theoretical base and an operational plan to maximize the
revenue a restaurant can make. The demand side of RRM includes issues
related to pricing, how and when customers arrive at the restaurant, and
ways to influence customer behavior and the customer experience.
LEARNING OBJECTIVES
After studying this chapter, you should be able to evaluate
restaurant demand in the context of RRM. Speciÿcally, you
should be able to:
Explain ways in which restaurant demand impacts restaurant revenue and
discuss how managing demand ÿts into RRM
Evaluate several demand management techniques for restaurants and iden-
tify the strategies to use in di°erent operational situations
Describe variable pricing and apply it to a restaurant. Assess variable pricing
practices, such as price fences and couponing
261
Examine basic ways to determine menu prices, focusing on data-based

menu engineering
Perform a basic analysis of restaurant arrivals and compare the ways in
which arrivals can be measured
Determine when waiting lines occur and describe the di°erent methods for
managing them
OUTLINE
Introduction
Demand Side of RM = Demand Management
Pricing
• Variable Pricing
• Variable Pricing Strategies
• Setting Prices
Arrivals
• Types
• Basic Arrivals Analysis
• Forecasting Demand
Waiting Lines
• Why ˜ey Happen
• Psychology of Waiting Lines
• Wait List Management
Summary
Applications
• Cayuga Resort
• Northman’s
Advanced Demand Management Concepts  263
Team Activity
Internet Activity
Glossary
References
SO WHAT?
A goal of almost every food or beverage service operation is to be
proÿtable. No restaurateur starts a business to have lagging revenues
and elevated expenses. To help ensure that a restaurant is maximiz-
ing its revenue stream, many operators employ the theories and tech-
niques of restaurant revenue management (RRM). Some well-known
RRM tools frequently used to manage demand include an often costly
multiple-platform reservations system and restaurant seating and POS
systems.
In many restaurants, managing demand is the responsibility of the
host function. However, this is often a low-paying position that does
not require any business training or restaurant experience. Why would
this be the case?
INTRODUCTION
Like most service industries, the restaurant industry faces an imbalance

between supply and demand at di°erent times. When demand is too low to
ÿll available seats, restaurants must try to attract additional customers and
ÿnd alternate ways to generate revenue. When demand is more than can
be served by the seats or tables or kitchen, restaurants would like to serve
as many of the most proÿtable customers as possible. Restaurant revenue
management (RRM) is used to maximize the revenue per available seat
hour (RevPASH) by stimulating demand when it is low and redistributing
and serving demand in the most proÿtable way when it is high (Kimes et
al., 1998).
˜e demand side of RRM is the focus of this chapter. Because all parts
of a restaurant are directly exposed to demand ˝uctuations and demand
behavior, understanding patterns and qualities of demand is integral to

using RRM to its fullest. RRM aims to increase top-line revenues gen-
erated by an operation and has traditionally focused primarily on front-
of-house (FOH) concerns.
DEMAND SIDE OF RM = DEMAND MANAGEMENT
Managing demand means making sure all the operating policies and
procedures, prices, and sales and marketing programs are designed and
functioning to attract and maintain the most profitable customer base.
The set of demand management strategies being used must work col-
lectively in the best interests of a business, with no secondary objective
overshadowing the primary RM goal of optimizing revenue. The demand
management side of RRM combines traditionally different operations
management (e.g., forecasting) and marketing (e.g., pricing) methods
and techniques to influence demand in a way that maximizes RevPASH.
Common demand management practices include:

1. In˝uencing the type of requests for service
2. In˝uencing the timing of requests for service
3. Shi˙ing demand to periods that are less taxing on the operating sys-
tem
4. Shi˙ing demand to products that are more proÿtable
Services implement demand management practices in various ways.
For instance, airlines in˛uence the timing of requests for seats on ˛ights
by o°ering signiÿcant discounts for booking early. And hotels shift
demand from peak to o°-peak nights by having length-of-stay restric-
tions.
Food and beverage outlets frequently use the four types of demand
management practices previously listed. To in˛uence the types of
requests for service, a restaurant may use atmosphere and table size
to attract higher-revenue-per-person parties of two. A common strat-
egy to in˛uence the timing of service requests is to issue coupons for
speciÿc times only. To shift demand, many restaurants use early bird
specials or happy hour discounts. And many restaurants train sta° to
shift demand to di°erent products by upselling and suggestive selling.
Can you think of another strategy a restaurant could use for each of the
four demand management practices?
Demand management tactics are usually used reactively when demand

is greater than supply. ˜e problem with reacting to demand is that if an
operation changes course quickly, without proper planning and analysis,
it could su°er declines in productivity, quality, and proÿt (Croxton et al.,
2002). Using demand management tactics proactively when demand is less
than supply gives operators more control over the how and when demand
arrives and how and when the service system processes demand.
Pricing
Along with duration, pricing is considered one of the strategic levers of

RM. ˜ese strategic levers are the demand-side elements that an oper-
ator could potentially control in an e°ort to satisfy as much demand
as possible in the most revenue-enhancing way (Kimes & Chase, 1998).
Pricing is used in RRM to entice demand to move to di°erent time periods
or products and/or to stimulate new demand.
Variable Pricing
In theory, every customer has a time-sensitive price he/she is willing to pay

for any good or service. A restaurant would hypothetically be in a reve-
nue-maximizing position if it were able to charge di°erent prices to di°erent
customers in di°erent circumstances. Varying prices for every transaction
are unrealistic but a restaurant can apply variable pricing to a lesser, but still
proÿtable, extent.
Consider the graphs in Figure 10.1. ˜ey are basic economic price-quan-
tity graphs with the revenue determined by the amount sold and price
charged. Figure 10.1a shows one month of revenue from the baked ziti entrée
at a family-style Italian restaurant. When one price—$14 in this case—is
charged for the baked ziti, 100 dishes are sold, bringing in revenue of $1,400.
Figure 10.1b shows the potential revenue that could be made from baked
ziti when three prices—$8, $14, and $20—are charged. At $8, 65 dinners are
sold, 35 are sold at $14, and 25 are sold at $20, which totals $1,510. More of
the potential revenue is captured when more prices are o°ered.
Figure 10.1a: Effect of Variable Pricing: Charging One Price
Figure 10.1b: Effect of Variable Pricing: Charging Multiple Prices

Research has shown, though, that customers only tolerate variable

pricing under certain conditions, including
• customer value and company value are balanced (i.e., prices can be
raised to maintain proÿts, but not to raise proÿts) and
• customers have been made to expect to be charged di°erent prices at
di°erent times and for di°erent products (i.e., as in the airline, hotel, and
car rental industries) (Kimes & Wirtz, 2003; Simon & Dolan, 1999).
˜e use of variable pricing in restaurants can be more complex than in

other service situations. To start with, the customer has a large amount of
control over the duration of the service, making the determination of when/
how/to what extent to vary prices almost impossible. In addition, a restau-
rant does not just sell food; it also sells the use of a seat at a table, along with
the restaurant’s atmosphere, for a period of time. ãt is, restaurants o˙en
sell a time-based experience.
THINK HISTORICALLY
In the early 1990s, when the application and success of yield manage-
ment (now more commonly known as revenue management) in the air-
line industry was emerging, Robert Crandall, then the CEO of American
Airlines, famously said “If I have 2,000 customers on a given route and
400 di°erent prices, I’m obviously short 1,600 [prices].”
Now, over 20 years later, the use of variable pricing has not reached such
an extreme level but customers undoubtedly have accepted that prices—
especially on services—change without warning.
Because restaurants sell an experience, it would seem that variable pric-
ing would be a fantastic idea, since every customer would have a di°er-
ent price in mind that she is willing to pay for her experience.
However, consider this theoretical scenario: Becky, Pat, and Lou have
enjoyed a wonderful dinner at Ray’s Lobster & Crab, which practices
pure variable pricing. When the bill came, Becky told the waiter she had
a discount code she got online, Pat commented that she thought the crab
was worth less than it was priced on the menu, and Lou didn’t think it
was crowded enough to warrant the peak-hour surcharge.
˜is type of scenario would present operating and customer service
problems and would likely cause dissatisfaction for all parties. Can you
think of examples of what could go wrong in a restaurant that heavily
uses variable pricing?
˜e extent to which variable pricing can be used in RRM has yet to be

fully studied by researchers and tested by restaurant operators. Although
prices now cannot be varied to an extreme extent, adding some element of
variable pricing into the demand side of RRM is beneÿcial to maximizing
the revenue a restaurant’s supply can generate.
Variable Pricing Strategies
˜ree variable pricing strategies that can be used by a restaurant to optimize

revenues are as follows:
1. ˜e use of price fences (Kimes et al., 1998): Fences are restrictions
or conditions put on some aspect of a service that e°ectively lets a
restaurant charge di°erent prices to di°erent customers. A common
price fence used in the restaurant industry is a mandatory gratuity
for large parties. Some price fences are tangible; something physical
is attached to the price, like a bottle of champagne or seating at the
chef ’s table. Some price fences are intangible; the conditions put on
the restaurant service cannot be seen, like a noncancellable reserva-
tion.
Price fences can be based on characteristics of demand, such as party
size or group aˆliation, or characteristics of supply, such as table
location, time of day, or added amenities. ˜e set of price fences that
will be successful in maximizing revenue di°ers based on a particular
restaurant and its customer base. Research has shown that custom-
ers ÿnd some fences unfair, such as pricing based on table location
(Kimes and Wirtz, 2003). ˜erefore, while some creativity can be
used in determining appropriate price fences, customer response
and satisfaction should always be considered and incorporated into
this variable pricing strategy.
2. Issuing coupons with restrictions: Coupons with restrictions are not
a new concept to the restaurant industry. When used appropriately,
they can bring in demand during slow periods by o°ering pricing
incentives. Restrictions attached to a coupon can also encourage dis-
count-seeking customers to dine during an o°-peak time, so that
more price-insensitive customers can be eˆciently served during
peak hours. An example of a coupon with restriction would be a
50%-o° coupon that can be used a˙er 7:00 p.m. on the weekends for
Tyrel’s Burger Stop, a fast casual restaurant located in the heart of the
Wall Street ÿnancial district.
3. Adjusting service o°erings: Changing what is available for cus-
tomers to purchase at speciÿc times is another variable pricing
technique. Examples of adjusting a service o°ering include having
di°erent menus/prices for lunch and dinner and making a reduced-
price pre-theater menu only available until 6:30 p.m. Limiting what
is o°ered for sale can potentially defer demand from overcrowded,
peak hours to shoulder or o°-peak periods.
Whatever variable pricing strategies are used, research has shown that
presenting price di°erences as discounts instead of premiums makes vari-
able pricing seem more acceptable to customers (Kimes & Wirtz, 2003). ˜is
practice is called framing. For example, a restaurant that o°ers both a low-
er-priced lunch menu and a higher-priced dinner menu should frame the
lunch menu as a discounted dinner menu instead of vice versa.
SEEING FURTHER
A popular variable pricing strategy is the online
group coupon. Groupon and LivingSocial are
examples of websites that sell huge discounts in
the form of coupons. Many restaurants have been using these types of
sites to stimulate demand.
However, Alex Failmezger, an RRM executive, has observed: “These cou-
pons are really taking a toll on the industry because, in some cases, they
overstimulate demand but from the wrong customers at the totally
wrong price. Already-struggling restaurants hoping to boost short-term
revenue need to make certain they can cover the costs to fulÿll all of the
coupon purchases. Plus, group coupons attract discount-seekers, who
may not always be the best repeat business prospects.”
Alex agrees that in the right situation, group coupons can be a good vari-
able pricing strategy to use to attract demand or, with the right restric-
tions, smooth it from peak periods. She just warns restaurateurs, “If your
demand is already strong, there is no need to issue a group coupon.
Everyone already wants to go to your restaurant and giving them a dis-
count just sets you up to never get to charge them full price!”
What are some situations where using a group coupon with restrictions
would be beneÿcial to a restaurant? What are some restrictions that could
be used to create a proÿtable, but still customer-friendly, coupon deal?
Another wide-reaching discount strategy that has gained popularity in
the restaurant industry is social media marketing. Gracie Doren, an inde-
pendent F&B consultant, commented that “giving discounts for check-
ing in or following an establishment are certainly great ways to reach
an expanded potential customer base. But a good social media strategy
requires planning, analysis, ˛exibility, and attention, and doesn’t always
need to be about cost and coupons.”
Can you think of any social media campaign in the F&B industry that pos-
itively or negatively impacted your perception of the business? Was there
a discount associated with this campaign?
Setting Prices
Restaurants can determine their prices—no matter the extent to which they
use variable pricing—in several di°erent ways. A full discussion of menu
pricing is outside the scope of this chapter, but a synopsis of several com-
mon pricing methods is provided below.
• Cost-plus: Each menu item’s price is based on the cost to make it plus
a predetermined markup. Costs include ingredients, condiments
and garnishes, overhead, and may/may not include labor. Mark-
ups are generally chosen based on a variety of factors, including the
atmosphere provided to customers, labor (if excluded from the cost
portion), and investment goals.
• Competition-based: Under this market-based approach, menu item
prices are set by benchmarking the prices of similar items from com-
peting restaurants and tailoring them as needed. An extreme exam-
ple of competition-based pricing is Wally’s Clam Shack charging
$12.99 for a bucket of fried clams simply because both Under-the-C
Clam Stand and Von’s Clam Truck charge that price.
• Demand-based: Prices are set based on what customers will support.
If a series of menu items prepared tableside by a chef has enough
demand to sell out every night, the price set will be as high as pos-
sible until interest decreases, which signals that price should be
decreased.
In recent times, the restaurant industry has greatly expanded its use of
marketing and delivery systems that make the price of restaurant services
more transparent than ever before. Restaurant websites and third-party res-
ervation sites, such as OpenTable.com and Yelp.com, provide sample menus,
o˙entimes complete with prices and service charges. A consequence of
these market changes is that restaurant pricing is heavily competition- and
demand-based (Cli°ord, 2012).
Menu Engineering
For a restaurant that uses a traditional prepriced, preprinted menu, menu

engineering can help optimize prices of individual items based on the pop-
ularity and proÿtability of all items. A popular analytic tool associated with
menu engineering is the 2 × 2 Boston Consulting Group (BCG) matrix,
shown in Figure 10.2. ˜is matrix provides a clear visual of how a set of
menu items perform in relation to each other. Menu sections, such as start-
ers, entrees, and desserts, are usually analyzed separately.
Sales Volume
Low High
Puzzle
High
Stars
Contribution Margin
Low
Dogs Cash Cow
Figure 10.2: BCG Matrix to Categorize Entrees

Each menu item is categorized based on its level of sales and level of
contribution margin.
Contribution margin = price − food cost

˜e four performance categories for menu items are
• Cash cows: Items are popular but either costly to make or priced low
to encourage sales.
• Dogs: Items are neither popular nor proÿtable; they are items that
have traditionally been on the menu.
• Puzzles: Items do not sell well, but make a good proÿt when they do.
• Stars: Items are the favorite items of both customers and operators
because they are both popular and proÿtable.
A BCG matrix analysis requires sales, price, and food cost data for each
item. ˜e basic steps to constructing a BCG matrix for one menu category
are illustrated using the following example:
˜e Cove is a small, upscale restaurant located at a winery in the Finger

Lakes region of New York. Its signature menu item is a duck dish because the
logo of the winery includes a duck. Data was collected for each menu item
for the past 3 months:
Entrée Number Price – Cost = Contribution Margin

Sold
Filet 1200 $42 $10 $32
Lamb 850 $38 $9 $29
Duck 650 $35 $8 $27
Sea Bass 1000 $38 $9 $29
Chicken 1050 $28 $6 $22
1. Calculate the averages for sales and contribution margin:

Average number sold: (1200 + 850 + 650 + 1000 + 1050)/5 = 950
Average contribution margin = ($32 + $29 + $27 + $29 + $22)/5 = $27.80
2. Compare the number sold and contribution margin (CM) of each
menu item to the averages:
Filet—number sold: 1200 > 950 CM: $32 > $27.80
Lamb—number sold: 850 < 950 CM: $29 > $27.80
Duck—number sold: 650 < 950 CM: $27 < $27.80

Sea Bass—number sold: 1000 > 950 CM: $29 > $27.80
Chicken—number sold: 1050 > 950 CM: $22 < $27.80
3. Determine the category of each item based on if number sold is higher-
or lower than average and if CM is higher or lower than average :
• Cash cow—high sales, low CM—chicken
• Dog—low sales, low CM—lamb
• Puzzle—low sales, high CM—duck
• Star—high sales, high CM—ÿlet and sea bass
4. Graph the results. ˜e lines marking the four quadrants are the aver-
age Number Sold on the x-axis and the CM on the y-axis.
Di°erent pricing strategies are associated with the di°erent categories

but the goal for each is to maximize the performance of the menu by essen-
tially trying to make all menu items into stars. Some strategies for items
within each category are
• Cash cows: Raise price, highlight on menu, modify item to decrease
cost;
• Dogs: Raise price, remove from menu;
• Puzzles: Highlight/change menu position, lower price, modify item

to decrease cost, remove;
• Stars: Highlight on menu, raise price.
Solutions are unique to the operations, demand-base, and competitive

market of a restaurant. Periodically performing a menu engineering analysis
using a BCG matrix not only helps ÿne-tune menu pricing but also helps
ensure that production costs are regularly reviewed and demand trends are
followed.
In the example of ˜e Cove, the chicken is a Cash cow. Its sales volume is
high and its cost is the lowest on the menu, so a marginal price increase could
potentially increase CM without radically decreasing the number sold. ˜e
Duck entrée is a Dog but should not be removed from the menu since it is
the restaurant’s signature dish. Instead, management could consider raising its
price to increase its CM and move it closer to the Star category. ˜e Lamb is a
Puzzle, as it is one of the higher-CM items on the menu but is not as popular
as most of the other dishes. Highlighting the Lamb on the menu to drive sales
could help make it a Star. ˜e Sea Bass and the Filet are the Stars of the menu,
as both high sales and high CMs. ˜e Filet is by far the most popular and
proÿtable entrée, and its pricing does not need any adjustment in this analysis.
˜e Sea Bass is also a Star, performing well relative to most other menu items.
Management could highlight it to grow sales, increase its price, or do nothing
and choose to focus resources on the other categories at this time.

Bello’s, a casual, full-service restaurant in Bu°alo, NY, has
been a local favorite for the past 17 years. It was owned and
operated by Sergey Yevgeny until a month ago, when he
sold Bello’s to Raul Pena, a relatively new chef. As part of his restaurant
training, Raul took several business classes and learned that an analyt-
ical approach to menu planning could help his new restaurant be as
successful as possible.
Raul wants to thoroughly analyze the current menu before making any
changes, so he pulled sales, pricing, and cost data from Bello’s POS
system, provided in the Excel spreadsheet. A screenshot of the data is
To Do
1. Sort and separate data into menu categories and calculate the aver-
age sales for each category. Determine the CM for each menu item
and calculate the average CM for each menu category.
2. Compare each item to the averages, using = IF statements as nec-
essary. Determine the Stars, Cash cows, Puzzles, and Dogs for each
menu category.
3. What changes would you suggest to the menu?
Arrivals
Arrivals refer to the number of parties or customers arriving to a restau-

rant in certain time periods. ˜is is the demand for the restaurant and it
generally follows patterns by day, time, season, or year. Obtaining precise
information on arrivals can be complicated: Imagine how diˆcult it would
be to track every customer walking in the door—no matter if he was seated,
le˙ the restaurant, or waited at the bar for an hour—for hours every day of
the week for weeks.
If a restaurant uses wait-list/reservation management technology, con-

siderable information on arrivals can be easily obtained. If a wait-list/reser-
vation management system is not used, point-of-sale (POS) data can serve
as a proxy for when a check is opened but it does not always re˝ect when the
customer arrived to the restaurant, especially if there was a wait for a table.
RRM analyses can use the time the check is opened in the POS plus an addi-
tional time measure to estimate arrivals. ˜is additional time addresses the
time-shi˙ problem of using POS data by accounting for time before checks
are opened and can be estimated via a time study.
PROS & CONS

12Q Bistro is a very popular restaurant in Portland,
Oregon. 3Spark, the parent company of 12Q Bistro, plus six other F&B
establishments, has just hired the JCM Restaurant Consulting Group to
help build and integrate a Restaurant Revenue Management strategy for
3Spark.
The analysts at JCM contacted the GM of each 3Spark restaurant and
asked for several speciÿc data sets, including demand by hour for each
day of the week. When Ann, the GM at 12Q Bistro, tried to pull together
the data, she quickly realized that there are a number of possible times
when demand could be recorded:
• At the time a party arrives
• When the table’s check is opened
• When the party is seated
• When the table’s check is closed
What are the pros and cons for each option of recording demand?
Suppose Ann also wants to provide the JCM consultants with data on
Arrivals. Which of the options would you recommend Ann choose as a
measure of arrival time?
Types
Customers physically arrive to a food and beverage (F&B) outlet in dif-

ferent ways, depending on the nature of the facility. For example, customers
walk up to a boardwalk ice cream stand, drive up to a drive-in restaurant or
drive-through window, or park/valet and walk into a sit-down restaurant.
In RRM, however, the concept of types of arrivals refers to how the

customer ÿrst approached the dining experience at a restaurant—by mak-
ing a reservation, simply walking in, or calling ahead to be put on a wait list.
Restaurants choose the type(s) of arrivals to use based on the type of restau-
rant and how the operators want business to be conducted.
Walk-ins
All quick-service restaurants and countless casual sit-down restaurants

operate solely on a walk-in basis. An advantage of taking only walk-in cus-
tomers is fairness, as customers are usually served on a ÿrst-come-ÿrst-
served (FCFS) basis. In addition, many restaurant customers do not want
to be bothered with making reservations, so walk-ins force ˝exibility into a
service delivery process.
A disadvantage of walk-in demand is that it can be unpredictable and

variable. And while restaurants can try to encourage demand to come in
at di°erent times, arrival time is ultimately under the walk-in customer’s
control. Plus, using walk-in demand practically guarantees that customers
will have to wait at the restaurant during excess demand periods. However,
a well-controlled waiting line is a way to inventory service demand and have
it present and ready to be processed when a table becomes available.
Reservations
Finer dining restaurants rely heavily on reservations, and many moderate,

sit-down eateries accept reservations for large parties. Taking reservations
gives an operator control over the arrival of demand to a service system.
However, it also assumes the risk of losing the opportunity to make money
o° a table if the party does not show up for the reservation. Restaurateurs
have several ways for managing no-shows for reservations, including requir-
ing a credit card guarantee and overbooking the restaurant in anticipation
of no-shows.
Many restaurants take some reservations but leave the rest of the seats
and tables open for walk-in business. Most restaurateurs and dining room
managers use knowledge of their demand base and historical data to set
the number of reservations to accept for di°erent dates and di°erent times.
However, determining the optimal number of reservations to accept and
the number of no-shows to anticipate is a mathematical problem that is
outside the scope of this chapter.
Call-ahead Seating
Another form of arrival used by some sit-down restaurants is call-ahead

seating. In call-ahead seating, customers call in advance of their desired
arrival time to be put on the waiting list. ˜e advantage of using call-ahead
seating is that customers reduce the amount of time they must wait at the
restaurant, which positively impacts customer satisfaction (Noone et al.,
2007).
In addition, research has shown that accepting call-ahead seating slots

for up to 50 percent of the total number of expected parties decreases the
average wait for all customers—those using call-ahead seating and those
simply walking in and waiting (McGuire & Rohlfs, 2005). However, call-
ahead seating reduces the chance that waiting customers will spend money
at a bar (if available). It also requires good communication with all custom-
ers, so parties waiting in-house do not perceive a violation in FCFS if a party
that seemingly joins the wait later is seated ÿrst.
Imagine that you are the new owner of a 150-seat Louisiana-style sit-
down restaurant and oyster bar. Business is good and waits at peak
dinner hours on the weekends can sometimes exceed 45 min. During
the week, waits are closer to 10–15 min at the busiest hours. What
types of arrivals would you recommend the owner use and at what
times?
Basic Arrivals Analysis
A basic analysis of arrivals begins with collecting data and cleaning it of out-
liers or other dirty data. Cleaned arrivals data is then sorted by hour and day
of the week and the average number of arrivals for each hour and each day of
week is calculated. Analyzing arrivals by hour and by day of week is a good
place to start for most sit-down, full- service operations. Restaurants that are
quick-service style or that have high levels of steady demand warrant a more
detailed analysis, such as using 15-min increments.
Graphing Arrivals
˜e next step in a basic arrivals analysis is graphing arrivals to show pat-

terns and trends in demand as it enters the restaurant system. Data patterns
usually have a short- to medium-term time frame and can be seasonal or
cyclical. Data trends usually refer to systematic ups and downs over lon-
ger periods of time. Graphs showing di°erent trends are in Figure 1 0 . 3:
Figure 1 0 . 3a shows no trend, as the data clusters around a horizontal line
and Figure 10.3b shows an upward trend as data, consistently, is increasing.
Figure 10.3a: No Trend in Data
Figure 10.3b: Trend in Data
Patterns are sometimes harder to discern and can re˝ect short sea-
sonal e°ects or more extended cycles in demand. Examples of di°erent
patterns are shown in Figure 10.4: Figure 10.4a shows seasonality, since
the data has consistent peaks and valleys across time; Figure 10.4b shows
cyclical data with gradual increase and decrease over more extended peri-
ods.
Figure 10.4a: Seasonal Pattern in Data
Figure 10.4b: Cyclical Pattern in Data
From a basic graph of arriving demand, the following periods are notice-
able:
• Peak demand periods: Times when demand is consistently at its
highest.
• Shoulder periods: Times of increasing demand before a peak period
and decreasing demand a˙er a peak period.
• O°-peak periods: Times when demand is consistently at its lowest.
REAL PEOPLE
Troy Copper is the new manager of the Old

County Bu°et, a bu°et restaurant located in the
Gables Senior Community in Boca Raton, Florida. Troy
collected data for the past year from the POS system and averaged
the number of customers that arrived within each 15-min time period
by each day of the week. Because of the serve-yourself nature of the
restaurant and the no-wait tolerance of the customer base, no additional
time had to be added to account for waits or predining processes.
Troy was able to graph the true arrivals to the bu°et. From the graph,
it can be seen that the number of customers arriving to Old County
starts o° strong at open, peaks around 6:00 p.m. every night, and falls o°
quickly a˙erward. ˜e shoulder time for most days is one-sided, from
5:45 p.m. to 7:00 p.m., when demand falls sharply on many days. Demand
on Wednesday is particularly interesting, as it is consistently higher than
any other day. It turns out that the bu°et issues weekly Wednesday two-
for-one coupons, which attracts a tremendous amount of demand.
Analysis by day of week for Old County Bu°et

How do you think Troy changed Old County Bu°et’s coupon strat-
egy to smooth demand? Why is demand smoothing a good RRM strat-
egy to use here?
Party Size Distribution
A considerable amount of demand to many restaurants comes in the form

of parties of customers. ˜e distribution, or percentage breakdown, of party
sizes can be gathered from arrivals information as long as only an insignif-
icant number of arriving parties leave before being seated. Understanding
the party size distribution of a restaurant’s demand is useful in many oper-
ating situations, including assigning servers to stations and determining the
best table mix for the restaurant.
A count of the number of parties of each size can usually be garnered

from wait-list/reservations and/or POS system data. It is simple to then cal-
culate the party size distribution of demand. For example, a diner served
2400 parties over the past week and 1340 parties of those were parties of 4.
˜erefore, the
% of demand from parties of 4 = 1340/2400 = 70%.
For most RRM analyses, determining the overall average party size dis-
tribution is suˆcient, although atypical or demand-stimulating events (e.g.,
a children-eat-free promotion or 2-for-1 coupons) should be analyzed sep-
arately. Figure 10.5 provides an example of a party size distribution for a
Chinese restaurant that serves dim sum during brunch hours on Sundays.
Party % of Demand % of Summary

Size (Mon-Sat Demand
Party % of Demand % of
lunch & (Sun brunch)
Size (No brunch) Demand
dinner, Sun
(Sun
dinner)
brunch)
1 11.2% 8.0%
1-2 64.1% 31.7%
2 52.9% 23.7%
3-4 28.4% 36.90/o
3 16.2% 14.5%
5-6 5.8% 17.90/o
4 12.2% 22.4%
7-8 1.7% 13.5%
5 3.9% 10.2%
6 2.0% 7.7%
7 1.0% 5.2%
8 0.7% 8.3%
Figure 10.5 Example of a Party Size Distribution Analysis


Kollam is a full-service Indian restaurant that serves lunch
and dinner Tuesday–Sunday. You have one month of covers
data, included in the Excel spreadsheet (a screenshot is provided
below). You would like to determine the party size distribution of
demand at Kollam for both lunch and dinner meal periods.
TO DO
1. For each meal period, calculate the percentage of total demand for
party sizes 1–8+.
2. Does the mix of party sizes di°er between lunch and dinner?
Forecasting Demand
Accurate demand forecasts are essential to e°ective demand management

because if an operator cannot anticipate demand, she cannot properly plan
for it. Forecasting demand is already done in restaurants as it serves as the
basis for staˆng decisions and raw ingredient purchases. Most restaurants
already forecast demand in the form of covers or the number of dinners
expected to be served per night. In an RRM analysis, this forecast is evalu-
ated for accuracy and how it accounts for elements including: Time, demand
characteristics, like party size or purpose of visit, and distribution channel
di°erences.
Forecast Considerations
˜e time horizon of the forecast is a basic consideration in evaluating a fore-

cast for RRM purposes. Common options are yearly, quarterly, monthly,
weekly, and daily. In general, longer forecast horizons are associated with
less accurate forecasts. So, forecasts made today for 10 years in advance will
not be as reliable as forecasts made for next month. ˜e appropriate fore-

cast horizon depends on the restaurant situation but all forecasts should be
updated as time progresses.
Another aspect of restaurant forecasts that should be noted relates to

a technical element of forecasting. Speciÿcally, forecasts use past arrivals
data to predict future demand. One aspect of demand that most arrivals
data does not include is the number of customers who intended to purchase
service from the restaurant but le˙ before they did. Actual demand plus
this intended demand (o˙en referred to as Additional Demand in the hotel
world) unconstrained demand. Intended demand represents the demand
that was not able to be processed by the restaurant.
Obtaining accurate unconstrained demand data is not a simple task.

Consider a restaurant operating in a Food Court at a suburban U.S. shopping
mall. Unconstrained demand for a restaurant for a Saturday lunch service
would be the actual customers served plus possible customers—the number
of customers who paused and read the menu board but ultimately did not
order. Collecting this type of unconstrained data could be done by manual
observation but this is time-consuming and still does not entirely precise.
Many restaurants have websites and/or participate in an online restau-

rant network like OpenTable. O˙en, interest in a restaurant can be gauged
using “clicks,” or the number of times a user looks at a restaurant’s page or
searches for a table. However, this can greatly overestimate demand, as many
clicks come from information-gathering and were never serious demand
inquiries.
Forecast Methods
Qualitative forecasting methods use intuition, judgment, and information

to estimate future demand. Methods of qualitative forecasting include:
• Executive judgment: Relying on a manager’s years of experience to
forecast demand.
• Grass roots: Having those in closest contact with customers, such as
servers and hosts, forecast demand.
• Market research: Using gathered information on competitors, area
demographics, and local economic conditions to forecast demand
• Panel consensus: Having experts use market research information

to agree on a forecast.
RRM is a data-driven ÿeld, so an RRM program would advocate using

more data-driven forecasting methods, which generally result in more accu-
rate forecasts. Quantitative forecasting methods can be classiÿed as either
time-series or causal.
• Time-series forecasts use past data and historical patterns to forecast
future performance. Time-series forecasts use only past information
from the same data series; for instance, restaurant demand for next
week’s forecast uses only demand from past weeks.
• Causal forecasts use past data plus additional external information
to predict future demand. For example, demand is forecast using
past data plus extra factors such as weather, local hotel occupancy,
and area happenings.
If restaurant demand data shows no trend and no pattern, then a simple

time series method called the simple moving average—where the forecast
for the next period is simply the average of the data from the last several
periods—can be used to forecast future demand. If restaurant demand data
shows no trend but does have a pattern, time series methods that are more
appropriate for forecasting include the weighted moving average and expo-
nential smoothing. ˜e forecast from either of these methods is a weighted
average of past data, so more important periods have more weight in deter-
mining the forecast.
For restaurant demand data with a trend, more complicated causal

methods are appropriate to use for forecasting. ˜ese include trend-ad-
justed exponential smoothing, simple linear regression, and multiple linear
regression. All of these methods use historical data instead of averages or
smoothed averages and use mathematical equations and models to forecast
future performance. ˜is advanced level of statistics is outside the scope of
this chapter.
˜e forecast method a restaurant uses is o˙en based on factors in addi-

tion to trends and patterns in data. Other considerations include the antic-
ipated use of the forecast, data availability, and data reliability. Certainly,
though, the best method to use is the one that produces the most accurate
forecast.
Forecasts are checked for accuracy by measuring the error between

what actually happened and what the forecast projected would happen. For
instance, if the forecast for June sales at Sal’s Hotdog Stand was $3,000 and
Sal only sold $2,600 worth of dogs, the forecast error would be +$400. Many
di°erent measures can be determined from this simple error data, includ-
ing the cumulative forecast error, bias, mean squared error, mean absolute
deviation, and mean absolute percent error. All of these error measures help
reveal the strengths and weaknesses of the di°erent forecasting methods
depending on a restaurant’s particular demand and operating characteris-
tics.
Waiting Lines
Queuing theory is the mathematical study of queues, also known as waiting

lines. A waiting line is made up of arriving customers that cannot be served
right away. ˜e beneÿt to a service of having waiting lines is that customers
are essentially inventoried demand waiting to be served by the system when
it has the capacity. However, customers notoriously dislike waiting lines and
o˙en include the presence or absence of a line in purchase decisions.
Why They Happen
Even with excellent forecasting, all restaurants face some variability in

their service systems. Waiting lines occur because of this variability and
particularly the uncertainty in the
• size of demand and the timing of arrivals for a service,
• duration of a service,
• behavior of customers as they arrive and wait in line for the service.
To understand to what extent waiting lines will occur, it is helpful to com-

pare the rate at which customers arrive at a service and the rate at which cus-
tomers can be processed by the service. ˜e Greek letters lambda (˜) and
mu (°) are always used to denote average arrival rate and average service rate
in queuing theory:
˜ = arrival rate = rate at which customers arrive
° = service rate = rate at which customers are served
Compare the two rates. If

• ãnd ° are almost equal, then systems will sometimes develop long
waiting lines, will sometimes have no waiting lines, and will have aver-
age-size waiting lines most of the time,
• ˜ is much greater than °, then the system will eventually collapse
because more customers are arriving than can be processed,
• ˜ is much less than °, then the system will not experience waits
but will likely not be making a proÿt if not enough customers are
arriving.
For example, customers arrive to Yuma Smoothie Shop at a rate of 15

per 30 min. Customers are served at a rate of 14 per 30 min. ˜e arrival
rate (per 30 min) is ˜ = 15. ˜e service rate (per 30 min) is ° = 14. ˜ and
° are almost equal with customers arriving a little faster than they can be
served, so Yuma Smoothie Shop usually has a short line.
A small pub can serve, on average, 10 customers per hour. If its arrival
rate is 6, would it have a waiting line?
A mall bistro has an arrival rate of 32 customers per hour during peak
times. If its service rate is 22, does it have a waiting line? How could
this situation be remedied?
Line Terms and Types
Lines are characterized by quantity (single or multiple lines) and server (sin-
gle or multiple servers). Common types of lines are as follows:
• Single line, single server (e.g., single-register co°ee shop)
• Single line, multiple servers (e.g., bank, post oˆce)
• Multiple lines, multiple servers (e.g., toll booth, grocery store)
A hybrid line combines line types at di°erent stages of the wait. An exam-
ple of a hybrid line is the line for an airline check-in system—it includes
a single-line, multiple-server component for coach passengers and a sin-
gle-line, single-server component for ÿrst-class passengers.
˜ree terms—balk, renege, and jockey—are commonly used to talk

about the behavior of customers with regards to waiting lines.
• Customers balk when they decide not to join a line, even though
they had intended on purchasing the service at the end of the line.
• Customers renege when they leave a line a˙er they have joined it but
before they purchased the intended service.
• Customers jockey when they leave a line and join another, anticipat-
ing that the new line will be shorter than the old one.
Many larger F&B outlets face a choice between the single line, multiple
servers and multiple lines, multiple servers types. ˜e pros and cons for both
are as follows:
Line Type Pros Cons

Single line, - Fair since customers are served - Line looks long
multiple server frst come-frst served - Takes a lot of space to
- Lines appear to move fast accommodate
- No jockeying occurs
- Transactions are more private
Multiple lines, - Can save space - Unfair since the frst customers
multiple servers - Lines look shorter, so there is less are not guaranteed to be the frst
balking served
Psychology of Waiting Lines
Along with the quantitative theories and calculations available to under-

stand waiting lines, plenty of research has been conducted on how custom-
ers react and respond to waiting. In general, customers try to avoid waiting;
it increases the investment a customer makes in a transaction, prevents the
customer from using that time more productively, and can actually cause
psychological pain (Schwartz, 1975).
Many researchers agree on the following eight propositions related to wait-

ing lines (Dube-Rioux et al., 1989; Maister, 1985; McGuire et al., 2010):
1. Unoccupied time feels longer than occupied time: Businesses o˙en

use strategies to combat this; for instance, amusement parks use tele-
visions mounted near lines for rides and spas occupy customers by
having them wait in a serenity room with additional distractions.
2. Preprocess waits feel longer than in-process waits: It feels longer to
wait for a bartender to take an order than for him/her to deliver the
drink, regardless of whether the time to do both tasks was equal.
3. Anxiety makes waits seem longer: People perceive the wait at a doc-
tor’s oˆce to be longer than the wait at a salon.
4. Uncertain waits feel longer than certain waits: Many call centers try
to alleviate this by automatically telling a customer his estimated
wait. Restaurants also use this strategy when hosts quote wait times
to arriving parties.
5. Unexplained waits feel longer than explained waits: O˙en, busi-
nesses inform customers on operations and issues to increase wait-
time tolerance. ˜ink of how a pilot update passengers when the
wait on the runway begins to feel too long.
6. Unfair waits feel longer than fair waits: Providing roped areas for
lines helps customers monitor the fairness of the lines themselves.
Also, training employees with standard operating procedures (such
as not spending more than 30 s on a phone call if a customer is wait-
ing in-person) is another strategy that addresses this.
7. ˜e more valuable the service, the longer the customer will wait:
Customers are more tolerant of waiting in line on December 26 to
pay for items on sale than they were two days before when paying
full price.
8. Solo waits feel longer than group waits.
Wait list Management
In a sit-down restaurant, when all tables are occupied, the next party
to be seated starts a waiting line. At this point, many restaurants sim-
ply record a name and party size for customers(s) waiting for a table in
the order of arrival, thus creating a wait list. Managing the wait list entails
trying to match party and table sizes while maintaining the FCFS rule,
quoting accurate and reliable wait times, communicating with customers,
preserving customer satisfaction, and essentially ensuring that the invento-

ried demand is available to be processed when supply is unoccupied.
A number of di°erent tactics can be used to manage a restaurant wait

list. Many restaurants use buzzers to alert a party when its table is available;
this technique helps mask any violations of the FCFS rule and can thus help
the restaurant better match party—to table size. Another wait list man-
agement technique is to use a boarding pass system, which is a two-wait
system; customers wait in one line to receive a boarding pass and then in
another line—perhaps even at another time—to “board” the restaurant. ˜e
total wait is split up, making it seem shorter, and customer time is occupied,
which also makes a wait seem shorter. Call-ahead seating allows for virtual
waits, so customers can use their time waiting for a table in a more valuable
manner, which should cultivate repeat business from customers.
SUMMARY
˜e demand side of RRM is concerned with the number, type, and prof-
itability of customers that frequent a restaurant. Operators have less
control over demand than they do capacity, so understanding and applying
demand management tools and strategies can help a restaurateur operate
more e°ectively and maximize proÿtability. Practices that in˝uence the
timing of demand and/or the services demanded must work in harmony
with capacity management to avoid suboptimal RM solutions.
1. Customers arrive to the drive-thru window at the Co°ee Hut
every 2 min. What is the arrival rate per hour? If the sta° at the
drive-thru can process a customer in 45 s, what is the service
rate per hour at the Co°ee Hut?
What can you deduce about the line at the drive-thru window?
2. Taking reservations is one way a service business can try to reduce the uncertainty
of arrivals. Predicting when a customer is going to walk in the door could help
management precisely plan and manage an experience that delights a customer
in the most e˝cient and cost-e°ective way.
For a restaurant, however, taking a dinner reservation does not reduce arrival
uncertainty as much as it does for a hotel that takes a room reservation. Explain
some reasons for this.
3. Calculate the contribution margin for each entrée in the following table. Average
the three contribution margins together and compare the average to each
entrée. Which entree has above- average contribution margins? Which entrées
have below-average margins?
entrée Price Food Cost (%)

Halibut $25 38%
Pork chops $16 32%
Petite ÿlet $34 40%
4. Demand at Curet, a restaurant in Los Angeles, can be categorized in a number
of ways. Looking at demand by day of week yields di°erent information to the
dining room manager than does looking at demand by party size or by time-of-
day. What are some other classiÿcations of demand that may be helpful for an
RRM analysis?
5. Sketch a visual of these two types of lines:
• one line, three servers;
• two-stage line with Stage 1: Three lines, three servers; Stage 2: One line, two
servers.
APPLICATIONS
Cayuga Catering
Cayuga Quick Grub has one drive-through window to

serve its customers. A study of the lunch hours found
that cars arrive to t he sp e aker at a rate of four cars
every 30 min. Data on drive-through times has shown
that the time it takes for people to place an order at the
speaker, proceed to the window to pay for the order and collect the order at
the window averages about 6 min per car. Determine the arrival rate and
service rate for the drive-through window process and comment on the
waiting line situation at the drive-through.
Northman’s
Pete Abrams is the owner of a very successful middle-tier restaurant called

Northman’s in San Francisco. Pete and the dining room manager, Sandy, are
hoping to develop an appropriate and e°ective wait list management plan
for Northman’s. Unfortunately, Pete and Sandy do not agree on the following
two main issues:
• Whether or not to use call-ahead seating.
• How to seat parties—on an FCFS basis or on a match-party-size-to-
table-size basis (right sizing)?
Sandy does not want to use call-ahead seating or right-sizing; she is ada-
mant that customers will be very angry if a party that entered a˙er them
is seated ÿrst. Pete thinks both of these practices would be beneÿcial in
decreasing wait times, preserving customer satisfaction, and fulÿlling as
much demand as possible in a timely manner.
Help Pete by providing support for the use of call-ahead seating and
right-sizing. Answer questions such as: How would wait times likely be
impacted under both strategies? How could the issue of potentially angry
customers be handled?
TEAM ACTIVITY
˜is case should be completed in teams of two to three. Imagine that

all the members of your team have been hired into Royale Casino’s
management program. Program members rotate working in di°er-
ent areas of the casino and you are assigned to manage the bu°et restaurant
while its general manager is on leave for the next 6 months.
A˙er observing dinner operations for a few days, your team notices the
following things:
• Demand is very strong from 5:30 p.m. to 7:00 p.m., and customers
wait for what seems to be a long period of time. Customers do not
look happy in line.
• During peak hours, tables are only unoccupied when waiting to be
bussed and then waiting to be seated.
• Lots of customers balk and renege, especially a˙er being quoted the
wait time.
• Demand builds up slowly to 5:30 p.m. but falls o° quickly a˙er 7:00
p.m.
Customers arrive at the bu°et and wait in line to pay one of two cashers.
˜ey then snake through a roped-o° line in a large holding area. At the front
of this line, each party chooses to join one of three very short lines, each
headed up by a host. ˜e ˝oor manager ÿnds an unoccupied table for the
party and informs the host of the table assignment. ˜e host then takes the
party to its table.
On the basis of this information, recommend some demand manage-

ment strategies for the restaurant. What additional information would you
need to ensure that these strategies are appropriate for the situation? What
additional information would you need to determine how to customize
these strategies?
INTERNET ACTIVITY
Do an Internet search for “restaurant group coupons.” Did you

ÿnd any discounts that seemed too good to be true for you, the
customer? Assume that the going rate for a restaurant to partici-
pate in a group coupon is 50 percent of the amount charged. For
example, if a coupon allows a customer to purchase a $30 meal for $15, the
restaurant pays the coupon site half of that, or $7.50. On the basis of this,
did you ÿnd any “deals” that are likely to negatively impact the restaurant’s
bottom line?
GLOSSARY
Balk – When customers who had intended on joining a system do
not do so once they see the line.
Contribution margin – ˜e proÿtability of a menu item, measured
by its price less its food cost.
Data patterns – Consistent ups and downs in data over the short to
medium term.
Data trends – Consistent ups and downs in data over a long period of time.
Jockey – When customers leave one line to join another line.
Renege – When customers leave a line before being served.
Unconstrained demand – ˜e total demand in a segment or overall in the
Variable pricing – ˜e practice of charging di°erent prices to di°erent cus-

tomers.
REFERENCES
Cli°ord, S. (2012, September 4). When it Comes to Reservations, Time is Money.
˛e New York Times. Retrieved from http://www.nytimes.com.
Croxton, K., Lambert, D., García-Dastugue, S., & Rogers, D. (2002). ˜e demand
management process. ˛e International Journal of Logistics Management, 13
(2), 51–66.
Dube-Rioux, L., Schmitt, B., & Leclerc, F. L. (1989). Consumers’ Reactions to Wait-
ing: When Delays A°ect the Perception of Service Quality. Advances in Con-
sumer Research, 16, 59–63.
Kimes, S. (1989). Yield Management: A Tool for Capacity-constrained Service
Firms. Journal of Operations Management, 8 (4): 348–363.
Kimes, S., & Chase, R. (1998). ˜e Strategic Levers of Yield Management. Journal
of Service Research, 1 (2), 156–166.
nell Hotel and Restaurant Administration Quarterly, 39 (3), 32–39.
Kimes, S., & Wirtz, J. (2003). Has Revenue Management Become Acceptable? Find-
ings from an International Study on the Perceived Fairness of Rate Fences.
Journal of Service Research, 6 (2), 125–135.
Maister, D. (1985). ˛e Psychology of Waiting Lines [White paper]. Retrieved June
16, 2001 from davidmaister.com/articles
McGuire, K., Kimes, S., Lynn, M., Pullman, M., & Lloyd, R. (2010). A Framework
for Evaluating the Customer Wait Experience. Journal of Service Management,
21 (3), 269–290.
McGuire, K., & Rohlfs, K. (2005). Wait List Management: A Simulation Study. Paper
Presented at the HEC 80 Conference, Ithaca, NY.
Noone, B., Kimes, S., Mattila, A., & Wirtz, J. (2007). ˜e E°ect of meal pace on Cus-
tomer Satisfaction. Cornell Hotel and Restaurant Administration Quarterly, 48
(3), 231–244.
Schwartz, B. (1975). Queuing and Waiting. Chicago: University of Chicago Press.
Simon, H., & Dolan, R. (1999). Price Customization. ˛e Journal of Professional
Pricing, 7 (3), 15–18.
CHAPTER 11
Restaurant Revenue Management:

Advanced Supply Management
Concepts
Kristin V. Rohlfs
OVERVIEW
The objective of Restaurant Revenue Management (RRM) is to ensure that
the capacity offered by a restaurant serves the demand for a restaurant in
the most profitable way. The capacity side of the RRM equation is usually
under the control of the restaurant operator to a greater extent than the
demand side. This chapter covers the aspects of RRM related to supply.
LEARNING OBJECTIVES
After studying this chapter, you should be able to evaluate
restaurant supply in the context of RRM. Speciÿcally, you
should be able to:
Relate capacity planning and capacity management to RRM
Explain ways in which optimizing capacity usage leads to
maximizing revenue
Perform an analysis of both occupancy and dining duration
Construct and perform a table mix analysis
Name several RRM solutions to possible supply side issues
295
OUTLINE
Introduction
Supply = Capacity
• Capacity Planning
• Capacity Management
Capacity in Restaurant Revenue Management
• Utilization = Occupancy
• Dining Duration
• Di˜erences in Supply O˜ered
• Supply Mix
• Layout of Supply
Summary
Applications
• Vail Ski Mountain Resort

• Arepas
• Tacky Fingers
Team Activity
Internet Activity
Glossary
References
Advanced Supply Management Concepts  297
SO WHAT?
Some RRM research looks at how di˜erences in what seem-to-be iden-
tical physical inventory units contribute to the goal of maximizing
revenue (Rohlfs, 2009). For example, hotel rooms with one king, one
queen, or two double beds are all considered standard rooms. And all
seats in a restaurant seem to be identical, but they really di˜er by table
type (e.g., banquette, round), table size (e.g., four-top, eight-top), and
the amount of space tables take up (e.g., 45 square feet, 108 square
feet).
In the context of RRM, space is deÿned as the physical area that is
needed to put a unit of inventory into use. Space is an important facet
of the RRM problem since some physical inventory units (e.g., 8-tops)
take up more space than other physical inventory units (e.g., 2-tops).
So, a restaurant may be able to capture more revenue if it takes space
into account when determining its capacity proÿle.
To understand better, imagine this scenario:
You are planning a restaurant and tell your designer to allot 15 square
feet of space for each seat. A portion of the drawing she gives you is
shown below. You are surprised at how tiny the two-tops look next to
the six-tops. What do you think is the problem with the drawing?
INTRODUCTION
RRM practices can optimize the revenue that a restaurant generates over a
period of time. RRM combines elements of both demand and supply man-
agement in an eõrt to in°uence how and when demand occurs and how it
is processed by the service system once it arrives. For the most part, oper-
ators have more control over what is supplied to customers demand from
operators.
˛is chapter focuses on the supply side of RRM. Because RRM aims to
increase top-line revenues generated by an operation, it has traditionally
focused on front-of-house (FOH) concerns. Accordingly, supply in an RRM
context generally does not mean the raw ingredients needed to provide food
to customers. Instead, supply refers to the dining experience provided to
customers—the food plus the time and eõrt spent doing actions in a restau-
rant, such as entering, ordering, receiving, consuming, paying, and exiting.
SUPPLY = CAPACITY
Supply—also known as service capacity—is the amount of output a ser-

vice system can produce (Lovelock, 1984). ˛e capacity of a service can be
deÿned and measured in di˜erent ways, including the level at which full
inputs are used, the point at which a bottleneck develops, or the maximum
output that can be produced in a speciÿed time period. For a restaurant,
capacity could involve factors such as employees, seats, tables, and kitchen
capabilities. In RRM, the capacity of a full-service/sit-down restaurant is
usually measured by the total number of seats in its dining room available
to be sold. Because restaurants have a time element, a sit-down restaurant
could also measure capacity by seat hours.
Capacity Planning
Capacity planning is usually done in the early stages of opening a business

and involves determining the supply proÿle of an operation which means
making risky, long-term decisions and investments based on forecasts and
estimates. ˛e optimal supply proÿle would minimize the costs of opera-
tions and satisfy the demands of customers (Eppen et al., 1989). A full sup-
ply proÿle has many long- and short-term elements, including: location of
facility, size and layout of facility, space allocation for production/customer
use, type/amount/mix of physical inventory, service process design, °exibil-
ity in service system, and employee/sta˙ng requirements.
Many aspects of a restaurant’s long-term supply proÿle are determined

by corporate standards, site location and availability, opportunity, competi-
tion, and estimation (Bradach, 1997). ˛e aspects of capacity planning most
relevant to day-to-day RRM are shorter-term decisions that pertain to FOH
operations, such as: the amount of physical inventory (seats and tables) put
into use and the space allocated (to the dining room). Determining the opti-
mal, or “right,” amount of physical inventory can be especially important
for a service because there is no signiÿcant bu˜er between production and
consumption.
Capacity Management
For a service system, capacity management follows capacity planning, as

long-term decisions about the supply drive the real-time management of
supply. ˛e goal of capacity management is operate a system in a way that
maximizes the amount of revenue the system can generate, without compro-
mising quality and increasing costs.
Capacity management helps services use the four types of resources—

equipment, employees, facilities, and information—as productively as pos-
sible. Using resources is expensive for a restaurant, as they generally account
for most of the costs associated with operating a restaurant (taxes, insurance,
and rent are excluded). Resource costs can be ÿxed (e.g., manager salaries) or
variable (e.g., server wages, paper goods, and food costs). An additional cost
of using resources is the opportunity cost of forfeited revenue if no resource
is available to do its part in the service delivery system and fulÿll demand.
Restaurant resources, or inventory, can be classiÿed as either physical

or nonphysical. Nonphysical inventory—employees and information—are
needed to produce a service, but are not dedicated to one customer at a
time. Examples of nonphysical resources are servers, cooks, and ambience.
Physical inventory—equipment and facilities—is also needed to produce a
service experience for customers. Physical resources can be shared, such as
ovens and tables, or dedicated to one customer at a time, such as seats and
silverware rolls.
Two traditional strategies for managing resources are the chase and the
constant methods. ˛e chase method calls for using °exible capacity so that a
delivery system can respond quickly and easily to demand (Johnston, 1999;
Sasser, 1976). Essentially, supply is supposed to “chase” demand. Trademark
chase techniques include using shared equipment, scheduling short-term
employees, and increasing customer participation in the service delivery
process.
˛e constant method involves operating with a ÿxed amount of capac-

ity. Supply is held at a constant level, and in manufacturing, all output not
immediately sold is put into inventory (Crandall & Markland, 1996; Sasser,
1976). Constant method strategies include operating under a long-run out-
look, and using skilled, permanent workers.
THINK HISTORICALLY
˛e nature of services—speciÿcally, their immediacy and inherent lack
of an inventory cushion—requires mixing aspects of the chase and the
constant methods. Services that can e˜ectively mix the strategies can
keep costs down and support an agile service system that reacts well
to variations in demand (Sasser, 1976). Traditional chase strategies that
have long been used by restaurants include eliminating service bot-
tle-necks and opening earlier/staying open later. A more contemporary
strategy used to help supply react better to demand is opening a “next-
door” add-on restaurant adjacent to a popular counterpart.
Traditional constant strategies utilized in restaurants include seating cus-
tomers only at certain times, o˜ering incentives to encourage customers
to vacate tables as needed, and o˜ering limited menus during the busiest
times. A more contemporary constant strategy used by many restaurants
is waitlist management, which focuses on making waits more expected,
comfortable, and acceptable to customers.
A chase strategy frequently used in high-capacity restaurants is opening
and closing dining room sections as needed. What are some other chase
strategies used in restaurants today?
A constant strategy frequently used by all types of full-service restau-
rants is taking reservations. What are some other constant strategies
used in restaurant today?
˛e footprint of a restaurant (the space allocated to the kitchen, dining

room, restrooms, etc.) is not easily altered in a way that could considerably
change the number of customers who can ÿt at any given time. Because of
this, total restaurant capacity is substantially ÿxed and it would seem that
restaurants should follow the constant strategy for capacity management.
However, restaurants have a higher level of °exibility in their capacity than
many other services. If necessary, a restaurant can add another table or seat
to its inventory to fulÿll demand without incurring a signiÿcant additional
cost, which is a chase capacity management strategy.
˛e complexity of managing the capacity of service business varies. A

reservations-only restaurant is an example of a less complex capacity man-
agement situation. Predictable demand and °exible resources are charac-
teristics of generally straightforward capacity management. Ordering and
scheduling of resources can be completed with much more accuracy if
demand is known ahead of time.
More complex examples of capacity management situations include a

full-service casino or an expansive theme park. Volatility in demand and
ÿxed resources usually make managing capacity much more complicated.
˛ere are also usually many more resources to be managed, and planning
around a variable demand pattern is not easy.
A factor that impacts the management of all capacity is customer
involvement in the service process. In reality, customers often unknow-
ingly manage capacity themselves. Think about this situation: you are
planning a visit to a very popular theme park on the most crowded day
of the year. One strategy you consider to avoid the largest crowds, and
make your time at the park more enjoyable, is to visit the park later in
the evening. This strategy also beneÿts the park because you are e˜ec-
tively moving your use of the park facilities to times that could better
accommodate you.
What are some other strategies you could consider to make the most of
your planned visit to the theme park? How do these strategies also help
the park manage capacity?
CAPACITY IN RESTAURANT REVENUE MANAGEMENT
˛e supply side of RRM focuses on optimizing how and when restaurant

capacity is used for the objective of maximizing revenue. Traditionally, RRM
has been most useful when a service is operating at, or close to, capacity. As
RM has evolved into a more strategic, customer-centric discipline, tools and
techniques have expanded to include those that help in creating and manag-
ing demand when capacity is not being highly utilized (Cross et al., 2009).
As in all areas of RRM, evaluating supply requires collecting and ana-

lyzing pertinent data. ˛e operating situations of a restaurant will dictate
the level of detail required and the data available. Di˜erent RRM programs
involve di˜erent amounts and types of data. In addition to information on
the supply proÿle, supply side measures used in the analysis of the physical
inventory of a restaurant include: table occupancy, seat occupancy, demand
mix by party size, and dining duration by party size.
REAL PEOPLE
Isaac Cohen understands all too well that behind

any restaurant that uses RRM is good data. Isaac
is a sales director at a leading company that develops and
provides technology and data systems to assemble and analyze
information from a restaurant’s point-of-sale (POS) system, making it
a great platform to help get the data needed to perform an accurate and
meaningful RRM analysis.
According to Isaac, “Sometimes, new customers express unease
over the ‘wall of numbers’ that comes with RRM. Nowadays, getting
the numbers is easier. Training owners and managers how to appropri-
ately and accurately interpret them is now a focus.”
Do you see RRM as an overwhelming “wall of numbers”? Or do
you ÿnd exploring data to be interesting? If you were a restaurant
owner and felt the ÿrst way, what qualiÿcations would you look for if
you hired someone to apply RRM to your establishment(s)?
Utilization = Occupancy
Utilization—known as occupancy - measures how e˙ciently physical capac-

ity in a restaurant is being used. Two occupancy measures—table occupancy
and seat occupancy—help track how well the physical inventory of the service
is working. ˛e two measurements are both important, because although
seats are the smallest inventory unit in a restaurant system that can generate
revenue, they are situated at tables, which are the actual units sold in most
restaurants. ˛e formulas for these occupancies are:
Customers Served per Time Period

Seat Occupancy per Time Period =
# of Seats
Parties Served per Time Period
Table Occupancy per Time Period =
# of Tables
Many restaurant operators are familiar with seat occupancy and calcu-
late seat occupancy by:
• Summing the number of covers for a time range, with covers being
deÿned as the number of people whose check was opened during
that time range (e.g., a party of 4,seated at a six-top at 6:35 p.m.
would translate to 4 covers in the time range of 6:00–6:59 p.m.)
• And then dividing this number by the total number of seats in the
restaurant.
PROS & CONS

The Pizza Factory is located in a popular shopping mall
in Dallas, TX. It is one of the most successful restaurants in the area, with
table occupancy hovering around 95%. The wait for a table averages 60
min at lunchtime and 90 min during dinner hours.
Lemongrass Grill is located in the same mall as The Pizza Factory. It is not
nearly as busy, with an overall table occupancy around 35%. Lemongrass
Grill rarely has a wait, and often has a group of sta˜ standing idle at the
entrance.
What are the pros and cons of a 95% occupancy for: the wait sta˜, the
kitchen, the customers, and the reputation of The Pizza Factory?
What are the pros and cons of a 35% occupancy for: the wait sta˜, the
kitchen, the customers, and the reputation of Lemongrass Grill?
Occupancy is linked to a time period, and depending on how it is cal-

culated, represents either a snapshot in time or a picture over a time range.
For example, the occupancy at Em’s Café at 5:00 p.m. is 60 percent because
39 of the 65 seats on the dining-room °oor have customers in them. How-
ever, occupancy at Em’s Café from 5:00 to 6:00 p.m. is only 27 percent. ˛is
is because 20 customers exited the restaurant between 5:00 and 5:14 p.m., 10
more leˆ by 5:29 p.m., and an additional 6 were gone by 5:44 p.m. Averaging
the occupancies for each of these 15-min snapshots gives the occupancy from
5:00 p.m. to 6:00 p.m., which is quite di˜erent from the occupancy at 5:00 p.m.
Occupancy at 5:00 = 39/65=60%

Occupancy at 5:15 = 19/65=29%
Occupancy at 5:30 = 9/65 =14%
Occupancy at 6:00 = 3/65 = 5%
Average = 27%
An example of calculating at occupancy is as follows: Paprika is a 276-seat

restaurant that has 64 tables. Every day for 3 months, the host counts the num-
ber of seats and the number of tables occupied at 6:00, 7:00, 8:00, and 9:00 p.m.
She averages the data by day-of-week and hour, which results in the following
operating statistics for Saturday nights:
Hour Seats Tables Seat Table

occupied occupied occupancy* occupancy*
6 p.m. 169 50 61% 78%
7 p.m. 200 64 72% 100%
8 p.m. 153 51 55% 80%
9 p.m. 104 27 38% 42%
*Overall occupancy at the beginning of the hour
Another way to determine occupancy over a time period is to collect

check and cover data at a certain time and then adjust it to account for cus-
tomers who began the service in one time period, but ended in the next. A
measure of duration can be used as a proxy for this adjustment.
Regardless of the method used, occupancy calculations should always

be clearly labeled by the time or time range they represent or else data could
be misinterpreted. Additionally, a consecutive string of occupancy ÿgures
provides insight into trends in physical inventory utilization.
In most RRM programs, calculating occupancy by day-of-week and hour

is su˙cient. However, restaurants with short dining durations may beneÿt
from understanding average occupancy by 15-min periods. Additionally,
calculating restaurant occupancy by table type can yield useful information,
especially when analyzed in conjunction with spend by table type.
When analyzing occupancy of the same dining room over time—such

as month-to-month—an increase in seat occupancy means that capacity is
being utilized more e˜ectively, so more customers are moving through the
restaurant system. A decrease in seat occupancy signals that fewer custom-
ers have been served over the time period, which could be the result of a
breakdown in operations or changes in customer demand.

Crow & Steel, a 980-seat, high-volume breakfast bu˜et in
Las Vegas, NV has hired you to develop an RRM program.
You are developing the baseline for your analysis and need
to calculate and graph both table and seat occupancy. Cover and
check data are included in the Excel spreadsheet. Screenshots of the
Excel ÿle are:
Crow & Steel has 300 tables, and the table mix is as follows:
150 two-tops; 120 four-tops; 20 six-tops, and 10 eight-tops
TO DO:
1. Average the Number of Checks by hour and day-of-week. Assume
duration is 1 h/table. Calculate the overall table occupancy by hour
and day-of-week.
2. Average the Number of Covers by hour and day-of-week. Assume
duration is 1 h/table. Calculate the overall seat occupancy by hour
and day-of-week.
Dining Duration
A party occupies a table at a restaurant for the duration of a meal; this means
a table (and its corresponding number of seats) is taken out of the physical
inventory available to serve other customers. Dining duration is signiÿcant
in RRM because e˜ectively, in addition to selling an actual meal, a restaurant
is selling the use of one or more of its physical inventory units for a period
of time (Kimes et al., 1998). So if an operator is able to control the time a
customer occupies a seat at her restaurant, she can better manage RevPASH.
Duration of any restaurant service experience is unpredictable. Upon

entering a restaurant, no customer could precisely answer the question: how
long will you be sitting at your table? Most restaurateurs are able to provide
a good estimate of how long any meal would take at their establishment.
However, approaching the issue of dining duration from the angle of “how
is physical inventory used” yields insight into how well a restaurant is oper-
ating and if it is making as much money as it could be.
Dining duration is a function of several factors, including:

Front-of-House Back-of-House Customers
Individual servers Equipment Expectations
Server responsibilities Staffng Preferences
Level of staffng Menu Party size
Measuring Duration
˛e data used to calculate dining duration are usually gathered from the
POS system. If duration is not automatically computed by the POS, this sim-
ple formula can be used to determine for dining duration:
Dining duration = ˛e Time a Check is Closed by Processing Payment –

˛e Time a Check is Opened in the System
˛e mean and standard deviation of dining duration are the statistics of

most interest in RRM. ˛e mean simply re°ects how long a table is occupied,
on average, over many transactions. ˛e standard deviation measures vari-
ability—to what extent the length of time a table is occupied—over many
transactions.
Duration times calculated using POS data are not always completely
accurate. Some activities keep a table occupied but are not captured by the
POS data. ˛ese include the time it takes for a server to greet a table and
open its check in the POS system and the time a party at a table lingers aêr
its check has been closed. So measuring duration using POS data can under-
state the true amount of time a physical inventory unit is in use.
In addition, using POS data does not provide information about the
steps in the dining process. Studying a process by breaking it into smaller
elements is a technique that dates back to Frederick Taylor, the “father” of
scientiÿc management, in 1881. It is applicable here because understanding
which activities within the dining process take the longest and/or vary the
most can help isolate problems and identify areas that can be improved. Per-
forming a manual time study provides the needed information.
˛e procedure for performing a time study is easy:

1. Determine the steps of the dining process to include.
2. Develop a worksheet for data collection that has spaces for each
piece of information that should be noted about each observation.
3. At the restaurant, select several tables to observe and note the clock
time at which each stage of the dining process begins for each table.
Duration is usually measured by day-of-week, meal part, and party size.

As usual, a minimum of 30 observations for each day-of-week and each
meal part under study should be collected for a statistically sound analysis.
More observations result in more accurate analyses.
˛e steps to include in a time study depend on the individual restaurant.

Some common steps include:
• Seating • Taking drink orders
• Drink delivery • Taking food orders
• Appetizer delivery • Entrée delivery
• O˜ering dessert and co˜ee • Taking dessert orders
• Dessert delivery • Check presentation
• Check pickup • Check return
• Departure • Bussing table
• Resetting table
A sample of a portion of a completed time study is provided in Exhibit 1.
Table Party Time

# size
Party Drink Drink Food Appetizer Entrée Check Check Check Party Table
seated order delivery order delivery delivery dropped picked returned departure bussed
taken taken up and
reset
17 2 6:31:30 6:33:01 6:35:22 6:35:57 6:42:31 6:51:10 7:12:02 7:14:23 7:18:32 7:19:18 7:21:04
20 3 6:33:59 6:34:58 6:37:19 6:40:46 6:50:25 7:07:18 7:12:06 7:15:55 7:20:46
21 6 6:36:04 6:38:11 6:41:01 6:42:29 6:49:15 6:59:18 7:25:47 7:31:35 7:34:48 7:36:04 7:39:15
19 4 6:39:27 6:41:33 6:45:50 6:47:17 6:53:00 7:02:43 7:18:32 7:21:12 7:23:46 7:25:02
17 2 7:22:45 7:24:24 7:28:13 7:29:48 7:41:31 7:59:34 7:59:59 8:02:13 8:03:55 8:06:28
Exhibit 1: Example of a Time Study Worksheet
You extracted data from your restaurant’s POS to calculate dining dura-
tion for each day of the week. You scrubbed the data for problems, and
of the 1200 transactions you pulled, you found four outliers—observa-
tions that are noticeably unlike the rest of the data in some manner. The
outliers are listed in the table.
Table Table Party size Check Check closed
identifer size opened
Z2 4 4 8:16:08 11:58:49
X17 8 6 8:19:19 8:21:22
F1 4 9 8:25:30 9:29:00
Z9 2 1
What is wrong with each of these data points? What should you do with
them?
Analyzing Duration
A spreadsheet or other data-analysis program is used to calculate the desired

metrics using the data collected from the POS and/or time study. ˛ere are
three steps to a basic data analysis for a duration study:
1. Calculate the time spent on each activity for each observation.
For example, the time from seat to greet = drink order taken−time
seated and the total duration for each observation = departure−time
seated.
2. Calculate the average and standard deviation for the overall dining
process and for each activity. ˛e mean, or average, re°ects how long
tables are generally occupied (and how long each activity takes) and
the standard deviation measure show variable these average num-
bers are. Using the observations in Exhibit 1, Exhibit 2 gives exam-
ples of time measurements that may be of interest.
Time Study Calculations

Table# Party Seat-to- Drink Food Food Check Total Time Bus
Size Drink Order-to- Order Order- Process Customer Process
Order Delivery to-App. to-Eittree Occupies
Delivery Delivery Table
17 2 0:01:31 0:02:21 0:06:34 0:15:13 0:06:30 0:47:48 0:01:46
20 3 0:00:59 0:02:21 0:09:39 0:04:48 0:41:56 0:04:51
21 6 0:02:07 0:02:50 0:06:46 0:16:49 0:09:01 1:00:00 0:03:11
19 4 0:02:06 0:04:17 0:05:43 0:15:26 0:02:40 0:44:19 0:01:16
17 2 0:01:39 0:03:49 0:11:43 0:02:39 0:41:10 0:02:33
Average 0:01:40 0:03:08 0:06:21 0:13:46 0:05:08 0:47:03 0:02:43
Standard 0:00:28 0:00:53 0:00:33 0:02:58 0:02:42 0:07:41 0:01:24
Deviation
Exhibit 2: Example of a Time Study Spreadsheet Analysis
3. Determine average and standard deviation by other levels of detail

desired, such as hour or party size. Exhibit 3 gives examples of ways
to summarize the results of a dining duration analysis—by hour by
party size and activities by party size.
Dining Duration by Hour by Party Size
1 2 3 4 5 6 7 8 9 10
5PM Avg: 58:39 Avg: 57:33 Avg: 55:38 Avg: 59:16 Avg: 59:38 Avg: 64:23 Avg: 74:01 Avg: 80:01 Avg: 86:36 Avg: 88:45
SD: 5:16 SD: 8:01 SD:5:16 SD: 8:56 SD: 5:16 SD: 7:32 SD: 8:19 SD: 9:12 SD: 13:19 SD: 14:00
6PM Avg:52:51 Avg: 52:33 Avg: 56:11 Avg: 59:01 Avg: 60:40 Avg: 63:54 Avg: 74.02 Avg: 75:26 Avg: 85:34 Avg: 89.23
SD: 5:04 SD: 6:44 SD:5:15 SD: 7:31 SD: 8:08 SD: 8.23 SD: 8:19 SD: 10:19 SD: 12:59 SD: 15:46
7PM Avg: 52:45 Avg: 63:09 Avg: 58:19 Avg: 60:52 Avg: 60:01 Avg: 65:13 Avg: 80:09 Avg: 89:06 Avg: 84:13 Avg: 90:15
SD: 10:12 SD: 8:56 SD: 14:12 SD: 8:22 SD: 9.44 SD: 10.17 SD: 9:41 SD: 9:20 SD: 10:09 SD: 18:26
Exhibit 3a: Example of a Dining Duration Analysis

Dining Duration by Steps in a Meal by Party Size

Seat-to-Greet Order-to-Entrée Check Delivery-to-Exit
Delivery
Party Size Avg Std Dev Avg Std Dev Avg Std Dev
1 -2 3:17 1:09 20:17 9:35 10:12 6:05
3-4 3:31 2:25 23:41 11:53 14:29 7:16
5-6 3:43 2:12 29:25 14:51 14:00 7:29
7 -8 4:00 2:38 36:26 15:40 16:26 8:07
Exhibit 3b: Example of a Dining Duration Analysis
Another useful metric in analyzing duration and its stages is Coe˙cient

of Variation (CoV). ˛e CoV scales the standard deviation for an activity by
the size of its mean, so apples-to-apples comparisons of performance can be
done across di˜erent processes.
As a rule of thumb, if the CoV is above 0.5, the process is likely a prob-
lem area and should be studied as soon as possible. If the CoV is below 0.5,
the process is likely satisfactory.
˛e formula for CoV is:
Coe˙cient of Variation (CoV) = Standard Deviation/Average
An example of calculating the CoV is as follows: the check process at a

restaurant takes 7 min, 45 sec on average and has a standard deviation of 5
min, 20 sec. ˛e average duration of the seating process is 3 min, 20 sec, with
a standard deviation of 1 min, 5 sec. ˛e CoV calculation for each is:
CoV for the check process = 5:20/7:45 = 0.688
CoV for the seating process = 1:05/3:20 = 0.325
Notice that the CoV for the seating process is less than 0.5, while the
CoV for the check process is greater than 0.5. ˛e CoV rule of thumb would
identify the check process as the problem area between these two processes.
CoV calculations are easily accomplished and only require two sum-
mary statistics for each process—average duration and standard deviation
of duration. Recall the time study data from Exhibit 2, reprinted here:
Time Study Calculations

Table# Party Seat-to- Drink Food Food Check Total Time Bus
Size Drink Order-to- Order Order Process Customer Process
Order Delivery to-App. to-Elltree Ocruples
Delivery Delivery Table
17 2 0:01:31 0:02:21 0:06:34 0:15:13 0:06:30 0:47:48 0:01:46
20 3 0:00:59 0:02:21 0:09:39 0:04:48 0:41:56 0:04:51
21 6 0:02:07 0:02:50 0:06:46 0:16:49 0:09:01 1:00:00 0:03:11
19 4 0:02:06 0:04:17 0:05:43 0:15:26 0:02:40 0:44:19 0:01:16
17 2 0:01:39 0:03:49 0:11:43 0:02:39 0:41:10 0:02:33
Average 0:01:40 0:03:08 0:06:21 0:13:46 0:05:08 0:47:03 0:02:43
Standard 0:00:28 0:00:53 0:00:33 0:02:58 0:02:42 0:07:41 0:01:24
Deviation
Notice the average and standard deviation summary rows. A simple

spreadsheet analysis of time study data provides the necessary data for the
CoV calculation for each stage of the dining experience:
Standard Average
/ = CoV
deviation duration
Seat-to-drink order 0:00:28 / 0:01:40 = 0.28
Drink order-to-delivery 0:00:53 / 0:03:08 = 0.28
Food order-to-appetizer
0:00:33 / 0:06:21 = 0.09
Delivery
food order-to-entrée
0:02:58 / 0:13:46 = 0.22
Delivery
Check process 0:02:42 / 0:05:08 = 0.53
Bus process 0:01:24 / 0:02:43 = 0.52
A CoV >0.5 indicates that a process is too variable. Every process in a

system will experience some variability, but a high CoV re°ects excessive
inconsistency in an area. In this example, this check and bus processes serve
as good starting points to address and ÿnd potential opportunities to more
e˜ectively manage overall dining duration. For instance, in analyzing the
check process in this example restaurant, it was found that the wait sta˜ was
not closing out checks immediately upon payment, which falsely increased
the average of the process. In reality, the customer-centric portion of the
check process was very e˙cient.
Aêr pertinent duration metrics have been determined and calculated,

they need to be understood and used to answer questions such as: Why is
that step in the process too long? Why is this process so variable? What is the
bottle neck? Where should I put extra resources?
SEEING FURTHER
Pam Artly, a new assistant manager at a well-es-
tablished and popular restaurant, decided to
take the initiative and use some RRM tools to
examine issues the restaurant was having. After authorizing a lengthy
time study, she analyzed dining duration and found a huge problem
with the time between entrée and check delivery—the time that it was
actually taking customers to eat. With a CoV of 0.867, the time to dine was
extremely variable.
After using a ÿshbone diagram, Pam determined that the high CoV was
caused by a combination of two things: including too many outliers in
the analysis and the check-dropping process. In fact, Pam found so many
outliers in her sample that she was compelled to take a closer look at the
transactions.
Upon further investigation, Pam discovered that three servers had been
providing free food to tables of friends and family, so nothing was entered
in the “check delivery” ÿeld in the data for the duration study. A glitch in
the spreadsheet analysis interpreted this as the closing time, so many
durations for the entrée-to-check delivery time were grossly overstated.
Consequently, the CoV was not as alarming as it appeared at the begin-
ning of the duration analysis and was able to beneÿt from reÿning the
process for dropping checks and retraining servers accordingly. Of course,
the three servers who were involved in the crimes Pam uncovered were
terminated.
What other potential causes of the high CoV do you think were included
on the ÿshbone diagram?
Why do you think anything above 0.5 is the threshold for an unaccept-
able CoV?
Controlling Duration
As previously mentioned, in addition to selling an actual meal, a restaurant

is selling the use of one of its physical inventory units for a period of time
(Kimes et al., 1998). An interesting characteristic of restaurants is that cus-

tomers largely determine the amount of time an inventory unit is used. ˛e
more control an operator can gain over the duration that seats are occupied,
the better he can manage RevPASH.
Having control over duration means having a low standard deviation of

dining duration and an average dining duration that is suitable for the type,
size, location, and atmosphere of restaurant under study.
Controlling duration can be accomplished in di˜erent ways (Kimes et al.,

1998):
• Reducing the time it takes to accomplish steps in the service process.
• Standardizing services so that the variation inactivity times is
reduced or eliminated.
• Increasing forecast accuracy so that optimal sta˙ng levels can be
determined and accurate wait times can be quoted.
If an operator could regulate how long customers sit at seats in her

restaurant, she could potentially serve more customers and perhaps even ÿt
in another table turn, close earlier, or ÿne-tune employee schedules to save
money. A few speciÿc duration management strategies are as follows (Kimes
et al., 1999; Kimes et al., 1998):
• Retool a menu to exclude items that cause customers to linger and
items that take too long to prepare.
• Hire a dedicated host, food runner, or busser if it is found that any of
these processes are signiÿcantly holding up the restaurant system.
• Use cues to let customers know it is time to move along in the meal
process.
Another duration management strategy is to speed up the pace of meals

during busy periods. ˛is type of duration reduction technique is recom-
mended only for casual and upscale casual restaurants, as customers at ÿne
dining restaurants expect a leisurely pace. To preserve customer satisfaction,
the best times to increase the pace of a meal are during the pre-dining and
post-dining stages (Noone et al., 2007).
Note that controlling duration does not always equate to decreasing

duration. Research has shown that the revenue increase from decreas-
ing duration is marginal and not nearly proportional to the amount of the
decrease (˛ompson, 2009). Take, for example, the following case: ˛e
owner of Bistro 7, a small, upscale jazz fusion restaurant located in St. Louis,
is considering adopting several RRM strategies to decrease average dining
duration. If he can decrease the amount of time a customer spends at a table
by 10 percent (from 62 min to 56 min), he should expect an increase in rev-
enue of less than half of that, or less than 5 percent.
Differences in Supply Offered
As discussed earlier in this chapter, physical inventory units—restaurant

seats—can really be very di˜erent even if they appear to be identical. ˛e
most recognizable di˜erence in seats is to what table size is it assigned (e.g.,
two-top, four-top). Another di˜erence in seats due to the table size at which
a seat is situated is the amount of space that is taken up by the seats at a table
(e.g., 45 square feet, 108 square feet). Recall that “space” in an RRM context
refers to the physical area that is needed to put a unit of inventory into use.
Fences
Both physical and nonphysical restrictions—known as fences—can be

placed on supply to segment it into specialized categories. ˛is way, the same
inventory—seats—can be used to create a larger variety of service products,
such as a character breakfast at a theme park. Fences also create a situation
where di˜erent prices could potentially be charged to di˜erent customers
based on the location of a table or time-of-day specials (Kimes et al., 1998;
Kimes & Wirtz, 2003).
Another fence that di˜erentiates seats that seem to be identical is the

seating assignment rule. ˛is is the rule a restaurant uses to determine
which party size can sit at which table size.
• A strict seating assignment rule dictates that party sizes are only
seated at their closest matching table size. For instance, parties of
1–2 sit only at two-tops, parties of 3–4 sit only at four-tops, and par-
ties of 5–6 sit only at six-tops. ˛is is quite unrealistic in a real-world
restaurant.
• ˛e relaxed seating assignment rule is on the other end of the spectrum

and allows for party sizes to be seated at any table size larger than the
party. For instance, parties of 2 can be seated at two-tops, four-tops, six-
tops, or eight-tops, but parties of 6 can only be accommodated by six-
tops or eight-tops. ˛is is also a bit unrealistic, as a party of 2 will seldom
be seated at an eight-top.
• Right sizing is usually the seating assignment rule most restaurants
use. ˛is simply means trying to seat a party at the table size that ÿts it
best, but using other reasonable table sizes to accommodate parties as
needed.
Combining Tables
Whether or not tables can be combined is another characteristic that not

all supply units may have. Restaurants frequently combine smaller tables
(and the seats situated at them) to make a larger table. Not all tables are
combinable; for instance, some are too large to move and some are anchored
booths.
More importantly, though, is the question: Is it better to use tables that

can be combined or to have the proper mix of tables, including dedicated
ones that can only accommodate parties that are the same size or smaller
than the table? ˛e answer to this depends on the restaurant. In a study, it
was found that:
• Smaller restaurants (e.g., 50 seats) that do not serve many large par-
ties beneÿt from using combinable tables.
• Smaller restaurants that serve many large parties beneÿt from using
dedicated tables.
• Larger restaurants (e.g., 200 seats) beneÿt from using dedicated
tables (˛ompson, 2002).
Combining tables can mean that one or more units have to be taken
out of inventory and put on hold until all the tables needed are unoc-
cupied and ready to be combined. Why is this not desirable?
Supply Mix
Another aspect on the supply side of RRM that impacts how much revenue
can be generated is the mix of physical inventory units used. As with a dura-
tion analysis, the inventory under consideration in a supply mix analysis is
tables. Research has shown that better matching the physical supply of tables
to customer demand characteristics positively impacts revenue (Kimes &
˛ompson, 2004).
Supply mix at a restaurant is oên determined subjectively. For exam-

ple, the mix of tables used in many restaurants follows corporate standards,
re°ects what is o˜ered by competitors, or is chosen to support the image
and atmosphere desired for the facility (Katsigris & ˛omas, 1999). ˛ere
are several di˜erent quantitative, objective techniques and tools available to
help determine the optimal table mix for a restaurant.
˛e Team Activity provided in this chapter sets up an example that

demonstrates why having the right table mix is important. ˛is example will
be used throughout the rest of this section, so it is recommended that the
Team Activity be completed at this point.
Percentage Match
˛e simplest method of determining an appropriate table mix matches the

percentage of table sizes supplied to the percentage of table sizes demanded.
Using the Shockwave example from the Team Activity, the mix of parties
coming into Shockwave, based on the arrivals information the instructor
announced, is:
Party Size Demand Mix %*

1 16.67%
2 50.00%
3 22.22%
4 11.11%
*Note that this demand mix does not include
the parties of fve or more that could not be
accommodated.
˛e percentage-match method for determining the best table mix for

Shockwave is straightforward and has two steps:
1. Determine the demand percentages for each of the two table types
supplied, remembering the seating rule that parties of 1–2 should be
seated at two-tops when possible and parties of 3–4 should be seated
at four-tops.
Parties of 1 and 2 = 16.67% + 50.00% = 67% Parties of 3 and 4 =
22.22% + 11.11% = 33%
2. Estimate the number of tables by applying the party size percentages
to the number of seats available:
% Parties 1–2 × 36 seats = 0.67 × 36 = 24 seats
Divided by 2, since there are 2 seats per two-top = 12 two-top tables
Estimate the number of four-tops:
% Parties 3–4 × 36 seats = 0.33 × 36 = 12 seats
Divided by 4, since there are 4 seats per four-top = 3 four-top tables
Percentage-Duration Match
Adding more information into a table mix analysis will oên produce
more accurate results. For instance, adding duration to a table mix analy-
sis accounts for how long di˜erent parties actually occupy tables. However,
more information can quickly complicate the problem.
To illustrate, suppose duration information was collected for Shock-

wave, the restaurant from the Team Activity. ˛e demand characteristics
now known are as follows:
Party Size Demand Mix %* Duration

1 16.67% 45 min
2 50.00% 50 min
3 22.22% 55 min
4 11.11% 60 min
*Note that this demand mix does not include the parties of 5 or more
that could not be accommodated.
˛e percentage-duration match method determines its recommended

table mix as follows (Kimes & ˛ompson, 2004):
1. Determine the total amount of time needed to accommodate the
demand for seats that are situated at di˜erent table types:
For two-tops: [demand percent for parties of 1 × duration for parties

of 1]
+ [demand percent for parties of 2 × duration for parties of 2]
= [0.1667 × 45] + [0.50 × 50] = 32.5
Multiplied by 2, since there are 2 seats per two-top = 65min
For four-tops: [demand percent for parties of 3 × duration for parties
of 3]
+ [demand percent for parties of 3 × duration for parties of 3]
= [0.2222 × 55] + [0.1111 × 60] = 18.8889
Multiplied by 4, since there are 4 seats per four-top =75.56 min
Sum of both = 65 + 75.56 = 140.56 min
2. Calculate the percentage of this total time demanded for seats that is
needed to satisfy customers at each of the table types.
Two-tops: 65/140.56 = 46.25% Four-tops:75.56/140.56 = 53.75%
3. Estimate the number of tables by applying the percentages to the
number of seats available:
Two-tops: 0.4625 × 36 seats = 16.6482 seats/2 = 8.3241 tables
Four-tops: 0.5375 × 36 seats = 19.3518 seats/4 = 4.8379 tables
˛e number of tables can only be an integer, so the table mix that
best matches demand to supply, accounting for duration, is rounded
to: 8 two-top tables and 5 four-top tables.
More Complex Methods
˛e two main problems with the percentage match and the percentage-du-
ration match methods in determining the best table mix are as follows:
• Recommended table mixes that cannot ÿt into the dining room space
available. ˛ese simple models allocate the existing number of seats
to di˜erent tables without initially taking into account the actual
space each table needs.
• Table mixes may be based on the wrong number of seats. ˛e two sim-
ple models work by allocating the existing number of seats to di˜er-
ent groups of demand. However, the number of seats in use may not
be right for the operation and the space it has available.
Many complex table mix models have been developed and tested to
either solve these problems or to include more demand and/or supply infor-
mation and assess if better results can be achieved (Kimes & ˛ompson,
2004, 2005; Rohlfs, 2009; ˛ompson, 2011).
One common aspect most of these models share is the use of Integer
Programming (IP), which is a mathematical model used to solve a problem
with many parts. ˛e purpose of using an IP is that table mixes are oên
unrealistic because the recommended number of tables is a fraction. Simple
table mix methods simply round to the nearest whole number using con-
ventional rounding rules, so the table mixes they produce are not “optimal”
in that, while they capture a good amount of available revenue, they do not
capture all of it.
Demand intensity and demand value can also in°uence the results of a
supply mix model, but usually to a lesser extent than party size and duration.
Additionally, table space measurements and table seating options could pos-
sibly impact supply mix models.
Space Allocation
Space allocation, the ÿnal model presented in this chapter, speciÿcally

addresses the two problems listed above. It takes space considerations into
account and determines the mix and number of tables that maximize reve-
nue potential. It does not include duration data, as testing of this model has
indicated that it does not yield better results. Using an IP is outside the scope
of this chapter, so conventional rounding methods to determine the ÿnal
table mix recommendation are used.
˛e space allocation method begins by determining a few space measure-

ments:
• ˛e size of the planning square required for each table size. A plan-
ning square is the square foot age required to accommodate the fol-
lowing for each type of table (Rohlfs, 2009):
- ˛e physical size of a table top
- ˛e size and number of chairs at the table
- ˛e area needed for people to sit in the chairs when a table is
occupied
- ˛e area needed for sta˜ to circulate around the table during din-
ing service
• ˛e total amount of useable FOH area. Useable dining space includes
the area that can actively be used to put physical inventory. It does
not include stairs, poles, and FOH requirements such as restrooms
and coat-check areas. ˛is should be carefully measured to ÿnd this
total.
Returning to the Shockwave example, standard-size tables will be used,

and the following square footage information is now known:
Table Size Square footage

requirements
2-top 31.5 square feet
4-top 43.75 square feet
Useable FOH space = 610 square feet
1. Determine the total amount of space needed to accommodate the

demand for seats that are situated at di˜erent table types:
For two-tops: [demand percent for parties of 1 × space for parties of
1]
+ [demand percent for parties of 2 × space for parties of 2]
= [0.1667 × 31.5] + [0.50 × 31.5] = 21.00
Multipliedby2, sincethereare2seatspertwo-top=42.00squarefeet
For four-tops: [demand percent for parties of 3 × space for parties of
3]
+ [demand percent for parties of 4 × space for parties of 4]
= [0.2222 × 43.75] + [0.1111 × 43.75] = 14.58
Multiplied by 4, since there are 4 seats per four-top = 58.33 square
feet
Sum of both = 42.00 + 58.33 = 100.33 square feet
2. Calculate the percentage of this total space demanded for seats that
is needed to satisfy customers at each of the table types.
Two-tops: 42.00/100.33 = 41.86%
Four-tops: 58.33/100.33 = 58.14%
3. Estimate the number of tables by applying the percentages to square

footage available to ÿt tables:
Two-tops: 0.4186 × 610 square feet = 255.35 square feet
= 255.35/31.5 square feet per table = 8.11tables, rounded to 8 two-
top tables
Four-tops: 0.5814 × 610 square feet = 354.65 square feet
=354.64/43.75 square feet per table = 8.11tables, rounded to 8 four-
top tables
4. Calculate the number of seats to be used in the restaurant:
8 two-tops × 2=16 seats 8 four-tops × 4= 32 seats 16 + 32 = 48 seats
Once a table mix that better matches demand is adopted, seat occupancy
would be expected to increase. If it does not, it is likely that the average
seat occupancy is already quite high or that the demand information upon
which the model is based is incorrect. ˛ese table mix models are perfectly
sensitive to changes in a restaurant’s demand mix, so even small changes in
the distribution of party sizes could drastically impact the recommended
number of tables.

A restaurant is under construction and is ready to order
tables and chairs. You are tasked with determining the
physical inventory to purchase. You have the following
information:
Expected Square Footage
Demand Requirements (includes space
Mix for chairs and movement)
Parties of 1 and 2 at 2-tops 30% 30 sf
TO DO
Use the Excel spreadsheet to determine how many 2-top, 4-top, 6-top,
and 8-top tables to order.
Layout of Supply
˛e layout of a dining room, including seat types and table types and loca-
tions, is another aspect of restaurant operations that can be tied in to RRM.
All of these characteristics further di˜erentiate physical inventory not only
in their looks and comfort, but also possibly in the amount of space they
take up.
Seat types include chairs, stools, banquettes, and booths. Table types
include freestanding, booths, cocktail tables, and communal tables. Table
locations range from anchored to a wall or other obstruction, in the center
of the room, in a corner, or with a view.
In addition, certain table types sometimes encourage customers to

behave in a certain way; gaining more control over customer behavior is
frequently used in RM and RRM (Katsigris & ˛omas, 1999). For instance,
dining duration at round tables has been shown to be longer than dining
duration at square ones. ˛is information about a supply side atmospheric
characteristic of a restaurant would be helpful for both a restaurateur trying
to decrease the amount of time customers spend at tables and a ÿne dining
operator wondering how his customers would perceive a switch to square
tables.
SUMMARY
˛e supply side of RRM is concerned with how well the physical capacity
of a restaurant is being used to capture and generate revenue. As capacity
is usually under the control of the restaurant operator to a much greater
extent than demand, learning, and applying the capacity management
tools associated with RRM provides restaurateurs with many opportuni-
ties to improve a business. While di˜erent capacity strategies are useful
when demand is high compared to when demand is low, applying RRM
techniques helps an operation use its available supply to e˜ectively and
e˙ciently serve its demand.
1. In the simplest terms, the objective of RRM is to use the
fundamental supply and demand conditions of a restaurant
to maximize revenue. What elements of the supply are under
the control of the restaurant? What elements of demand are
under the control of the restaurant?
2. Flo’s is a breakfast-only diner, open from 5 a.m. to 11 a.m., and very popular with
the employees of a local package delivery warehouse. Flo recorded the “at” seat
occupancy for each 15-min period from 8:00 to 10:00 a.m. over a few weeks; the
averages are provided below. What is the “from” occupancy for each hour? Which
method of recording occupancy do you think is more useful for Flo?
Time Seat Time Seat Time Seat Time Seat

Occ Occ Occ Occ
8:00a.m. 92% 8:30a.m. 94% 9:00a.m. 99% 9:30a.m. 96%
8:15a.m. 60% 8:45a.m. 55% 9:15a.m. 51% 9:45a.m. 66%
Party Party Party Party Party Party Party Party Party Party
of 1 of 2 of 3 of 4 of 5 of 6 of 7 of 8 of 9 of 10
5% 25% 5% 25% 3% 5% 5% 15% 5% 7%
3. The current mix of tables at a restaurant with 102 seats is as follows: 4 two-tops,
18 four-tops, 2 six-tops, and 1 ten-top. The seating rule currently used at the
restaurant is to seat the largest waiting party at tables as they come available.
Demand at the restaurant is distributed as shown in the table below.
What is your opinion of the current table mix?
4. Recall that fences are used in RRM to di˜erentiate seats, so these identical physical
inventory units can be sold as di˜erent products. O˜ering tables of di˜erent sizes
is a type of fence; the seats situated at a 6-top are used to accommodate a party
that would not be able to use the seats at a 2-top, as a larger party could not ÿt.
Describe how a seating assignment rule can be used as a fence to di˜erentiate
identical inventory.
5. Conceptualize (but do not try to calculate) a table mix model using the
percentage-duration method for a restaurant with the following characteristics.
Party Size % of demand Table Size Duration

1–2 5% Two-top 52 min
3–4 15% Four-top 57 min
5–6 25% Six-top 66 min
7–8 30% Eight-top 71 min
9–10 25% Ten-top min
Use able FOH space for tables = 8000 square feet current number of seats=535.
Be sure to ÿrst deÿne the seating rule the restaurant will follow.
6. Restaurants usually follow a hybrid of the constant or the chase methods
for managing capacity. Because a restaurant has a ÿxed amount of space to
serve customers, it has to use some constant strategies. However, restaurant
capacity can be quite ˛exible and often can be changed at a low cost to better
accommodate demand, which are characteristic chase strategies. What are some
other constant and chase strategies that coexist in a restaurant operation?
APPLICATIONS
Vail Ski Mountain Restaurant
Vail Ski Resort Mountain Restaurant serves lunch from

11:00 a.m. to 3:00 p.m. every day. When the restaurant
opens, guest slowly, but steadily, arrive until about 12:15
p.m. when groups of customers coming o˜ the slopes
show up. ˛is in°ux of demand “clumps” lasts until about
1:30 p.m. What supply related RevPASH strategies would you suggest and
for what times?
Arepas
˛e manager of Arepas, a Colombian-themed, quick casual restaurant,

would like to perform an analysis of duration—how long it is and how much
it varies.
You visit Arepas and write down your observations about the dining pro-
cess:
• Customers wait for a long time at the hotel and when they ÿrst walk
in.
• It takes a long time to navigate through the maze of tables when
being seated.
• Servers bring fried plantains to the tables when greeting customers.
• ˛e menu o˜ers no appetizers.
• ˛e dessert menu is limited, but the co˜ee and liqueur selection is
impressive.
• Servers are trained to bring the check with the entrée.

• Cash and credit cards are accepted.
Design a time study data collection worksheet for the manager.
Tacky Fingers
A popular BBQ restaurant is opening a very large second location across

town. You met the owners at a cocktail party and got to talking with them
about RRM. ˛ey were especially interested in the table mix material and
o˜ered you lots of free BBQ if you would help them determine the best table
mix. You agreed and collected the following information:
Party Size Expected Percent of Table Size Planning Square

Demand
1–2 25% Two-Top 28 square feet
3–4 50% Four-Top 44 square feet
5–6 25% Six-Top 72 square feet
Useable FOH space for tables = 3220 square feet
TEAM ACTIVITY
˛is activity should be completed in conjunction with the Supply

Mix section of this chapter.
You are challenged with helping your brother’s beachside, surf-

themed restaurant, Shockwave. In teams of two to three, determine the
appropriate table mix for its 36 seats.
Your brother can get a good deal on new two-tops and four-tops, so
these are the only two table types that he will use. Fire codes indicate that
no more than two people can be seated at a two-top and no more than four
people at a four-top. You are to assume that tables cannot be combined.
Decide how many of each table type you will have (remember that you
only have 36 seats). Use the table sizes and restaurant footprint in the Appen-
dix to sketch a layout for Shockwave.
˛e seating rules Shockwave will follow are:

• First Come, First Served.˘˘
• Attempt to seat each party at the table size that most closely matches
its size (e.g., parties of one are seated at two-tops; parties of two are
seated at two-tops, parties of three are seated at four-tops).
• If that match is not available, the party is then seated at the next
largest available table size (e.g., parties of one or two are seated at
four-tops if all two-tops are taken).
Now let’s test how your table mix performs. As you go through the list of
parties arriving to Shockwave (Arrivals), you should:
• Seat each arriving party at appropriate tables by marking an X for
each customer on the table.˘
• Keep track of any parties that cannot be accommodated, recording
them as lost demand.
Arrivals:
Party # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Party Size 2 4 2 5 3 1 3 2 4 2 2 6 3 2 2 1 2 2 1 3
Aêr all parties have arrived, answer the following questions:

1. Your table occupancy should be 100 percent. Why? Is this realistic?
2. What is your restaurant’s seat utilization?
3. How many customers were lost?
4. Which table mix performs the “best”?
INTERNET ACTIVITY
Go to http://www.bu.edu/revpash/, an online app that uses seat

capacity and revenue to calculate and graph RevPASH. Use this
RevPASH app and the information provided to calculate how
well the 60 seats at Vi’s Lakeside Diner are generating breakfast revenue.
˛e data you will enter into the hourly tab is:
Day 1 Revenue Customers Day 2 Revenue Customers Day 3 Revenue Customers
Hour 1 $400 30 Hour 1 $450 30 Hour 1 $500 35
Hour 2 $600 40 Hour 2 $700 50 Hour 2 $700 50
Hour 3 $650 50 Hour 3 $900 60 Hour 3 $875 55
Hour 4 $375 30 Hour 4 $550 40 Hour 4 $500 40
• Aêr you’ve entered Day 1, press the Flow Data button. Click on the
Daily tab to see that the data have been summarized and transferred.
• Returning to the Hourly tab, click on the Clear Table button. Re-en-
ter 60 available and enter Day 2 data. Press the Flow Data button and
check the Daily tab that the data have been transferred.
• Again, clear the Hourly tab, enter Day 3 data, and °ow the data to the
Daily tab.
Look at the Charts tab. What day generates the most revenue per seat?
GLOSSARY
Duration – ˛e amount of time a customer spends at a restaurant,
measured from arrival to departure.
Fences – Di˜erences in physical inventory units.
Nonphysical inventory – ˛e intangible resources required to
deliver a service.
Physical inventory – ˛e tangible resources required to deliver a service.
Planning square – ˛e square footage required to accommodate a table in
a restaurant.
Seating assignment rule – A guideline used to regulate which party size can
sit at which table size.
Service capacity – ˛e amount of output a service system can produce.
REFERENCES
Bradach, J. (1997). Using the Plural for Min the Management of Restaurant Chains.
Administrative Science Quarterly, 42 (2), 276–303.
Crandall, R., & Markland, R. (1996). Demand Management—Today’s Challenge for
Service Industries. Production and Operations Management, 5 (2), 106–120.
Cross, R. G., Higbie,J. A., & Cross, D. Q.(2009).Revenue Management’s Renais-
sance: Are Birth of the Art and Science of Proÿtable Revenue Generation.
Cornell Hospitality Quarterly, 50 (1), 56–81.
Eppen, G., Martin, R. K., & Schrage, L.(1989).A Scenario Approach to Capacity
Planning. Operations Research, 37 (4), 517–527.
Johnston, R. (1999). Service Operations Management: Return to Roots. Interna-
tional Journal of Operations & Production Management, 19 (2), 104–124.
Katsigris, C., & ˛omas, C. (1999). Design and Equipment for Restaurants and
Food Service: A Management View. New York: Wiley.
Kimes, S. (1989). Yield Management: A Tool for Capacity-Constrained Service
Firms. Journal of Operations Management, 8 (4), 348–363.
Kimes, S. (1999). Implementing Restaurant Revenue Management: A Five-Step
Approach. Cornell Hotel and Restaurant Administration Quarterly, 40 (3),
16–21.
Kimes, S., Barrash, D., & Alexander, J. (1999). Developing a Restaurant Reve-
nue-Management Strategy. Cornell Hotel and Restaurant Administration
Quarterly, 40 (5), 18–29.
nell Hotel and Restaurant Administration Quarterly, 39 (3), 32–39.
Kimes, S., & ˛ompson, G. (2004). Restaurant Revenue Management at Chevys:
Determining the Best Table Mix. Decision Sciences, 35 (3), 371–392.
Kimes, S., & Wirtz, J. (2003). Has Revenue Management Become Acceptable? Find-
ings from an International Study on the Perceived Fairness of Rate Fences.
Journal of Service Research, 6 (2), 125–135.
Lovelock, C. (1984). Strategies for Managing Demand in Capacity-Constrained
Service Organizations. ˛e Service Industries Journal, 4 (3), 12–30.
Noone, B., Kimes, S., Mattila, A., & Wirtz, J. (2007). ˛e E˜ect of Meal Pace on
Customer Satisfaction. Cornell Hotel and Restaurant Administration Quar-
terly, 48 (3), 231–244.
Pullman, M., & ˛ompson, G. (2003). Strategies for Integrating Capacity with
Demand in Service Networks. Journal of Service Research, 5 (3), 169–183.
Rohlfs, K. (2009). ˛e Role of Space in Revenue Management (Doctoral disserta-
tion). Cornell University, Ithaca, NY.
Sasser, W. E. (1976, November– December). Match Supply and Demand in Service
Industries. Harvard Business Review, 48, 133–140.
˛ompson, G. (2002). Optimizing a Restaurant’s Seating Capacity: Use Dedicated

or Combinable Tables? Cornell Hotel and Restaurant Administration Quar-
terly, 43 (4), 48–58.
˛ompson, G. (2009). (Mythical) Revenue Beneÿt of Reducing Dining Duration in
Restaurants. Cornell Hospitality Quarterly, 50 (1), 96–112.
˛ompson, G. (2011). Inaccuracy of the “Naïve Table Mix” Calculations. Cornell
Hotel and Restaurant Administration Quarterly, 52 (3), 241–252.
APPENDIX: MATERIALS FOR TEAM ACTIVITY

CHAPTER 12
Function Space Optimization

Marianna B. Accomando and Bob Chamberlin
OVERVIEW
Revenue management in the hospitality industry has traditionally been
associated with the management of sleeping rooms. A strong database
of information and multiple distribution channels allowed you to position
your inventory to an eager public. In this chapter, however, we are going
to examine a revenue stream that isn’t as clear-cut as rooms: Function
Space, and the multiple revenue streams associated with banquet/
catering events.
Traditionally, function space was an afterthought. The “Group” segment

which was coming to our property needed a place to meet and we
provided “Function Space” to accommodate their needs focusing on
filling high margin sleeping rooms to achieve bottom line results. The
multiple revenue sources associated with events was complicated
to track and understand so they were only partially considered or
evaluated. Database management has finally caught up and now we can
understand exactly what the guest requires and what it costs to deliver.
As we mine our database, we begin to grasp the multiple revenue streams
associated with events which can produce 30–40 percent of a property’s
entire revenue production. Technological advances have allowed us to
understand that Function Space revenue is not an ancillary byproduct of
filling sleeping rooms but a symbiotic and lucrative partner in the success
of a property. Only by looking holistically at each piece of business that
comes to your property can you determine the best fit to achieve your
331
property’s potential. In this module, we will focus on the use of a new

set of criteria with which to evaluate the opportunities in front of sales
managers, general managers, and ultimately asset managers and owners.
With a diminishable inventory function space, optimization seeks to yield
the inventory to its highest value and margin.
LEARNING OBJECTIVES
Describe the relationship between hotel rooms and function space
Translate the concepts of function space optimization into a Yield Manage-
ment Strategy
Apply the Yield Management Strategy to increase bottom line proÿt
Identify what we are selling and its relationships within Space Optimization
theory
Segment your customer base and sales force to position yourself for success
Justify the importance of communication in keeping your team focused and
aligned
OUTLINE
Introduction
• ˜e Evolution of Function Space

• ˜ink Historically
Closer Look: Function Space Optimization
• Similarities between Rooms and Function Space

• Unique Characteristics of Space
• Function Room Revenue Sources
• Flow ˜rough Percentages
• Upselling Opportunities
Function Space Optimization  333
Segmentation and the Negotiation Process
• ˜e Group Segment
Communication and Communication Tools
Closing
Summary
INTRODUCTION
Another Busy Day!
Is there anyone who thinks the pace of business is slowing down or that the
decisions we make daily are getting easier? Case in point: the decisions a
Sales Manager faces daily. Typically, the ÿrst thing one would check is your
Request for Proposal (RFP) inbox. You have 15 requests since 6 pm last
night all looking for a response within 24 h with requests ranging from:
(1) A group looking to arrive October/November requiring 900 rooms
with a peak room night of 250. ˜ey need general session space for
600 with breakouts, breakfast, lunch, and a dinner/reception upon
arrival. ˜ey are looking for an answer by 2 pm.
(2) Another group has no date ˛exibility arriving in May for three
nights, with peak rooms at 325 rooms, requiring all your function
space with a food minimum of $250k.
(3) A catering request for your best ballroom on a Wednesday night in
April, F&B minimum $90k.
(4) A group looking for 30 sleeping rooms with meeting space for 75
people requiring breakfast, breaks, lunch, and breakout space arriv-
ing in two weeks.
(5) A large group looking for your best rate and F&B prices to arrive
over July 4. ˜ey require 90 percent of your room inventory, multi
occupancy rooms taking all double doubles but only 50 percent of
your function space with breakfast, lunch, and general session.
˜ese are the types of decisions a property is faced with on a daily basis,
competing against multiple properties, all with the knowledge that the ÿrst
responder normally gets the business 70 percent of the time. While speed of
response is a major factor, responses based on accurate fundamentals and
training win the game.
SO WHAT?
In “Another Busy Day!” you get a sense of the pace and demands of
a sales environment matched against the needs of the client. ˜ere
are so many factors involved in deciding what piece of business is the
best ÿt, but there is one overriding factor of all, time. Why is time so
important? What makes it a leading factor in every decision and nego-
tiation which takes place in a hospitality organization?
The Evolution of Function Space
Function space optimization is a relatively new concept, an emerging sci-

ence (Kimes, 2011). ˜e number one trend in business today is analytics.
Analytics is about being able to gather, mine, and develop strategies based
on solid empirical data. It is crucial to evaluate all the information available
and act on it. Marketing has always been about understanding your cus-
tomer but never before has so much information been available to identify
likes, needs, and habits and tie them to the assets used to satisfy the guest.
Function space optimization is an analytical process which is evolving
quickly to meet the challenges of a highly competitive environment provid-
ing the foundation to develop a winning strategy.
THINK HISTORICALLY
Function space management 30 years ago consisted of manually logging
your event into a function book called the “Bible.” You hoped that while
you were selling the space to your client another colleague wasn’t sell-
ing the same space to theirs! ˜en the Direct Operating System (DOS)
arrived, an operating system which actually allowed a sales person to
view the “Bible” electronically at their desk and manage a properties
function space in real time. As Sales and Catering databases evolved
a team approach to selling became apparent, now you can track a sale
from the initial “prospect” status of meeting the client, to generating a
contract and sending it o˝, “tentative” status, to the actual signing and
receipt of the contract, “deÿnite” status.
You also began to realize e˙ciencies of production as menus were

loaded into your system and detailed instructions were produced called
Banquet Event Orders (BEOs). Operationally, properties were realizing
great e˙ciencies in “function space management,” while all along more
and more data was being collected:
• Data on contract decision makers
• Where the business originated from and how oên
• How much revenue was being generated and who were your best
customers
• What types of requests were most prevalent and what did you
need to have on hand to satisfy those requests
We now had concrete data to direct our strategic decision making.
Questions:
˜e evolution of “SPACE” has transitioned from a perspective of
operations to sales: how does this change beneÿt your organization?
Databases were over˛owing with information and while business realized
the potential, there was still a divide between having the information and
accessing it for analytical purposes. No longer is that a problem, we now
have the tools; all that’s leˆ is to ensure the information being entered is
accurate. We now have at our disposal a wealth of information collected
and reÿned over decades from which Function Space Optimization has
emerged.
CLOSER LOOK: FUNCTION SPACE OPTIMIZATION
Space optimization is about the management of an extremely perishable

resource representing between 30 percent and 40 percent of total revenue
generated by your property. It is referring to a resource that extends beyond
just physical space and into food and beverage revenue and margin manage-
ment. A common term when referring to the proÿtability of an item is yield.
What is the maximum return one can expect from a product or resource?
Initially used as a model from the airline industry, hotels use yield as a base
for room’s revenue and õw through management. From this base, yield has
developed into a science or discipline called yield management.
Yield management is a variable pricing strategy, based on understand-

ing, anticipating, and in˛uencing consumer behavior in order to maximize
revenue or proÿts from a ÿxed, perishable resource such as an airline seat
or hotel room. As a speciÿc, inventory-focused branch of revenue manage-
ment, yield management involves strategic control of inventory to sell to
the right customer at the right time for the right price. Applying the rules
of supply and demand to identify patterns of seasonality by month, week,
day, and time of day, you develop a variable or dynamic pricing strategy to
maximize the return on your perishable product. Developing tiered pricing
allows you to easily adapt to demand and time constraints, shiîng your sell-
ing strategy to obtain the maximum return on your product without losing
the sale. Space optimization is a natural extension of revenue management
as we apply many of the same principles used from the yield management of
sleeping rooms to function space (Kimes and McGuire, 2001).
Similarities between Rooms and Function Space

(1) It is the same life cycle of perishability, what you don’t sell today you
lose forever.
(2) It is subject to the same rules of constrained and unconstrained demand.
(3) A critical component is the identiÿable patterns of seasonality by
month, week, and day.
(4) Time is fundamentally important. Speciÿcally how much time prior
to the expiration date of the diminishable inventory do we have
(Booking Window)?
Taken down to their essences, function space and sleeping rooms are
the same, they are space. A physical structure located in a speciÿc location/
vicinity with o˝erings that attract visitors.
Unique Characteristics of Space
Distinct Meal Periods: in looking at the yielding of space we can determine

that there are typically four separate periods of the day that allow for reve-
nue generation:
• Morning: 6 am to noon
• Lunch: Noon to 2 pm
• Aêrnoon: 2 pm to 6 pm
• Dinner: Aêr 6 pm
Four distinct opportunities to produce revenue in a 24-h period, which

unlike the typical sale of a hotel room is a BIG PLUS! ˜e notion of “time”
similarly a˝ects the sale of both rooms and space, but the opportunity to
subdivide space into four revenue producing units is a unique characteristic
of function/event space and these subdivisions into meal periods a˝ords us
an opportunity for variable pricing (Kimes and McGuire, 2001).
Pricing in relation to space is not the same as rooms. ˜e best available

rate (BAR) pricing of sleeping rooms allows you to quickly adjust to changes
in demand but with function space the revenue streams are ÿxed. However,
the option of adding food and beverage can give you ˛exibility. Food and
Beverage (F&B) prices are typically set in advance, printed, and distributed
in a menu format which is then given to clients limiting your ability to ˛ex
price. What you can do however is determine your seasons (high, medium,
and low) for your geographic area, identify your most proÿtable space and
then set revenue minimums which you will accept from those speciÿc ven-
ues over that time period. ˜ere are a wide range of items from which rev-
enue is produced when looking at Space Optimization. When evaluating a
piece of business one must consider not just the season or demand period,
but the ˛ow through percentage of the item to maximize returns.
Function Room Revenue Sources

(1) Food and Beverage: ˜e menu and its o˝erings provides opportunity
for variable pricing techniques. ˜e packaging of items with upgrade
options allows a sales manager the unique opportunity to increase
revenue while satisfying the needs of the client. We will delve deeper
into this concept shortly
(2) Rental Fee: Rent is the opportunity for variable pricing when provid-
ing a quote to a client. Like average daily rate (ADR) in rooms, you
are not constrained by the printed menu pricing set in F&B, but a
sliding rent scale a˝ords the opportunity to sell the space and ˛ex as
demand dictates.
(3) Administrative Fee: An almost 100 percent ˛ow through item on

the Proÿt and Loss Statement (P&L). ˜ink of this fee in the same
manner as shipping and handling. It is a fee provided to the man-
agement of the facility producing the event. It is not a gratuity to the
banquet sta˝ but incremental top line revenue for management in
exchange for servicing the event
(4) Resources: ˜ese are ancillary items which every event needs:
• Audio visual
• Linen and chair upgrades
• Chef, bartender, attendant, or coat check fees
• Staging and lighting upgrades
• Security personnel
Linked to each of these revenue sources is a ˛ow through percentage.

Flow through or revenue conversion, is what ˛ows from the point of gen-
eration, through associated costs to produce the item or service sold, to the
bottom line of the P&L and ultimately to the owners of the property (see also
Kimes and Renagan, 2011, p. 24).
Flow Through Percentages

• Rent: ˛ows at approximately 90 percent. ˜e labor expense of the
function room set up and ÿxed costs of energy are all that apply to
decrease the margin of proÿt in this revenue stream. ˜is revenue
stream is the most ˛exible when negotiating a contract, however, it is
oên the ÿrst expense a client will try to contain. From the property
perspective, this is a highly valuable and dynamic revenue stream.
With a high ˛ow through which can ˛ex over high and low demand
periods it is a key to high return in a space optimization strategy.
• Administrative Fee: 100 percent ˛ow through, a beautiful thing.
Administrative fees average 7–10 percent of F&B revenue based on
the type of facility and location.
• Resources: varies;
• Audio Visual could average 35–55 percent proÿt given the setup
of the contract with an outsourced vendor or the internal cost of
ÿxed assets which constantly need upgrading and labor to ser-
vice the need. Do you contract out or produce in-house? ãt is a

critical business decision which a˝ects margin to an overall P&L.
• Linen and Chair upgrades: upsell pricing can support a “markup”
of handling this outsourced revenue stream
• Chef, Bartender, Security Fees: 80–90 percent ˛ow through based
on the labor demand/schedule.
• Food and Beverage: this items ˛ow through can vary widely based
on cost of goods sold for each geographic location factoring in trans-
portation costs, production, and service labor expenses as well as the
menu engineering. Competitive pricing and ultimately, the desired
margin/˛ow through the owners expect are fundamental. ˜e best
way to analyze ˛ow through is by meal type. While varying by geo-
graphic area, cost of goods sold and labor, some averages are:
• Continental Breakfast: highest ˛ow through due to the low cost
of goods and lack of dedicated sta˝ ˛exing to serve multiple
events simultaneously, all set as bu˝ets. Average ˛ow through 50
percent.
• Breakfast: similar to continental, average ˛ow through 50 per-
cent.
• Lunch: varies based on the option for bu˝et or served meals and
the volume of each for the property. Average ˛ow through 45
percent.
• Dinner: typically the lowest ˛ow through due to the highest
expense in labor for the culinary team and production of a spe-
ciÿc plated meal. However the addition of alcoholic beverages at
higher margins than food will improve this ˛ow through. Aver-
age ˛ow through 35 percent.
• Reception: based on the purchase or on site preparation of the
product, this can be a high margin event based solely on the cost
per piece vs. retail pricing and the service style which replicates a
bu˝et. Average ˛ow through 55 percent.
• Break: high margin item served in bu˝et style with minimal
labor dedicated to the service. Like continental breakfasts, the
ability to have multiple events at one time with limited sta˙ng
helps control costs. Average ˛ow through 50 percent.
• Wedding: as a speciÿc meal type, “bundling” pricing can be

instrumental for margin impact here with guaranteed F&B ser-
vice at a price per person driving a high margin. Average meal
only ˛ow through 30 percent.
Distinguishing meal periods is vital because of both the cost of goods

sold by meal period and the labor cost to produce those meals. Looking
at breakfast; eggs and co˝ee as a one or two course breakfast compared to
a dinner which may be three to four courses requiring intricate prepara-
tion and production costs allows us to compare the margin for each meal
period. Culinary and service teams brought in for an 8-h shiˆ can prepare
two to three meal periods in the morning (breakfast or continental, lunch,
and a break) with lower cost products. Alternatively the team brought in
from 3 pm to 11 pm to prepare a single reception/dinner menu has sub-
stantially increased costs. Products are more expensive and we have only
one meal period over which to spread labor costs. Not only must we con-
sider maximizing the space, we need to consider maximizing the e˙ciency
of resources needed to produce the meals. When you can relate ˛ow through
of each item and meal type to the season, (month, day and time of day) you
are operating in, then and only then can you communicate a solid Func-
tion Space Optimization strategy to deliver optimal results. ˜e mix of meal
types you sell to your client determines the proÿt which will be delivered to
the owners.
Upselling Opportunities
Suggestive selling can also impact the ˛ow through of a meal period to
improve the margin of the meal. While not a consideration at the start of the
booking process, designing a menu which increases the average check can
signiÿcantly impact proÿtability. Let’s look at beverage sales. If the sales team
can improve the beverage margin by selling a “package beverage service”
by the hour for each of the guaranteed guests in attendance, it will impact
the ˛ow through to the positive. Why? ˜e preponderance for all guests to
drink at the same level over a set time is unlikely, unless the demographic
is the same. As a result, top line revenue improves with a guarantee of sales,
˛owing positively to the bottom line. ˜is is relevant in both the actual meal
period and when analyzing opportunity. Certain types of business have the
ability to increase expectations and others are less likely to drive the oppor-
tunity for upsell. As another example, selecting additional items on a co˝ee

break can substantially increase the average check for that meal period. Cof-
fee breaks in general have low labor support and multiple breaks can happen
at the same time with limited service dedicated to that meal period. ˜e
potential to drive revenue by adding additional menu items on high margin
meal types will help the ˛ow through. In evaluating business this should
all be considered because events that are part of bookings laden with high
margin meal periods become more attractive in the booking process, more
revenue ˛ows to the bottom-line.
PROS & CONS

With “Flow Through” in mind, list the Pros & Cons of
Package Pricing vs Per Item Pricing
Flow Through Example
A single all day event for 100 people–
Labor Meal Covers Avg. Check Flow Net Rev.
Shift Period Through
percent
6 am to Breakfast 100 $30 50% $1,500
3 pm Breaks 200 $20 50% $2,000
Lunch 100 $40 45% $1,800
˜ Total 400 $18.25 48% $5,300
˜ ˜
3 pm to Reception 100 $38 55% $2,090
12 am Dinner 100 $75 35% $2,625
˜ Total 200 $58 42% $4,715
Increased Proft $585
Understanding the ˛ow though of each meal period is the key to under-
standing the proÿtability of your facility and the optimization of your space.
In this example the labor and cost of goods sold for the morning/lunch
period vs evening period delivers a 6 percent increase in proÿt, an additional
$585 to the bottom line.
Space Optimization is about ÿtting the right piece of business into the
best function room on the proper date. Only by analyzing each Request for
Proposal (RFP), then breaking out the requested meal period and matching
to available space and sleeping room patterns can you optimize your space
to meet budgeted objectives.
How do you match the RFP request with the proper space? Data from
your Sales and Catering database is the key. It contains everything you need
to know in ranking your function space based on revenue production. All
that is required is a measurement technique to turn the information in the
database into usable standards for space valuation. ˜e standard measure-
ment of space is in square feet. A hotel or function facility is as much a piece
of real estate as a warehouse or o˙ce complex measured and valued in reve-
nue per square foot. Yes, the o˝erings of the function space add complexity
through scenic views, room layouts and décor, but the basic measurement
is revenue per square foot. Some identify the calculation as Revenue per
Available Space (RevPAS) but the formula is the same.
Revenue/Sq. Ft.
Total revenue generated in the space for a speciÿc time period/Square
footage of the space:
Ballroom 1 is 15,000 sq. ft.
Revenue generated in the month $500,000.
$500,000/15,000 sq. ft. = $33.33 per sq. ft.
It is important to use this calculation to identify your highest revenue

generating space, yet equally important to view the calculation in terms of
time. Time is at the root of space optimization. Time identiÿes the perish-
ability of the product. Time segments the selling period into four distinct
meal/selling periods. At the start of this discussion we asked, why is time so
important when considering a space optimization strategy? Time identiÿes
your high, medium, and low season. Time communicates when to imple-
ment or change your selling strategy, when to drop or raise your price based
on the booking window. Time is the essential component which deÿnes and
sets the parameters of your entire selling strategy.
Only when applying the Revenue per Sq. Ft. calculation on a daily,
monthly, and meal period basis can you best understand and rank the value
of your space. ˜e Function Room Occupancy Report brings this all together.
It relates the demand utilization of the space by month, day of week, and
time of day producing an occupancy percentage for measurement, tracking,
and comparison.
As in any business where you are called upon to identify your best
employee, menu item, or car type it is imperative in the hospitality industry
to comprehend which of your physical assets is the most valuable and why.
With that data you set minimum revenue expectations driving both the top
line and margin limits dictated by owners. Would we put a prom in a prime
ballroom on a highly sellable night? To answer this, we analyze the occu-
pancy report, identifying demand patterns and revenue per Sq. Ft. returns
contrasted against the contribution dollars of the business we are consider-
ing. We need to keep in mind that each piece of business yields di˝erently.
Perhaps the prom, with a chicken dinner and no alcohol is “trading down”
on our best space not optimizing the day/time patterns. If demand shows
that we could place another dinner in this prime real estate with a higher
contribution and additional revenue sources (such as alcohol, rented linens,
and other resources) we would not want to under yield the room with the
less contributing event. Equally we would not want to break a sellable group
pattern with a social event in the middle of the week if we could sell to a
weeklong group. ˜e consideration of all these inputs constitutes a func-
tion space optimization strategy easily identiÿable because of the Function
Room Occupancy Report.
Function Room Occupancy Report
Dates: October
Status: Defnite
Sq Ft 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Occ % Revenue Rev /
Sq Ft
We Th Fr Sa Su Mo Tu We Th Fr Sa Su Mo Tu We Th Fr Sa Su Mo Tu We Th Fr Sa Su Mo Tu We Th Fr
October
Ballroom 1 5,880 D D D d D D D d D D D D d D D D d D D D D D D D D 80.65% 208,949 $35.54
Morning D d d d D d D D D d d D D d d D D D D 61.29% 10,602 $1.80
Lunch D d d d D d D D D d d D D d d D D D D D 64.52% 48,779 $8.30
Afternoon D d D d D D D d D D D d d D D d D D D D D D D D 77.42% 20,203 $3.44
Evening D d D d D D D D D D D D D D D D D 54.84% 129,366 $22.00
Ballroom 2 7,524 D d D D d D D D D D D D D d d D d D D D D D d D D D d 87.10% 391,439 $52.03
Morning D D D D D D D D D d d d D d D D D d D D D d 70.97% 28,505 $3.79

Lunch D d D D d D D D D D D d d d D d D D D D d D D D d 80.65% 15,305 $2.03
Afternoon D d D d D D D D D D D d d d D d D D D D D d D D D d 83.87% 57,705 $7.67
Evening D d D d D D D D D D D D d d D d D D D d D D D d 77.42% 289,924 $38.53
Ballroom 3 6,115 d d d D D d D D d D D D d d D d D D d D D d d 74.19% 66,663 $10.90
Morning d d d D D D D D D d D D d d 45.16% 25,420 $4.16
Lunch d d d d d d D d D D d D d d d 48.39% 21,282 $3.48
Afternoon d d d D D d D D D d d D d D D d D d d d 64.52% 10,842 $1.77
Evening d D D d D d D d d D d D d D d 48.39% 9,120 $1.49
Capital D = Complete Ballroom in Use Small d = Divisable ballroom only a portion in use
Figure 12.1: Function Room Occupancy Report
Pulling directly from the Sales and Catering database the Function Room
Occupancy Report highlights by function room, how the space is being uti-
lized. Which meal period is generating the highest return in which month
and day of week. Linked to a speciÿc function room you derive expected
minimums to deÿne your yield strategy. ˜is report highlights the status
of business, for example Deÿnite, Tentative, and Prospective, identifying if
a ballroom is subdividing by using lower case and capital letters (see sam-
ple deÿnite report above). Ballroom 1 subdivides into three parts providing
greater ˛exibility when determining its best use, the report highlights this.
Only when you view your data in this manner can you truly understand and
yield your product e˝ectively. Looking historically at the data you can set
anticipated revenue minimums based on identiÿable patterns. From a future
perspective you can develop a sales strategy to optimize the utilization of
the space and yield the anticipated returns based on; business on the books,
what status they’re in, how long have they been in that status and how much
time is leˆ for selling, the “booking window.” Everything you need to know
is condensed into an easily accessible format.
Looking at the Function Room Occupancy Report above Ballroom 3 is
producing $10.90 sq. ft. for the month. This is far below the other ball-
rooms: what factors could be in°uencing this and what can be done?
˜e Revenue per Sq. Ft. is not only used to identify selling patterns or
value space, when viewed over time it can indicate trends. It starts the inves-
tigation as to why is the space generating this value? Has the value changed
and why? Is it a result of a physical change, selling strategy, guest’s perspec-

tive? Reports and metrics identify possibilities how you use them is summed
up through your Optimization Strategy.
In a hotel environment, space optimization focuses on yielding space

when sleeping rooms are needed. ˜e success of the property mandates that
you consider the relationship between function space and sleeping rooms.
Sleeping rooms provide the greatest ˛ow thorough which translates to the
highest ADR and RevPAR. So in order to maximize both you want just
enough function space to ÿll the group segment, or do we? Every Yield strat-
egy focuses on ÿnding balance between the segments.
Full service hotels may divide room segments into the three main cate-
gories:
(1) Transient: Individual travelers who are staying for business or lei-
sure
(2) Group: Organizations or corporations who gather for a shared pur-
pose.
(3) Crew: Airline employees or longer term stays who by their nature
are transitory and need temporary housing.
˜e demand of your market will dictate the probable mix with the Group
segment laying a base which requires function space. To understand this
symbiotic relationship between rooms and space consider the:
ROOMS TO SPACE RATIO

#Sleeping Rooms/Sq. Ft. Function Space
Evaluate two properties:
500 room property with 200,000 sq. ft. of space
1000 room property with 60,000 square feet of function space:
The Ratio
500 rooms/200,000 sq. ft. = .0025
1000 rooms/60,000 sq. ft. = .016
When the ratio is low you have too few rooms to ÿll the space and a high
ratio indicates your space may not be su˙cient to ensure all the rooms can
be ÿlled. Remember we are looking for the balance of both to employ in our
Yield Management Strategy.
PROS & CONS

Every market is di˝erent but on average a ratio of
.016 is utilized.
Which “Rooms to Space Ratio,” .0025 or .016, is better and why?
Understanding this relationship is the foundation of a comprehensive

revenue strategy. It signals just how many sleeping rooms are required by
a “Group” to lay a base and yield the property. Every revenue management
strategy has a focus on Revenue per Available Room (RevPAR) but RevPAR
excludes banquet revenue from its calculation. A comprehensive strategy
optimizes all revenue streams. ˜e food and beverage contribution from
sleeping rooms is best summarized in the:
GROUP BANQUET REVENUE CONTRIBUTION =

Banquet Revenue/Group Rooms Consumed
Example: $100,000/575 rooms = $173.91 Group Banquet Revenue Contribution
What this is telling you is that for each room night associated with
the group segment $173.91 of banquet revenue is being generated. Group
Banquet Revenue Contribution tracked by year and month provides the
historical baselines to evaluate all future business presented in the group
segment over this particular date range or season.
A Group piece of business, or the total mix of business, can only be

properly evaluated when you understand these ratios. Rooms to Space sets
the boundaries of what is possible. In a complete yield management strategy,
Transient, Group, and Crew rooms are balanced within the demand needs
of your location. In the quest to maximize RevPAR each segment plays a
part in maximizing proÿt. ˜e Group and Crew segments lay the base for
sleeping rooms with higher Transient ADR ÿlling the gaps maximizing
return. To understand and maximize the return of Group ADR and F&B
revenue the Group Banquet Revenue Contribution ties the Rooms and
Banquet revenues together to give an accurate depiction of the business or
mix you are considering. When you look at, and understand the amount of
banquet revenue generated in relation to each group room night consumed,
tie that revenue to the function space utilized, and measure it against histor-
ical parameters, can you accurately evaluate a piece of “Group” business and
ÿnd the optimal mix of Transient, Group, and Crew.
Let’s demonstrate: If Transient gives us the greatest ˛ow through we

must want to allocate the most rooms to this segment, right?
As you can plainly see, only when you consider all the revenue streams
can you achieve optimal revenue generation. Focusing on a high REVPAR
never factored in the banquet revenue revealed in the above analysis, and
when considered, the shiˆ in segment mix between Transient and Group
delivered an additional $20,200.
To Do:
You have a 200 room property with 10,000 sq. ft. of meet-
ing space which breaks out as follows;
5000 sq. ft. Ballroom Average Checks
2500 sq. ft. Ballroom Cont. Breakfast - $30 Breakfast - $34
1000 sq. ft. Lunch - $54 Break - $17
Conference Room
3/500 sq. ft. Dinner - $75 Reception - $60
Meeting Rooms
Focusing on Event Type, Flow Through, Covers and Group Banquet
Revenue Contribution evaluate 2 pieces of business to choose the bet-
ter ÿt arriving in May for 2 days with an ADR of $329 per night.
Sleeping Rooms per night 1st Day Events 2nd Day Events
1) 100/20 Dinner 100/Reception 100 2 Breaks 100 ea./Break-
fast 100 Lunch 100
2) 75/75 Cont. breakfast 125 /Lunch 125/Break 125 Cont.
Breakfast 125/Lunch 125
1. Would you change your segmentation strategy and how would
that e˛ect your distribution strategy?
Speed to market and accuracy mandate that this process of calculating

revenues and ˛ow through, especially for a sales manager on the clock
whose time is far more valuable connecting with clients, be automated. To
that end, the Revenue Maximization sheet (REVMAX Sheet) was created.
˜is sheet automates the process, providing insight and learning as well
as speed to market. ˜e REVMAX sheet is both an analysis/sales tool and
method of communication allowing sales managers speak to their busi-
ness at hand.
˜e sheet details the following criteria which are all instrumental in con-
sideration for contracting business, not only with rooms and associated ban-
quet revenue, but all business generating revenue for your property.
1. Room pattern being requested, number of sleeping rooms Blocked
and Rm Rate O˝ered and if Commissionable to a third party. It also
denotes the existing business on the Deÿnite line and how this will
impact the pattern for the time period.
2. Minimum Available Rate (MAR): A rate determined by the Director
of Revenue based on history and forecast
3. Meal Type, Covers and Revenue projected to be generated by the
group
4. Function Rooms to be used and number of Days required
5. Revenue produced by each Meal Type
6. Anticipated Proÿt by each revenue stream; F&B Proÿt, R-O (Rent/
Other) Proÿt, Rm Proÿt, Total Proÿt.
7. Group Banquet Revenue Contribution generated
8. Total Proÿt Margin
9. Comments to inform the management team of pertinent informa-
tion on Group History, Competition, is the group ˛exible or is this
the only or preferred date. Any information relevant to help us arrive
at an optimal decision.
10. Group Banquet Revenue Contribution, Rooms Only: ˜is section
breaks the ÿnal decision into 3 categories based on all the informa-
tion entered, comparing input to history providing 3 alternatives for
Banquet Revenue and Group Banquet Revenue Contribution:
a. Way To Go = Exceeding historical levels
b. Bring to REVMAX =Close to historical averages but allows the
Sales Manager to argue why this piece of business should be
taken, even at the lower margins i.e. (Valued Client, Booking
Window Closing, Other Meetings in the Pipeline, Pattern com-
pliments other groups to optimize revenues)
c. Time To Talk: business should be turned down not meeting
minimum potential.
11. Rooms Only: Is based on a properties size designating the impor-

tance of F&B contribution to the success of a property. If a group
is going to use rooms only and no function space, then the pattern
requested needs to be a need date or else should be turned down in
favor of business with Rooms and F&B producing high Group Ban-
quet Revenue Contribution.
Obviously the best scenario is to have a group whose banquet revenue

and Group Banquet Revenue Contribution both display “Way To Go.” In the
case they do not: look at other factors such as proÿt margin (proÿt margin =
proÿt/revenue) or items highlighted in the comments section to help sway
the decision process. ˜e multitude of factors a˝ecting the outcome is what
makes function space optimization so challenging. ˜e best use of this form
is to provide direction and team discussions. Objectively the best decisions
are arrived at collectively, with each stake holder presenting their unique
position. ˜e REVMAX Sheet puts in front of everyone the unique charac-
teristics of a piece of business highlighting key points. Only when you can
present the information in a concise, usable and consistent format such as
this can a proper decision be determined.
A critical component to success today is speed to market. 70 percent

of first responders to an RFP get the business. However speed without
accuracy is a recipe for disaster. The REVMAX Sheet, like any computer
generated revenue management tool, helps base decisions on empirical
data. It brings together all the individual parts of the group piece of busi-
ness, presenting a comprehensive view. It also goes to the next step and
looks at profit margins to help guide the Sales Manager in negotiations.
The piece of information not automated is the detailed knowledge/intel-
ligence of the sales manager who produces it. That qualifying process
is important because it determines from the customer any flexibility in
dates or needs as well as any historical references that will help us deter-
mine the highest yield/conversion, hence the comment section. A good
Sales Manager given the proper tools can steer a client to a date that is
best for all.
Figure 12.2: REVMAX Sheet

Source: Flow throughs used in this example are illustrative of this particular property’s
proft calculations. Please refer to the student supplement for additional explanation.
In this example the mix of meal types generates $61,625 ˛owing at 47

percent to the bottom generating $28,778. ˜e high level of breaks ˛ow-
ing at 50 percent makes this a highly desirable piece of business, however
the amount of space required to hold this event and the revenue genera-
tion opportunities of the space indicate this is not a good piece of business,
“Time To Talk.” ˜e $5000 in rent ˛owing at 90 percent helps, but is still not
enough giving the Sales Manager the opportunity to ˛ex the rent up to make
it more attractive. If the rent went to $25,000, $5000 per day the total Ban-
quet revenue generated would bring this in line from a purely F&B banquet
perspective. From a rooms perspective the $113,022 ˛owing at 71 percent,
$80,246 with 10 percent commission is great. What makes the rooms per-
spective even better is that it takes only 420 total rooms to generate $66,625
in total banquet revenue sending Group Banquet Revenue Contribution up
to $158.63 a “Way To Go.”
So is this a good piece of business? Looking at Banquet Revenue only,

no, but adding Rooms, the mix of meal types and rental, with the knowledge
we are heading into Labor Day, a slow period, this is a GREAT piece of busi-
ness which will generate a proÿt of 63.25 percent!
As you can see there are a multitude of factors here but the REVMAX
Sheet condenses them down to an easily understandable format that takes
only minutes to complete providing answers based on empirical data.
SEGMENTATION AND THE NEGOTIATION PROCESS
REAL PEOPLE
*Emily Smith the Director of Sales at a large con-

vention property adjacent to the city’s convention
center has been seeing an erosion of group proÿtability.
An analysis revealed Rental Revenue was down 40 percent, City-
wide sleeping rooms up 25 percent, Commission percentage up 10
percent and a large shiˆ in covers from Breakfast/Breaks to Dinner/
Reception. She has hired you to help return her Groups Sales operation
to historic proÿtability levels. What recommendations can you o˝er?
*Name has been concealed.

We touched earlier on the importance of segmenting your business to

achieve maximum return, now let’s look a little deeper into the importance
each segment plays in segmenting of your sales force. Like any product a
business sells, the seller must identify a need in the community, develop a
product to satisfy the need and ÿnd a way to distribute it at a price the com-
munity is willing to pay. It is vital to understand what you have to o˝er and
who you are o˝ering it to. To understand your customer’s needs one com-
mon rule is to identify like characteristics and segment them into groupings
to discover viable options which will appeal to them.
Taking the characteristics of each segment into account hotels develop

a yield management strategy and balance the mix to achieve the optimal
return. When looking at this segmentation, “Group” is the only one which
will require function space. Now that we have identiÿed the “Group” seg-
ment as the one with a need for function space, we need to subdivide it
further to focus our selling e˝orts. When we speak about “Group” who are
we referencing?
˜e characteristics of the “Group” segment refer to the reasons they

gather. Are they a corporation gathering to review a new selling strategy,
train or reward employees? Is it an organization gathering to show new
products, bring together experts from their ÿelds of expertise to teach and
inform? Whatever the reason, they gather with a shared purpose and char-
acteristics which we can identify and use in our strategy of Space Optimi-
zation.
THE GROUP SEGMENT
• Group (Large): Typically deÿned as over 75 rooms on peak night

o Citywide: 4–10-year booking window. Will ÿll a city with peak
night rooms exceeding 2000 total rooms nights (typically using
a convention center /complex and contributing high F&B to the
center or the surrounding hotels; including opening receptions
or dinners of 2000–10,000 guests.
o Trade Show: 2–5-year booking window requiring large exhibit
space for booth displays, and product demonstrations. Could
use 100,000 to 1,000,000 sq. ˆ. facilities.
o Self-Contained: 1–5-year booking window. ˜e most proÿtable

business as all sleeping rooms and F&B can be contained within
your facility. ˜is provides the highest contribution margin for
the property.
˜e “Group” team traditionally lays a base of business for the property.

Because of the volume they provide in both rooms nights and function
space /food and beverage revenue, they are a˝orded the best (lowest) pric-
ing. Typically, this business, due to the longer booking window has the best
availability for their needs. ˜e Group segment provides the foundation for
the property establishing an inherent demand for the remaining inventory.
With this base, the remaining inventory can now be sold for future groups
at higher/dynamic prices.
• Small Group Meetings: Typically deÿned as less than 75 room night’s
peak and 50–100 guests for meetings. By their very nature they are
the most proÿtable segment. ˜ey book short term 3 to 90 days out
which when viewed through the prism of supply and demand indi-
cates they will pay the highest rates. (Yield Management share an
unwritten rule: Always be the last to ÿll! In times of unconstrained
demand the property which ÿlls last can demand the highest price)
˜e small meetings team/catering and events sales team, is critical
in any yield management strategy as they not only get the highest
prices but ÿll around a “Large Group” base so all the space is used
and none perishes once the consume day is completed. Communi-
cation of need dates and time periods to this team is critical as this is
the most e˝ective conversion segment with the guest on the phone
live. ˜erefore this team needs to be aware on a daily basis of where
opportunity lies and must clearly understand the value of each func-
tion room as well as the ˛ow through percentages we reviewed ear-
lier. Short term sellers, this agile and fast paced team can oên sway
the ÿnancial results for the property in a given month.
• Social Catering: 80 percent of this business books in the year of
the event. ˜e booking window can be very short which by its very
nature means you can place it where you need it. Oên it desires
week nights as well as weekends and holidays for Birthdays, Anni-
versaries, Mitzvahs, Corporate Events and Nonproÿt Fund Raisers.
˜is business segment can ÿll the gaps leˆ from groups not utilizing
evenings where the space would otherwise sit empty and continue to
optimize the inventory. ˜is segment is important because it oên
establishes the “reputation” in the business community for the prop-
erty. ˜e events this segment produces oên speak to the creativity
of the property, community engagement and ability for the property
to create a name for itself in the local business and social scene.
• Weddings: 6 month to 1.5-year booking window. A highly proÿt-
able subset of Social Catering separated only because of the booking
window and speciÿc need for weekend/holiday demand dates. ˜e
potential here is not only for high revenue opportunities (especially
with the opportunity to bundle beverage and other services). As well,
weddings have a high emotional bonding value for the property. ˜e
repeat potential for business from this segment is extremely high.
Having been the venue for such a personal and memorable lifetime
experiences, the preponderance for the venue, especially a hotel, to
be the purchaser’s destination of choice and the property garnering
a customer for life is very high. ˜is creates a speciÿc, however not
totally quantiÿable value for the decision making process. Lastly,
weddings are almost recession proof. ˜is is where dynamic pricing
and contribution are e˝ective.
Segmentation by market naturally points to a strategic division of your

Sales force. When you understand the characteristics of your customer you
can focus your sales team’s e˝orts to produce the optimal result. You build
your pricing and yield strategy by layering Large Groups in as a base busi-
ness component. Short term business ÿlls in with higher contribution while
Social Catering/Weddings balances out the week. Weekly pattern manage-
ment recognizes that each day contributes uniquely to your Function Space
Optimization Strategy. Once you understand the booking window and the
segments’ characteristics, you can implement a selling strategy founded
in yield management principles while taking advantage of seasonality and
the strength of your product. Having a sales force responsible for di˝erent
market segments o˝ers a safety net of overlapping opportunities. When one
team doesn’t produce as expected another team can compensate according
to the time horizon or booking window.
˜is is where negotiating comes in. Once selling teams are educated in
the science of space optimization, and they are utilizing the REVMAX sheet
to present business opportunities to management and their coworkers daily,
they can begin to negotiate for the optimal result. Should the rate be higher?
Lower? How e˝ective is the weekly booking pattern? What is the Group
Banquet Revenue Contribution? All these questions must be considered.
However the time to have that negotiating process is not just with the cus-
tomer, it is with the internal management team to ÿrst determine the highest
and best use of the available rooms and space based on the time leˆ to sell
the diminishable inventory remaining. ˜en the negotiating conversation
happens with the customer!
Accurate forecasts are the communication vehicle which allows Sales

Teams to react to changing conditions. Identifying new bookings which then
create more demand or conversely communication of cancellations to create
a sense of urgency to ÿll is essential for success. Communication is the key
to keeping your Yield Management strategies on track. Not only commu-
nication to upper management but throughout the entire organization. We
all need to be pulling in the same direction to achieve desired results. Set in
place a schedule of meetings and insure that all the stake holders are present
and prepared. Publish reports to inform the sta˝ of current and anticipated
conditions.
COMMUNICATION AND COMMUNICATION TOOLS

1. REVMAX Meeting: Held daily to review complex pieces of business
that require a team perspective. With all members of the sales force
present providing their insights you not only arrive at a consensus
but a better educated Sales force. ˜e team sees business from all
angles and better understands the needs of the property.
2. Merchandise Meeting: Held monthly bring Operations and Sales
together to review how the business which has been sold is com-
ing together. Are minimums going to be met or exceed? Is the space
which was sold going to be adequate or is there a possibility to
release space for sale by the short term bookers. Have we yielded the
property appropriately, is there any short term change to consolidate
expenses and drive margin? Many pieces of business were sold years
ago and only this interaction between Sales and Operations can opti-
mize the results as they are today.
3. Forecasts: Weekly for operations to schedule and plan, monthly to
review the business for the next 90 days to focus Sales, Marketing
and Operational initiatives.
4. Pace Reports: An analytical perspective of Rooms and Banquets to
see how we are “Pacing” to Budget, Forecast, and history. ˜e Pace
Report is a good indicator of anticipated pickup from this point in
time compared to what’s on the books. Will we make budget and if
not is there time to put a strategy in place to overcome the short fall.
To Do:
Build a Pace Report to answer this question:
As we enter Q4 will we make budget at year end? (Use history
to predict/forecast the future)
YTD (Year To Date)

Information
Status October November December
Deÿnite = $13,691,785 Deÿnite $1,901,090 $1,401,994 $1,617,619
Budget = $14,390,678 Tentative $ 122,919 $ 29,513 $ 258,686
Prospect $ 84,102 $ 93,962 $ 336,991
Last Year = $14,064,563 Last Year $2,469,901 $2,113,707 $2,640,181
STLY = $14,064,563 STLY $1,830,285 $1,518,402 $2,000,086
(Same Time Last Year)
SUMMARY
Function space optimization is a holistic approach to the analysis of busi-

ness opportunities. A logical extension of Revenue Management is applying
Yield strategies to an equally perishable product, function space. It focuses
on understanding your assets and your place in the market. Establishing
base line measurements to monitor and evaluate performance against his-
tory and competitors, segmenting the market and sales force to identify
trends and capitalize on opportunities as never before. With an educated

sales force focusing on the principles of meal period ˛ow through, product
life cycle and asset valuation, viewed through the prism of revenue per sq. ˆ.
and rooms to space ratios, it provides a greater understanding of what we are
selling and to whom we are selling it to, ultimately leading to optimization
of all assets.
Enhanced analytical capabilities in data mining are shining lights on

hidden opportunities as never before. ˜e detail found in a Function Room
Occupancy report not only shapes a selling strategy but allows you to react
quickly to an ever changing, competitive environment on a timely basis.
Managing booking windows and selling patterns against available space and
revenue minimums sets a framework for enhanced returns. Establishing a
communication system founded upon solid data, keeps the entire team pull-
ing in the same direction. Function space optimization focuses on revenue
generation which when combined with operational e˙ciencies of the past
makes a perfect marriage and recipe for long term success.
SEEING FURTHER
Continued advancements in technology and
the use of algorithms will lead to the develop-
ment of tools which will advance the calculation
of time in the equation. These tools will suggest alternative dates, times
and function rooms moving ever further toward a holistic view of busi-
ness encompassing; Rooms, Space and F&B factoring in booking win-
dows. Function Space Optimization has and will continue to be a di˝cult
calculation taking into consideration all the factors we have discussed
thus far, but we are inching ever closer to a Revenue Management Sys-
tem that takes all aspects of revenue generation into account to produce
optimal results for a property.
The owner of a downtown property with a mix of business 70 percent
Transient/30 percent Group is ecstatic that his STR report shows him
leading in his Comp Set RevPAR. How can Function Space Optimization
help him?
Question 1: Is there ever a bad piece of business? What factors
should be considered when relating your properties needs to the
piece of business before you?
Question 2: The Group requires 20 breakout spaces with no F&B
but will generate $75,000 from a dinner and reception while only using 50 sleeping
rooms: is this a good piece of business?
Question 3: Catering has a $50,000 dinner for a Wednesday in October 5 months
away; should we take it?
APPLICATIONS
The Excelsior Hotel—Case Scenarios
Property Description: ˜e Excelsior is a downtown prop-

erty in a tier 1 city with 428 rooms and 162,000 Sq. Ft.
of meeting space. High demand months are April–June,
September–October and December. High demand days
of the week are Tuesday–˜ursday and Saturday. ˜e
property space breaks out as:
1. Property Function Rooms: Purple denotes highest revenue produc-
ers based on Revenue per Sq.Ft.
PLZ—7524 sq ˆ sub-divides into 3 rooms
SPT—3680 sq. ˆ. sub-divides into 3 rooms
FLAG—1868 sq. ˆ.
LBT—902 sq. ˆ.
CONST—1254 sq. ˆ.
LTHS—6115 sq. ˆ. sub-divides into 2 rooms
HBV—5880 sq. ˆ. sub-divides into 3 rooms
CTV—5415 sq. ˆ. sub-divides into 3 rooms
AMP—400 seat Amphitheater
CNG—782 sq. ˆ.
WTF -5546 sq. ˆ. sub-divides into 3
HALL—115,000 sq. ˆ. Exhibition Hall
BKB—1100 sq. ˆ.
FED—850 sq. ˆ.
Businesses to be Evaluated
Below are two REVMAX sheets which lay out the piece of business which
we must accept or turn down. All pertinent information is contained within
each sheet. ˜e challenge is for you to determine whether this business should
be bid on or turned down and why? °e Banquet Revenue, Group Banquet
Revenue Contribution and Rooms Only sections have been removed as to not
give the answer:
1) Business A: Orthopedic Summit: ˜is is a “Group” piece of busi-
ness e˝ectively selling out your property of both sleeping rooms and
function space as it layers over an existing piece of business. ˜e
booking window is long so there is plenty of time. Is this best choice
at this point of time?
2) Business B: Spin Council—Is a “Catering” piece of business using your
largest space. Space is wide open in October and your booking win-
dow is 6 months. No sleeping rooms are required and looking at your
Deÿnite line on the REVMAX sheet sleeping rooms are available.
TEAM ACTIVITY
Let’s evaluate a piece of business. In this activity, divide the class into
the representative roles of a Sales organization.
Break the class into the following roles:

1. Group Sales Managers
2. Catering Sales Managers
3. Small Meetings Sales Managers (Select one member of this team to
present the business)
4. Wedding Managers
5. Director of Sales
6. Director of Revenue
As you review the business to decide to accept or not, ask each team to
provide their unique perspective of the business, and then as a team, make
the decision to accept or decline and why. ˜e Director of Sales and Direc-
tor of Revenue are the ultimate decision makers taking all the voiced per-
spectives into account ˜e ultimate goal of this team activity is to learn the
perspective of the other team members and the business opportunities they
represent. Ultimately, there is room for each sub segment in any Hotel. ˜e
key to the puzzle is balancing business, ÿnding the integrated day which
supports multiple sub segments maximizing the day’s opportunity and mar-
gin. ˜e lead roles of Director of Sales and Director of Revenue are to facil-
itate the conversation. ˜ey look to build consensus from the team, with
respect for each piece of business, and are ultimately ÿnal decision makers
of what is the optimum ÿt.
Business To Be Presented:
Engineering Alliance: ˜is Lead came into the property in February for May
of the same year arrival, with minimal sleeping rooms required. All perti-
nent information is contained in the REVMAX Sheet including the com-
ments section.
Team Perspectives
1. Group Sales Managers: Your responsibility is to book large volumes
of business for the current year as well as any future years. You are
responsible for generating both rooms and associated food and bev-
erage revealed through the Group Banquet Revenue Contribution.
You are always interested in multiple night patterns with open space
to layer in a base of business.
2. Catering Sales Managers: Your responsibility is to ÿll the gaps leˆ by
the Group and Small Meetings Sales Managers. Your main oppor-
tunity periods are evening and weekends. Your focus is food and
beverage top line revenue.
3. Small Meetings Sales Managers: Your goal is to ÿll gaps leˆ by the
Group Team who lays the base. You are looking for the best ÿt
with overall, high contribution. As in any yield strategy the short-
term bookings are usually the highest rated contributors providing
the best REVPAR and Group Banquet Revenue Contribution.
(Remember the rule of thumb: Be the last to ÿll its always the highest
rated business) To this end, you always want to save some rooms and
space for the short-term meetings team.
4. Wedding Sales Managers: While not a role in every hotel the focus
of this specialist team is weekends and holiday periods driving room
nights, F&B revenue and ultimately proÿt.
5. Director of Sales: Your role is to balance the selling initiatives to
achieve the strategic sales strategy. You have to think “big picture”
always and keep the customers need in check with ownership objec-
tives while motivating the entire selling team to achieve top line rev-
enues.
6. Director of Revenue: Your role is optimization of the opportunity
presented while balancing the “big picture” perspective. Oên a
counter role to the Director of Sales in that this role focuses on net
operating proÿt as opposed to top line revenue. ˜is role does not
manage employees but manages the business principles of the orga-
nization.
INTERNET ACTIVITY
• Research your local Convention and Visitors Bureau
website to identify the role they play in both selling the
city as a destination and their role in the lead distribution
to hotels and facilities in their community.
GLOSSARY
Banquet event order (BEO) – Form generated by your Sales and
Catering system delivering detailed instructions to all oper-
ational teams in your organization.
Proÿt and loss statement (P&L) – ˜is ÿnancial statement details
the revenue, expenses, and proÿt (loss) generated during a
ÿxed period of time.
Revenue per available space or revenue per square foot (RevPAS) – ˜e
revenue generated on a square foot basis for a speciÿc period of time.
Request for proposal (RFP) – A detailed requisition a client sends to properties

to begin a dialog. It details the needs of the client (dates and size con-
straints) and allows the property to match its facilities to those needs.
Constrained/unconstrained demand – Economic terms to describe the
level of demand irrespective of supply. Unconstrained demand dic-
tates that demand exceeds supply and a property ÿnds itself in the
driver’s seat for Rate and Function Space Minimums. Constrained
indicates supply exceeds demand and you are in a buyer’s market.
Group Banquet Revenue Contribution – the banquet revenue generated
from each Group room night consumed.
Contribution margin ratio – Banquet revenue/group rooms consumed – a
performance metric that ties sleeping rooms to banquet revenue for
a comprehensive view of business.
Flow through – ˜e revenue that ˛ows to the bottom line aêr all expenses
have been deducted.
Function space optimization – ˜e application of yield management prin-
ciples to function space to optimize the return on an extremely per-
ishable resource.
Pace reports – An analytical report on how current business performance is
relative to budget, forecast, and history.
Retail rate/best available rate (BAR) – ˜e rate a customer pays “o˝ the
shelf,” oên referred to as “best available.”
Revenue per available room (RevPAR) – Total rooms-related revenue per
[Rooms Revenue/(Rooms Available * Number of Days)].
Rooms to space ratio – Sleeping Rooms/Sq. Ft Function space: A metric
which allows you to deÿne the structure of your property enabling
you to see the symbiotic relationship of rooms and space.
Yield management – A variable pricing strategy, based on understanding,
anticipating and in˛uencing consumer behavior in order to maxi-
mize revenue or proÿts from a ÿxed, perishable resource.
Yield – ˜e return or proÿtability of an asset.
REFERENCES
Kimes, S. E. (2011). ˜e future of hotel revenue management. Journal of Revenue
and Pricing Management, 10(1), 66-72.
Kimes, S. E., & McGuire, K. A. (2001). Function-space revenue management: a case
study from Singapore. Cornell Hotel and Restaurant Administration Quarterly,
42 (6), 33-46.
Kimes, S. E. & Renagan, L. M. (2011). ˜e role of space in revenue management.
In Revenue Management: A Practical Pricing Perspective; Yeoman, I., McMa-
hon-Beattie, U., Eds.; Palgrave and Macmillan: Basingstoke, pp 17–28.
CHAPTER 13
Cruise Line Revenue Management

Adam Snitzer
OVERVIEW
At its core, cruise line revenue management is similar to hotel revenue
management. Like his or her hotel revenue management counterpart, the
cruise line revenue manager’s job is to ÿll ships to capacity at the highest
prices available in the market. But consumers buy cruises very di°erently
than they buy hotel room nights; and commercial terms and practices vary
signiÿcantly between these two sectors of the hospitality industry. Cruise
line revenue managers are tasked with achieving exceedingly high capacity
utilization and have a vast array of tools at their disposal for meeting that
challenging objective.
LEARNING OBJECTIVES
Describe the cruise industry’s evolution from a narrow market niche for
wealthy travelers to a rapidly growing vacation alternative that appeals to
tens of millions of guests around the world
Di°erentiate between hotel revenue management and cruise line revenue
Explain the roles that those di°erences play in allowing cruise line revenue
managers to achieve full capacity utilization
Understand the key tools available for managing prices
Detail the types of strategic cruise line prices
Explain how cruise line revenue managers use discounted prices to stimu-
late demand
Be familiar with cruise line revenue management systems
367
OUTLINE
Cruise Industry Evolution
• Brief History
• Capacity Growth
• Ship Size/Amenities
• Internationalization of Passengers
• Worldwide Deployment
Difference between Cruise Line revenue management and hotel

revenue management
• Discretionary, Leisure Travelers
• Fixed Embarkation and Debarkation Dates
• Long Booking Window
• Option Periods, Deposits, Final Payments and Cancellation Fees
• Per-Person Pricing
• Captive Audience for Ancillary Revenues
• Year-Round Ship Deployments versus Seasonal Ship Deployments
• Wave Season
Implications for Cruise Line Occupancy
Tools for Managing Cruise Line Prices

• Worldwide Guest Sourcing
• Customer Databases
• Ship Conÿguration
Cruise Line Pricing
• Strategic Cruise Pricing

• Tactical Cruise Pricing
• Pricing Constraints
Cruise Line Management Systems
Conclusion
Cruise Line Revenue Management  369
SO WHAT?
While cruise revenue managers and hotel revenue managers face
similar challenges, cruise line revenue managers operate in a very
different environment. Which aspects of the cruise line operating
environment are most different from the hotel operating environ-
ment? Why do you think those differences are so important?
CRUISE INDUSTRY EVOLUTION
Brief History
Ships have been transporting passengers across oceans for thousands of

years. But the idea of modeling a ship a°er a hotel is a relatively recent inno-
vation. ˛e Prinzessin Victoria Luise, built for the Germany-based Ham-
burg America Line in 1900, is credited with being the world’s ÿrst cruise
ship. ˛e ship boasted 120 luxuriously appointed staterooms as well as all
the trappings of a private yacht.
Around the same time, steamship lines also began to compete by try-
ing to outdo each other, and by laying claim to being ever more spacious,
luxurious, faster, and safer than any ship that had sailed before. Sadly, we
have all heard the tragic story of the doomed Titanic, which in 1912 with
capacity for 2200 guests and crew was the ill-fated wonder of ship building
engineering.
As new laws slowed the flow of immigrants and as commercial flights

overtook sea voyages as the most popular way to cross the oceans, the old
steamship lines tried to reinvent themselves by attracting leisure trav-
elers to warm and culturally interesting destinations. But for the most
part, the steamboat companies stayed married to their age-old maritime
traditions and cruising remained a narrow niche for wealthy and older
travelers.
In time, however, the epicenter of passenger shipping moved from New

York and the Atlantic Ocean to Miami and the Caribbean Sea. A group of
entrepreneurs repurposed some old ships, installed a new technology called
air conditioning, and went on to establish Norwegian Cruise Line Holding,
Royal Caribbean Cruises Ltd., and Carnival Cruise Line.
Today, those three companies make up more than 75 percent of the

worldwide cruise market. ˛ey operate more than 200 ships, all of which
dwarf the Titanic in terms of size and onboard amenities
Capacity Growth, Ship Size, and Onboard Amenities
Since 1998, the world’s cruise ship capacity has increased 181 percent from
185K guest berths to 521K berths in 2018. Passenger growth has been even
more dramatic. In 1998, the Cruise Line Industry Association reported that
5.9 million people took a cruise. By 2017, that number had increased by 337
percent to 25.8 million. And as of 2018, there were 106 new cruise ships on
order, representing another 261,812 cruise berths.
˛ree factors are responsible for the cruise industry’s growth:

1. ˛e construction of ever larger ships.
2. ˛e spread of cruising’s appeal to international consumer markets.
3. ˛e deployment of cruise ships to far-˝ung destinations around the
world.
During this period of rapid cruise industry growth, cruise ships them-
selves have undergone tremendous change. ˛ey have gotten much bigger,
and with the increased guest capacity has come a host of new onboard ven-
ues and amenities.
For example, Royal Caribbean’s Quantum of the Seas carries 4,180

guests who can “˝y” 300 feet above the sea level in a giant mechanical
arm, go skydiving at sea, crash into each other in bumper cars, ˝y on a
trapeze at circus school, or jog around a giant track. To say nothing of an
enormous ÿtness center, outdoor, poolside movie screen, a casino, show
lounge, music hall, basketball courts, and more than 20 distinct dining
venues.
Source: Royal Caribbean International company brochure.
Internationalization of Passengers
In the early days, cruising appealed to a narrow market segment. Most guests
were older, retired North Americans and Brits. Today, cruising attracts
guests from virtually every major demographic including its traditional base
of older retirees, but also families with children, baby boomers, time-press-
ing young professionals, spring breakers, and honeymooners. And cruising
has expanded its reach far beyond North America and the U.K. ˛e appeal
of cruising has spread throughout the European continent. ˛e number of
Europeans cruising has increased 155 percent from 2.7 million in 2003 to
6.9 million in 2017. Today, guests from emerging markets in Asia represent
the fasting growth segment of cruisers. In fact, some industry forecasters
predict that China will soon become the world’s second largest cruise mar-
ket.
Worldwide Deployment
As cruise lines’ ˝eets have expanded to include more ships and as their guest
sourcing has spread to more international markets, ship deployment has
expanded as well. In cruising’s early days, most ships were deployed in the
Caribbean calling on ports in the Bahamas, San Juan, Jamaica, Mexico, and
the U.S. and British Virgin Islands. But cruising soon expanded to summer
deployments in Alaska and the Mediterranean with port calls in cities like
Barcelona, Marseilles, Rome, Venice, Istanbul, and Athens. As more ships

came online, deployment spread to far-˝ung destinations around the globe.
˛e Most Popular Cruise Regions by Percentage of Capacity.
Rank Cruising Region Percent of Cruise Capacity (%)

1 The Caribbean 35.4
2 The Mediterranean 15.8
3 Europe (without Med) 11.3
4 Asia 6.0
5 Australia/South Pacifc 6.0
6 Alaska 4.3
7 South America 2.1
8 All Other 13.8
Source: CLIA, 2017 Annual Report

1. Given the Net Ticket Revenue Yield assumptions below,
build an MS Excel spreadsheet to evaluate the revenue
potential from keeping a ship on a year-round Caribbean
itinerary versus putting the ship on a seasonal itinerary split between
the Caribbean and the Mediterranean. Assume that the ship’s capacity
is 3000 and that the spring and fall repositioning cruises are both 14
nights long. In this exercise, assume that operating costs and onboard
revenues are the same in both year-round Caribbean deployment as in
a seasonal split between Caribbean and Mediterranean itineraries.
Operating Caribbean Mediterranean Positioning
˜ Days Yield Yield Yield
Jan 31 $130
Feb 28 $135
Mar 31 $138
Apr 30 $140 $90
May 31 $145 $167
Jun 30 $148 $170
Jul 31 $155 $185
Aug 31 $165 $185
Sep 30 $125 $180
Oct 31 $128 $90
Nov 30 $128
Dec 31 $160 ° °
Based on all of this expansion and growth, it is clear that with more
than $40 billion in annual ticket and onboard revenue, the worldwide cruise
industry o˙ers ample challenges for revenue management professionals.
THINK HISTORICALLY
In the mid-1900s, the passenger shipping industry was virtually wiped
out by two things: (1) Changes to immigration laws that dramatically
curtailed the ˝ow of people from Europe to the United States and (2)
the advent of commercial ˝ights across the Atlantic Ocean, which were
dramatically faster and cheaper than crossings by ship. What threats do
you see, if any, to the modern day cruise industry? What steps should
cruise lines be taking to mitigate these threats?
Hotel and Cruise Line Revenue Management Compared
˛ere are many di˙erences between hotel and cruise line revenue manage-
ment, which will be explained in detail below. But fundamentally, the reve-
nue management principles are the same.
RevPAR is the main measure of hotel revenue management success.

RevPAR combines a hotel’s average daily rate (ADR) with its occupancy.
RevPAR can be calculated as ADR × Occupancy. Or, it can be calculated as
total guest room revenue per night divided by the number of total available
room nights.
˛e corresponding metric in the cruise industry is Yield. In fact, rev-

enue management in the cruise industry is sometimes also referred to as
yield management. Yield combines a cruise line’s average daily rate, which
is referred to as average per diem (APD) or as net per day (NPD) with its
occupancy. APD is calculated by subtracting travel agent commission from
the amount a guest pays for their cruise and then dividing that result by the
cruise length. Yield is then calculated by multiplying APD and the occu-
pancy percentage. Alternatively, Yield can be calculated as total net ticket
revenue divided by the available capacity nights.
Occupancy = 105%
APD = $140.00
Yield = $147.00
Like RevPAR in hotels, a cruise lines’ Yield statistic is used to evaluate

revenue performance across multiple types of ships, varying cruise lengths,
di˙erent itineraries, di˙erent times of year, etc.
Question to Consider #1
A cruise line revenue manager is considering two di˙erent promotions.

Calculate which has the higher APD. ˛e ÿrst promotion is a cruise only
fare of $999 per person for a 7-day cruise. ˛e second promotion has a fare
of $1599 and includes free air from Chicago for a 10-day cruise. ˛e airfare
costs $350 roundtrip. Both fares are subject to a 15 percent travel agent com-
mission.
Differences Between Cruise Line Revenue Management and

Cruise ships are sometimes characterized as ˝oating hotels; and in many

regards—with their casinos, pool decks, sweeping lobbies, ornate dining
rooms—some cruise ships do resemble Las Vegas style resorts. But while
cruise line revenue management challenges are similar to resort hotels, they
are di˙erent from city-based hotels in several important ways.
Discretionary, Leisure Travelers
While the meeting and incentive market is an important subset of cruise

lines’ group business, on average it accounts for a very small percentage of
cruise passengers. For all practical purposes, all cruise guests are leisure
travelers. Unlike business travelers, for whom a hotel stay is a company-paid
means to achieve a business objective, cruise guests are paying their own
way to enjoy a personal vacation.
Furthermore, even among personal travelers, a hotel stay is typically a

means to another, compelling objective such as visiting family, attending
a special event such as a wedding or school reunion, or sightseeing in an
interesting city. ˛e motivations of cruise guests are purely discretionary.
˛ey rarely “need” to go on a cruise and are o°en ˝exible in their dates and
destinations.
As a result, cruise pricing typically goes down close to a voyage’s

departure date. While that’s not necessarily the case for the most popular
destinations and during the busiest seasons, in general, cruise prices fall as
the departure date nears.
Fixed Embarkation and Debarkation Dates
Cruise durations are ÿxed, so cruise line revenue managers do not have to
cope with uncertain arrival and departure dates and signiÿcantly varying
demand between weekdays and weekend days.
Cruises vary in length from 3-day weekend vacations that depart on Fri-
day and return on Monday to 120-day around the world cruises that leave
in January and return in April. ˛e most common cruise length is 7 days,
which ÿts well with most people’s vacation plans, although 10-, 11- and
14-day cruises are also common.
While cruise lengths vary, any given cruise has a ÿxed duration with
a discrete start and end. All guests arrive on the same day to embark the
ship and they all leave the ship on the same debarkation day. From an
operational perspective, embarkation and debarkation days are known as
“turnaround” days. In the morning, guests leave from the cruise that is just
ending. In the a°ernoon, new guests embark a sparkling clean ship that has
just been prepared by the housekeeping sta˙ for a new cruise. Cruise ships
remain in-service at all times, other than during mandatory maintenance
periods every other year.
Long Booking Window
A cruise is typically opened for sale in a cruise line’s reservations system a

year-and-a-half before the departure date. Especially long cruises, or voy-
ages to exotic destinations, are opened even further in advance. One cruise
line, Crystal Cruises of Miami, Florida, has found success by opening their
world cruises for sale as early as 3 years prior to departure.
Cruises to the same, or similar, destinations are typically opened together

as a new season. Cruise line revenue managers present the new season to the
marketplace as an event with specially cra°ed pricing aimed at the groups
market and at past guests, two segments which book far in advance. ˛e
early reaction to a new season is o°en an important harbinger of how future

demand will develop during the rest of the booking window. ˛ese early
booking patterns help cruise line revenue managers establish pricing strat-
egies and action plans for implementation as the cruise’s departure date
approaches.
Once a new season is launched, a cruise line’s revenue management

system measures each individual cruise against expected booking patterns.
˛ese expectations vary by type of cruise, season, customer segment, dis-
tribution channel, and point-in-time in the booking horizon. Booking pat-
terns, and variances to expectations, inform cruise line revenue managers
about which pricing and inventory settings will lead to optimal revenues for
each cruise.
Option Periods, Deposits, Final Payments, and Cancellation

Fees
Cruise line booking terms vary signiÿcantly from hotels. Cruise line book-
ing processes typically follows these steps:
Guests make a reservation and are allowed to hold it for up to 48–72

hours without a deposit. ˛is is called an option period.
At the end of the option period, guests are required to pay a deposit.
In most cases, the deposit is fully refundable in the event of cancellation
long before the cruise departure date. Some cruise lines, however, assess an
administration fee in the event of cancellation. Once guests make a ÿnancial
commitment to their reservation, the cancellation rate is low, typically less
than 10 or 12 percent.
As the departure date approaches, full payment becomes due. Due dates
for full payment vary by cruise length, with longer cruises requiring full
payment earlier than shorter cruises. For a 7-night cruise, ÿnal payments are
typically due 60–75 days prior to departure.
Cancellations made a°er ÿnal payment are subject to an escalating

schedule of cancellation penalties. Guests who cancel at 45 days, for exam-
ple, are o°en subject to a penalty of 50 percent of the cost of cruise. Guests
who cancel at 30 days typically pay a penalty of 75 percent. Guests who can-
cel within 14 days are likely to lose the entire cost of their cruise.
As such, close-in cancellations and no-shows are rare in the cruise

industry. ˛is gives cruise line revenue managers a clear sense of how much
inventory remains and it greatly reduces the industry’s overbooking risks.
Norwegian Cruise Line (NCL) Payment Terms and Cancellation Policy

Cabin Deposit Final Payment Cancellation Penalties by Days Prior to Departure
Per Person Due Date 75–56 55–30 29–15 14 days or
less
$250 75 days prior Deposit 50% 75% 100%
of cruise of cruise fare of cruise fare
fare
Source: NCL Company Brochure.
Per Person Pricing
A hotel’s capacity constraint is its number of rooms, which can be purchased

for one or more nights. ˛erefore, hotel pricing is expressed on a per room,
per night basis.
A cruise ship’s capacity constraint is its number of lifeboat seats. A

portion of a ship’s lifeboat seats are, of course, reserved for the crew. ˛e
remaining lifeboat seats establish the upper boundary of how many guests
a ship can carry.
Therefore, cruise ship capacity management works as follows: The

number of cabins on a ship times two establishes the double occupancy
capacity of a ship. If a ship has 1500 cabins, it has a double occupancy
capacity of 3000. (Note: Some cruise ships have cabins specifically
designed for a solo traveler. The number of these cabins is multiplied
by one, not by two.)
˛e di˙erence between 3000 and the number of lifeboat seats establishes

the capacity for third and fourth guests in a cabin. On most ships, the num-
ber of lifeboat seats above the double occupancy capacity is 400 to 600, or
even more. ˛ese third and fourth guests in a cabin are accommodated in
sofa beds or in bunk beds that pull down from the ceiling.
In this way, a cruise will o°en sail with more guests than the ship’s dou-
ble occupancy capacity. So, by industry convention, a cruise line’s occu-
pancy rate can be more than 100 percent. If a ship with a double occupancy
capacity of 3000 is carrying 3150 guests due to family and friends travel-
ing in third and fourth berths, the occupancy for the cruise is 105 percent,
which is calculated as 3150 total guests divided by the ship’s 3000-person
double occupancy capacity. Furthermore, when one person is in a cabin, it
is counted at 50 percent occupancy, which somewhat o˙sets the impact of
thirds and fourths.
For these reasons, cruise pricing is expressed on a per person basis, not
on a per cabin basis. Also, since cruises are sold in their entirety, not per
night, cruise pricing is expressed on a per person per cruise basis. (Note:
While some people in other industries may well question cruise line occu-
pancy calculations, what’s re˝ected in this textbook chapter is consistent
with industry practices, including SEC ÿlings among the public companies,
including Carnival, Royal Caribbean, and NCL).
Captive Audience for Ancillary Revenues
A strong cruise itinerary includes plenty of time for guests to experience

interesting destinations. But it also includes a lot of time onboard the ship
where guests can partake in a myriad of spending opportunities. Cruise ships
boast large casinos, numerous bars and lounges, expansive retail shops, spe-
cialty restaurants, as well as other onboard revenue venues.
Source: Public fnancial documents from Carnival Corporation, Royal Carib-

bean Cruises Ltd., and Norwegian Cruise Line Holdings.
Source: Estimations based on author’s industry experience.
˛ese ancillary onboard revenues account for 25 percent or more of

a cruise line’s total revenue and is one of the most important reasons the
cruise industry is so strongly biased towards sailing without any empty cab-
ins. Today, onboard revenue assumptions play a key role in the recommen-
dations generated by cruise line revenue optimization models, which are
programmed to use the contribution of onboard revenue in their algorithms.
Year-round Ship Deployments versus Seasonal Ship Deploy-

ments
Hotels are ÿxed in a certain spot and are forever tied to the seasonal demand
patterns of their location. Cruise ships, on the other hand, are able to move.
So they tend to follow the good weather, which minimizes their days spent
operating in an o˙-season during which pricing and/or occupancy would
otherwise be particularly low.
Some ships are deployed on year-round itineraries in the Caribbean,

which enjoys good weather and relatively strong consumer demand at all
times. Other ships are deployed on a seasonal itinerary in which it might
spend November through March in the warm, sunny Caribbean and then
April through October in the warm, sunny, and culturally fascinating Med-
iterranean. ˛e revenue beneÿts of such a seasonal deployment would be

somewhat o˙set by the relatively low revenue opportunity of two reposi-
tioning cruises across the Atlantic Ocean, one in the Spring and another in
the Fall.
˛e balance between year-round and seasonal deployments, and the

number of days spent repositioning is an important factor in cruise line rev-
enue management.
Wave Season
˛e two-and-a-half month booking period from early January through late

March is known in the cruise industry as the annual “Wave” season. During
these 10 weeks, cruise lines book close to 40 percent of their reservations for
the coming year. From a promotional standpoint, Wave season for cruise
lines is like retailers’ Black Friday, Cyber-Monday, and holiday shopping
season all rolled into one.
In the months leading into the Wave season, cruise line revenue manag-
ers are able to clearly read the demand characteristics of each departure for
the coming calendar year. Cruise pricing and inventory control settings are
ÿne-tuned accordingly. But more importantly, strong promotional o˙ers are
launched into the general marketplace, supported by millions of dollars of
advertising spend and signiÿcant support from the sales department and its
distribution channels.
Wave promotions work at two levels. Strategically, they are designed to

promote cruises in general with special o˙ers that are widely available across
hundreds of cruises. Tactically, cruise line revenue managers aim the most
compelling o˙ers at sailings that need the greatest demand stimulation.
Wave season is so important to demand patterns that the timing of its

impact is carefully calibrated into all cruise line demand forecasting models.
By the end of March, when the Wave season is over, cruise lines have
typically booked 85 percent or more of their revenue goals for the current
calendar year. As such, when Wave season is over, cruise line revenue man-
agement departments begin to turn most of their attention to the following
calendar year.
Implications for Cruise Line Occupancy
Let’s recap the factors listed above:
Cruises have a ÿxed start date and end date. Cruise guests must book an
entire cruise. So there are no broken room nights caused by a mismatch of
arrivals and departures.
˛e sales cycle for cruises begins a year-and-a-half or more from the

departure date. So there is a long time for cruise line revenue managers to
adjust pricing and inventory settings in response to demand characteristics
and to sell all available capacity.
Capacity is constrained by the number of lifeboat seats, which are greater

than the double occupancy capacity of the ship, allowing cruise line revenue
managers to aim for occupancies of more than 100 percent.
Onboard revenues are a signiÿcant portion of a cruise line’s total reve-

nues. ˛erefore, the opportunity cost of an empty cabin is comprised of both
the lost ticket revenue and also the lost onboard revenue. As such, cruise line
revenue managers are highly motivated to ÿll every cabin, even if it means
signiÿcantly reducing ticket prices in discrete, covert markets.
Ships are deployed in a way that maximizes demand throughout the year
and repositioning cruises are kept to a minimum. So there is never a time at
which full occupancy is not possible.
Wave Season brings a surge in cruise bookings when demand character-

istics are clear and allows cruise line revenue managers to optimize prices.
Cruises with strong demand can be managed to maximize prices. Cruises
with weak demand can be priced to stimulate suˆcient demand to achieve
occupancy targets.
For all of these reasons, cruise line revenue managers are able to achieve
occupancies unlike any other sector of the travel industry. One measure of
excellence among cruise line revenue managers is a propensity to sail with-
out a single empty cabin. In fact, the most successful cruise line revenue
managers have a credo: “Zero tolerance for empty cabins.”
Source: Annual reports for Carnival Corporation, Royal Caribbean Cruises Ltd.,
and Norwegian Cruise Holdings.

Build an MS Excel spreadsheet to decide how to approach
the following cruise line revenue management problem:
˛ere are 200 unsold beds in inside cabins on a departure
60 days out. ˛e forecast for the main strategic market estimates
there is demand for 150 beds at the current price of $799 per person,
leaving 50 beds empty. Based on observed price elasticity, every $5
reduction in price increases demand by 2 percent. In other words,
lowering the price from $799 to $794 will increase demand from 150
guests to 153 guests. Additionally, based on previous experience, a
covert tactical promotion to a select market is likely to generate 50
guests at a price of $599 per person.
Which is a better revenue management decision and why? Reducing
prices in the main strategic market to ÿll the 50 beds? Or, leaving
the price as is in the strategic market and implementing the covert
tactical promotion?
Does your decision change if the covert tactical price required to
generate 50 beds is $399?
Tools for Managing Cruise Line Prices
In order to support their full ship mentality, cruise lines have built signiÿ-
cant passenger sourcing infrastructure and they have also conÿgured their
ships with revenue optimization in mind. Both factors are key tools used by
revenue managers.
Worldwide Guest Sourcing
Cruise lines have saleforces that establish deep and broad relationships with
individual travel agencies and travel agency consortia around the world. ˛e
major cruise lines have a signiÿcant sales presence in all of the important
global cruise markets. Even small cruise lines typically maintain salesforces
in their main domestic market as well as one or two additional international
markets.
˛e diversity of international guest sourcing is used by cruise line reve-

nue managers in three key ways:
1. Willingness-to-Pay: Guests’ willingness-to-pay varies geographi-
cally. A French guest, for example, thinks of the Caribbean as a far-
away and exotic destination, particularly in February when France is
dark and cold. But a February cruise to the Caribbean is a quick, easy
getaway for someone who lives in Miami. In this case, the French
guest is likely to be willing-to-pay more than the Miami guest for a
February Caribbean cruise. On the other hand, the Mediterranean is
a far-away and exotic destination for a Miami guest, who is likely to
be willing-to-pay more to sail out of Marseille in June than a French
guest. A cruise line revenue manager will set prices according to
these varying geographic preferences.
2. Disguising Di˙erential Pricing: For reasons that will be discussed
later in this chapter, a cruise line revenue manager tries to mask the
fact that cruise guests pay di˙erent prices. International guest sourc-
ing helps in this regard for two reasons. First, international curren-
cies and exchange rates can help to make direct price comparisons
diˆcult. Second, commercial terms in international markets o°en
vary. Taxes, for example, are typically assessed in addition to cruise
fares in the U.S. market. In Europe, on the other hand, they are
bundled into the price, which further obscures direct comparisons
across international prices.
3. Close-in Discounting: In some cases, in order to ÿll every cabin, it
becomes necessary for a cruise line revenue manager to o˙er close-in
discounts to stimulate demand. But if the distressed inventory is on

Mediterranean sailings, it is harder to stimulate demand among
North American guests because they still have to buy an expensive
long-haul ˝ight across the Atlantic. It is much easier to stimulate
demand among French and Italian guests who can drive to the cruise
port. In these cases, international passenger sourcing capabilities are
a key resource for cruise line revenue managers.
Customer Databases
In addition, cruise lines maintain large computerized customer relationship

management (CRM) systems. ˛ese customer databases contain details
about the lines’ past guests and prospects. Past guests are people who have
already sailed with the cruise line one or more times. Prospects are peo-
ple who have visited the line’s website and requested additional information
but have not yet sailed with the company. Both past guests and prospects
are marketed to constantly. It is not unusual for cruise lines, both large and
small, to send promotional emails on a daily basis to certain segments of
their customer database.
˛e ability to “mine” the customer database is used by cruise line reve-

nue managers in three key ways:
1. Stimulate demand: Working together with the marketing depart-
ment, cruise line revenue managers are able to address demand
shortfalls by using promotional o˙ers to stimulate demand among
large numbers of potential guests.
2. Control dilution: A risk of lowering prices is that people who are
already booked at higher prices may demand a refund. Cruise line
CRM systems typically track which guests are booked on future
cruises. ˛ese guests can be suppressed from promotional commu-
nications.
3. Test price points: Response to email o˙ers is almost immediate. So
cruise line revenue managers can test the e˙ectiveness of various
price points and o˙ers before committing to a large scale promotion.
Ship Confguration
Cruise ship cabin conÿgurations are designed to maximize the total units
of demand while at the same time capturing maximum value from di˙er-
ent cruise customers’ willingness to pay. A cruise ship can have up to 30
di˙erent cabin categories ranging from small, windowless rooms on low
decks to expansive, multi-level suites on upper decks. Prices for a 7-day
cruise could easily vary across these cabins categories by 785 percent, from
a low of $949 per person to a high of $8399 per person, with many price
points in between. In this way, cruise line revenue managers are able to
use a single cruise ship to appeal to a wide array of guest demograph-
ics, from value-oriented vacationers on a relatively tight budget, to luxury
and high-end amenity seeking guests at the opposite end of the willing-
ness-to-pay spectrum. A revenue-maximizing cruise ship is broken down
into six major cabin categories, each aimed at a distinct willingness-to-pay
guest segment:
Cabin Type Cabin Characteristics
Inside Standard size cabins, no window. Usually on low decks, close to

the waterline, which by cruise industry convention are less desirable
than upper decks.
Outside Standard size cabins, with a fxed window.
Balcony Standard size cabins, with a sliding glass door that opens onto a
private balcony overlooking the ocean. Most cabins on modern
cruise ships fall into this category.
Premium Balcony Same as standard balcony cabins, but with upgraded amenities
such privileged access to the Spa or concierge services.
Suite Larger cabins, typically one-and-a-half to two-times the size of

standard cabins. Also have upgraded amenities such as priority
lines for embarkation and debarkation, access to premium seating
in the show lounges and exclusive dining rooms, concierge services
and upgraded in-room amenities such as large screen TVs and
larger bathrooms.
Super Suite Very large cabins, sometimes as much as 1500 square feet or
more. Include all of the features of standard suits plus butler
service, in-room dining rooms, multiple bedrooms and bathrooms,
huge wraparound balconies and state-of-the-art entertainment
systems.
Royal Caribbean Oasis of the Seas, sample pricing by cabin

category.
7-Night Caribbean Sailing.
Cabin Description Sq Ft Price per

Category Person
RS Royal Suite 1284 $8,399
SL Sky Loft Suite 722 $7,769
L1 Crown Loft Suite 545 $4,099
L2 Crown Loft Suite 545 $3,749
OS Owner's Suite 569 $3,549
GS Grand Suite 371 $2,899
JS Junior Suite 287 $2,099
B1 Boardwalk View Balcony 182 $1,269
B2 Boardwalk View Balcony 182 $1,249
C1 Central Park View w/Balcony 182 $1,219
C2 Central Park View w/Balcony 182 $1,199
D1 Superior Ocean View w/Lg Balcony 182 $1,559
D2 Superior Ocean View w/Balcony 182 $1,509
BV Boardwalk View 187 $1,089
CV Central Park View 194 $1,049
F Ocean View Stateroom 178 $1,089
H Ocean View Stateroom 178 $1,069
I Ocean View Stateroom 178 $1,049
PR Promenade Stateroom 193 $1,129
L Large Interior Stateroom 178 $1,039
M Large Interior Stateroom 178 $999
N Large Interior Stateroom 178 $979
Q Interior Stateroom 150 $949
Weighted ° $1,379
Average Price
Source: Royal Caribbean International website.
Question to Consider #2
A cruise line revenue manager is considering making a change to which of

the company’s ships is deployed in Alaska. ˛e ship conÿgurations and pre-
dicted selling prices per cabin type are contained in the table below. Which
ship would you send to Alaska and why?
Ship 1 Ship 2
Number of Per Person Number of Per Person
Cabins Price Cabins Price
Suites 50 $1,499 150 $1,349
Balconies 500 $1,199 500 $1,199
Window 100 $999 50 $1,049
No Window 100 $899 50 $949
In addition to providing built-in willingness-to-pay ÿlters, cruise ship

cabin conÿgurations also provide useful inventory management function-
ality. When necessary, cruise line revenue managers are able to use excess
demand from lower priced cabin categories to supplement weak demand
in higher priced cabin categories. When faced with this demand scenario,
cruise line revenue managers oversell lower cabin categories and upgrade
those guests into higher cabin categories where demand is insuˆcient to ÿll
the available space. ˛is is especially convenient and revenue maximizing
for the following reasons:
1. Lower price dilution: ˛e price di˙erence between an inside cabin
and an outside cabin, or between an outside cabin and a balcony
cabin could be as little as $25 or $50 per person. If the demand short-
fall in lower cabin categories is not signiÿcant, planned upgrades can
be a cost-e˙ective solution.
2. Easier than implementing a promotion: While cruise lines launch
promotions all the time, there are many steps involved: such as set-
ting up the price program in the reservations system and coordinat-
ing with the marketing department. Setting the inventory control
parameters to oversell a cabin category and then upgrading guests
into a higher category is administratively easier. Some cruise line
reservations systems can do this automatically, on the basis of busi-
ness rules entered into the reservation system by the revenue man-
agement department.
3. Less disruptive to guests who are already booked: Promotions can

sometimes be disruptive to guests who are already booked and may
have already paid a higher fare. Free upgrades, on the other hand,
are typically considered simply the luck of the draw as cabins are
assigned.
Cruise Line Pricing
˛ere are two basic types of cruise line pricing: strategic and tactical. Strate-
gic cruise pricing refers to the prices that are set-up when a cruise is opened
for sale in the reservations system, typically 18-months prior to departure.
Tactical pricing refers to price adjustments and promotional o˙ers that are
implemented in response to actual booking patterns.
Strategic Cruise Pricing
When establishing strategic prices, cruise line revenue managers perform a

detailed analysis of how current and historical prices have performed for the
same or similar cruise itineraries. In cases where historical prices have o°en
been increased, cruise line revenue managers may decide to increase strate-
gic prices for the new season. If historical prices have o°en been decreased,
or if an unexpectedly high number of promotions have been needed to ÿll
capacity, cruise line revenue managers may decide to set strategic prices
lower for the new season.
In addition to analyzing historical price performance, cruise line reve-

nue managers will also consider anticipated changes in the operating envi-
ronment. If the line is introducing a new ship onto an itinerary, cruise line
revenue managers will o°en decide to increase prices on the expectation
that the new ship will attract more customer demand. If, on the other hand,
competitors have announced a new entry or a capacity increase on an itiner-
ary, cruise line revenue managers may reduce prices in anticipation of price
pressure due to more competitive capacity.
When cruises are opened for sale, cruise line revenue managers publish
a comprehensive set of prices for all cabin categories. ˛at set of prices typ-
ically includes the following:
Strategic Price Program Description

Type
Brochure Cruise line brochure rates are like the MSRP of a car.
No one pays this price, but it is used to establish a
reference price against which discounts are positioned.
Not all cruise lines use brochure rates.
Early Booking This is a special price, typically positioned as a

percentage off the brochure rate, to encourage guests
to book early. These prices are often positioned as
having set expiration periods and as being subject to
increase as the sailing date approaches. The actual
change in these prices is dependent on the demand
characteristics for a sailing.
Past Guest Past guests can make-up as much as 40% of a cruise

line’s guests. To insure loyalty, past guests are often
given an additional discount off the Early Booking
rates.
Group – Promotional Groups comprise an important part of a cruise line’s

total guest mix. In many cases, travel agents will
organize a group promotion which typically includes
a special price and/or onboard amenity as well
as an opportunity for the travel agent to earn extra
commission.
Group – Meeting & Incentive Meeting and Incentive groups are also an important
part of a cruise line’s total guest mix. Because these
groups tend to be bigger than promotional groups and
because they tend to have different requirements for
onboard services, these groups are priced separately.
International Most, if not all, of a cruise line’s prices are converted

from a base currency into other international
currencies. These conversions include any variances
in commercial terms from market to market and any
decisions to favor one market over another based on a
cruise line’s international priorities and strategies.
Net, non-commissionable Cruises are often included in tour operator programs,

where the cruise is part of a larger vacation package.
In these cases, cruise lines provide a tour operator with
a net, non-commissionable price, which is typically
fxed throughout the booking window, regardless of
how market prices may change.
Charter Small cruise ships with fewer than 750 beds are often
chartered for meeting and incentive programs. For
these ships, its typical for cruise line revenue managers
to provide the sales force with rates for full ship
charters.
PROS & CONS

When cra°ing strategic pricing, some cruise line
revenue managers prefer to start with prices on the
high side and then discount later to ÿll in the gaps. Other cruise line
revenue managers prefer to start with prices on the low side then
increase prices as ships ÿll. Which approach makes more sense to you
and why?
Tactical Cruise Pricing
Once a cruise season has been opened for sale and the strategic pricing
has been launched, cruise line revenue managers begin to track the pace
of bookings relative to expected booking patterns. ˛ese booking patterns
are tracked in a detailed manner and are discretely measured across cabin
categories on the ship, across customer segments in the market place and
across geographic sectors of the distribution channel. As the actual booking
pace begins to vary from expectations, cruise line revenue managers begin
to adjust prices accordingly.
Stronger than expected demand scenarios put cruise line revenue man-
agers in the catbird seat. With 100 percent occupancy assured, they can shi°
the guest mix away from lower priced segments and increase rates in core
markets. In this case, cruise line revenue managers raise prices in order to
guard against spilling demand which would otherwise exceed supply.
Weaker than expected demand scenarios are an entirely di˙erent matter.

When demand is weak, mitigating the risk of spoilage is a serious chal-
lenge. Organizationally, responsibility for addressing these challenges typ-
ically falls to the revenue management team, which is expected to reduce
rates by the minimum amount required to suˆciently stimulate enough
demand to ÿll the at risk cabins. In this role, the revenue management team
is expected to provide leadership and direction that will steer the sales and
marketing teams toward activities to address the problem sailings. Solving
a weak demand scenario requires well-cra°ed promotions that are properly
communicated to the distribution channel and to the customer database.
˛e components of a well-cra°ed cruise promotion are:

1. Aimed at the right part of the ship: Cruise line revenue managers pay
careful attention to which cabin categories need promotional sup-
port. If the suites are on pace to sell-out, for example, any promo-
tions should exclude suite categories.
2. Targeted to an underperforming customer segment: When possible,
it is better to stimulate demand among weak performing customer
segments. If that approach fails, a cruise line revenue manager may
have no choice but to further stimulate demand among customer
segments that are already performing as expected.
3. Targeted to an underperforming sector of the distribution channel:
Sometimes a particular travel agency consortium is underperform-
ing. In these cases, it may make sense to o˙er special sales incentives
to steal share from other cruise line alternatives.
4. Discounted enough to stimulate suˆcient demand without giving
away more than necessary: Cruise line revenue managers rely on
price elasticity models and assumptions about price/demand rela-
tionships to determine the level of discounting necessary to stimu-
late just the right about of additional demand.
5. Compelling and easy to communicate: In order to successfully stim-
ulate demand, cruise line promotions must be easy to understand
and o˙er a compelling reason to book. Many cruise lines accomplish
this by using high brochure prices to o˙er a Two-for-One deal, which
is a very e˙ective promotional tool. In other cases, cruise lines o˙er
additional amenities for free, such as free airfare, free hotel nights
before or a°er the cruise, or free drinks onboard.
To achieve their promotional objectives, cruise line revenue managers

turn to two types of promotional o˙ers:
1. Percent O˙/Dollars O˙: Traditionally, cruise line revenue managers
have stimulated demand by simply lowering cruise fares. ˛e classic
technique is the use of the brochure rate as a reference price and
o˙er a large discount (up to 50% or more) with a very compelling
lead rate, such as $499 for a 7-night Caribbean cruise. Alternatively,
cruise lines o°en express their discounts as dollars-o˙ the standard
cruise fare. Such dollar-o˙ discounts can be as high as $500 to $1000
o˙ per person, or even higher for ultra-luxury cruise lines.
2. Value added: Recently, cruise line revenue managers have developed

a preference for using value-added promotions to stimulate demand.
˛e list of free value-added amenities used by cruise line revenue
managers includes: drinks packages, onboard spending credits,
free WiFi, shore excursions, specialty dining, cabin upgrades, third
and fourth berths, and gratuities; plus air credits and even reduced
deposits. Cruise line revenue managers like these promotions
because their cost to the cruise lines is dramatically lower than cus-
tomers’ perceived value. A $100 drinks package, for example, costs
less than $15. A $50 shore excursion credit costs only $25. Free third
and fourth berths cost very little outside of summer and school hol-
idays. And reduced deposits are only a minor cash ˝ow issue. In this
way, cruise lines are able to preserve a lot of net ticket revenue while
sacriÿcing very little net onboard revenue.
Pricing Constraints
It is a reality that in the dynamic pricing environment of a revenue manage-

ment system, customers frequently pay di˙erent prices for essentially the
same product. But, over the relatively short duration of most ˝ights, airline
passengers do not speak to their seatmates about how much they paid for
their tickets. Similarly, individual hotel guests do not speak to the people
across the hall about how much they are paying per night.
But the social milieu on a cruise ship is quite di˙erent. Strangers meet
over dinner, at the card tables in the casino, in the bars and during a vari-
ety of group activities around the pool or during shore excursions. It is not
unusual for people to talk about how much they paid for their cruise.
So one unique challenge for a cruise line revenue manager is to cra° a

tactical pricing strategy that does not leave certain guests feeling ripped o˙
and angry with the cruise line or with their travel agent. Most people are
comfortable with the concept of “book early as save.” So if a guest paid more
than another guest who booked earlier, that is viewed as fair. A problem can
arise, however, when a guest who booked early paid more than a guest who
booked later.
In these cases, revenue managers try to disguise their discounts by bun-

dling the deal into a value added promotion, or o˙ering the special price for
limited customer groups such as residents of certain states or senior citizens.

Sometimes cruise line revenue managers will use restrictive fares that o˙er less
˝exibility and choice. With these fares, guests are not able to choose a speciÿc
cabin or may not be permitted to hold a cabin without an immediate deposit.
REAL PEOPLE 1
During the worldwide ÿnancial crisis of 2008,

the bottom fell out of the ultra-luxury cruise
market. Demand fell o˙ sharply just as signiÿ-
cant new capacity was coming online. Some of
the ultra-luxury brands resorted to deep discounts to spur demand
and keep ships sailing full. One cruise line executive, Frank Del Rio,
took a di˙erent path. Instead of lowering prices for the Regent brand,
he added value by making the product truly all inclusive. He even
took the then unprecedented step of including shore excursions in the
cruise fare.
1. What are the pros and cons of Del Rio’s approach?
2. What do you believe were the strongest aspects of his strategy?
If you were a cruise line revenue manager, would you have adopted the
same approach?
Avoiding Close-in Discounting
˛e best cruise line revenue managers address weak demand scenarios early,
as soon as booking patterns begin to vary from expectations. Otherwise,
they may be le° with too much space to sell too close to departure, when
cruise lines and other travel companies dump their space in a panic. Because
cruises are typically sold to leisure travelers who make their vacation plans
far from departure, there is relatively little natural demand for cruises within
30 days of departure. At that point, any unsold cabins are considered at risk
of sailing empty, with the corresponding lost ticket and onboard revenues.
˛erefore, cruise lines that are caught with too much space close to depar-
ture o˙er highly distressed prices in order to assure 100 percent occupancy,
even at very low APDs. ˛e problem has become so bad that senior man-
agement at one cruise line issued an outright ban on discounting within
30-days of departure.
REAL PEOPLE 2
Royal Caribbean Cruises, Ltd., Chairman and

CEO Richard Fain was fed-up with close-in dis-
counting. Even though close in sales made up
just a small percentage of the company’s overall
bookings, Fain and his senior advisors felt that such discounts were
highly disruptive; denigrated the brand’s image, and encouraged peo-
ple and travel agents to wait until the last minute for a better price. In
April 2015, Fain put a new hurdle in front of his company’s revenue
management department. He banned last minute cruise discounts.
1. What are the pros and cons of Fain’s approach?
2. What do you believe were the strongest aspects of his strategy?
If you were a cruise line revenue manager, would you have adopted the
same approach?
Cruise Line Revenue Management Systems
In the early days of the cruising, there were no computerized systems. Cus-
tomer service agents on roller skates would manually update customer
reservations in berthing books. Years later, when cruise line revenue man-
agement practices ÿrst started to take hold, revenue managers would go
from meeting to meeting carrying reams of paper reports and use rulers to
keep track of rows and columns of numbers that spanned the full width of
legal-sized paper.
˛ere are still vestiges of those old paper-based reports, but most large
cruise lines have installed computerized revenue management systems that
use high-level mathematics to forecast demand, gauge consumers’ price
elasticity, and recommend optimal prices and upgrade limits.
At some cruise lines, the revenue management system’s recommenda-

tions are ÿrst presented to cruise line revenue managers for evaluation and
approval prior to implementation. At other cruise lines, recommendations
that fall within carefully deÿned parameters are automatically sent directly
to the reservations system.
Computerized revenue management systems for cruise lines are expen-

sive and take a long time to implement. ˛erefore, they have not yet been
adopted by smaller cruise lines where the scale of the business is such that
the revenue management team can be successful with well-deÿned processes
and a combination of MS Excel and paper-based reports.
CONCLUSION
It is true that the airline, car rental, and hotel industries are much big-
ger than the cruise industry and o˙er many more potential jobs for travel
industry revenue management professionals. But with its unique charac-
teristics and drive for 100 percent occupancy, the cruise industry o˙ers an
exciting opportunity for revenue management professionals looking to be
challenged and willing to assume important leadership roles within their
companies.
SEEING FURTHER
The sophistication of cruise line revenue man-
agement has increased as the business has
grown. Today, all major cruise lines use predic-
tive demand modeling and revenue optimization models to support
decision making about price and inventory settings. But cruise line rev-
enue management continues to be used primarily as a tactical method
to manage the physical inventory of cabins and determines things
such as the number of cabins to sell at a given price and when to open
and close prices.
Some revenue management departments in other hospitality sectors
are taking a more customer-centric approach and are using strategies
and promotions to maximize the lifetime value of a customer and are
blending both ticket revenues and onboard revenues.
What are some of the ways that you think cruise line revenue managers
could leverage the data in their CRM systems to increase cruise line
proÿtability?
1) With the cruise industry continuing to grow, more and more
cruise lines are diving into the hot market of Asia, more
speciÿcally China. The Chinese government is predicting that
by the year 2020, the cruise tra˛c in China will amount to 4.5
million passengers (Forbes). What do you think makes cruising so popular in Asia?
How does cruising in Asia compare to cruising in others parts of the world, such
as Europe, the Caribbean, and Alaska?
2) In order to stay a˝oat in the competitive cruising industry, Norwegian Cruise Line
plans to spend $400 million to build new ships and improve older ones (Skift).
With the introduction of the Norwegian Edge program, ships from the company’s
extensive ˝eet are going to be modernized and improved upon. What areas do
you think the company should focus allocating that money when improving their
ships? Which will be the most proÿtable and set the cruise line apart from others?
3) Which types of cruises are the most expensive for customers yet still generate the
highest demand?
APPLICATIONS
Application 1
Silvio Pascual is deciding between a free air promotion

or a residents special at $899 per person to help solve
a demand shortage problem of 100 guests on a 7-night
Caribbean cruise departing in 6 months. Silvio has
decided to focus his analysis and recommendations on the states of Ohio
and Arizona and is evaluating the following facts:
Ohio Arizona
Current Cruise Price $1299 $1299
Current Air Price $499 $599
Air Cost $350 $475
Commission Rate 15% 15%
What additional information is required in order to make the best possi-

ble decision? Would you recommend a reduced air promotion or a residents’
special promotion? Why? What additional information would assist in mak-
ing the best possible decision?
In your analysis, you should assume that all the promotional options
will generate the incremental 100 guests required to ÿll the sailing. Be sure
to consider air costs and commissions on both cruise fares and air add-ons.
Application 2
Isabel Alonzo has been asked by the owner of a small-ship cruise line to help
decide whether the line should build a new ship. ˛e owner has asked Isabel
to consider the following questions:
1. Where should the ship be deployed?
2. How many suites and super-suites should the ship carry?
3. What pricing can the company expect?
4. How would the pricing of other ships already in the ˝eet be impacted?
5. What types of investments would the company have to make in marketing
and sales infrastructure to ÿll the additional, new capacity?
Your ÿrst step is to perform an analysis of the company’s historical per-

formance. What information is required regarding:
Yields by itinerary?
Prices by cabin category?
Premium pricing that can be achieved on new ships versus older ships?
Size of the company’s past passenger database?
Potential to grow the company’s traditionally strong guest sourcing mar-
kets? Opportunities to expand into new guest sourcing markets?
For this exercise, formulate how you would approach such an analysis
and discuss how the ÿndings would in˝uence your recommendations.
TEAM ACTIVITY
˛e sales and marketing departments have come to the revenue

management department for approval to implement a “Kids Sail
Free” promotion in third and fourth berths. In order to generate
as many bookings as possible, they’d like to make the promotion available
on all future departures. Using the internet, research if and how this sort of
promotion is currently used by major mass market cruise lines. What are the
booking terms, conditions and restrictions? Would you approve this promo-
tion? Why or why not? If not, what would you propose as an alternative and
why?
INTERNET ACTIVITY
Using the Internet, study the types of promotions that are in use
at three or four cruise companies. Separate the promotions into
two categories: Value Add and Dollars/Percent discount.
What is similar between the two examples? What are the signiÿcant dif-
ferences? Which do you believe would work better and why?
In your evaluations, assume that the proÿt margin on beverage packages

is 75 percent, on Spa services the proÿt margin is 55 percent and on shore
excursions, the proÿt margin is 45 percent.
GLOSSARY
ALBDs – Abbreviation for available lower berth days, which is
the measure of cruise capacity. Some cruise lines refer to PGCDs,
which means potential guest cruise days.
APD – Abbreviation for average per diem, which is the net ticket
revenue divided by the number of days in the cruise. Some cruise
lines refer to NPD, net per diem, which is the same statistic.
Cabin categories – Cruise ship cabins have di˙erent physical attributes and/
or di˙erent locations on a ship. Similar cabin types are grouped into
the same cabin category and sold at the same price.
Cancellation penalties – Fees assessed in the event that a cruise is canceled
a°er the full payment due date.
Crew – ˛e cruise ship sta˙ is referred to as crew. ˛is includes hotel oper-
ations sta˙ who serve the guests and marine and technical sta˙ who
operate and maintain the ship.
Cruise berths - Beds on a cruise ship are referred to as berths. ˛e ÿrst two
beds in a cabin are referred to as lower berths. ˛e third and fourth
beds are referred to as upper berths.
Cruise length – ˛e number of days in a cruise.
Debarkation day – ˛e date the cruise arrives at its ÿnal port of call and
passengers leave the ship.
Departure date – ˛e date the cruise departs from its ÿrst port. Also
referred to as embarkation date.
Deposit – ˛e payment required to hold a reservation. Can range from
$500 to $1,000 dollars or more.
Dilution – ˛e amount of a refund given to a guest who converts to a tacti-
cal promotion a°er having already booked at a higher fare.
Double occupancy capacity – By cruise industry convention, each cabin has
a capacity of two guests (a small percentage of cabins are designed
for single guests) and a double occupancy capacity of 2. If that cabin
carries a third guest, its occupancy is 150% (3 divided by 2.) If that
cabin carries four guests, its occupancy is 200% (4 divided 2.) In this
way, cruise ship occupancy typically exceeds 100%.
Embark – To board a ship.
Full payment date – ˛e date the full payment for the cruise is due, typically
30 days or more before the start of the cruise.
Full ship mentality – Cruise line revenue managers are expected to sell
every cabin on a ship prior to the departure date. ˛is is a cultural
imperative at the most successful cruise lines.
Itineraries – ˛e cruise region and the ports of call during the cruise.
Leisure travelers – People traveling as part of a personal vacation without a
business purpose. Leisure travelers tend to be more price sensitive
than business travelers and tend to book further in advance.
Lifeboat seats – By law, a cruise ship must carry lifeboats with enough seats
for every person onboard the ship, including both guests and crew
members.
Net onboard revenue – Onboard revenue a°er deducting the cost of goods
sold.
Net ticket revenue -- Ticket revenue a°er deducting travel agent commis-
sion or other direct sales costs (such as airfare for air-inclusive tick-
ets.)
No-shows - Guests holding a fully paid reservation who do not cancel in

advance and who do not show up at the ship on the departure date.
Typically, very few people are no-shows.
(NPD) – Net per day - See APD
Occupancy – ˛e percentage of available capacity that is occupied or sold.
Calculated as the guest cruise days divided by the ALBDs.
Onboard revenue – Revenue derived from onboard sales in venues such as
bars, casinos, shore excursions, gi° shops, spas, etc.
Option period – ˛e number of days between the time of reservation and
the time the reservation will automatically cancel if a deposit is not
received. Can range from 1 day to 1 week.
Passenger sourcing infrastructure – In order to ÿll all capacity for all depar-
tures, cruise lines build customer relationship management systems
to facilitate frequent direct marketing to past guests and prospects.
˛ey also deployment sales teams around the world to build and
maintain relationships with the travel agency distribution system.
Revenue optimization models – Large cruise lines use mathematically
sophisticated models to forecast demand at various price points
and in various markets and recommend prices that will result in the
highest proÿt contribution.
Seasonal itinerary – Some cruise ships are deployed on various itineraries
throughout the year. For example, a ship might sail in the Caribbean
in the winter and reposition to Alaska for the summer, returning the
Caribbean in the Fall.
Solo traveler – A cruise passenger traveling alone in a cabin.
Spill – When there is more demand than supply, the demand that can’t be
accommodated is “spilled.”
Spoilage – When there is less demand than supply, any cabins that sail
empty are “spoiled.”
˜ird and fourth guests – Cruise ship cabins are designed to accommodate
three or four guests, and sometimes more. Most o°en, these guests
are children sharing the same cabin as their parents.
Ticket revenue – Revenue derived from cruise fares and does not include
any ancillary revenues from onboard or other sales.
Travel agent commission – Roughly 65% of cruises are sold through travel
agents who earn commissions ranging from 10% to 20% of Ticket
Revenue.
Two-for-One – ˛e most e˙ective cruise line promotion is o˙ering two for
the price of one. Some cruise lines purposely set their brochure rates
high enough so they are willing to accept that fare for the ÿrst guest
and no fare at all for the second guest.
Year-round itineraries – Some cruise ships are deployed on the same itin-
erary year round, o°en in the Caribbean.
Yield – ˛e most important revenue management statistic in the cruise
industry. Yield can be calculated two ways: 1) Average per diem
times occupancy percentage, and 2) net ticket revenue divided by
ALBDs. But equations give the same result.
REFERENCES
Anonymous, PR Newswire. (2010). CLIA’s 35th Anniversary Puts Spotlight on
Remarkable Story of Growth & Evolution of Cruise Industry: History of
Industry’s Leading Trade Association Parallels Dramatic Transformation of
Cruising, Cruise Ships, Consumer Expectations. Proquest. Fort Lauderdale.
Biehn, N. (2006). A Cruise Ship Is Not a Floating Hotel. Journal of Revenue and
Pricing Management, 5(2), 135-142.
Cruise Lines International Association: Press Releases. (2005). Strong 3rd Quar-
ter Passenger Growth Extends 2005 Trend for CLIA-Member Cruise Lines.
Cruise Lines International Association. New York.
Cruise Lines International Association: Press Releases. (2006). Cruise Industry
Reports Double-Digit Growth in Second Quarter 2006. Cruise Lines Interna-
tional Association. New York.
Cruise Lines International Association: Press Releases. (2009). ˛e State of the
Cruise Industry in 2009: Well-Positioned for Challenging Times. Cruise Lines
International Association. Fort Lauderdale.
Cullen, K. (2015). ˜e evolving dynamics of revenue management. A Comprehensive
Revenue Optimization Road Map for Hotel Owners, Operators and Practition-
ers. HSMAI Foundation.
Garin, K. A. (2006). Devils on the Deep Blue Sea. ˜e Dreams, Schemes and Show-
downs ãt Built America’s Cruise-Ship Empires. New York, NY: Penguin.
Green, M. (2015). CLIA Reports on Cruise Trends for 2015. Travel Age West. North-
star Travel Media Group.
Lieberman, W. (2012). Pricing in the Cruise Line Industry. In Ö. Özer & R. Phillips
(Eds.), ˜e Oxford Handbook of Pricing Management; ; Oxford, UK: Oxford
University Press, 199-216.
Maddah, B., Moussawi-Haidar, L., El-Taha, M., & Rida, H. (2010). Dynamic
Cruise Ship Revenue Management. European Journal of Operational Research,
207, 445–455.
Mathisen, O. (2012). State of the Industry Report. Cruise Industry News. New York.
More, R. (2015). Why Holiday cruises are more expensive. Examiner.com.
Royal Caribbean International Company Brochure. (2008). Independence of the
Seas.
Sampson, H. (2016, January 22). To Get an Edge on Competition Norwegian Cruise
Plans to Spend $400 Million. Ski°.com.
Scott, L. & Ramdeen C. (2013). Cruise Ship Itineraries and Occupancy Rates.
Tourism Management, 34, 236–237.
Selby, D. (2013) Revenue Management in the Cruising Industry. In P. Legohérel,
E. Poutier, E. & A. Fyall, A. (Eds.), Revenue Management for Hospitality and
Tourism; ; Woodeaton, Oxford: Goodfellow Publishers Limited, pp. 157–168.
Shao, H. (2014). Fast Sailing: China’s Cruise Market to Become World’s Second
Largest by 2017. Forbes Asia.
Sun, X.; Jiao, Y., & Tian, P. (2011) Marketing Research and Revenue Optimization
for the Cruise Industry: A Concise Review. International Journal of Hospital-
ity Management, 30, 746-755.
Toh, R., Rivers M., & Ling T. (2005). Room Occupancies: Cruise Lines Out-Do the
Hotels. International Journal of Hospitality Management, 24, 121-135.
CHAPTER 14
Total Revenue Management

Gabor Fenyves
OVERVIEW
Over the last decade, the hospitality industry realized that revenue managers
cannot solely focus on room pricing and inventory management. Long gone
are the days when guests were assigned a monetary value solely based on a
room rate. A more holistic approach needs to be taken and all revenue streams
per guest should be considered to truly drive total hotel proÿt instead of just
room’s revenue. Improvements in technology are enabling revenue managers
to measure the overall guest spend and guide the sales and marketing
team to attract these high-value segments to the hotel. This new revenue
management branch is called total revenue management (TRM).
LEARNING OBJECTIVES
Explain the key foundations of TRM
Identify the di°erent RM time-based metricize used to measure auxiliary
revenue performance
Describe and implement a revenue management strategy to a nonroom
outlet
Perform calculations to evaluate which business is most proÿtable based
on TRM
Combine all outlet revenue management strategies into a holistic TRM
approach
Apply a framework to implement a successful TRM strategy
Discuss the opportunities and future of TRM
403
OUTLINE
Introduction
What is Total Revenue Management?

Total Revenue Management Framework
• Non-Room Level Optimization
• Know the Existing ˜eory and Metrics
• Spas
• Spa Characteristics
• Spa Optimization
• Golf Courses
• Golf Characteristics
Demand Forecasting
Price Optimization
• Casinos
• Customer Segmentation
• Demand Forecasting
• Pricing
• Groups
• Pricing Strategy
Displacement Analysis
• Catering
Creative RM Strategy
Future Opportunities for TRM
Total Revenue Management  405
INTRODUCTION
In the past, revenue management (RM) was solely focused on room’s reve-
nue being the most important factor in maximizing proÿt. Most methods
that were used in order to optimize business mix looked only at room rev-
enue and occasionally food and beverage in the decision-making process.
Customers who were willing to pay a higher room rate were considered
the hotel’s “best” guests. ˜is meant that the optimization of other reve-
nue streams was overlooked or little focus was placed on sources such as
restaurants, spas, or golf courses in the optimization decision. Only in the
last couple of years has total revenue management come to the forefront
of incorporating all guest spend at non-room outlets into a comprehensive
strategy. Even though more hotels are adopting such a comprehensive RM
model the industry is slow to keep up with such changes due to the avail-
ability or cleanliness of data. ˜ere is also not a clear uniÿed measurement
to compare a hotel’s performance against its competitive set.
SO WHAT?
Due to the success of revenue management being applied to hotel
rooms, expanding the horizon into other revenue-generating areas
is the next opportunity. How do you think competitive analysis and
benchmarking tools need to evolve in order to keep up with such
trends?
WHAT IS TOTAL REVENUE MANAGEMENT?
TRM is the holy grail of RM. It shines a light on what is possible when a
hotel focuses on optimizing revenue on all levels instead of just the room’s
department. When implemented e˛ciently, TRM takes into account all
possible guest revenue-generating streams and enables revenue managers to
drive the highest overall hotel proÿt.
˜ere are ÿve basic characteristics that need to be demonstrated in order

for revenue management to be successfully implemented (Kimes, 1989).
1. Relatively ÿxed capacity

2. Time perishable inventory
3. Time-variable demand
4. Segmentable market
5. High ÿxed and low variable costs
If an outlet demonstrates the above-mentioned criteria then imple-

menting a revenue management strategy can be successful. Hotel rooms are
the traditional example where RM is most prevalent as it typically is the
most proÿtable. However, other revenue centers, such as spas, golf courses,
casinos, or even meeting space, are prime examples where revenue man-
agement strategies can be further applied. Applying RM tactics to improve
proÿts generated from these revenue streams is one part of TRM. TRM then
combines these decisions from all revenue streams on a customer level to
generate the optimal mix. It focuses on not just maximizing individual reve-
nues per customer at the outlet level but the combination of all transactions
within the hotel.
TRM strategy relies heavily on the mix of business that the hotel is
receiving and making sure that the correct segments are being attracted.
TRM decisions need to involve the sales and marketing teams so that they
are targeting the most proÿtable segments. A revenue management culture
needs to be instilled in all the outlets of the hotel so that every employee
is dedicated on the proÿtability of the entire operation. ˜is is critical for
implementing a successful TRM strategy. ˜is chapter will focus on how
RM tactics can be implemented at various non-room outlets. It will then
look at combining the outlets’ RM strategies into a holistic TRM framework
and what is required to be successful in the long run. Finally, it will look
at the future of TRM and where the boundaries can be pushed to generate
higher proÿts.
TOTAL REVENUE MANAGEMENT FRAMEWORK
In order to implement a total revenue approach, there needs to be a com-

prehensive framework that allows hotels to ÿnd untapped opportunities and
deploy strategies based on total guest spend. ˜ere has been research and
strategies developed for various aspects of auxiliary revenue management,
such as golf and spa. However, very few have combined these individual
outlets’ revenue strategies with a TRM framework. It is no longer enough
to simply approach local revenue optimization on an outlet level to make
granular decisions. On a customer level, a more holistic method is necessary
to better understand the impact of total guest spending on the hotel’s overall
proÿt.
˜ere are four key pieces for implementing a successful strategic TRM
framework.
1. Outlet Level Optimization
2. Guest level revenue management
3. Proÿt focus
4. Total revenue management ICEing
˜e ÿrst step is to make sure that optimizing has been implemented on

an outlet level. Optimization on the outlet level allows the hotel to generate
incremental revenue that was previously untapped. ˜e second step goes
hand-in-hand with the third step which is optimization on the customer
level whilst making sure proÿt is the focus. ˜ese two steps allow the hotel
to attract the right mix of business that is most proÿtable for the entire oper-
ation instead of just one outlet. ˜e ÿnal step, which is the “icing” on the
framework, is to make sure that TRM practices are incentivised, communi-
cated, and employees are educated (ICEing). Using the combination of these
four levels the hotel can deploy a successful TRM strategy. Below, each level
will be discussed in detail.
OUTLET LEVEL OPTIMIZATION
In general, hotels already have a robust room’s revenue management strat-

egy in place. However, most hotels are lagging or struggling in identifying
other potential incremental revenue-generating opportunities.
Here are the steps adapted from McGuire (2016) that can assist in imple-
menting revenue management strategy for any untapped outlet.
1. Know the existing theory and metrics
2. Roadmap for new outlets
3. Recognize “immediate wins”
4. Break down intraorganizational silos

5. RM celebrations
Each stage is very unique and has its own objective with a focus on an
outlet TRM revenue framework. Working through each of these steps will
help hotels implement a revenue management strategy and drive incremen-
tal revenue. Once implemented, it can then be integrated with a customer
level optimization for a holistic TRM strategy.
Know the Existing Theory and Metrics
˜e following will outline some of the key theories, best practices, and met-
rics for implementing a revenue management strategy for most common
hotel outlets. ˜ese are ready to go RM tactics that can immediately be
implemented on an outlet level.
Spas
Many hotels and resorts have spas that are considered a key auxiliary revenue
generator. However, it is very rare that spa revenue management techniques
are implemented. ˜is is mainly due to the fact of how spas currently mea-
sure their performance and view their sales. Reconÿguring some of these
metricize allows spas to implement a successful RM framework that can
then be incorporated into a TRM strategy. A TRM strategy not just enables
the spa to maximize its own outlet revenues but makes sure that customers
that are visiting the spa are the most proÿtable for the hotel.
Spa Characteristics
Spas are very similar to hotels and have all ÿve characteristics for a suc-
cessful revenue management strategy to be implemented (Kimes, 2009).
˜e number of spa treatment rooms and therapists are considered a ÿxed
capacity. ˜e building’s physical limitations cause a natural constrain and
all rooms might not be available due to a specialized therapist not being
on duty. Demand is highly variable by time, causing some periods to be
busier than others. Urban spas can be signiÿcantly busier over Saturdays
whilst midweek could be much quieter. Customers can also be segmented
easily. For example, a segment could be a leisure day user living nearby the
spa. Such a customer would be available to visit the spa any time of the day,
in contrast to a corporate guest who has limited time allocated during the
day for a spa visit. Most spas demonstrate high ÿxed costs and low variable
costs. Facilities and in some cases salaried therapists are also considered
ÿxed costs. In most cases spas usually would need to make enough revenue
to cover their variable costs and at least a portion of their ÿxed costs.
Spa operators, in general, look at cost and revenue for any given month
but ignore the time factor in the equation. Kimes suggests that a spa inven-
tory should be considered only the actual time the treatment rooms are
available for treatment (both room and therapist) instead of just the physical
rooms or therapists. If the capacity of the spa is not fully occupied at any
given moment it is lost forever. ˜e best way to measure spa e˝ectiveness
is to look at the revenue or contribution per available treatment hour
(RevPATH). ˜is measurement not just focuses on volume of sales (aver-
age customer expenditure) but also incorporates a time-related revenue fac-
tor (occupancy). RevPATH can be calculated by multiplying the treatment
room occupancy by the average treatment-related expenditure per person.
It can also be calculated by dividing revenue for a speciÿc time period by the
number of treatment hours available to the same time frame (Kimes, 2009).
A spa has ÿve treatment rooms that on Tuesday between the hours of
1:00 p.m. and 4:00 p.m. make $755 in revenue. Calculate their RevPATH
for the spa over the given time frame. What would you say to the own-
ers when asked how the spa is performing in the market if you know
that other spas have a RevPATH of $73?
Spa Optimization
By analyzing RevPATH and looking at low and peak demand periods a spa
revenue management strategy can be developed. ˜e two revenue manage-
ment levers that can be implemented are time management and price man-
agement (Kimes, 2009).
Time management is the ÿrst lever that has to do with controlling the
customers’ time at the spa. Spas sell a ÿxed time slot for each treatment with
a deÿned duration. ˜e easiest way for spas to manage time is to vary the
treatment lengths being o˝ered from the standard 1-h treatment to treat-
ments ranging from 30 to 90 min. However, guests are actually buying an
“experience” and not just a time slot. Hence there needs to be a ÿne-line
in managing the duration of the guests’ stay without inhibiting their expe-
rience. Even though this can be sometimes di˛cult, the primary driver to
controlling the time slot is making sure that the treatment can be completed
in the allocated time frame. By training therapists and setting up various
cues for the guests, such as chiming of a bell or o˝ering a beverage to indi-
cate that the service is over, helps in managing the allocated treatment time.
Also, looking at ways to reduce the changeover between treatments can
allow spas to schedule more appointments resulting in increased revenue.
Managing the uncertainty of arrivals is also vital in controlling time

and maximizing RevPATH. Making sure that reservations are being taken
over peak periods can signiÿcantly reduce uncertainty. Collecting advanced
deposits or credit card guarantee bookings helps spas forecast their arrivals
better and manage inventory. Yet, it still does not guarantee full capacity
over peak periods. ˜ere could still be a reliance on last-minute walk-in traf-
ÿc or guests not honoring their reservations. By collecting no show, cancel-
ations, and walk-in data, spas can look at setting up an overbooking policy
that should help minimize potential arrival risk.
During low demand periods, spas need to focus on attracting more cus-
tomers. ˜is can be done by o˝ering special priced treatments to attract
customers that are available to ÿll the gaps.
Price management is the second lever that has to do with o˝ering dif-
ferential pricing based on the level of demand at the spa. Typical hotels and
airlines o˝er di˝erential pricing to their guests based on the demand levels
and are o˙en fenced. Spas on the other hand, in general, tend to o˝er the
same price regardless of customer demand or segment without any real rate
fences. ˜ere might be a peak and o˝-peak pricing structure at some spas
but it is not fully integrated into a maximizing RevPATH strategy. Imple-
menting rate fences, such as room location, view, time of day/week, or length
of treatment, can help build a strong revenue management strategy to help
drive the highest margin business at peak times. At the same time, steps also
need to be taken to entice demand to be generated over slow periods. ˜is is
usually done with discounting such as a two for one o˝er, reduced premium
services, or added value items such as complimentary retail products. By

having these fences and pricing strategies spas are able to drive RevPATH.

Super Beauty Spa
˜e owner of Super Beauty Spa has appointed you the
new manager for their 20 room day spa. You are tasked to identify
peak periods to see if there is a way to drive additional revenues. At
the same time, you also want to note so˙ periods to see if there is a
way to attract more business to the spa. ˜e owner has never heard
of RevPATH before and has only been tracking number of treatment
rooms occupied and the total revenue per hour.
1. Calculate the spas occupancy per hour
2. Calculate what is the average spend per guest per hour (assume
that one treatment room is occupied by one guest)
3. Calculate RevPATH and graph the results in a line graph
4. Where are the hot periods and what would you implement to
help drive more revenue?
5. Where are the cold periods and how can you attract more busi-
ness to the spa?
Golf Courses
As revenue management becomes widespread outside of the hospitality and

airline industry, golf courses are an ideal candidate to follow suite. Apply-
ing some key revenue management levers to optimize utilization can play
an important component in improving golf course proÿtability. Combining
revenue generated from golf with room’s revenue can help to establish the
overall most proÿtable guest which is a key in TRM.
Golf Characteristics
Golf courses possess the key characteristics to implement a successful rev-

enue management strategy. ˜ey have perishable inventory, predictable
demand, limited capacity, varying customer price sensitivity, and high ÿxed
and low variable costs (Kimes & Schruben, 2002). Tee times are perishable
inventory and cannot be resold or kept for another day; if they are unsold
they disappear. ˜ere are only a limited number of tee times that a golf course
can accommodate on a given day. Due to the ôw of the game tee times need
to be spaced out so that players do not impede other players ahead or behind
them. Capacity restrictions are due to the size of the golf course, numbers of
holes, and the hours of operation. Golf courses vary highly in size and can
range anywhere from 9 to 36 holes. Most typical golf courses are around 18
holes. Customer price sensitivity can be based on various demand periods
due to seasonality, day of the week, and even time of the day. Less price-sen-
sitive players are willing to pay premium rates to play during high demand
periods (for example early in the morning on the weekends), whereas more
price-sensitive players might wait for later in the day and potentially mid-
week or leverage potential discounted o˝ered. Golf courses also have a high
ÿxed cost due to turf and clubhouse maintenance but a low variable cost as
the impact of selling one additional tee time is relatively minimal.
A performance baseline needs to be established in order to measure the

success of revenue management techniques implemented to golf courses. We
are all familiar with the standard RM indicator used for hotels and airlines.
For golf courses, this metric is revenue per available tee time (RevPATT)
(Pekgun et al., 2014). To make sure that RevPATT is being fully optimized
we need to take a look at demand forecasting and price optimization for tee
times and relate it back to the overall revenue management goal.
Demand Forecasting
One of the challenges golf courses face is to accurately forecast demand since
customers make tee time reservations through di˝erent channels, whether
online or in-person and for di˝erent size parties. ˜ere is a maximum of 4
players per tee time and golf courses need to ÿnd the best way to combine
2 and 2 players or 3 and 1 players to ÿll the entire spot. If players prefer to
claim the entire tee time over peak periods and are less than 4, then the golf
course should charge a higher price to account for the potential displace-
ment from that time slot. ˜e following is a list of items that need to be
considered when forecasting demand for a golf course:
• Day of the week, weekday/weekend
• Time of the day
• Weather
• Size of party (1–4)
• Booking lead time
• Season
• Player skill level
• Member versus visitor
A combination of these elements can assist in creating a comprehensive

microlevel forecast. Which then allows golf courses to identify patterns and
trends to determine when is it appropriate to apply revenue management
strategies to optimize revenues.
Price Optimization
As with all other revenue management areas the key is to determine what is
the best price to charge customers during peak and o˝-peak times to max-
imize revenue. Since we have determined when customers are booking and
their patterns, a systematic pricing structure needs to be implemented based
on the demand periods and the price elasticity of demand. One method that
is suggested which simpliÿes pricing structures is to o˝er a base rate and
adjust it with addition or multiplication o˝sets depending on the selected
variable options (Pekung et al, 2013). For example, multiply the base rate for
a single player by a demand period multiplier and by the number of players
within the party (base rate × 1.2 peak period multiplier × 2 players = 2 player
pricing over peak period). ˜is sort of pricing would mainly be used for vis-
itor pricing as member pricing is usually ÿxed. Member demand also needs
to be taken into consideration as it has an impact on capacity. Pricing also
needs to be in conjunction with continuous monitoring of competitor pric-
ing to remain market centric. As within the hospitality industry customers
are savvier and are easily able to benchmark your pricing vs the competition
using the Internet.
One pitfall that needs to be addressed is the fact that the duration of
a game of golf is highly unpredictable (Kimes, 2000). Within the hotel or
airline world guests clearly purchase a deÿned time frame of utilization.
Guests stay for a set number of nights or use the seat for a predeÿned time
until they arrive at their destination. Whereas, golfers book a round of golf
with no time restriction and can play as long as they wish until the round
is completed. ˜is puts some uncertainty into booking tee time frequency
and causes delays. ˜erefore, even though theoretically it might make sense
to schedule more tee times to generate more revenue due to slow play, all
scheduled players might not be accommodated (Kimes & Schruben, 2002).
Your golf course has a RevPATT of $89. The neighboring golf course
down the street has a RevPATT of $103. Calculate your RevPATT index.
What does it mean if you had a -4 percent index change year over year?
What if the change was 3 percent?
Casinos
Casinos are a perfect example of where TRM can be e˝ectively used. Large
casinos such as the ones in Las Vegas have a variety of revenue streams such
as restaurants, bars, and night clubs as well as the main source of income the
casino itself. Most guests that gamble are part of a casino loyalty program
that allows casinos to collect highly valuable customer data. Casinos need
to make sure that they use this data to establish three key pillars: customer
segmentation, demand forecasting, and strategic pricing. With these pillars
combined the value of a guest can be calculated and TRM can be imple-
mented.
Customer Segmentation
Customer segmentation can get a little more complicated in casinos than

in the traditional hotels. ˜is is mainly due to accurately assessing the con-
tribution of hotel guests from the casino ôor. One way to do so is to
use a tiered based system that analyzes guest valuation based on gambling
behavior (Kuyumcu, 2002). Data could be taken from the hotel’s loyalty
system that tracks basic information, such as demographics, betting fre-
quency, amount per hand, favorite games, and winnings. ˜is informa-
tion can then be used to create guest valuation segments. Below are some
examples that casinos use to establish di˝erent levels of customers based
on their value:
Level Customer Valuation Summary

1 • Customer value is based on the total amount of money wagered per
visit
• Customer value is not discounted by how much the customer wins
2 • Customer value is based on the total amount of money wagered per
visit
• Customer is tracked by type of game—machine or table game
• Customer value is not discounted by how much the customer wins
3 • Customer is tracked by the customer's betting frequency, dollar level
per bet, favorite slot machines, and gaming tables
• Customer's winning profles are monitored and customer value is
discounted by how much the customer wins
• The probability of winning at each gaming machine or table is taken
into account to compute the customer’s expected worth to the resort
Adapted from Kuyumcu (2002).
˜e above measurements create a net worth per customer based on their

level of spend. In the ÿrst level, only the basic information is collected and
the value of the customer is not reduced by their win. ˜is level is for recre-
ational gamblers that frequent casinos occasionally and bet small amounts.
˜e second level is for customers that are more frequent to casinos and
wager a fair amount of money per visit. ˜eir favorite machine/table game
is tracked but their value is not discounted by their winnings. ˜e ÿnal level
is for high rollers, o˙en referred to as “whales” in the casino industry. ˜ese
players spend a lot of money in and wager large hands. ˜ese customers are
one of the most proÿtable segments for casinos so more information is col-
lected. Furthermore, due to the amount of money that whales gamble, the
value of their winnings is discounted from their proÿle. Since the casino can
lose signiÿcant amount of money from these payouts, the probability of each
guest winning is also monitored.
All of these segments are linked by one metric which is the theoretical
win or “theo.” ˜e theo is calculated by multiplying the coin-in amount by
the hold percentage. ˜e coin-in amount is the total money spent by a cus-
tomer on a given occasion. ˜e hold percentage is the probability that the
casino will win a speciÿc play. For example, if the coin-in from a customer
is $10 and the slot machine is programed to return $7 to the customer on
average then the hold percentage is 30 percent. ˜e average theo of all games
played by the customer over a given period is called the average daily the-
oretical (ADT). ˜is value can also be supplemented with a more holistic
spend that incorporates all revenue streams of the casino and not just ôor
spend. Basically, the higher the ADT of a customer the more valuable they
are to the casino as they spend more.
˜ere are two potential pitfalls in trying to truly provide an accurate

total value of a customer. First, data can easily be collected from most elec-
tronic games, such as slot machines, but table games like blackjack pose a
higher challenge. Not all transactions are digitally monitored and amount
per hand or betting frequency becomes harder to attribute to an individual
guest. Second, there is a new trend evolving where guests visiting casino
resorts such as Las Vegas are not only going there for the gambling. ˜ey
are visiting to dine, drink, and have fun using various resort amenities. Yet,
casinos still tend to places a large amount of value on just casino spend-
ing and undermine other revenue streams. ˜is could be because customer
spending is much harder to monitor and attribute to an individual due to
the frequency of cash transactions. However, by understanding all revenues
associated with a customer a more comprehensive segmentation can be cre-
ated and better TRM decisions can be made.
THINK HISTORICALLY
Harrah’s Entertainment is currently one of the leaders in casino loy-
alty program or so-called “slot club.” Even though these loyalty pro-
grams have grown popular over the last 30 years they were met with
some resistance when casinos tried to pioneer such programs in the
80’s. Casino managers claimed that these programs were creating bar-
riers between casinos and their guest’s individual needs. Fred Kiser,
Vice President of Marketing for Becker Gaming’s Arizona Charlie’s
brand, at the time remarked, “They don’t keep coming back to us
for slot clubs, we don’t have one. They like the personal attention ...
We don’t have to put them in a computer and turn them down for a
complimentary show or restaurant because they missed the number
of points needed for that day. This happens in other places” (Pledger,
1994).
Why do you think not adopting a “slot club “would have been a critical
mistake as it relates to casino TRM?
Demand Forecasting
It is imperative to have a clear understanding of demand patterns in casinos

and to forecast accordingly. As with most forecasting methods, historical
data is the prime information used to understand unconstrained demand.
˜e forecast can then be used to make strategic revenue management deci-
sions on what RM levers need to be adjusted to maximize revenue.
˜is forecast should be done on a granular level where each customer
segment’s unconstrained demand is calculated. By understanding the behav-
ior of each segment casinos can better prepare their strategies accordingly.
For example, due to continued last-minute booking pattern of high valued
players, it might be necessary to hold back some rooms to accommodate such
guests. Also, understanding same day or walk-in reservations and no shows
will have an impact on your demand forecasting or overbooking levels.
Pricing
In the traditional hotel environment, the objective of revenue management

is to drive RevPAR ideally through rate as it has the greatest impact on bot-
tom-line proÿtability. ˜is might not always be the case for casinos. Studies
have shown that proÿtability is higher for casinos when they are able to run
at a higher occupancy and lower ADR (Norman and Mayer, 1997). ˜is is
due to the potential auxiliary-spend of guests through other revenue centers
once at the casino. ˜is forces revenue managers to apply a unique pricing
strategy to casinos and plays an important factor in TRM.
Opportunity costs should be taken into consideration as guests are fre-
quently given a complimentary room which could be counterintuitive if the
objective is to maximize room revenue and not total revenue. ˜ere is a
revenue optimization calculation o˙en used in the casino industry to deter-
mine when to provide a complimentary room (reinvestment amount) or a
guest-centric room o˝er. ˜e reinvestment amount basically is the mon-
etary value corresponding to the services and products given away to the
customer (Hendler & Hendler, 2004).
We can use ADT and the reinvestment amount to determine the optimal
room rate o˝er for a guest or if the guest should be o˝ered a complimentary
room night. ˜e casino must ÿrst determine what its optimal reinvestment
amount usually calculated as a percentage of ADT. ˜ere is no industry
standard for what the reinvestment amount should be but it ranges any-
where from 12 percent up to 30 percent depending on how much competi-
tion there is in the market. Once a reinvestment amount is established, we
can then subtract it from the best available rate for the desired stay period.
Whatever the remaining value is should be the optimal rate o˝ered to the
guest. If the reinvestment amount is equal to or greater than the daily room
rate the guest should be o˝ered a complimentary room as their theoretical
daily spend would o˝set the room revenue loss. Using the ADT and rein-
vestment amount, casinos can optimize total revenue based on individual
customer value (Hendler & Hendler, 2004).
Assume that a speciÿc customer has an ADT of $500. The casino has
determined that they have a 30 percent reinvestment policy based on
the ADT value of the guests. The hotel is currently selling at BAR rate
of $250. Based on this information what rate should the casino should
o°er to the customer?
Groups
Groups have always been looked at as a way to support hotel operations and
as a good base to ÿll the hotel with rooms that could not be sold to tran-
sient business (Cullen & Helsel, 2010). However, there is a huge potential
in breaking down groups into their own revenue-generating discipline and
incorporating it as a part of a TRM strategy. With a proper plan in place for
groups, hotels can make sure that all revenue potential can be maximized.
Pricing Strategy
It is important to establish a strong group pricing strategy that is in line

with the hotel’s transient pricing strategy. Establish what the need and peak
periods are and use that to create a pricing guideline. Equip the sales team
with this pricing guideline so they understand how the future outlooks are
able to sell the product e˝ectively. By providing a pricing tool to the sales
team, it empowers them to be involved in educated and immediate pricing
discussion with potential clients. Not having to continually check-in with
the revenue director for a rate whilst on the road.
However, it is imperative that it is understood that the rates provided

to the sales team should only serve as a guideline. Various other elements
can have an impact on the rate o˝ered to a group, which require the rate to
be ûid and dynamic. Arrival pattern, F&B revenue, other group prospects
or even a displacement analysis should be used once the sales manager is
able to get a better understanding of the group’s needs before a ÿnal rate is
o˝ered.
Based on Cullen and Helsel (2010), the following chart outlines some of
the elements to consider when creating a group pricing strategy:
Pricing element Purpose

SWOT Similar to the transient segment, the hotel must understand
its attributes, strengths, and weaknesses as it relates to
its competitive set. This must be conducted from a group
perspective and how the hotel attempts to satisfes the group’s
needs.
Market position An analysis must be conducted to see how the hotel should be
positioned in the market compared with its competitors. This
will play a key role in determining group pricing.
Seasonal demand Rates must be fexible and based on demand/season in the
marketplace.
Walk away rate Establish the lowest rate the hotel is willing to accept during
each season. This will serve as a guide to knowing when to
walk away from a piece of business.
Group segmentation Identify specifc group segments that the hotel is targeting and
create specifc price points.
Special need periods Pinpoint any high need periods such as holiday, special
events or low demand periods in the market. Create a
forward-looking action plan to target these periods and
deploy a group strategy in advance.
Rooms types Understand the various group types that are being contracted
to groups and their associated price points.
Room costs Knowing the direct and indirect cost associated with rooms
helps focus the pricing strategy on driving proft.
Displacement Analysis
It is very important to make sure that the full impact of taking a certain
piece of group business is understood. Due to the constraints imposed by
the hotels, physical capacity not all sources of business can be taken over
a given day. ˜is means that the hotel will potentially have to turn away
some business if demand exceeds capacity. In most cases, such a displace-
ment, it relates to group as it usually takes up a large percentage of rooms

in the hotel. A group displacement analysis should be conducted in order
to understand what brings the most value to the hotel. ˜is type of analysis
allows the hotel to compare the total value of group business against the
total value of transient business. Based on the loss or gain in revenue or
proÿtability the business is accepted or rejected. ˜e total value of group
business should include F&B spending, meeting room rental, and any other
outlet revenue stream minus the appropriate costs. ˜e following is a basic
example of a displacement analysis:
Transient Group
Number of rooms 20 20
ADR $200 $150
Room’s revenue total $4,000 $3,000
Ancillary revenues $1,500 $5,000
Rooms costs −$900 −$900
Catering costs −$0 −$1,500
Total $4,600 $5,600
In this displacement analysis, we are comparing 20 group rooms to 20

transient rooms on a certain day. Just by looking purely at room’s revenue it
would make more sense to take the transient piece of business as it produces
$1,000 more in revenue. However, when we look at it from a TRM perspec-
tive we need to look at all sources of revenue and cost to establish the most
proÿtable piece of business.
˜e group brings in an additional $3,000 in F&B revenue, $1,000 in AV
rental and $1,000 meeting room rental. ˜is is a total of $5,000 in auxil-
iary revenues. ˜e costs should then be factored out from each segment.
Cleaning of $900 is the same for both transient and group as it is based on
the number of rooms. Group has a catering cost of $1,500 due to additional
labor and meeting room setup. ˜is displacement analysis shows that when
all revenues and costs are factored in the group is actually a better piece if
business as it generates $1,000 more in total revenue for the hotel.
˜is sort of analysis can be done with a lot more detail to even provide a
greater in-depth understanding of any potential displacement. Other factors
such as cost of walk, cost of acquisition, or even length of stay can be used
to create a comprehensive analysis. It can also be used to see what rates are
needed to break even between two segments or should there be a need to
increase rates.

Holloway Suites
You are the brand new revenue manager for the Holloway
Suites and have been approached by your sales team on a potential
group business for this year in May. ˜e new group is looking for 75
rooms per night at a rate of $160. ˜e arrival pattern would be Monday
to ˜ursday and they would have breakfast and lunch every day with
two co˝ee breaks for a total catering contribution of $85 per room per
night. ˜e exact arrival dates for the group are currently not ÿxed but
the sales team is eager to sign the deal and are dra˙ing up the contract.
Knowing that your peak occupancy nights are Tuesday and Wednesday
you suggest to the sales team that you will do a quick displacement
analysis to see if this is the right piece of business for the hotel.
You pull the historical day by day revenue and occupied rooms for
last years from your property PMS. Historically in the month of May, the
hotel had 40 percent of the rooms occupied Monday through Wednes-
day by group which made up 35 percent of the revenue for those days.
˜e hotel’s catering cost is $30 per room per night. Transient guests
have an average auxiliary spend of $35 per room per night. Assume that
any sort of displacement the hotel is going to have is from the transient
segment and that forecasted occupancies and business mix are going to
be exactly the same this year as they were last year.
1. Using the data provided, ÿll in the segmentation mix day by
day for group and transient.
2. Fill in the average historical occupancies based on the day of
the week.
3. Based on the arrival pattern for the group, calculate the dis-
placement value for the new group for each day.
4. Should this group business be accepted based on historical
averages for the month of May? If so, why?
5. Would your recommendation change if the group were to spe-
ciÿcally ask for arrival the 3rd Monday of the month?
Catering
˜ere are typically two types of catering events, one that involves hotel room
nights and one that is catering only. ˜ey both have an impact on TRM and
can help drive revenue contribution. Catering contribution per group room
is one measurement that can be used to assess the value of a piece of catering
business. However, this metric is only useful if the catering business has group
rooms attached to it. An overarching measurement that includes both types of
catering source is revenue per available square foot (RevPAS). ˜e following
items are examples that can contribute to RevPAS (Cullen & Helsel, 2010).
• Catering menu
• Audiovisual/Internet
• Parking
• Valet
• Meeting and function space rental
Looking at the contribution margin of each item based on proÿtability

helps revenue managers make sound decisions to assist the TRM strategy.
˜e price of items should be adjusted based on-peak and o˝-peak periods.
˜is will overall assist in driving total contribution.
PROS & CONS

Group contribution is mostly evaluated based on
a one time piece of business. List the pros and cons of
such a decision.
Creative RM Strategy
Implementing a creative revenue management strategy means your need to

think beyond the rooms’ only revenue source. Many hotels have some sort of
retail area, sell various forms of packages, or o˝er resort credits to drive addi-
tional revenue from guests. ˜ese are all considered to be a part of a creative
revenue management strategy and should be included in the TRM goal.
Hotel packages, such as ones that include massages can be used in order
to drive incremental business into the spa. Spas can then place their high
sale volume items strategically on shelves in order to capitalize on impulse
purchases. Resort credit can also be used to help entice guests to increase
their spend at various outlets. O˝ering a $25 dinner credit to a couple, when
the hotels know its average check is $45 per person, can help drive that addi-
tional spending that would not have naturally occurred. Hotels should think
even further outside the box and look at unconventional revenue streams
such as ATMs. Most hotels have an ATM in their lobby so that customers
have access to quick cash. Hotels make money on the transaction fee that is
being charged to the guest once they take out money. Looking at ûctuating
transaction fees based on time of day and demand can be a very avant-garde
way to drive additional revenue and be part of a TRM strategy. Another
strategy that is becoming more common is the implementation of a resort or
city-center fee for various services or amenities. ˜is additional fee is added
on top of the room rate and ideally incurs no cost for the hotel. ˜is allows
the incremental proÿts gained to ôw directly to the bottom line. Las Vegas
resorts have been using resort fees for years but recently it has started to
pop-up in city centers such as New York hotels.
˜ere is not one guideline as to where revenue management can be imple-

mented. Each hotel must evaluate its own unique opportunities to identify
what can be done to drive additional guest spend. It does not matter how small
the revenue sources are it must be tracked on a customer level and incorpo-
rated into a TRM decision. By using all the data from the customer spend rev-
enue managers can make the best decisions about most proÿtable guest mix.
REAL PEOPLE
Lisa Mathews* is the Director of Revenue Man-

agement at a luxury hotel in downtown Toronto.
She has been trying to implement a TRM culture
one step at a time by focusing on two areas, the
restaurant, and spa. However, instilling a revenue management mind-
set with the sta˝ continues to be a challenge. She is faced with push-
back due to frontline sta˝ being scared of guest’s reaction to some of
her new TRM initiatives. Restaurant servers and massage therapists are
concerned that they will lose customers and their tips along the way.
How would you educate and convince employees in these outlets that
a comprehensive TRM strategy can help drive proÿts into their respec-
tive departments?
*name changed
Roadmap for a New Outlet
˜is road-map shows hotels how to implement a RM strategy to a new outlet

and adjust the existing theory in the previous section to ÿt the optimization
problem at hand. In order to develop a revenue management process in a
new outlet, there needs to be a very comprehensive understanding of the
operations. Adapted from Kimes (1998) and McGuire (2016) there is a ÿve-
step process for implementing revenue management in a new outlet.
Establish a Baseline
Detailed information must be collected from the outlet and then analyzed
thoroughly to understand the current state of the outlet. ˜e informa-
tion collected should focus on the key revenue management levers: price,
duration, and space and how they relate to the current performance. Some
examples of data collected should be pricing strategies, demand patterns,
and inventory utilization. A revenue per available time-based inventory unit
(RevPATI) to measure performance needs to be clearly established. Data
can be collected from various sources including but not limited to the PMS,
POS, reservations systems, and methodical observation.
Understand performance drivers:
Analyze the baseline performance and see if customers can be segmented

based on their needs, demand patterns, price sensitivity. Try to pinpoint
what is causing low and high demand periods and utilization patterns or
anything that is impacting the outlets’ RevPATI. Using tools, such as ÿsh-
bone diagram and service blueprints, to identify if sta˛ng levels, technol-
ogy, or job function is causing underperformance.
Develop an RM strategy
Once the performance drivers are understood, areas, where the revenue
management levers can be applied, needs to be identiÿed. Example of some
questions that should be answered are:
• How can the outlets be optimized?
• Can demand be stimulated or restricted by altering prices?
• Will technology or sta˛ng levels improve utilization?
• Are there ways to implement duration management?

• Are overbooking procedures e˝ective or in place?
• Is there policies that are impeding revenue generation?
Implement the strategy
In order for the implementation of the strategy to be successful, it is essen-

tial that everyone within the outlet is engaged and understands the revenue
management objective. Every employee needs to be trained on how the RM
strategy beneÿts the outlet and themselves and there is a unanimous buy-in.
˜e incentive plans also need to be realigned to reward for the desired out-
come.
Monitor the outcome
It is not purely enough to identify, develop, and implement a RM strategy

in a new outlet. Monitoring the outcome is as important not only to cele-
brate success but to further identify opportunities. ˜e new results should
be compared with the baseline performance and the outlet manager should
be involved in further enhancing the strategy. A system also needs to be
developed so that the RM practices implemented are continued even with
sta˝ turnover.
Recognize “Immediate Wins”
Once you have understood the theory and are working to implement the
revenue management roadmap as outlined above, do not forget that small
changes can have “immediate wins.” Do not try to recreate the wheel by rede-
veloping processes and procedures but look for the small changes that can
have a big impact on revenue. Try to answer the question “What can we do
immediately that will generate more revenue for us?” Even though there are
multiple new so˙ware solutions out on the market that can help almost opti-
mize anything, small operation changes should not be overlooked. ˜ere are
multiple examples identiÿed in the theory above, such as credit card guar-
antees to decrease now shows (Kimes, 2009), golf marshals to speed up the
game (Kimes and Schruben, 2002) or cross-training spa therapists (Kimes,
2009) that can be used as the groundwork for these changes.
Break Down Intraorganizational Silos
Once there is a revenue management program in place make sure that

everyone is involved in its success. ˜is means that all levels of the outlet,
from front line sta˝ to management are on board and understand their role
and how it relates to the revenue management targets. However, that is not
always enough and as many times the success of one department is linked
to the performance of another. How successful would a front o˛ce initiative
be without understanding how housekeeping impacts the outcome? ˜is
goes the same for many departments. ˜erefore, silos within the organiza-
tion need to be broken down and links understood. All departments need to
understand the others’ revenue management objectives and can align their
performance accordingly. ˜is is one of the most important steps that is
o˙en overlooked in developing a TRM strategy.
RM Celebration
Make sure that the success of the program is publicized whenever possible.
Using success stories and sharing them with all sta˝ can be very helpful in
instilling a RM mindset. ˜e wins can also generate a hype about the initia-
tives and inspire the team on all levels to perform even better. ˜ese celebra-
tions also help break down the silos between departments as mentioned in
the previous step and create unity with a TRM focus.
˜e above framework should provide a solid foundation for imple-

menting a related revenue management strategy. Once such a plan is imple-
mented, it should then be incorporated into the overall TRM strategy where
a more holistic approach is taken and revenue is optimized not just at the
outlet level but the hotel level.
GUEST LEVEL REVENUE MANAGEMENT
We have until now looked at how to optimize on an outlet level. ˜e second

step of the TRM framework is to optimize on the guest level. Traditional
segments are no longer enough to clearly identify the behavior of a guest.
Business travelers are no longer just booking through the GDS and stay-
ing midweek. Business trips are merging with personal travel and corpo-
rate clients are booking directly on the hotel websites or using OTAs. As
these market segments change, hotels need to start applying a more granular
level segmentation where guests are grouped based on their spending power
instead of traditional segmentation. A guest value revenue strategy needs to
be implemented as a fundamental element of TRM. ˜ere are two potential
ways to look at assigning a monetary value to a guest.
Value Per Stay
A value per stay method looks at the guest’s total spend during their last stay
and assigns a total spend value based on the past. ˜is method is best imple-
mented in the casino industry. As mentioned earlier in the chapter, a casino cre-
ates an ADT for each guest. By encouraging players to join their robust player
loyalty program, guest’s bets, and purchases can easily be tracked. A few resorts
have started to use this approach in order to better track guest spending. Hyatt
and Fairmont are looking in the near future to incorporate a proprietary in
their RM practices a loyalty program scoring system based on historical spend.
When total spend on a guest level is incorporated into the revenue manage-
ment decision it tends to favor guests that have a higher value per stay.
Customer Lifetime Value
Customer lifetime value (CLV) is the second method that sums all proÿts
from a given customer over their lifetime relationship with the hotel. ˜e
simplest way to calculate CLV is to assess guest proÿtability, forecast future
spending, adjusting for probability of guest retention, discount this back to
present value, and then sum up all transactions (McGuire, 2016). In this
method, the revenue is accounted for the entire life horizon of the guest
instead of just focusing on the short term potential.
In either method, the integration of marketing plays a vital role. Revenue

managers are responsible for determining which customers are most prof-
itable and group them based on value. Marketers are then responsible for
attracting these high-value guests to the hotel. By having this close relation-
ship with marketing and the data to support tactical decisions, a customized
marketing campaign can be created to attract high-value segments. As this
type of mindset progresses in the future the two disciplines, revenue man-
agement and marketing will start to blur.
An important piece that hinders the development of guest level TRM is

the collection of clean data on a customer level. Most hotels currently do not
have the capabilities to integrate all transactions from various points of sale
unless guest’s charge items to their room. Until this becomes feasible, there
is no method that can give a 100 percent accurate value on an individual
guest level. Furthermore, guest values change over time due to the ûctu-
ation in the willingness to pay. ˜erefore, the TRM goal should always be
to look at ways to grow the guest value over time. It is not enough to just
simply establish what the anticipated guest value is and project it into the
future. Long term growth opportunities need to be also incorporated into
such calculation and impact TRM decisions.
PROFIT FOCUS
˜e third part of the TRM framework is directing the focus from revenues to
proÿts. Once more revenue streams are integrated into the overall guest con-
tribution proÿle the better hotels can identify their most valuable customers.
For a TRM strategy to be successful in the long run a proÿt-focused revenue
management philosophy needs to be shared equally by all departments. ˜is is
important as there will be occasions where one revenue stream might be sacri-
ÿced for the overall beneÿt of driving another more proÿtable revenue source.
With the rising cost of distribution impact all channels it will not be enough to
just optimize based on revenues without taking costs into the decision.
Measurements, such as total revenue per available room (TrevPAR) and

gross operating proÿt per available room (GOPPAR) have made a step in
the right direction to allow revenue managers not to just look at top line but
include other revenues sources and costs. However, very few hotels are actu-
ally optimizing their mix based on these measurements. Furthermore, these
metrics also have shortfalls. TrevPAR does not take into consideration the
cost factor and GOPPAR does not accurately reêct topline room’s revenue
performance. ˜ese two measurements also look at the hotel’s performance
on a per room level versus on a per guest level.
A new metrics need to be developed that incorporates costs and per

guest level measurement. Such a metric then needs to be unanimously
adopted in order for TRM to be successful industry-wide. Similarly, to what
casinos have done, hotels should also embark on establishing a theoretical
contribution value per guest. Lifetime value per available customer or newly
created total contribution per available customer (TocPAC) are metrics
that try to put a value on customer contribution. TocPAC does not just take
into consideration the associated costs with the room but also looks at the
total value of the guest spend within the hotel. Below is the calculation for
total guest contribution:
TocPAC = (Room’s revenue + auxiliary revenue – variable cost)/number

of guests
Revenue managers can look at TocPAC on a hotel, segment, or even indi-

vidual guest level and ÿnd highest value guest. It can also be used to see the
TRM strategy implemented is e˝ective. Optimizing revenues to maximize
TocPAC is not yet a common practice. However, in the future, this would
allow hotels to take the right mix of business and make sure that rooms
are always available to their most proÿtable customers. Forecasting, for each
outlet, will also need to evolve encompassing a total contribution mindset. It
will no longer be enough to just do a traditional operational forecast to help
with better management of labor. A more granular approach will need to be
taken where the focus will be on the proÿt by customer segment.
TOTAL REVENUE MANAGEMENT ICEING
˜e ÿnal part of implementing a successful TRM framework is the ICEing. It

is like baking a cake. Once the cake is complete, the baker wants to make sure
that there is something that holds the foundation together. ˜e icing provides
to extra âvor and decoration ensuring the cake is appealing and going to be
eaten. ˜is is very similar to what the objective of TRM ICEing is.
Incentives cannot solely be rewarded on department level achieve-

ments and must incorporate the proÿt goals for the entire organization.
˜ese goals need to be clearly communicated. Everyone must know who
the organizations most valuable customers are and how each department
and employee impacts the TRM strategy. Success needs to be communi-
cated and celebrated so employees feel engaged and connected with TRM
objectives. ˜is also needs to be backed up by a solid education program.
Employees need to know the basic TRM concepts and understand how
small changes can have big impact on their own and the hotel’s proÿts.
Education will help break down silos between departments and provide
an understanding of how to attract, nurture, and maintain the hotels’ most
proÿtable guests.
SEEING FURTHER
Technology has changed signiÿcantly over the
past decade. More and more systems are now
integrated making the abundance of guest
data a reality. This trend will continue into the foreseeable future allow-
ing for transactional data to be collected on an individual level no mat-
ter where at the hotel the purchase takes place. To have a successful
TRM culture silos between departments need to be broken down and
all outlets need to function as one unit.
Which department(s) other than revenue management do you think
holds the key to success and why?
What sort of information do you think would help the hotels’ goal of
TRM?
FUTURE OPPORTUNITIES FOR TRM
TRM is still a new topic and there continue to be many developments. As

technology and big data trends evolve, the application of TRM will be made
much easier. Nonetheless, research by Noone et al. (2017) have identiÿed
some key areas that need to be further developed for TRM to be easily
adopted by the hospitality industry.
A distribution strategy for s inventory needs to be created. Guest

room distribution is still the main focus for hotels but a more holistic
approach should be to be considered. Hotels need to identify ways to
capture additional s revenue in advance. Whether, that is done through
the booking engine, a mobile app, or via a third-party reseller. Further-
more, distribution costs should also be considered when developing
such a strategy.
˜ere needs to be an easy and accessible way of capturing more custom-

er-level data. Proÿt contribution needs to reorganized in order to account
for all costs on a guest level when making pricing decisions. It is not enough
to just look at the traditional cost hitting the P&L statement but other indi-
rect acquisition costs also need to be accounted for (e.g. merchant-model

pricing). Furthermore, a more comprehensive process needs to be devel-
oped to account for the total spend of a guest. Enticing guests to join loy-
alty programs is scratching the surface but is nowhere near able to o˝er an
all-encompassing picture of the true guests spend.
As the hotels move into the direction of looking at contribution per

customer there needs to be a unifying element of total hotel proÿt. Reve-
nue managers should no longer just be looking at driving top-line revenue
but looking at ways to maximize total hotel proÿtability through all revenue
streams. Once guests are on the property then revenue management strate-
gies deployed in various outlets of the hotel should take over in assisting with
TRM optimization. Each revenue-generating outlet of the hotel needs to be
analyzed to see if there is an opportunity that creates incremental revenue.
Total hotel revenue management at its core is applying a revenue man-

agement mindset to all departments and attracting the optimal mix of busi-
ness that delivers the highest levels of total hotel proÿt.
Question 1: What are the necessary characteristics that need to
be present in order for revenue management to be successfully
implemented? Give an example of why each characteristic is
important?
Question 2: Why is it best to use a RevPATI metric to establish a baseline and track
performance?
Question 3: If you were to implement a RM strategy to a nonroom revenue-generating

outlet, what sort of data would you ask the team to collect to establish a baseline?
Question 4: Why do you think it is taking so long for total revenue management to
be implemented?
Question 5: Do you think there is an industry-wide deÿnition of TRM? What are some
areas that the deÿnitions could vary?
Question 6: What do you think the future of TRM is? Where do hotels need to focus
and what challenges do you expect they will encounter?
APPLICATIONS
1. Which of the two customer segments below would
you accept to stay at your hotel purely based on TRM?
• An individual corporate client arriving on Mon-
day night for three nights with and ADR of $559.
˜e guest has three breakfast at the hotel that costs
$25 per breakfast. Hosts a client dinner one eve-
ning for a total of $275. Uses the limo service for
$150 per trip to and from the airport and prints/
faxes items at the business center for $40.
• A leisure couple arriving ˜ursday for four nights with and ADR
of $259. ˜e guests have breakfast each morning for a total of $20
per person. ˜ey eat dinner twice in the restaurant for a total of
$150 per dinner. ˜e wife gets a spa treatment on Saturday for a
total of $400 whilst the husband plays a round of golf for $300.
˜ey valet parked their vehicle for the duration of their stay for
$55 a night.
Cost per occupied room is $60 per night. F&B cost margin is 30 percent.
All other outlets have a cost margin of 10 percent.
2. You are the Revenue Manager of Historical Hamilton Hotel which
has 150 rooms. ˜e sales team has approached you with a new piece
of business that they are looking at taking. It is over a highly com-
pressed period so you suggest that a displacement analysis be done
in order to make sure that taking the business makes the most total
revenue sense. ˜e group pattern is for arrival Monday and depar-
ture on ˜ursday for 80 rooms a night. ˜e sales manager has indi-
cated that the group has an ADR budget of $190 per room per night.
˜e 150 attendees will have breakfast daily and one dinner at the
property. ˜ey will also have a meeting room rental fee of $1,500 and
AV for $900 per day.
You know that typically you are busy over the speciÿc stay pattern with
transient guests with an ADR of $299. ˜erefore, by taking this group the
hotel going to walk 10 guests to another hotel for at an ADR of $280 per
night. On average, transient guests have breakfast every day of their stay
and one dinner at the property. You also know that 50 percent of guest use
overnight parking which cost $25 per night and 70 percent pay to use the
Internet at a daily rate of $9. Transient reservations have the following dis-
tribution source, 40 percent direct at property, 20percent GDS, 10 percent
chain website and 30 percent OTA. Group reservations are 40 percent call in
and 60 percent on the website.
˜e breakfast is $21 and a three-course dinner is $54 per person. Cost

per occupied room is $50 per night. F&B and catering cost margin is 30 per-
cent. All other outlets have a cost margin of 10 percent. Channel costs are $2
for direct, $7 for GDS, $5 for chain website, and $28 for OTAs. ˜ere is also
a $2, 100 additional labor cost associated with the group. Assume that there
is one guest per occupied transient room and all rooms have a three-night
length of stay.
Calculate the displacement for the above scenario and decide on which
piece of business is best suited for the hotel based on TRM principles?
What is the lowest ADR rounded to the nearest dollar that would you
change your decision and the switch proÿtability from one segment to the
other?
TEAM ACTIVITY
Hotels have a wide range of guests and it is sometimes di˛cult to

narrow down the correct target segment that the hotel should focus
on in order to have the highest total revenue. Luxury hotels, as well
as resorts, have many di˝erent nonroom outlets including food and bever-
age, spa, and golf courses. Below you will ÿnd ÿve typical guests with their
spending habits who are most likely to stay at your property.
Guest 1: Basic massage, tee time on ˜ursday at 3:00 p.m., F&B $75, stan-
dard king room (three nights, Tuesday–Friday). Corporate traveler for a
conference and leisure, before ˆying home.
Guest 2: Basic massage, basic manicure, and pedicure, deluxe suite (three
nights, ˜ursday–Sunday), F&B $230. Leisure couple ˆying in from a major
city for a romantic weekend.
Guest 3: Tee time on Saturday at 8:00 a.m., one-bedroom suite (one night,
Saturday). Leisure couple driving in for a weekend getaway
Guest 4: Presidential Suite (one night, Tuesday), F&B $375. Corporate CEO
for overnight business meeting
Guest 5: Tee time on Friday at 5:00 p.m., tee time on Sunday 2:00 p.m.,
standard double room (three nights, Friday–Monday), F&B $125. Leisure
couple coming for a golf weekend
Assignment:
• Pick a resort in the US that has a golf course, spa, and restaurant.
• Choose a speciÿc week and use real-time pricing information by
browsing their website site (calling the hotel if you need more infor-
mation) to determine how much revenue each of the ÿve guests’
stays generate at the resort (if couple, assume that both guests will
play golf and/or have the same spa treatments).
• Identifying which guest proÿle generates the most revenue, then as
a team, create ÿve di˝erent marketing techniques you could use to
attract a similar target guest.
INTERNET ACTIVITY
Casinos are very popular across America and not just for gam-
bling. Many have multiple nonroom revenue outlets and operate
as fully as a resort.
Choose a casino in Las Vegas, Nevada and explore their website. Iden-
tify a nonroom revenue-generating outlet (besides, golf, spa, or restaurant)
Go through each of the ÿve steps (establish a baseline, understand per-

formance drivers, develop an RM strategy, implement the strategy, monitor
the outcome) of the roadmap to a new outlet.
For your chosen new outlet, write down what data you would need?
What could be impacting the performance? What strategies you would
implement? How would you go about implementing the strategy? How you
would monitor the success?
GLOSSARY
(ADT) Average daily theoretical – ˜e daily average “theo” of all
games played by the customer over a given period.
(CLV) Customer lifetime value – ˜e sum of all proÿts from a
given customer over their lifetime relationship with the
company.
Reinvestment amount – ˜e monetary value corresponding to the services
and products given away to a customer o˙en expressed in terms of
a percentage.
RevPAS – Revenue per available space, or revenue per square foot the rev-
enue generated on a square foot basis for a speciÿc period of time.
RevPATH – Revenue per available treatment hours.
RevPATI – Revenue per available time-based inventory unit.
RevPATT – Revenue per available tee time.
(˜eo) ˜eoretical win – ˜e “theo” is calculated by multiplying the coin-in
amount by the hold percentage. ˜e coin-in amount is the total
money spent by a customer on a given occasion. ˜e hold percent-
age is the probability that the casino will win a speciÿc play.
(TocPAC) Total contribution per available customer – (Room’s revenue +
auxiliary revenue – variable cost) / number of guests
(TRM) Total revenue management – Decision process based on the sum of
all revenue streams from both room and outlets on a customer level.
REFERENCES
Cullen, K., & Helsel, C. (2010).ˇˇ˜e Evolving Dynamics of Revenue Management: A
Comprehensive Revenue Optimization Road Map for Hotel Owners, Operators,
and Practitioners. HSMAI 109-120
Hendler, R., & Hendler, F. (2004). Revenue Management in Fabulous Las Vegas:
Combining Customer Relationship Management and Revenue Management
to Maximize Proÿtability. Journal of Revenue and Pricing Management, 3 (1),
73-79.
Kimes, S. E. (1989). ˜e Basics of Yield Management.ˇCornell Hotel and Restaurant
Administration Quarterly, 30 (3), 1419.
Kimes, S. E., & Schruben, L.W. (2002) Golf Course Revenue Management: A Study
of Tee Time Intervals. Journal of Revenue and Pricing Management, 1 (2), 111-
120.
Kuyumcu, A. (2002). Gaming Twist in Hotel Revenue Management. Journal of.

Revenue and Pricing Management, 1 (2), 161-167.
McGuire, K. A. (2016).ˇHotel Pricing in a Social World Driving Value in the Digital
Economy; Hoboken, NJ: Wiley.
Nair, H. S. (2013).ˇBig Data and Marketing Analytics in Gaming: Combining Empir-
ical Models and Field. Rochester, NY: Simon Graduate School of Business,
Univ of Rochester: Rochester, NY, 2013.
Noone, B. M., Enz C. A., & Glassmire, J. (2017). Total Hotel Revenue Management:
A Strategic Proÿt Perspective. Cornell Hospitality Report, 17 (8).
Noone, B. M., Enz, C. A., & Glassmire, J. (2017). Total Hotel Revenue Management:
A Strategic Proÿt Perspective. Cornell Hospitality Report, 17 (8), 3-15.
Norman, E. D., & Mayer, K. J. (1997). Yield Management in Las Vegas Casino
Hotels. Cornell Hospitality Quarterly, 38 (5), 28-38.
Pekgün, P., Menich, R. P., Acharya, S., Finch, F. G., Deschamps, F., Mallery, K., van
Sistine J., Christianson, K., & Fuller, J. (2013). Carlson Rezidor Hotel Group
Maximizes Revenue ˜rough Improved Demand Management and Price
Optimization. INFORMS Journal on Applied Analytics, 43 (1), 21-36.
Pekgün, P., & Garner B., & Uyar, E., (2014). Applying Pricing and Revenue Man-
agement in the Golf Industry: Key Challenges. Journal of Revenue & Pricing
Management, 13, 470-482.
Pledger, M. (1994). Slot Clubs Making a Splash ˜roughout Vegas Casinos. Las
Vegas Review Journal, p. E17.
CHAPTER 15
Revenue Management:
A Hotel Owner’s Perspective
Jonathan Jaeger and Lambis Pahiyiannakis
OVERVIEW
Hotel Revenue Management has become increasing vital to the success
of a hotel; owners and asset managers must understand the underlying
concepts in order to analyze and improve the performance of a hotel. A hotel
owner’s involvement in revenue management can vary dramatically based
on ownership type and objectives. Important decisions regarding the pricing
of hotel units are typically made by the revenue manager alongside other
members of the executive committee and operations team. The owner and/
or asset manager of a hotel may not be involved in everyday pricing decisions,
but will typically maintain a level of oversight.
LEARNING OBJECTIVES
Explain the unique perspective hotel owners have towards revenue
management and how it di˜ers for institutional versus individual owners
Analyze long-term revenue management goals as a hotel owner and
demonstrate how to measure success
Demonstrate why consistent revenue management is critical for owners
with regard to both proÿtability and responsibilities to a hotel’s lender
Discuss the relationship between hotel owner and hotel operator and
how it relates to revenue management
Apply operational revenue management skills in order to identify the
future potential of a hotel
Describe ways for hotel management to maximize the value of a
property through revenue management strategy improvement
437
OUTLINE
Introduction
• ˜e Evolution of Revenue Management

• Hotel Ownership Types
• ˜e Relationship Between Owner and Revenue Manager
• Ownership versus Revenue Management Objectives
• Macroeconomic Trends in Revenue Management
• Metrics to Measure Revenue Management Success
• Participating on Revenue Management Ownership Calls
• Cost per Guest Acquisition and its Importance to Proÿtability
• Price Elasticity of Demand
• ˜e Focus on Proÿtability
SO WHAT?
Typical hotel ownership groups are return on investment (ROI)

focused. While some hotel properties can appreciate as a result of
external economic forces, the true value enhancement opportunity of
a hotel investment can be expanded by sophisticated revenue man-
agement strategies. What factors within revenue management lead to
either increasing or decreasing the value of a hotel?
INTRODUCTION
˜e concept of revenue management in hotels has evolved over the past

decade. First utilized by the airline industry, revenue management has
become one of the most important and complex facets of hotel management.
Similar to airline or restaurant seats, hotel rooms are perishable, meaning
rooms le˛ vacant cannot be resold for that particular day. With the advent of
Revenue Management: A Hotel Owner’s Perspective  439
new online booking companies and third-party travel agencies, the revenue
manager is now responsible for repricing rooms on a minute-by-minute and
on a channel-by-channel basis. Revenue Management initiatives can and do
have an enormous impact on the value of a hotel.
Hotel owners must acknowledge that principles previously derived from

yield management remain fundamental components of revenue manage-
ment today. ˜e following four conditions apply to Hotel Revenue Manage-
ment:
• A ÿxed amount of resources is available for sale at any given time.˝
• Resources are perishable (a˛er a given point in time, resources are
not sellable).
• Di˙erent customers are willing to pay a di˙erent price for the same
resources.
• ˜ere is some ability to predict future demand for resources.
Source: Stuart-Hill, 2016, pp. 1–5.
While all hotel owners have di˙erent agendas and programs for manag-
ing or asset managing a hotel, revenue management is now at the forefront
of every decision being made regarding the revenue producing aspect of
hotel management. ˜e four factors listed above are true for all hotel assets.
˜e last factor, regarding ability to predict future demand, has expanded
in recent years given the creation of sophisticated forecasting tools such as
Hotelligence, TAP Reports, and the products o˙ered by Kalibri Labs.
Prior to the late 1990’s and early 2000’s, most hotels did not have a reve-
nue manager; today the revenue manager is o˛en one of the highest ranking
members of the hotel executive team. While general managers were previ-
ously recruited, and hired primarily based on experience in the rooms, sales,
and food and beverage departments, savvy hotel owners are now looking for
operations executives who truly understand and have experience in revenue
management.
Institutional hotel owners typically hire a third-party management com-

pany to manage the day-to-day operation of a hotel and do not typically
focus on the minutia of a Hotel’s Revenue Management strategies. ˜is chap-
ter will not focus on the di˙erent strategies and tools available for revenue
managers, but will concentrate on how owners interface with the revenue
management function of a hotel. Hotel owners with a propensity to under-
stand the historical performance and future marketing strategies of a prop-
erty must have a working knowledge of the subject. Many owners reserve
the right to make higher level decisions regarding future pricing strategies.
˜is chapter will explore how di˙erent hotel owners approach revenue man-
agement directly or indirectly through their management teams/operators.
The Evolution of Revenue Management
˜e advent of new technologies within the lodging industry has led to the
increasing importance of revenue management. According to several hotel
owners, the 2008/2009 downturn in the hotel industry was another cata-
lyst for the revenue management concentration, for reasons which will be
explored within this section.
New online travel agencies and their respective technologies have been
deÿned as disrupters within the industry. Several of the more well-known
online travel companies are as follows:
1. Priceline (Booking Holdings)
2. Booking.com (Booking Holdings)
3. Orbitz (Expedia, Inc.)
4. Expedia (Expedia, Inc.)
5. Travelocity (Expedia, Inc.)
6. Hotels.com (Expedia, Inc.)
7. Trivago (majority owned by Expedia, Inc.)
8. Hotel Tonight (Airbnb)
9. RoomsTonite
Within the list of online travel companies presented above, there has
been a signiÿcant consolidation in the industry over the past several years.
As a result, many of the agencies presented are now owned by the same
parent company. Something all of these companies/websites have in com-
mon: they did not exist prior to the 1990’s. All of the aforementioned sites
o˙er a variety of products and services to di˙erent customers, but for the
most part they represent additional booking options for the same perish-
able hotel room night. In other words, they have created an intermediary
between the hotel product and the end user (customer). Without the pro-
liferation of online booking agencies competing with direct sales methods
by hotel owners, the revenue management ÿeld would not be as complex
as it is today. Prior to the ease of booking a room online, consumers had
few options when making travel plans. Many guests either called the hotel
directly or went through a traditional “brick and mortar” travel agent. Now,
hotel guests have seemingly endless options for booking the same hotel
room, and many can be accessed directly from a smart phone. ˜e entire
process of booking a hotel room can now be completed within seconds.
THINK HISTORICALLY
Before the Internet technology boom in the late 1990s and early
2000s, many of the aforementioned online travel agencies did not
exist. According to CNN, during the mid-1990s there was a peak
of 34,000 travel agents; today there are less than 13,000 retail travel
agents in the United States. The following newspaper advertisements
date back to the year 1900.
Source: ˜e Seattle Post Intelligencer, May 20, 1900, Page 35, Image 35.
442 <y> Hospitality Revenue Management: Concepts and Practices
The newspaper excerpt presented above includes advertisements

for various cruise lines and trips throughout the Pacific Northwest. In
order to reach potential consumers, cruise lines posted the above adver-
tisements in newspapers as well as local gathering places such as general
store and/or saloon.
In today's society, it is much easier and less expensive to reach a
larger target market compared to the early 1900s prior to the advent
of television and the Internet. However, what are some of the new
challenges revenue managers face as it relates to the proliferation of
new options available to consumers?
Hotel revenue managers must be cognizant of the different booking
engines while developing pricing models. If a hotel room is priced at
$99 on two different websites, what will drive the consumer to book
directly on the hotel website versus a third-party travel agent?
~ PROS & CONS

The Buchin family from Indianapolis, Indiana is
planning a trip to Boston for July 4th weekend. The
Buchins are traveling with their two children, Michael and Jessica. While
many hotel options are available, the Buchins prefer to stay in Kenmore
Square in order to be near Boston University and Fenway Park and have
thus selected the Hotel Commonwealth. List the Pros and Cons for the
hotel owner if the Buchins buy an inclusive air and hotel package from
Expedia or book direct through the hotel's website. Which booking
channel is more profitable for the hotel owner?
The global economic recession had a major impact on the hotel indus-
try beginning in 2008. According to STR Global (formerly Smith Travel
Research), Revenue per Available Room (RevPAR) in the United States
declined by 1.8 percent in 2008 followed by 16.7 percent in 2009. In 2009,
the decline in United States performance metrics (occupancy and average
daily rate) was devastating, forcing hotel owners to find creative ways to
compensate for the changing conditions.
In addition to numerous cost cutting measures undertaken during the

recession, owners were also keenly focused on revenue management and
customer relationships. While the average decline in RevPAR during 2009
was 16.7 percent, many hotels did not experience such a dramatic impact.
Hotel owners who initiated sophisticated revenue management strategies
during the downtown were able to mitigate potential losses and obtain a
larger market share against its competitive set.
For example, many hotels placed an emphasis on deploying strategies

such as variable and dynamic pricing models during the downtown. ˜e
di˙erence between variable and dynamic pricing has evolved over time.
Variable pricing involves setting multiple price points for distinct market
segments, whereas dynamic pricing involves changing prices over time in
response to demand uncertainty (Sturman, Corgel, and Verma, 2011, 195–
196). With sophisticated revenue management programs, operators can
now set complex algorithms for pricing. For example, di˙erent rate fences
can be set such as: minimum length of stay, rates quoted by place of origin,
nonrefundable reservation fees, and cancellation fees. As revenue manage-
ment continues to evolve, operators must become increasingly savvy when
enforcing rate fences in order to better protect the integrity of a hotel room
reservation. Room cancellations can have a dramatic impact on a hotel’s
performance, and hotel ownership groups are now focused on protecting
reservations with strict cancellation policies, speciÿcally at resort proper-
ties. However, many branded hotels are required to follow the cancellation
policies of the parent company, thus leaving ownership with less control as
it relates to cancellations.
HOTEL OWNERSHIP TYPES
˜e complex nature of hotel ownership is not known to many outside of the

hotel investment community. Many believe a hotel branded as a “Marriott,”
for example, is owned by the parent company, however, for most branded
properties that is not the case. Since the 1980s, many large hotel brand and
management companies have moved towards as “asset light” strategy mean-
ing they typically do not own and do not want to own the actual real estate.
Most of the major brand companies (such as Marriott, Hilton, and Hyatt)
today are primarily franchise and/or management companies and own
only a limited number of (usually legacy) hotels. ˜e business model of the
brands is largely predicated on the generation of fees and income through

real estate investments, although sometimes in order to expand in certain
markets/locations they do participate by way of a real estate investment. ˜is
strategy was more common in the 1990s and early 2000s, but is no longer
a widely accepted practice (˜e Economist, 2010, 1–2). ˜e following list
comprises the di˙erent types of hotel owners:
1. Private Equity
• Examples include: Apollo Global Management, ˜e Blackstone
Group, Five Mile Capital Partners, Wheelock Street Capital
2. Real Estate Investment Trusts (REITs)
• Examples include: HOST Hotels and Resorts, Pebblebrook Hotel
Trust, Ashford Hospitality Trust
3. Insurance/Life Companies
• Examples include: Prudential, MetLife, MassMutual
4. Individuals/Family Oˆces
• Examples include: Cascade Investments, Ohana Real Estate
Investors, MSD Capital
5. Sovereign Wealth Funds
• Examples include: ADIA, GIC, Anbang Insurance
While there are also other types of hotel ownership groups, most ÿt into
one of the previous ÿve categories. Di˙erent types of ownership groups can
be more active depending on the current state of the economic cycle. For
example, during the 2010–2012 recovery period following the economic
recession, hotel REITs were the most active buyers due to their low cost of
capital. However, a˛er dramatic declines in the stock price and enterprise
value of hotel REITs during 2015, most have become net sellers. Another
investor group, international buyers, have become increasing active over the
past several years, especially in gateway markets such as New York City and
San Francisco.
Each type of ownership group has di˙erent objectives and procedures,

especially in regard to revenue management. Individual owners typically
have longer hold periods, meaning they own properties for a longer period
of time and enjoy income based returns compared to Private Equity owners.
Private Equity companies are primarily driven by appreciation returns, thus

a typical hold period is between 5 and 7 years. Ownership objectives as it
relates to hotel performance and management can be drastically di˙erent if
the owner is planning to hold the property for 5 years versus 50. Sovereign
Wealth Funds do not always have an immediate exit strategy, as they o˛en
plan to hold the asset in their portfolio for generations.
Private Equity investors are often focused on the short term as opposed
to the long term. For example, if a Private Equity owner had the option
to patch a leak in the roof for a cost of $25,000 versus replacing the
entire roof for $250,000; which option do you think the Private Equity
owner would choose and why?
As it relates to revenue management, short-term owners may be focused

on driving revenue and income in the near term and not on long-term client
relationships. In most cases, Private Equity owners are much more hands
on as it relates to asset management. Private Equity owners o˛en retain a
third-party management company (such as Aimbridge Hospitality, Pyramid
Hotel Group, and Crescent Hotels & Resorts) to operate their properties in
exchange for a fee. Many third-party management companies also hold a
sliver piece of equity in the overall investment. ˜is arrangement aligns the
objectives of both owner and operator to maximize proÿt and returns. Each
management company and/or asset manager has di˙erent levels of oversight
on revenue managers. However, ownership groups such as sovereign wealth
funds and high net worth individuals or families are primarily focused on
retaining a hotel property’s name or brand equity, with cash ˇows being
merely a beneÿt during the term of the investment. ˜e aforementioned
ownership groups typically invest in real estate assets (like hotels) in order
to protect their money from turbulence in other more volatile markets such
as commodities or stocks.
One of the major di˙erences between a corporate owned hotel asset

versus an individual or family owned asset is the type of management/
oversight. For example, a large management company with multiple assets
in a certain market may have a team of revenue managers overseeing sev-
eral properties, whereas an individual or family owned property typically

has a revenue manager on site focusing solely on that speciÿc asset. It is
very important for a revenue manager to understand the objectives of
ownership prior to accepting a position, as those objectives can vary dra-
matically.
The Relationship Between Owner and Revenue Manager
˜e relationship between a hotel owner and revenue manager varies

depending on the ownership type. In an owner operated franchised hotel
such as a Holiday Inn Express, the owner may handle the duties of reve-
nue management personally. However, in a Four Seasons hotel owned by
MSD Capital, there may not be any relationship between the ownership
group and the revenue manager due to all of the parties in between. In the
speciÿc case of Four Seasons and other luxury brands, owners also tend
to be restricted from operational level decisions, including revenue man-
agement.
All hotel owners have di˙erent management strategies, but the more
open communication between owner and revenue manager typically
results in stronger performance. By way of example, some management
companies have a “heads in beds” strategy in which they would rather
ÿll rooms at a lower rate, potentially in an e˙ort to maximize ancillary
revenues, versus other companies who focus on a higher average rate and
are willing to forego rate for a lower occupancy. ˜e revenue management
strategy must ÿt within the overall strategy of ownership in order to meet
budgetary goals.
In any hotel operation, it is important to deÿne who is responsible and

who has the ÿnal say in setting rates. In traditional hotels, the Director of
Sales typically has the ÿnal say over what rate to o˙er a large group inquir-
ing for a room block. However, more commonly now with sophisticated
revenue management so˛ware, revenue managers are better able to predict
future demand levels and quantify if the group should be accommodated or
if the hotel is better o˙ waiting for higher rated transient business. In many
hotels today, revenue managers have the ÿnal say over a quoted group rate.
Each owner and/or asset manager must establish a relationship with the rev-
enue manager who works for them and their overall objectives.
REAL PEOPLE
Written by:
Barry A.N. Bloom, Ph.D.

President and Chief Operating Oˆcer
Xenia Hotels & Resorts, Inc.
As bottom-line driven asset managers, one of the things we frequently try to under-
stand is whether concierge õors are, in fact, additive to a hotel’s ability to yield
both revenue (and, thereby proÿt) or whether they are simply a marketing tool used
by the brands to appeal to, and enhance the experience of, their loyal and frequent
guests at the expense of ownership. In a recent example, we worked with one of our
luxury hotel operators to analyze this topic.
˛e subject property is located in a large, but not primary U.S. market, with the
hotel experiencing typical occupancy in the mid-60% range with a market mix of
approximately 50% of its demand in the group segment. At these levels, it was unclear
whether or not a concierge õor/lounge was accretive to the hotel or not, particularly
given the relative few nights when the hotel was compressed and could yield guests
onto the concierge õor at a premium price.
We initially considered a strategy which would close the concierge õor saving
nearly $400,000 in annual operating expenses including ÿve employee FTE’s, cost
of food and beverage, reducing rooms expenses due to higher housekeeping room
credits, and reducing size and cost of guestroom amenities. We also calculated that
by closing the concierge õor, revenue would decrease by approximately $150,000
in reduced rooms and honor bar revenue. ˛us, we determined that the concierge
õor was resulting in a loss of approximately $250,000 per year.
In conjunction with property management, as opposed to shutting down the oper-

ation completely, we also analyzed the opportunity to more actively promote the
concierge õor while simultaneously revisiting the cost structure of the lounge. By
working with revenue management and actively promoting the concierge õor
through online and voice reservation channels, signiÿcant, trackable improvements
were made in concierge õor revenue. Speciÿcally, the premium for these rooms was
allowed to õat at various best available rate (BAR) levels rather than the previously
ÿxed upgrade cost of $50 per night.
˛is dynamic pricing ranged from as low as $30 per night during low occupancy
periods to as much as $100 per night during peak demand periods. In addition to
the online and voice channel o˝erings, a rejuvenated e˝ort was also made to upsell
the concierge õor at the front desk through speciÿc individual and team incentives
designed to motivate the front desk agents to promote the concierge õor.
In the ÿrst 12 months following implementation, the hotel recorded approximately

$300,000 in trackable revenue enhancement through upgrades and compression
while simultaneously lowering expenses by $150,000. As a result of these e˝orts,
the hotel is now earning approximately $50,000 in proÿt as compared to the prior
loss of $250,000.”
Questions:
1. Name several positive and negative factors that ownership may have con-
sidered when studying whether or not to abandon the concierge ˇoor
operation.
2. Do you think ownership ultimately made the right decision regarding
the concierge ˇoor?
Ownership Versus Revenue Management Objectives
˜e misalignment between hotel ownership and a revenue manager can

be devastating to a hotel property’s ability to maximize income, and there-
fore asset value. ˜ese situations typically occur within institutional owned
assets where there are several degrees of separation between owner and rev-
enue manager.
The subject property is a ÿve-diamond resort located in the Caribbean
and owned by a REIT. The hotel is currently operated by the brand with
oversight from a third-party asset manager (such as LW Hospitality
Advisors) that has been retained by ownership. Who does the revenue
manager report to? What types of con˛icts may arise between the asset
manager and the revenue manager?
In situations as previously described, the revenue manager would be an

employee of the Management Company and reports directly to the general
manager. Depending on the relationship between the asset management
(who represents ownership) and the Management Company, he/she may or
may not have access to speak directly with the revenue manager without
other members present.
O˛en times, asset managers and property level management including

revenue managers have a di˙erence of opinion regarding various strategies.
When negotiating a management contract, owners should require control
over important operational decisions relating to revenue management. In
cases of disagreement, the management company and/or brand is ultimately
an agent of ownership. ˜us, in most cases, ownership has ÿnal approval
rights in order to reach their speciÿc objectives.
Macroeconomic Trends in Revenue Management
Macroeconomic trends can have a material impact on revenue manage-

ment decisions. In many instances, hotel operators focus on microeconomic
factors a˙ecting the everyday operation of a hotel, such as controlling costs
or capital expenditures pertaining to renovations. ˜eir role is to manage
the daily operation of the property, while the role of the asset manager and/
or owner is to focus on the overall master plan. Asset managers may elect to
introduce broader macroeconomic information to the revenue manager in
order to better assist with pricing models.
In order to illustrate this point, let’s analyze an energy related mar-

ket such as Midland, Texas, which is located within the Permian Basin.
˜e˝Permian Basin˝is a˝sedimentary basin˝largely contained in the western
part of the State of˝ Texas˝ and the southeastern part of˝ New Mexico. ˜e
basin area reaches from south of Lubbock, to south of˝Midland˝and˝Odessa,
extending westward into the southeastern part of New Mexico. ˜roughout
the Permian Basin, hotels are largely dependent on the energy industry, and
more speciÿcally, the level of exploration and drilling occurring in the area
for demand.
˜ere are several examples of macroeconomic data that could be helpful

to a revenue manager in an energy related market. For starters, ownership
may introduce data such as the overall price of oil. ˜e price of crude oil
began its decent in July 2014 and continued throughout 2015, with the larg-
est percentage decrease occurring in December 2014 following OPEC’s deci-
sion not to reduce production at its meeting in Vienna (November 2014). As
presented on the following chart, the price per barrel of crude oil fell from
$105.79 in June of 2014 to a $42.91 in November of 2015.
Crude Oil Prices Per Barrel (Monthly)
Month/ Price Per % Chg Month/ Price Per % Chg Month/ Price Per % Chg Month/Year Price Per % Chg
Year Barrel Year Barrel Year Barrel Barrel
Nov-15 $42.91 -7% Dec-13 $97.63 4% Dec-11 $98.56 1% Dec-09 $74.47 -5%
Oct-15 $46.22 2% Nov-13 $93.86 -7% Nov-11 $97.16 13% Nov-09 $77.99 3%
Sep-15 $45.48 6% Oc t-13 $100.54 -5% Oct-11 $86.32 1% Oct-09 $75.72 9%
Aug-15 $42.87 -16% Sep-13 $106.29 0% Sep-11 $85.52 -1% Sep-09 $69.41 -2%
Jul-15 $50.90 -15% Aug-13 $106.57 2% Aug-11 $86.33 -11% Aug-09 $71.05 11%
Jun-15 $59.82 1% Jul-13 $104.67 9% Jul-11 $97.30 1% Jul-09 $64.15 -8%
May-15 $59.27 9% Jun-13 $95.77 1% Jun-11 $96.26 -5% Jun-09 $69.64 18%
Apr-15 $54.45 14% May-13 $94.51 3% May-11 $100.90 -8% May-09 $59.03 19%
Mar-15 $47.82 -5% Apr-13 $92.02 -1% Apr-11 $109.53 6% Apr-09 $49.65 4%
Feb-15 $50.58 7% Mar-13 $92.94 -2% Mar-11 $102.86 16% Mar-09 $47.94 23%
Jan-15 $47.22 -20% Feb-13 $95.31 1% Feb-11 $88.58 -1% Feb-09 $39.09 -6%
Dec-14 $59.29 -22% Jan-13 $94.76 8% Jan-11 $89.17 0% Jan-09 $41.71 1%
Nov-14 $75.79 -10% Dec -12 $87.86 2% Dec -10 $89.15 6% Dec-08 $41.12 -28%
Oct-14 $84.40 -9% Nov-12 $86.53 -3% Nov-10 $84.25 3% Nov-08 $57.31 -25%
Sep-14 $93.21 -3% Oct-12 $89.49 -5% Oct-10 $81.89 9% Oct-08 $76.61 -26%
Aug-14 $96.54 -7% Sep-12 $94.51 0% Sep-10 $75.24 -2% Sep-08 $104.11 -11%
Jul-14 $103.59 -2% Aug-12 $94.13 7% Aug-10 $76.60 0% Aug-08 $116.67 -13%
Jun-14 $105.79 4% Jun-12 $87.90 7% Jul-10 $76.32 1% Jul-08 $133.37 0%
May-14 $102.18 0% Jun-12 $82.30 -13% Jun-10 $75.34 2% Jun-08 $133.88 7%
Apr-14 $102.07 1% May-12 $94.66 -8% May-10 $73.74 -13% May-08 $125.40 11%
Mar-14 $100.80 0% Apr-12 $103.32 -3% Apr-10 $84.29 4% Apr-08 $112.58 7%
Feb-14 $100.82 7% Mar-12 $106.16 4% Mar-10 $81.20 6% Mar-08 $105.45 11%
Jan-14 $94.62 Feb-12 $102.20 2% Feb-10 $76.39 -2% Feb-08 $95.39 3%
Jan-12 $100.27 Jan-10 $78.33 Jan-08 $92.97
Fisc al Year Chg Dec - Nov 14/15 12/13 7% 10/11 9% 08/09 90%
-28%
Fisc al Year Chg Dec - Nov 13/14 11/12 -12% 09/10 13%
-22%
Source: U.S. Energy Information Administration; Compiled by LW Hospitality Advisors®
How can a revenue manager use the information presented above
regarding the constantly changing price of oil when making pricing
decisions for a speciÿc hotel property?
˜e dramatic decline in the price of crude oil is having a vast e˙ect

on hotel properties located throughout Texas, and speciÿcally within the
Permian Basin. Hotel revenue managers must utilize this information when
making pricing decisions. ˜roughout conversations with large energy
companies such as Exxon Mobile, Chevron, etc., it is apparent they are in
the midst of reducing travel spending given the downturn in the market.
˜ere are many other creative ways for revenue managers to utilize
macro and microeconomic data in order to assist with pricing decisions.
Within the Permian Basin, each county releases a monthly report con-
taining the number of drilling permits that were issued. In order to better
understand the activity of oil/gas companies in the area, revenue managers
can track this information and remain informed on where companies are
still actively drilling. During downturn periods, owner’s typically place more
emphasis on both Sales and Revenue Management strategies in order to pro-
tect their asset. Properties with attentive owners and revenue managers are
able to outperform competitive properties during diˆcult times, such as the
current situation in the Permian Basin and other energy dependent lodging
markets throughout the country.

Limited service hotel properties located in the Permian
Basin are typically valued and appraised based on two met-
rics. ˜e ÿrst is a Rooms Revenue Multiplier (RRM), and
the second is a Capitalization Rate (cap rate). Based on the informa-
tion presented in the attached excel spreadsheet for the West Texas
Inn, please calculate the potential ˇuctuations in the value of the hotel
based on changes to the property’s RevPAR. ˜ere is one additional
question as part of this exercise also included within the spreadsheet.
Metrics to Measure Revenue Management Success
A Revenue Management strategy is executed and measured based on pre-

deÿned goals and objectives. Hotel managers must show results in order to
prove they are e˙ective managers assisting ownership in achieving overall
investment goals. Results are measured by using certain benchmarks and
metrics such as: occupancy, average daily rate (ADR), and RevPAR. Although
these metrics are widely accepted as the most important tools for measuring
success, their scope is conÿned to the top line (revenue only), while hotel
owners are more focused on the bottom line, also known as proÿtability. As
hotel guests continue to utilize online booking intermediaries when making
reservations, the cost of guest acquisition (further discussed later in this sec-
tion) has been increasing at a disproportional rate. ˜erefore, using RevPAR
as the sole metric to benchmark a hotel against its competitive set seems to
be an outdated methodology. Hotel owners want to establish that not only
RevPAR has been maximized, but also that it has been strategically maxi-
mized by using the lowest cost channels and booking methods.
Entrepreneurial revenue managers have already created several new

metrics that go beyond the traditional top line benchmarks. One of these
new methods calculates RevPAR based on a net ADR (ADR less guest acqui-
sition costs) as a metric that allows owners and managers to understand
how eˆcient the booking channels selected were in securing guest busi-
ness. Another method being put forward by revenue managers is measuring
Total Revenue per Available Room which adds incremental spend into the
RevPAR equation providing for overall revenue contribution or “guest value”
by segment or channel. ˜is becomes especially crucial at resort properties
where the channel from which a guest books directly impacts the amount of
ancillary dollars they spend in other parts of the resort (such as Food & Bev-
erage or Spa). Finally, a metric currently on the rise in popularity is known
as Gross Operating Proÿt per Available Room (GOPPAR) which factors
in all operating costs (Parker, 2016, 1–3). Each of these newly introduced
metrics suggests that hotel owners are becoming more sophisticated and are
looking for ways to track overall proÿtability in addition to top line revenue.
With revenue management tools continuing to become more advanced and
with technological improvements of so˛ware that can track guests back to
their origin, hotel owners are beginning to measure their managers’ perfor-
mance with an enhanced toolbox of metrics. As the measurement of success
for a revenue manager continues to evolve, owners are also beginning to
base executive incentive pay and bonuses on these new metrics.
SEEING FURTHER
The metric known as GOPPAR is an important
indicator of hotel performance. GOPPAR is cal-
culated as follows:
GOPPAR = GOP (Gross Operating Proÿt) / # of Available Rooms
When analyzing the GOPPAR of a hotel property, the results can di˜er
dramatically based on many di˜erent factors. While results can di˜er,
the GOPPAR metric is widely used throughout the industry to measure
hotel performance. The GOPPAR provides ownership with a better indi-
cation of proÿtability when compared to RevPAR. As the industry con-
tinues to evolve, what other of metrics would be useful in assessing the
performance of a hotel?
Participating on Revenue Management Ownership Calls
Revenue management is directly linked to a hotel’s proÿtability, which in

return is directly linked to ownership’s top priority: retention and growth
of real estate values. Asset managers understand how important revenue
management is to a hotel’s success, and therefore take an active role in col-
laborating with a property’s senior management and revenue management
teams. During these interactions, it is the asset manager’s responsibility to
ask investigatory questions and test the revenue management team, inquir-
ing about how the long-term revenue management strategy is being imple-
mented and how short-term strategies contribute to the owner’s long-term
goals.
An example of a long-term strategy from an owner’s perspective is a

strategy which optimizes proÿtability for the hotel overall and not just the
rooms department which revenue management impacts directly. Another
characteristic of a long-term revenue management strategy is one which
focuses on long-term proÿtability, not just short-term proÿtability which is
usually what a hotel management’s team is incentivized on. A clear long-term
strategy also forces a hotel management team to focus on ADR integrity.
ADR integrity (also known as rate integrity) is a concept that guests value
signiÿcantly. Guests and consumers in general want to know when they pur-
chase a good or service, they are receiving the value they feel appropriate.
Continuously ˇuctuating rates at a hotel to achieve maximum short-term
occupancy confuses guests who may be used to paying a certain rate. While
guests may or may not understand the dynamic pricing model, it is import-
ant not to employ extreme pricing ˇuctuations for repeat guests. Retaining
rate integrity is critical to long-term ADR sustainability and growth of a
hotel. From an asset manager’s perspective, decisions such as rate parity in
the short term should support the long-term revenue management strategy
put in place for the entire investment horizon.
For example, a revenue management/sales team may be presented with

the opportunity to secure a corporate account for a hotel which would lock
in ADR with inˇationary growth over the next 2 years. Although corpo-
rate accounts are critical for a hotel’s revenue management success, an asset
manager must inquire about the timing of these contracts and whether the
hotel should be more willing to take on short-term risk. If ADR is forecasted
to increase substantially over the near term, it may be beneÿcial for the hotel
not to lock into a guaranteed contract and wait for other individual tran-
sient business. However, in so˛er market conditions, the hotel may create
an advantage by securing base business at a certain rate thus reducing the
sellable inventory when excess demand is limited. ˜ese are the types of
discussions and decisions that take place in meetings or on calls between
ownership and management.
Cost Per Guest Acquisition and Its Importance to Proftability
Selling the right room to the right customer requires revenue managers to
be able to accurately segment their demand and control room inventory and
pricing for each segment. Each segment of demand has di˙erent character-
istics, including sensitivity to pricing (price elasticity), timing of booking,
and brand sensitivity to name a few. One of the most important character-
istics to hotel owners is the path each segment choses to book reservations,
especially transient segments. ˜e type of channel a booking comes through
may directly impact the cost of guest acquisition. ˜e cost of guest acquisi-
tion is deÿned as the cost a hotel owner incurs to procure a new guest to stay
at their hotel. It is crucial to maintain a low cost of guest acquisition in order
to maximize the proÿtability of each guest’s stay at a property.
˜e booking channels that typically generate the most booking volume

for hotels are the direct channels (e.g., website and direct phone line) and
indirect channels which are primarily online travel agents (OTAs). OTAs are
online services hotels utilize to sell hotel inventory that is targeted to price
sensitive consumers who are brand agnostic and are looking for the best
value available to accommodate their staying needs. Examples of the major
OTAs are Expedia, Priceline, and Travelocity to name a few.
All reservations are not created equally. For a hotel owner who is pri-
marily focused on a hotel’s proÿtability (and value by relation), the custom-
er’s booking channel is of critical importance due to the cost associated with
guest acquisition. Whether a hotel is supported by a major brand (Mar-
riott, Hilton, Hyatt, etc.) or whether it is an independent hotel, it contin-
uously invests in its marketing e˙orts which aim to publicize the hotel to
guests seeking accommodations. Branded hotel owners market their hotels
by investing in franchise fees, national marketing fees, and by operating
in-house marketing departments. Franchise fees (also known as royalties)
are fees branded hotel owners pay to the major brands such as Marriott,
Hilton, and Hyatt in order to have the right to use those names and central
reservations systems (CRS). National marketing fees are monetary contri-
butions all branded hotels make that go towards advertising the brand as a
whole. A good example of such advertising is watching the “Courtyard by
Marriott” ads on TV during a sporting event. ˜e purpose is to advertise the
Courtyard by Marriott brand as a whole and increase brand familiarity of
the speciÿc brand of Marriott hotels, not promote a single Courtyard hotel.
In-house marketing departments are sta˙ed marketing teams whose sole
focus is to promote the subject hotel and to secure group business and cor-
porate negotiated business. Independent hotels do not pay the brand related
fees and instead funnel their marketing e˙orts and expenditure into their
on-property marketing teams. ˜e size of the marketing team varies across
hotels, with large hotels and resorts requiring a much larger sta˙ and budget
compared to smaller select service hotels requiring a lesser in-house mar-
keting e˙ort (especially if aˆliated with a national brand).
An owner’s choice to open a hotels inventory to OTAs is essentially a

decision to outsource room bookings, which as discussed results in higher
acquisition costs. OTAs are known to charge up to 20–30 percent of the rate
advertised to a guest through their website, an expense which understand-
ably can have a major impact on the proÿtability of such a guest, especially
when it is layered on to the existing marketing costs described above. As
a result, hotel owners drive their managers to generate bookings for their
hotels through direct channels, which they have more control over and
have already paid for through their ÿxed cost associated with operating the
in-house marketing departments.
˜ere are other downsides to using OTAs beyond increasing the cost
of guest acquisition. Guests who book hotel stays through OTA tend to
be hotel agnostic and the likelihood of converting them to a repeat guest
decreases versus a guest who may not always place pricing at the top of their
booking criteria. Additionally, the fact guests booking through OTAs are
price sensitive usually means they tend to not generate revenue at ancillary
departments in the hotel such as restaurants, room service, or even spas and
golf at resort hotels.
OTAs do also beneÿt hotels. Revenue management is all about selling

the right room to the right guest at the right time. OTAs can be very e˙ec-
tive as a marketing expense targeted towards price sensitive guests, a group
of guests who are hard to reach through direct channels. OTAs can be very
successful at maximizing potential revenues if they are used carefully and
strategically. ˜e challenge for hotel owners and their managers is to control
the amount of inventory outsourced to OTAs and the timing of opening
such channels. Additionally, studies have shown a hotel’s exposure through
OTAs increases the hotels revenues through other online channels, includ-
ing the hotel’s website which is a direct booking channel preferred by owners
(due to the lowest cost of acquisition).
Price Elasticity of Demand
Price elasticity of demand studies how sensitive consumer demand is to

ˇuctuations in price. Put simply, when a good or service is deÿned as
price elastic, it is considered to be a product very sensitive to small price
changes. When a good or service is deÿned as price inelastic, it is consid-
ered to be a product not very sensitive to small price changes. In the hotel
space, a hotel’s product may vary from elastic to inelastic depending on
the demand periods. During peak demand periods (such as conventions,
Super Bowl weekend, etc.) price is highly inelastic and as demand peaks
prices rise quickly. Alternatively, on a typical Sunday night (the least trav-
eled day of the week) hotel rooms tend to be extremely price elastic, where
a small change in price may a˙ect the consumer’s decision to choose one
hotel over another.
Revenue management aims to target a variety of demand segments and

price them according to their unique characteristics, including their pro-
pensity to be price elastic or inelastic to hotel pricing. ˜is section of the
chapter aims to discuss how price elasticity of demand for hotel rooms var-
ies across economic cycles. Economic cycles are a focal point of hotel owners
who are motivated to retain value through income during peaks and troughs
of an economic cycle. Revenue management must therefore be ˇuid and
understand what the macroeconomic trends are in order to accurately pri-
oritize occupancy versus ADR and target each segment according to their
continuously changing price sensitivity.
Not all goods and services are sensitive to changes in macroeconomic

shi˛s. Basic necessities like food, housing, and fuel are the ÿrst to be expended
on through a household’s income. ˜ings like travel and hotel rooms for the
most part are discretionary needs that are consumed when households have
enough disposable income to a˙ord them. ˜e same principle applies for
corporations. Basic needs to continue operations are expended ÿrst, travel
and especially incentive travel are considered luxuries. As a result, most
guests whether travelling on their own or their company’s expense tend
to be more price elastic during recessions and more price inelastic during
recoveries and expansions.
During economic downturns, there is typically downward pressure on

ADR. While at the same time, a hotel owner’s expenses typically continue to
rise at an inˇationary pace. ˜is dynamic causes an exponential downward
pressure on the hotel’s bottom line. It is imperative for revenue managers
to recognize which segments have become more elastic to price changes
and decrease rates for those segments while maintaining rate integrity for
segments that demonstration price elasticity resistance. Revenue managers
must be careful however not to heavily discount hotel rates. Once a guest
has grown accustomed to paying a lower rate for a hotel, they may be turned
away during a recovery when ownership is seeking to aggressively increase
rates.
During economic recoveries and expansions, owners should motivate

revenue managers to drive ADR and take more risk during shoulder and
o˙-peak seasons, asking them to keep discounted channels at a lower vol-
ume and inˇuence guests to book through direct channels at higher rates.
Increases in ADR are more typically proÿtable than increases in occupancy
and revenue managers know at what level of occupancy they can reduce the
need for discounted channels and go a˛er higher rated business. During
macroeconomic expansions, owners should ask revenue managers to move
their focus o˙ RevPAR and towards GOPPAR.
˜is phenomenon is something revenue managers need to be aware of

and experienced in. A revenue manager cannot only identify what the mac-
roeconomic state is at the present time but can also understand the changing
market fundamentals and how to properly adjust occupancy and ADR over
the next 12 or 24 months.
The Focus on Proftability
As portrayed within the chapter, revenue management initiatives are not

only in place to maximize RevPAR, but also GOPPAR. In other words, a rev-
enue manager should not only try to maximize revenue but also maximize
the source of bookings that generate the most proÿt for the hotel. Typically,
this means accepting higher rated business, even if that results in a lower
occupancy.
Why is proÿtability so important for a hotel? ˜e answer is to some

extent intrinsic: as with all economic units, hotels drive to maximize prof-
its. ˜e basic principles of microeconomic theory posit that the ultimate
goal of every business is to maximize proÿts. Non-institutional hotel own-
ers are usually “one-dimensional” and focus solely on short-term proÿt-
ability. However, institutional hotel owners are in some ways unique, and
seeking proÿtability extends further than just what a hotel’s bottom line
reads.
First and foremost, profitability is the main criteria for valuation

of a hotel asset. The higher the net income of a hotel asset, the higher
its value will be. Equally as important is the consistency of profitabil-
ity. Assets that can demonstrate consistent income generation through
various stages of an economic cycle tend to be sought after by the hotel

investment community and therefore benefit from a higher valuation.
Consistent and high valuation of an asset is extremely important for
institutional hotel investors who continuously track the value of their
assets and base their decision making on how their existing portfolio is
performing. Fluctuations in value create uncertainty for said investors
and could significantly impact their investment decisions. Hotel inves-
tors, as any other investors, are primarily focused on retaining and grow-
ing the value of the investment.
Secondly, most institutional hotel owners typically place debt in

the form of a commercial mortgage on their assets in order to leverage
income returns and overall internal rate of return on the investment.
Commercial mortgages are utilized by institutional investors to reduce
the amount of equity needed for a property and replace it with funds (typ-
ically from a bank) that carries an interest rate below what their equity
expects to earn. For example, if an investor acquires a hotel property
for $100M that generates $10M of income, the equity would earn a 10
percent income return in the first year. If the investor can secure $60M
of debt from a lender at an interest only rate of 5 percent, the investor
would owe the lender annual interest (also called debt service) of $3M.
With the debt in place, the investor would earn an annual income after
debt service of $7M ($10M of income less $3M of interest) over an equity
position of $40M ($100M acquisition price less $60M of debt), equates to
a return of 17.5 percent. This simple example demonstrates how debt can
be extremely accretive to an investor’s income return. The hotel property
is called the collateral of the loan and in the case of a default (e.g., the
income of the property drops below the interest owed, in this case $3M),
the lender may foreclose on the property and essentially take over equity
ownership of the hotel.

Based on the information presented in the attached excel
spreadsheet for the Main Street Boutique Hotel, please cal-
culate the following metrics: NOI, Cap Rate/Unleveraged
Cash Yield, loan-to-value (LTV), Debt Service, Debt Service Cover-
age Ratio, Debt Yield, Leveraged Equity Position, and Leveraged Cash
Yield. ˜ere are two additional questions as part of this exercise also
included within the excel spreadsheet.
Using a hotel as collateral for a commercial mortgage is a complicated

process that many recognized ÿnancial institutions would not consider.
Hotels are generally known as one of the riskier asset classes when compared
to other forms of real estate. Even ÿnancial institutions with a better under-
standing of the hotel industry are typically very cautious of placing debt on
hotels and frequently establish protection mechanisms that provide them
additional security when ÿnancing hotel assets. ˜ese tools are in place to
protect the lender from ˇuctuations in the hotel industry which unlike other
asset classes (oˆce, retail, residential, etc.) are realized immediately due to
the daily turn of inventory. Two common tools utilized by hotel lenders as
protection mechanisms from such volatility are loan-to-value (LTV) tests,
debt service coverage ratios, and cash sweeps (also known as Cash Traps).
When a lender issues a mortgage on any type of real estate asset, one of
the most important metrics is the LTV ratio, which examines the amount
of debt provided compared to the collateral’s value. For example, if a hotel
worth $100M received a senior mortgage of $60M, the loan is said to be a
60 percent LTV loan. Lenders decide on the outset of the loan what amount
of LTV they are comfortable with and do not typically allow the LTV of the
loan to far exceed that initial level. As a result, in the above example they
may stipulate the $60M loan placed on the $100M asset may not at any time
during the course of the loan become a 65 percent LTV loan. ˜is would
occur if the value of the hotel ˇuctuates downward. If the hotel, for example,
decreased in value and was worth $95M, the loan would be deemed a 63
percent LTV loan, which would not yet trigger the LTV test provided by the
lender. However, if the value of the hotel declined to $90M, the loan would
be deemed a 67 percent LTV loan, an LTV level that would trigger the LTV
test and would cause signiÿcant issues for the borrower. According to loan
standards, the borrower would be in default on the loan.
Another very important metric lenders focus on during the outset of a

loan process is the Debt Service Coverage Ratio (DSCR). ˜e DSCR exam-
ines how much cash ˇow the collateral hotel generates in order to cover debt
service, which is the annual interest and principal payment the hotel is liable
for in order to service its loan. Let us use the same hotel from the example
previously presented. If the subject hotel generates $10M of net operating
income (NOI) and the $60M loan has an annual debt service of $3M, the
debt service coverage ratio would be $10M/$3M, so 3.33×. In other words,
the hotel can generate enough cash ˇow to cover its debt service plus an
additional 233 percent. Lenders in the hotel industry typically seek to have
a minimum of a 1.2×–1.5× DSCR at the outset of a loan. Inability to achieve
the pre-agreed upon minimum DSCR may also lead to a loan default. ˜e
above loan example is represented in the exhibit below:
Investment Debt Terms Investment
Without Debt With Debt
Equity Investment $100,000,000 $40,000,000
Commercial Mortgage $60,000,000
Loan-To-Value 60.0%
Interest Rate 5.0%

Annual Interest Owed $3,000,000
Annual Income/Return to Equity $10,000,000 $7,000,000

Debt Service Coverage Ratio 3.3x
Income Return 10.0% 17.5%
˜e commercial mortgage example presented above assumes an interest

only mortgage with annual non-compounded payments.
When a prospective lender is underwriting a hotel loan, what are the
most important factors that must be considered? How can lenders
assure that loans are safe and income levels will remain above the
desired debt service coverage ratios?
A loan default is without question a catastrophic result for an invest-

ment which may lead to repercussions from the lender in the form of
Cash Sweeps or even worse, foreclosure. Cash Sweep is the process by
which if the DSCR drops below a certain level, any net cash flow gen-
erated by the collateral goes directly into an account controlled by the
lender. The cash is trapped in this account until either the DSCR rises
above the lender’s desired level or until the loan is paid off. Triggering
a Cash Sweep puts hotel owners in a difficult situation, as they become
completely unable to generate any cash flow for themselves or their
co-investors in the asset. All the cash is controlled by the lender and
releasing it generally requires legal involvement. Foreclosure is a legal
process in which a lender attempts to recover the balance of a loan from
a borrower, who has stopped making payments to the lender, by forcing
the sale of the asset used as the collateral for the loan. A lender may also
attempt to take over the equity position, thus assuming ownership con-
trol of the asset and forcing the borrower out of the investment, leading
to a complete loss of the investor’s equity.
Finally, generating free cash flow is extremely important for hotel

owners because it allows them to continue reinvesting in their assets.
Because hotel rooms are sold on a daily basis, they are subject to sig-
nificant “wear and tear” that forces owners to continuously reinvest in
the asset in the form of capital expenditures. This holds especially true
for owners of branded hotels that have to comply with brand standards
and are forced by the brands to renovate even if the hotel product has
not reached the end of its useful life. Profitability of a hotel asset affords
institutional hotel owners with the cash flow to spend on future renova-
tions. In addition, cash flow provides owners with the confidence that
any renovation expense made on the asset is a good investment that will
continue to provide a return.
As illustrated, there are many reasons why hotel owners must moti-
vate the executive team and revenue managers to strive for maximum
and consistent profitability to ensure a stable hotel valuation, a credible
standing with their lenders, and to ensure capital availability when the
hotel is due for renovation. The strength of a hotel’s bottom line is directly
tied to the health of a hotel’s ability to generate revenue. Therefore, rev-
enue managers must be continuously challenged to drive performance
and strive to flex their revenue management strategies and execute them
with accuracy. Although the above concepts are of crucial importance to
most hotel investors, high net worth investors or sovereign wealth inves-
tors may focus primarily on prestige or brand equity to retain and grow
value. A good example of this would be the Langham Hotel in London.
Its value stems primarily from its status as one of the oldest and most
prestigious hotels in London and secondarily from its income perfor-
mance. It also has tremendous value for Langham as a flagship property
for the brand.
Question 1: From an owner’s perspective, what are several
potential challenges of a brand managed hotel as it relates to
revenue management and pricing decisions?
Question 2: How would an owner’s decision-making process on a potential group

booking change depending on the investment horizon/hold period?
Question 3: Why would a revenue manager ask about the owner’s short- and long-
term objectives prior to accepting a job at the hotel?
APPLICATIONS
Case 1:
John and Anna Bentley own a Holiday Inn in the sub-

urbs of Houston, Texas. ˜e hotel was developed by their
father and they have been involved with the hotel, pri-
marily on the revenue management side of the operation
for several years. ˜e hotel is a full-service operation with 250 rooms and
10,000 SF of meeting space which is utilized by local oil drilling and reÿning
companies to host quarterly meetings and to house their corporate employ-
ees when they visit from out of town. Recently, the price of oil has dropped
from $80 to $100 per barrel to approximately $40, forcing some of the local
oil industry ÿrms to cut back not only on their travel but also on their quar-
terly meeting expenditures.
John and Anna have been tracking this sharp decline in the price of
oil and understand this will impact their hotel. However, there is dis-
agreement surrounding which revenue management strategy to imple-
ment. John believes the oil price shock will have a long-term impact on
local corporate business, so he is inclined to renegotiate local negotiated
rates at lower levels quickly to ensure loyal corporate demand continues
to stay at the hotel. He also believes all specific marketing efforts should
be implemented to secure the group business that delivers a fixed amount
of rooms quarterly and guarantees the usage of the hotel’s meeting space.
Anna has a different opinion. According to her, the oil price shock will
be short lived and local oil industry companies will not be significantly
impacted. She believes they should hold a hard line with their corporate
accounts and keep their negotiated rates in place. Based on her research,
Anna says there are other demand sources in the market that will allow
them to backfill corporate demand rooms (should they decrease) with
OTA generated rooms. She also believes they have a competitive advan-
tage with their meeting space compared to other competitive hotels in
the market.
What do you think the correct revenue management strategy is for this
hotel? How is John’s strategy going to impact top and bottom line? How is
his strategy impacting long-term performance of the hotel? How is Anna’s
strategy going to impact top and bottom line? What are the di˙erences of
corporate negotiated rate business and OTA business and which would you
prefer to have at a time of rate uncertainty? Does John’s strategy for increas-
ing sales e˙orts of their meeting space make sense if Anna is right about
their existing competitive advantage?
Case 2:
Philip Motely is the Director of Acquisitions for a small private equity real
estate investment ÿrm based in Boston, MA. Philip has identiÿed what he
believes is an interesting hotel acquisition located in Burlington, a prom-
inent and growing submarket of Boston. He believes he could acquire the
hotel and signiÿcantly improve revenue management initiatives by replacing
current management with a local experienced management company. ˜e
following chart depicts the existing room night segmentation compared to
the projections post acquisition:
Rooms 150 150

Annual Room nights 54,750 54,750
Existing Projected
Transient Rooms ADR Revenue Rooms ADR Revenue
Rack 3,833 100.00 383,250 8,213 110.00 903,375
Corporate 2,738 80.00 219,000 3,833 85.00 325,763
OTA 6,570 90.00 591,300 5,475 90.00 492,750
Government 2,738 75.00 205,313 2,738 75.00 205,313
Other 1,643 80.00 131,400 1,643 80.00 131,400
Group
Business 5,475 85.00 465,375 6,023 87.00 523,958
SMERF 9,855 75.00 739,125 9,855 80.00 788,400
Contract
Airline 4,380 65.00 284,700 1,643 65.00 106,76
Total 37,230 81.10 3,019,463 39,420 88.22 3,477,720
Occupancy 68.0% 72.0%
Philip is planning on obtaining debt for the acquisition, but understands

he has to convince a lender of the value he is planning to add through revenue
management. Given the remix presented above, what are the segments most
impacted by the new budget? Which segments are increasing or decreasing
in room night production and ADR? Do you think Philip’s plan is realistic?
How must Philip present his business plan to a lender to convince them of
his strategy? What can be said of the proÿtability of this hotel with the pro-
jected segmentation mix? How is that important for a lender to understand?
TEAM ACTIVITY
In teams of three to four students, designate a project manager.

Each student should choose an ownership company from the list of
groups presented on page eight. Each member of the team should
choose a company from a di˙erent group. ˜e objective of this assignment
is for each team member to conduct an interview (over the phone or in per-
son) with a representative of the ownership company (preferable an asset
manager). ˜e following questions should be asked:
1. How do you approach revenue management from an owner’s per-

spective?
2. Do you participate in monthly meetings with the revenue manager?
3. Does hotel management sta˙ have the ability to make future pricing
decisions, or do you require approval before any shi˛s in strategy?
Following the interviews, the team should prepare a PowerPoint pre-

sentation highlighting the similarities and di˙erences between the di˙er-
ent ownership groups/types. Which ownership group has the most involved
approach to revenue management?
INTERNET ACTIVITY
˜ere are many well-known hotel management companies in the

U.S. Complete a Google search to ÿnd at least three companies.
Do any of the companies mention revenue management on their
websites? In comparison, also run a search for third-party hotel
asset management ÿrms and look for references to revenue management on
their websites. Identify which company type (hotel management or hotel
asset management) more frequently references revenue management.
GLOSSARY
Ancillary Departments – Providing necessary support to the pri-
mary activities or operation of an organization, institution, indus-
try, or system (e.g., in a hotel the spa, ÿtness center, etc. would be
considered ancillary)
Dynamic Pricing – Practice of pricing items at a level determined
by a particular customer’s perceived ability to pay.
Gross Operating Proÿt per Available Room (GOPPAR) – A company’s
revenue from sales in a given period of time less its cost of goods sold
divided by the total number of rooms available for sale.
Macroeconomics – Branch of the economics ÿeld that studies how the
aggregate economy behaves.
Perishable – An item or good likely to decay or go bad quickly (e.g., a hotel
room is perishable and cannot be sold once the night has passed)
Price Elasticity – A consumer’s willingness to purchase a product depend-

ing on the level of price.
Return on Investment (ROI) – Excess cash ˇow (proÿt) received over the
initial investment. ROI is typically expressed as a percentage
Variable Pricing – A pricing strategy where a business o˙ers varying
price˝points at di˙erent locations or points-of-sale. ˜is is a common
approach used by retailers when the costs of o˙ering certain goods
and services and the level of market demand justify it.
Yield Management – Variable pricing strategy, based on understanding,
anticipating, and inˇuencing consumer behavior in order to max-
imize˝revenue˝or proÿts from a ÿxed, perishable resource (such as
REFERENCES
Educational Institute of the American Hotels & Lodging Association. (2006).
Uniform system of accounts for the lodging industry (10th ed.). Lansing, MI:
Author.
Hales, J. A. (2011). Accounting and Financial Analysis in the Hospitality Industry.
Upper Saddle River, NJ: Pearson Prentice Hall.
Hayes, D. K., & Miller, A. A. (2011). Revenue Management for the Hospitality Indus-
try. Hoboken, NJ: John Wiley & Sons.
Parker, J. (2016). GOPPAR (Gross Operating Proÿt Per Available Room) – Best
Measurement of Success. Retrieved from http://hotelexecutive.com/business_
review/1920/goppar-gross-operating-proÿt-per-available-room-best-mea-
surement-of-success%20).
Stuart-Hill, T. (2016). Revenue Management: An Overview on Past, Present, and
Future. Retrieved from http://hotelexecutive.com/business_review/3194/rev-
enue-management-an-overview-on-past-present-and-future.
Sturman, M.; Corgel, J., &Verma, R. (2011). ˛e Cornell School of Hospitality
Administration on Hospitality. Hoboken, NJ: John Wiley & Sons.
˜e Economist. (2010). Asset-Light or Asset-Right? Retrieved from http://www.
economist.com/node/17463399.
Glossary of Terms and
Abbreviations
A
AAA – American Automobile Association.
Ancillary Departments – Providing necessary support to the primary activ-
ities or operation of an organization, institution, industry, or system
(example: in a hotel the spa, ÿtness center, etc. would be considered
ancillary).
ADR – Average Daily Rate—Rooms revenue divided by rooms sold, dis-
played as the average rental rate for a single room.
ADT – °e daily average ‘theo’ of all games played by the customer over a
given period.
ALBDs (Cruise) – Abbreviation for available lower berth days, which is the
measure of cruise capacity. Some cruise lines refer to PGCDs, which
means potential guest cruise days.
APD (Cruise) – Abbreviation for average per diem, which is the net ticket
revenue divided by the number of days in the cruise. Some cruise
lines refer to NPD, net per diem, which is the same statistic.
ARI – Availability, Rates, and Inventory—referred to by connectivity sys-
tems.
ARI – Average Rate Index.
Arrivals – Amount of rooms set to arrive.
B
Balk – When customers who had intended on joining a system do not do so
once they see the line.
469
Banquet Revenue/Group Rooms Consumed – A performance metric that

ties sleeping rooms to banquet revenue for a comprehensive view of
business.
BAR – Best Available Rate. (see Retail Rate)
BEO – Banquet Event Order (Space Optimization)—form generated by
your Sales and Catering system delivering detailed instructions to all
operational teams in your organization.
Billboard E˛ect – In the Cornell study (see Chapter 4), the billboard e˛ect is
the marketing and advertising beneÿts experienced by hotels when
they're listed on online travel agent websites.
Bottleneck – °e process within a system that limits the operation and out-
put of the entire system.
Brand.com – °e main reservation booking website for the hotel or chain.
BRG – Best Rate Guarantee.
BT – Business Transient.
Bundled Travel – Reservations where multiple travel services are combined
such as ˝ight and hotel.
Bundling – Inclusion of additional services to a room o˛ering.
C
Cabin Categories – Cruise ship cabins have di˛erent physical attributes and/
or di˛erent locations on a ship. Similar cabin types are grouped into
the same cabin category and sold at the same price.
Cancellation Penalties (Cruise) – Fees assessed in the event that a cruise is
canceled a˙er the full payment due date.
Capacity (Restaurant)–°e supply of seats a restaurant has available to
accommodate customers.
Channel/Source – Platform or engine responsible for delivering a booking
transaction. °is could range from the hotel/brand call center, the
hotel website, an online travel agency (OTA), a global distribution
service (GDS), or the internal hotel sales team.
Channel Management – Where the sources of reservations are controlled
for purposes of revenue and proÿt enhancement.
Glossary of Terms and Abbreviations  471
Channel Manager – A connectivity third-party system that pushes a hotel’s

ARI to a distribution channel.
Citywide – Event in the market that results in lodging demand adequate to
ÿll the vast majority of all hotels.
Click – When a consumer clicks on a link.
CLV – Customer lifetime value—°e sum of all proÿts from a given cus-
tomer over their lifetime relationship with the company.
Clustering – Where a homogenous consumer market is divided into homog-
enous groups based upon.
Competitive Benchmarking – Conducting an analysis to understand the
position of a hotel against that of its competitors.
Competitive Grid Analysis – A tactical tool that evaluate the product and
service o˛ering for the subject hotel and its competitors.
Competitive Set (comp set) – A group of similar and directly competing
Commission – Cost associated with booking a room where a percentage of
revenue is due to the OTA or travel agent.
Constrained / Unconstrained Demand (Space Optimization) – Economic
terms to describe the level of demand irrespective of supply. Uncon-
strained demand dictates that demand exceeds supply and a prop-
erty ÿnds itself in the driver’s seat for Rate and Function Space
Minimums. Constrained indicates supply exceeds demand and you
are in a byers market.
Contribution Margin (Restaurant) – °e proÿtability of a menu item, mea-
sured by its price less its food cost.
CTA – Closed to Arrival.
CTR – Click °rough Rate—Percentage of clicks on a link or advertisement
out of the amount of times the link or advertisement was shown.
Conversion – When a consumer has completed the payment in an online
session.
Conversion Rate – Percentage of visits that resulted in bookings.
Cost of Acquisition – Fees, commissions, and expenses attributed to each

CoV – Coeˆcient of Variation.
CPOR – Cost per Occupied Room—°is cost represents the expenses asso-
ciated with occupying and servicing a room for one night. It includes
costs such as labor (front oˆce and housekeeping), cleaning sup-
plies, linen and utilities.
Crew – °e cruise ship sta˛ is referred to as crew. °is includes hotel oper-
ations sta˛ who serve the guests and marine and technical sta˛ who
operate and maintain the ship.
CRS – Central Reservation System—A computerized backend system of a
hotel’s booking engine.
Cruise Berths – Beds on a cruise ship are referred to as berths. °e ÿrst two
beds in a cabin are referred to as lower berths. °e third and fourth
beds are referred to as upper berths.
Cruise Length – °e number of days in a cruise.
Custom Tags – Are user-deÿned JSP language elements that encapsulate
recurring tasks. Custom tags are distributed in a tag library, which
deÿnes a set of related custom tags and contains the objects that
implement the tags.
D
Daily (Pickup) Pace – Net bookings and cancellations committed within a
set booking period (i.e. last seven days) for a given stay date as com-
pared to the same net bookings and cancellations that occurred over
the same booking dates (by day of week) prior year.
Data Patterns – Consistent ups and downs in data over the short to medium
term.
Data Trends– Consistent ups and downs in data over a long period of time.
Debarkation Day – °e date the cruise arrives at its ÿnal port of call and
passengers leave the ship.
Demand Generator – Any event, sports area, hospital, military base or busi-
ness that creates lodging demand for a market.
Departure Date (Cruise) – °e date the cruise departs from its ÿrst port.
Also referred to as embarkation date.
Departures – Amount of rooms that will or have checked out.
Deposit (Cruise) – °e payment required to hold a reservation. Can range
from $500 to $1,000 or more.
Dilution (Cruise) – °e amount of a refund given to a guest who converts
to a tactical promotion a˙er having already booked at a higher fare.
Dining Duration – °e amount of time a customer spends at a restaurant,
measured from arrival to departure.
Displacement Cost – °e value of the business that will be turned away
because the inventory has been committed to another segment
(group, contract, etc.)
Distribution Channel – °e chain of businesses or intermediaries through
which a good or service passes until it reaches the end consumer; in
the hotel industry distribution channels are business or intermediar-
ies through which a customer can purchase a hotel room.
DORM – Director of Revenue Management.
Double Occupancy Capacity (Cruise) – By cruise industry convention, each
cabin has a capacity of two guests (a small percentage of cabins are
designed for single guests) and a double occupancy capacity of 2. If
that cabin carries a third guest, its occupancy is 150% (3 divided by
2) If that cabin carries four guests, its occupancy is 200% (4 divided
2) In this way, cruise ship occupancy typically exceeds 100%.
Duration—See dining duration.
Dynamic Pricing – Practice of pricing items at a level determined by a par-
ticular customer's perceived ability to pay.
E
Early Departures – Rooms that are scheduled to depart on a later date but
have checked out earlier than expected.
Extranet – Connectivity system website where hotel’s upload their rates and
availability to display on the associated third party website.
F
Fair Share – °e proportional share of business assuming an even distribu-
tion of supply, revenue, and demand among all properties included
within a competitive set.
Fences – (Restaurant Revenue Management)—Di˛erences in physical
inventory units.
Fencing/Segmentation Hedges – Methods of control used by Revenue Man-
agers to manage which reservations they are willing to accept based
upon the price being paid.
FIT – Frequent Independent Traveler or Foreign Independent Tour - pre-
paid packaged tours for individual travel.
Fixed Costs – Costs maintained even if the hotel was empty.
Flow °rough (Space Optimization) – °e revenue that ˝ows to the bottom
line a˙er all expenses have been deducted.
Frame of Reference – Describes alternative choices in the market today to
set a baseline of existing expectations and further support the Point
of Di˛erence.
Full Payment Date (Cruise) – °e date the full payment for the cruise is due,
typically 30 days or more before the start of the cruise.
Full Ship Mentality – Cruise line revenue managers are expected to sell
every cabin on a ship prior to the departure date. °is is a cultural
imperative and the most successful cruise lines.
Function Space Optimization – °e application of yield management prin-
ciples to function space to optimize the return on an extremely per-
ishable resource.
G
GDS – Global Distribution System—A worldwide computerized reservation
network that provides transactions to travel agents, online reserva-
tion sites, and large corporations.
GM – General Manager.
GOPPAR – Gross Operating Proÿt per Available Room—A company’s rev-
enue from sales in a given period of time less its cost of goods sold
divided by the total number of rooms available for sale.
GRI – Global Review Index.

Group Banquet Revenue Contribution (Space Optimization) - °e Banquet
Revenue generated from each Group night consumed.
H
HRM – Hotel Revenue Management.
HRP – Hotel Rooms Pricing.
I
Impressions – °e amount of times an ad or link has been shown.
Index (Occupancy, ADR, RevPAR) – Property performance divided by com-
petitive set performance multiplied by 100. Internationally, indexes
are also referred to as MPI—Market Penetration Index (Occupancy
Index), ARI—Average Rate Index (ADR Index), and RGI—Reve-
nue/RevPAR Generation Index (RevPAR Index).
Inverse SWOT Analysis – Conducting a SWOT analysis through the lens of
a competitor.
Itineraries – °e cruise region and the ports of call during the cruise.
J
Jockey – When customers leave one line to join an other line.
K
KPI – Key Performance Indicator.
L
Leisure Travelers (Cruise) – People traveling as part of a personal vacation
without a business purpose. Leisure travelers tend to be more price
sensitive than business travelers and tend to book further in advance.
Lifeboat Seats – By law, a cruise ship must carry lifeboats with enough seats
for every person onboard the ship, including both guests and crew
members.
LOS – Length of Stay – Duration of a guest’s stay beginning with arrival date.
Revenue managers must manage revenue by adjusting strategies by
arrival pattern as this is the control point.
LRA – Last Room Availability – a condition granted to Special Corporate
accounts where their negotiated rate is automatically available if the
hotel is selling standard inventory.
M
Macroeconomics – Branch of the economics ÿeld that studies how the
aggregate economy behaves
MAPE – Mean Absolute Percentage Error.
MAR – Minimum Available Rate– °e lowest rate the property manage-
ment team sets for any day of the week to be quoted to consumers.
Market Segment – A subset of a customer group that can be easily identiÿ-
able by one or more common characteristics such as demographics,
purpose of travel, and buying behavior.
Meta Search Engine – Travel website that uses multiple search engine’s
(OTAs and brand.com) data to produce a compiled result.
Micro-Segments – Segments that can be further broken out in order to more
precisely group together those that share a similar level of interest in
a set of features.
Mix of Sales – see Market Segmentation.
MLOS – Minimum Length of Stay.
Monthly Pace – Net bookings and cancellations committed currently for a
given stay month as compared to the net bookings and cancellations
Monthly Pickup Pace – Net bookings and cancellations committed within
a set booking period (i.e. last seven days) for a given stay month as
compared to the same net bookings and cancellations that occurred
over the same booking dates (by day of week) prior year.
MPI – Market Penetration Index.
MXLOS – Maximum Length of Stay
N
Net Onboard Revenue (Cruise) – Onboard revenue a˙er deducting the cost
of goods sold.
Net Ticket Revenue (Cruise) – Ticket revenue a˙er deducting travel agent
commission or other direct sales costs (such as airfare for air-inclu-
sive tickets.)
NOI – Net Operating Income
Nonphysical Inventory—°e intangible resources required to deliver a ser-
vice.
No-Shows – Rooms that are scheduled to arrive but do not before a new date
arrives.
No-Shows (Cruise) – Guests holding a fully paid reservation who do not
cancel in advance and who do not show up at the ship on the depar-
ture date. Typically, very few people are no-shows.
O
Occupancy (Cruise) – °e percentage of available capacity that is occupied
or sold. Calculated as the guest cruise days divided by the ALBDs.
Onboard Revenue(Cruise) – Revenue derived from onboard sales in venues
such as bars, casinos, shore excursions, gi˙ shops, spas, etc.
Opaque – Where a guest books and is unaware of which hotel they are book-
ing until the non-refundable reservation is made.
Operations Forecast – Forecast utilized by operations leaders to appropri-
ately sta˛ the hotel.
Option Period (Cruise) – °e number of days between the time of reser-
vation and the time the reservation will automatically cancel if a
deposit is not received. Can range from 1 day to 1 week.
OTA – Online Travel Agent (OTA) – Travel website allowing customers to
plan and book travel.
Overbook – Selling hotel rooms beyond the hotel’s capacity.
P
Pace – Tracking performance versus a previous period, mostly done to com-
pare to the same moment in time as last year. For example, how many
rooms were sold at this point last year for the upcoming month ver-
sus how many are sold today for the upcoming month?
Pace Reports – An analytical report on how current business performance is
relative to budget, forecast, and history.
Passenger Sourcing Infrastructure – In order to ÿll all capacity for all depar-
tures, cruise lines build customer relationship management systems
to facilitate frequent direct marketing to past guests and prospects.
°ey also deployment sales teams around the world to build and
maintain relationships with the travel agency distribution system.
PAX – Passengers on the Ground.
PED – see Price Elasticity of Demand.
Percent Change (% Chg) – Amount of growth—up, down, or ˝at—this
period versus same period last year (day, week, running 28 days,
running month-to-date). Calculated as ((TY-LY)/LY)*100.
Perishable – An item or good likely to decay or go bad quickly (example:
a hotel room is perishable and cannot be sold once the night has
passed)
P & L – Proÿt and Loss Statement—°is ÿnancial statement details the rev-
enue, expenses, and proÿt (loss) generated during a ÿxed period of
time.
Physical Inventory – °e tangible resources required to deliver a service.
Planning Square – °e square footage required to accommodate a table in
a restaurant.
PMS – Property Management System.
Point of Di˛erence – What qualities separate the brand from its competitors.
°is trait must be imitable.
Positioning Statement – Statement of the hotel’s product and service o˛ering
that address the target market it is trying to fulÿl with a point of dif-
ferentiation compared to existing substitutes and includes a reason
why this organization is able to deliver the promise made.
PPC – Pay per Click—Ads that are placed on websites that cost a certain
amount per each click on the ad itself.
Price Discrimination – O˛ering various prices to various consumers.
Price Elasticity – A consumer’s willingness to purchase a product depending
on the level of price. Price elasticity of demand shows the relation-
ship between price and quantity demanded and provides a precise
calculation of the e˛ect of a change in price on quantity demanded.
°e following equation enables PED to be calculated.
% change in quantity demanded
% change in price
Price Inelastic – Where a customer is less sensitive to a change in price.

Product Di˛erentiation – How marketers modify or add supply in order to
better adapt to demand.
Product Type – Deÿned narrowly as the room type, package element or
booking policy attached to the reservation or more broadly as the
length of stay or lead time dimension. °is meaning, that a prod-
uct can be deÿned both by the physical attributes such a premium
room type or package element just as much as it can be considered
an accommodation available for purchase at the very last minute in
a compressed market.
Proÿt – Total revenue minus costs.
Proÿt Margin – Percentage of proÿt out of total revenue.
Purchasing Behavior – Common purchasing patterns found within a given
group of bookers including price sensitivity, responsiveness to vari-
ous types of advertisement, propensity to cancel, and customer loy-
alty.
Q
Qualiÿed Discount – Any discount that a consumer must be qualiÿed for
such as Senior Discount, AAA discount, Student Discount, etc.
Qualiÿed Segment – A segment that requires some type of membership
identiÿcation in order to qualify to receive the discount.
R
Rank (Occupancy, ADR, RevPAR, % Chg) – Property performance ranked
versus hotels in the competitive set (e.g. a “3 of 6” ADR ranking
means the subject hotel’s absolute ADR is third highest of the six
competitors).
Rate fences or Segmentation Hedges – Restrictions put in place to change
the price point o˛ered to a guest. Fences consist of 5 basic forms:
physical form, controlled availability, customer characteristics,
transactions characteristics, or product line.
Rate parity –Identical retail rate is quoted across all channels.
Reason to Believe – Provides the context of how the business is able to deliver
on its positioning statement.
Reinvestment Amount – °e monetary value corresponding to the services
and products given away to a customer o˙en expressed in terms of
a percentage.
Remaining Demand – Number of rooms the hotel can expect to sell with
unlimited physical capacity.
Remaining Supply – Number of rooms available for sale.
Renege – When customers leave a line before being served.
Retail Rate / Best Available Rate (BAR) – °e rate a customer pays “o˛ the
shelf ”, o˙en referred to as “best available”
Revenue Cycle –°e ability of a hotel to drive and optimize demand while
maintaining guest satisfaction.
Revenue Manager – °e individual or team responsible for maximizing rev-
enue within the constraints of available capacity and unconstrained
demand through e˛ective yield management.
Revenue Optimization Models (Cruise) – Large cruise lines use mathe-
matically sophisticated models for forecast demand at various price
points and in various markets and recommend prices that will result
in the highest proÿt contribution.
RevPAR – Revenue Per Available Room – Total rooms-related revenue per
[Rooms Revenue / (Rooms Available * Number of Days)].
RevPAS – Revenue per Available Space, or Revenue per Square Foot the
revenue generated on a square foot basis for a speciÿc period of time.
RevPASH – Revenue per Available Seat Hour.
RevPATH – Revenue per Available Treatment Hours.
REVPATI – Revenue per Available Time Inventory Unit.
RevPATT – Revenue per Available Tee Time.
RFP – Request for Proposal—A detailed requisition a client sends to proper-
ties to begin a dialog. It details the needs of the client (dates and size
constraints) and allows the property to match its facilities to those
needs.
RGI – Revenue Generation Index.
RM – see Revenue Manager
ROI – Return on Investment – Excess cash ˝ow (proÿt) received over the
initial investment. ROI is typically expressed as a percentage
Rooms to Space Ratio – Sleeping Rooms/ Sq. Ft Function space. A metric
which allows you to deÿne the structure of your property enabling
you to see the symbiotic relationship of rooms and space.
Rooms Revenue – What a hotel receives for the sale of its rooms.
RRM – Restaurant Revenue Management.
S
Sales Strategy Meeting – Revenue management strategy meeting consisting
of all members of the revenue management committee.
Seasonal Itinerary – Some cruise ships are deployed on various itineraries
throughout the year. For example, a ship might sail in the Caribbean
in the winter and reposition to Alaska for the summer, returning the
Caribbean in the Fall.
Seating Assignment Rule – A guideline used to regulate which party size can
sit at which table size.
Segmentation/Mix of Sales – How revenue managers and marketers classify
istics, behaviors, and preferences. °e most common customer seg-
mentation is transient, group and contract.
Segmented Data – Rooms sold and revenue data broken down by source of
business (transient, group, contract) and source of revenue (room,
food and beverage, other).
Service Capacity – °e amount of output a service system can produce.
Shoulder Dates – Dates that fall on the sides of peak demand dates.
Shoulder Night – A night where total hotel demand is not strong enough to
reach capacity.
SMERF – Groups booked that ÿt into the following classiÿcations: Social,
Military, Education, Religious, and Fraternal.
Smith Travel Research (STR) – Global provider of competitive benchmark-
ing, information services and research to the hotel industry with
performance data from over 63,000 hotels in 180 countries.
Solo Traveler – A cruise passenger traveling alone.
Spill (Cruise) – When there is more demand than supply, the demand that
can’t be accommodated is “spilled.”
Spoilage – Each unsold room at the end of a period.
Spoilage (Cruise) – When there is less demand than supply, any cabins that
sail empty are “spoiled.”
Stayovers – Rooms that occupy the room overnight and for subsequent
nights.
STLY – Same Time Last Year.
STR – Smith Travel Research.
Suboptimal Solution—An RRM solution that has a positive impact in one
area, but a negative impact on the overall service system.
SWOT Analysis – A four quadrant analysis to examine the subjects Strengths,
Weaknesses, Opportunities and °reats.
T
Target Market – Segment of customers the business it trying to reach.
Ticket Revenue – Revenue derived from cruise fares and does not include
any ancillary revenues from onboard or other sales.
°eo – °eoretical win. °e ‘theo’ is calculated by multiplying the coin-in

amount by the hold percentage. °e coin-in amount is the total
money spent by a customer on a given occasion. °e hold percent-
age is the probability that the casino will win a speciÿc play.
°ird and Fourth guests – Cruise ship cabins are designed to accommodate
three or four guests, and sometimes more. Most o˙en, these guests
are children sharing the same cabin as their parents.
°roughput Time – °e time a customer spends in a service system from
enter to exit.
°roughput Rate – °e number of customers that ˝ow through a service
system over a certain time.
TocPAC – Total contribution per available customer—(Rooms Revenue +
Auxiliary Revenue—Variable Cost) / Number of Guests.
Travel Agent Commission (Cruise) – Roughly 65% of cruises are sold
through travel agents who earn commissions ranging from 10% to
20% of Ticket Revenue.
TrevPAR – Total Revenue per Available Room—Total revenue that a hotel
accumulates coming from rooms, F&B, and all other outlets per each
available room in the hotel.
TrevPOR – Total Revenue per Occupied Room—Total revenue that a hotel
accumulates coming from all outlets per the occupied rooms in the
hotel.
TRM – Total Revenue Management—Decision process based on the sum of
all revenue streams from both room and outlets on a customer level.
Two-for-One – °e most e˛ective cruise line promotion is o˛ering two for
the price of one. Some cruise lines purposely set their brochure rates
high enough so they are willing to accept that fare for the ÿrst guest
and no fare at all for the second guest.
U
Unconstrained demand – Total demand in a segment or overall in the
absence of any constraints. (See also constrained/unconstrained
demand.)
V
Variable Costs – Expenses from labor and supplies to service the room a˙er
use, the expense of the utilities associated with the guest’s occupancy
and a designated cash reserve towards a capital budget for replacing
furniture, generally every 3–7 years, as part of a regularly scheduled
refurbishment.
Variable Pricing – A pricing strategy where a business o˛ers varying price
points at di˛erent locations or points-of-sale. °is is a common
approach used by retailers when the costs of o˛ering certain goods
and services and the level of market demand justify it.
Variable Pricing (Restaurant) –°e practice of charging di˛erent prices to
di˛erent customers.
Visit – A visit is when a consumer accesses and has an interaction with a
website.
Y
Year-Round Itineraries – Some cruise ships are deployed on the same itiner-
ary year round, o˙en in the Caribbean.
Yield – °e return or proÿtability of an asset.
Yield (Cruise) – °e most important revenue management statistic in the
cruise industry. Yield can be calculated two ways: 1) Average per
diem times occupancy percentage, and 2) net ticket revenue divided
by ALBDs. But equations give the same result.
Yield Management – A variable pricing strategy, based on understanding,
anticipating and in˝uencing consumer behavior in order to max-
imize revenue or proÿts from a ÿxed, perishable resource (such as
YOY – Year-over-Year.
Index
A Buying behavior within segments

HRM
Acquisitions among key players
bundling, 9
clear method, 105
group rooms, contractual basis of, 10
OTA standpoint, 105
market segments, 9
Priceline Group, 106
rate fences, 8–9
Availability, rates, and inventory (ARI), 104
Average daily rate (ADR), 13–14, 87, 198 C
B Central reservation system (CRS), 88
Competition
Basic calculations applications
key performance indicators (KPIs), 166 cases, 134–135
digital marketing and e-commerce, competitive grid analysis
183–184 facilities, 124
emerging profitability metrics, 180–181 property condition or age, 124
goals, 186 services and pricing, 124
inventory management, 175–178 site location, 124
market share, 168–172 competitive set, 117
mix of sales or market segmentation, 171 customer segmentation, 117
monitor and evaluate over time, 186–187 hotel services/tier, 117
pace reports available within HRM, 172–174 location, 117
RevPAR, 167 market, 117
Strategy Critique tool, 185 online information, 117–118
strategy planning utilizing key defined, 117
performance indicators, 185 determine competitive positioning within
Benchmarking performance, 45 SWOT analysis, 121–123
forward looking benchmarking data, guidelines for, 130
208–208, 211–212 internet activity, 135
OTA market data, 213–215 positioning statement, 130
pricing market data, 215–216 pros & cons, 118
Smith Travel Research Global (STR), 202–203 rate value matrix, 131–133
standards of benchmarking, 204–208 segment performance, 127–128
Best available rate (BAR), 41 STAR summary, 120–121
Budgeting, 156 team activity, 135
communication, 159 validating set, 118
execution, 158 Cruise industry
goal setting and compensation, impact on, 159 ancillary revenues, captive audience for, 378
internal and external expectations, 157 revenue optimization models, 379
485
486  Index
applications, 396–397 D
avoiding close-in discounting, 393
Distribution channel
cancellation fees, 376–377
and acquisitions among key players
capacity growth, 370–371
clear method, 105
cruise line
OTA standpoint, 105
occupancy, implications for, 381
Priceline Group, 106
pricing, 388
analysis, 91–93
revenue management systems, 394–395
applications, 109
tools for managing prices, 382–383
average daily rate (ADR), 87
customer databases
challenges, 94
control dilution, 384
customer relationship management (CRM) big data, 95
systems, 384 CRS system, 95
past guests and prospects, 384 fragmented distribution network, 95
stimulate demand, 384 proliferation, 95
test price points, 384 connectivity among
and debarkation dates, 375 availability, rates, and inventory (ARI), 104
deposits, 376–377 channel manager, 104
discretionary, leisure travelers, 374–375 CRS, 103
final payments, 376–377 extranet, 103
fixed embarkation, 375 pros & cons, 104
history, 369–370 continued mergers
hotel and cruise line revenue management clear method, 105
compared, 373–374 OTA standpoint, 105
internationalization of passengers, 371 Priceline Group, 106
internet activity, 398 cross device channel platforms
long booking window, 375–376 OTAs, 107–108
option periods, 376–377 Webtrends, 106
per person pricing drive direct practices
cabin, third and fourth guests, 377 methods, 94
lifeboat seats, 377 evolution of
ship, double occupancy capacity, 377 highlights, 89
solo traveler, 377 future of, 105
pricing constraints, 392–393 internet activity, 110
pros & cons, 390 online travel agencies (OTAs)
ship configuration agency, 97
cabin categories, 385–386 billboard effect, 97
easier than implementing a promotion, 387 hoteliers, 96–97
less disruptive to guests, 388 major benefits, 96
lower price dilution, 387 merchant, 97
ship size and onboard amenities, 370–371 opaque, 97
strategic cruise pricing, 388–389 rate parity and best rate guarantee
tactical cruise pricing legal challenges, 100–101
promotional offers, 391–392 pros & cons, 100
risk of spoilage, 390 sharing economy, 108
spilling demand, 390 social media
well-crafted cruise promotion, 390–391 increased involvement of, 106
team activity, 397–398 strategies used
wave season, 380 central reservation system (CRS), 88
worldwide distribution mix differences, 88
deployment, 371–373 global distribution channel (GDS), 88
guest sourcing, 383–384 hotel website, 87
year-round ship deployments versus seasonal meta websites, 88
ship deployments, 380 online travel agency (OTA), 88
itineraries, 379 voice, 88
Index  487
team activity, 109–110 careful analysis, 75

TravelClick˜’s data, 89 negotiated rates, 75
wholesalers and FIT companies, 99–100 type of analysis, 75–76
team activity, 80
E
Evolving hotel segmentation F
applications Fencing segments, 67–68
Minneapolis City Center hotel, 79 acceptability, 69
revenue managers A & B manage, 79–80 correlation, 68
Contract segment enforceability, 69
CPOR, 75 ethical issues with, 69
opportunities, analysis of, 74 information, 68–69
piece of business, 75 methods of, 68–69
fencing segments, 67–68 price discrimination, 68
acceptability, 69 rate fences, five basic forms of, 68
correlation, 68 Flow through management, 335
enforceability, 69 administrative fee, 338
ethical issues with, 69 food and beverage, 339–340
information, 68–69 rent, 338
methods of, 68–69 resources, 338–339
price discrimination, 68 Free independent travel (FIT), 99–100
Function space optimization
rate fences, five basic forms of, 68
applications
internet activity, 81
businesses to be evaluated, 360–361
market segmentation
Excelsior hotel, 359
average daily rate (ADR), 63
communication and communication tools,
one-segment profit versus two-segment
356–357
profit, 63 evolution of, 334
revenue managers, 62 flow through management, 335
mix of sales, analyzing, 76 administrative fee, 338
optimal mix, 77 food and beverage, 339–340
price sensitivity, varying levels of, 69 rent, 338
price-elastic segment, 70–71 resources, 338–339
price-inelastic segment versus price-elastic full service hotels, three main categories,
segment, 70 345–346
profitability within Group and Crew segments, 346
booking window, 72 Group Banquet Revenue Contribution, 347
displacement cost, 72–73 Group piece of business, 346
Littlewood’s rule, 72 internet activity, 363
pros & cons, 75 pros & cons, 341, 346
segmentation, evolution of request for proposal (RFP), 333
bundled travel, 66 Revenue Maximization sheet (REVMAX
clustering, 66 Sheet), 348–351
frequent independent traveler (FIT), 67 room revenue sources, 337–338
Littlewood’s rule, 64 rooms and function space, 336
macro- to micro-segmentation, 66 segmentation and negotiation process, 352
micro-segments, 66 characteristics, 353
Online Travel Agent (OTA) segment, 66 group segment, 353–356
opaque, 66 team activity, 361
pay per click (PPC), 67 business to be presented, 362
practice of tracking, 65 team perspectives, 362–363
product differentiation, 63 unique characteristics of space, 336
retail rate, 66 best available rate (BAR), 337
revenue managers, 66 Food and Beverage (F&B) prices, 337
various market segment, 65 upselling opportunities, 340–341
special corporate/negotiated segment Function Room Occupancy Report, 343–344
488  Index
request for proposal (RPF), 342 applications, 25

Revenue per Available Space (RevPAS), 342 daily interaction with property operations
yield management, 335–336 and sales, 23–24
ownership meetings, 23
G sales strategy meeting, 23
Global distribution channel (GDS), 88 forecasting and budgeting, 19–20
Global review index score (GRI), 218 inventory management, 20
last room available, 22
H no-shows and early departures, 22
overbook, 22
Hotel forecasting and budgeting, 141 market share
applications citywide, 16
cases, 160–161 competitive set, 16
budgeting, 156 low RevPAR index, 19
communication, 159 rate (ADR) and RevPAR, 17, 19
execution, 158 sample market share report, 17
goal setting and compensation, impact on, year over year performance (YoY), 18
159 mastering, 3
internal and external expectations, 157 mix of sales
calculating forecast error, 155–156 ADR and RevPAR, 10
forecasting methods, 148
performance metrics
fundamentals, 144
average daily rate (ADR), 13–14
constrained forecast, building blocks of,
house profit, defined, 15
150–152
indicators, 12
demand forecasting, sources of data for,
key performance indicators (KPIs), 12
146–148
length of stay (LOS), 13
forecasting group and contract confirmed,
occupancy, 12–13
151
profitability, 14–15
group block forecast example, 152–154
historical models, 148 revenue manager comparison, 15
time horizons and frequency, 145 room revenue, 14
unconstrained forecast versus constrained room statistics, 12
forecast, 146 room statistics in profit & loss statement, 16
impact of revenue cycle, 3
hotel valuation, 144 revenue manager (RM)
revenue strategy and sales deployment, 143 qualifications for applying, 4–5
seasonality and impact on operations, segmentation, 6
142–143 customers, 7
internet activity, 162 group and contracted rooms, 7
pros & cons, 156 hotels track and target, 7
team activity, 162 revenue managers (RM), 8
Hotel revenue management (HRM), 2 transient and group sub-segments, 8
buying behavior within segments Hotel rooms pricing (HRP), 34
bundling, 9 benchmark rate (BAR), 45
group rooms, contractual basis of, 10 last room availability (LRA), 45
market segments, 9 pricing fundamentals, 33
rate fences, 8–9 booking pace, 35
channel management segmentation, 34
brand.com, 11 variable demand and seasonality, 34
channel costs, 11 pricing tactics
commission, 11 computer-generated sensitivity models, 54
cost of acquisition, 11 differential pricing through booking
OTA segment and channel, 11 parameters, 49
rate parity agreements, 11 evaluating pricing effectiveness, 51–52
segment and channel relationship, 11 price sensitivity, 52–53
segments, 10 rate parity and channel distribution, 50–51
communication, 22 static versus dynamic pricing, 47–48
Index  489
transparent versus opaque pricing, 49–50 L

retail pricing evaluation
Last room availability (LRA), 45
best available rate (BAR), 41
Length of stay (LOS), 13
competitive pricing analysis, 42
pricing to manage demand, 178
competitive set, 41
Lifeboat seats, 377
price positioning process, 43
pricing level, 44–45
rooms mix, 45–46
M
seasonal pricing chart, 46 Market segmentation
segmentation mixes, 46 average daily rate (ADR), 63
value creation, 41 one-segment profit versus two-segment
value creation profit, 63
contract room, 38–39 revenue managers, 62
economic value, 36–37 Market share
government, 39–40 citywide, 16
group of rooms, 38 competitive set, 16
packages, 40 low RevPAR index, 19
qualified rates, 40 rate (ADR) and RevPAR, 17, 19
retail, 39 sample market share report, 17
segmentation, 38 year over year performance (YoY), 18
special corporate, 39 Mix of sales, 76
wholesaler, 40 optimal mix, 77
Modeling internal booking data
I average daily rate (ADR), 198
Inventory management, 20 booking curve, 200
last room available, 22 four booking pace quadrants, 197–198
no-shows and early departures, 22 four lenses of segmentation, 199–200
overbook, 22 property management system (PMS), 198
year over year (YOY) growth, 201
K
N
Key performance indicators (KPIs), 12
applications Non-traditional market data
cases, 187–188 air traffic, 218–220
basic calculations, 166 consumer sentiment converted into data,
digital marketing and e-commerce, 183–184 217–218
emerging profitability metrics, 180–181 custom tags, 217
goals, 186 global review index score (GRI), 218
price elasticity of demand (PED), 217
inventory management, 175–178
tracking website regrets and denials through
market share, 168–172
custom tags, 220–223
mix of sales or market segmentation, 171
monitor and evaluate over time, 186–187
O
pace reports available within HRM, 172–174
profit and profit margin, 167 Online travel agencies (OTAs)
RevPAR, 167 agency, 97
Strategy Critique tool, 185 billboard effect, 97
strategy planning utilizing key hoteliers, 96–97
performance indicators, 185 major benefits, 96
internet activity, 189 merchant, 97
length of stay pricing to manage demand, 178 opaque, 97
market share analysis progression, 172
pros & cons, 181 P
Shahawk hotel market share report, 169, 171 Per person pricing
STAR summary report, 170 cabin, third and fourth guests, 377
team activity, 188 lifeboat seats, 377
490  Index
ship, double occupancy capacity, 377 Restaurant revenue management (RRM), 234, 263
solo traveler, 377 applications
Performance metrics Arepas, 324–325
average daily rate (ADR), 13–14 Cayuga Quick Grub, 291
house profit, defined, 15 internet activity, 293
indicators, 12 Muchacho, 257
key performance indicators (KPIs), 12 Northman’s, 291–292
length of stay (LOS), 13 tacky fingers, 325
occupancy, 12–13 tasty banquets, 257
profitability, 14–15 team activity, 292–293
revenue manager comparison, 15 Vail Ski Resort Mountain Restaurant, 324
room revenue, 14 BCG matrix to categorize entrees, 271
room statistics, 12 capacity in
room statistics in a profit & loss statement, 16 areas of, 302
Price elasticity of demand (PED), 217 combining tables, 315
Property management system (PMS), 198 complex methods, 318–319
controlling duration, 312–314
R dining duration, 306
Rate parity and best rate guarantee duration study, 308–312
legal challenges, 100–101 fences, 314–315
pros & cons, 100 layout of supply, 322
Reporting and analysis, 196 measuring duration, 306–307
applications percentage match, 316–317
explaining loss, 226–227 percentage-duration match, 317–318
selecting right data, 226 space allocation, 319–321
benchmarking performance supply mix, 316
forward looking benchmarking data, supply offered, 314
208–208, 211–212 utilization, 302–305
OTA market data, 213–215 cyclical pattern in data, 280
pricing market data, 215–216 internet activity, 259, 326–327
Smith Travel Research Global (STR), managing demand, defined, 264
202–203 arrivals, 275–276
standards of benchmarking, 204–208 basic arrivals analysis, 278
internet activity, 227 call-ahead seating, 278
market analytics, future of, 223 Cove, 272
speaking to data, 224–225 data, collected, 272
modeling internal booking data extent waiting lines, 286–287
average daily rate (ADR), 198 forecast considerations, 283–284
booking curve, 200 forecast methods, 284–286
four booking pace quadrants, 197–198 forecasting demand, 283
four lenses of segmentation, 199–200 graphing arrivals, 279–280
property management system (PMS), 198 line terms and types, 287–288
year over year (YOY) growth, 201 menu engineering, 271–274
non-traditional market data party size distribution, 282
air traffic, 218–220 pricing, 265
consumer sentiment converted into data, psychology of waiting lines, 288–289
217–218 reservations, 277
custom tags, 217 setting prices, 270–271
global review index score (GRI), 218 strategies, 273–274
price elasticity of demand (PED), 217 types, 276–277
tracking website regrets and denials variable pricing, 265–268
through custom tags, 220–223 variable pricing strategies, 268–269
pros & cons, 220 wait list management, 289–290
team activity, 227 waiting lines, 286
Request for proposal (RFP), 333, 342 walk-ins, 277
Index  491
no trend in data, 279 commercial mortgages, 459–460

practices, 297 Debt Service Coverage Ratio (DSCR), 461
program financial institutions, 460
arrivals data, 247–248 fluctuations in, 459
average check, 250 institutional hotel owners, 459
baseline, 241 lender issues, 460
collect data, 252 loan-to-value (LTV) tests, 460
conditions necessary, 235–236 net income of hotel asset, 458
develop solutions, 253–254 net operating income (NOI), 461
dining duration, 248 hotel ownership types, 443, 446
duration and price, 239 individual owners, 444
fishbone diagram, 246–247 individuals/family offices, 444
implement and monitor solutions, 255–256 insurance/life companies, 444
operations component, 237 owner and revenue manager, relationship,
process flow chart, 241–243 446
process flow diagram, 245 ownership versus revenue management
program, 240–241 objectives, 448–449
private equity, 444–445
pros & cons, 236
real estate investment trusts (REITs), 444
revenue per available seat hour (RevPASH),
sovereign wealth funds, 444
237–238, 250
table occupancy and seat occupancy, 248–249
macroeconomic trends, 449–451
throughput, 243–244
metrics to measure, 451
pros & cons, 303
entrepreneurial revenue managers, 452
seasonal pattern in data, 280 Gross Operating Profit per Available Room
service capacity (GOPPAR), 452
capacity management, 299–301 ownership calls, participating on, 453–454
capacity planning, 298–299 price elasticity of demand, 456
chase method, 299–300 ADR, 457–458
constant method, 300 economic cycles, 457
nonphysical inventory, 299 segments and price, 457
physical inventory, 299 pros & cons, 442
predictable demand and flexible resources, team activity, 465–466
301 Revenue manager (RM)
team activity, 258–259, 325–326 fixed costs versus variable costs, 4
trend in data, 279 fixed number, 4
Revenue cycle, 3 perishable inventory, 4–5
Revenue management qualifications for applying, 4–5
applications variable demand, 5
cases, 463–465 Revenue Maximization sheet (REVMAX Sheet),
cost per guest acquisition and profitability 348–351
ancillary departments, 456 Revenue per available seat hour (RevPASH), 263
booking channels, 455 Revenue per Available Space (RevPAS), 342
branded hotel owners, 455
OTAs, 455–456 S
owner’s choice, 455 Segmentation
price elasticity, 454 evolution of
reservations, 455 bundled travel, 66
evolution of clustering, 66
new online travel agencies, 440 frequent independent traveler (FIT), 67
online booking agencies, 441 Littlewood’s rule, 64
Revenue per Available Room (RevPAR), macro- to micro-segmentation, 66
442–443 micro-segments, 66
variable and dynamic pricing models, 443 Online Travel Agent (OTA) segment, 66
focus on profitability opaque, 66
Cash Sweeps, 462 pay per click (PPC), 67
492  Index
practice of tracking, 65 optimization, 409–411

product differentiation, 63 price management, 410–411
retail rate, 66 RevPATH, 410–411
revenue managers, 66 time management, 409
various market segment, 65 strategy, 406
Ship configuration team activity
cabin categories, 385–386 assignment, 434
easier than implementing a promotion, 387 guests, 433–434
less disruptive to guests, 388 theory and metrics
lower price dilution, 387 average daily theoretical (ADT), 415–416
Smith Travel Research Global (STR), 202–203 casinos, 414
Special corporate/negotiated segment catering, 422
careful analysis, 75 creative RM strategy, 422–423
negotiated rates, 75 customer segmentation, 414–417
type of analysis, 75–76 demand forecasting, 412–413, 417
displacement analysis, 419–420
T groups, 418
Tactical cruise pricing price optimization, 413–414
promotional offers, 391–392 pricing, 417–418
risk of spoilage, 390 pricing strategy, 418–419
spilling demand, 390 reinvestment amount, 417
well-crafted cruise promotion, 390–391 revenue per available square foot
Total revenue management (TRM) (RevPAS), 422
applications, 432–433 theo, 415
break down intraorganizational silos, 426 theory and metrics
characteristics, 405–406 golf, 411–412
customer lifetime value (CLV), 427–428 spas, 408–411
framework, 406 total revenue management ICEing (TRM
incentivised, communicated, and ICEing), 429
employees are educated (ICEing), 407 value per stay method, 427
key pieces for, 407
golf U
characteristics, 411–412 Unique characteristics of space, 336
courses, 411 best available rate (BAR), 337
revenue per available tee time (RevPATT), Food and Beverage (F&B) prices, 337
412
guest level revenue management, 426–427 V
hotel rooms, 406
Value creation
hotel rooms pricing (HRP)
opportunities for, 430–431
contract room, 38–39
outlet level optimization
economic value, 36–37
strategy for, 407–408
government, 39–40
profit focus
group of rooms, 38
total contribution per available customer
packages, 40
(TocPAC), 428–429
qualified rates, 40
pros & cons, 422
retail, 39
recognize immediate wins, 425
segmentation, 38
RM celebration, 426
special corporate, 39
roadmap for new outlet
wholesaler, 40
develop an RM strategy, 424–425
establish a baseline, 424
monitoring, outcome, 425
Y
performance drivers, 424 Year over year (YoY)
strategy, implementation, 425 growth, 201
spas, 408–411 performance, 18
characteristics, 408–409 Yield management, 2, 439

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HOSPITALITY REVENUE

© 2021 Apple Academic Press, Inc.

Dr. Peter Szende has over 25 years of management experience in the

Currently, Dr. Szende is Programme Lead in Hospitality Management at

Meet the Contributing Authors......................................................................... ix

1. Hotel Revenue Management: An Introduction ................................1

10. Restaurant Revenue Management: Advanced Demand

Glossary .............................................................................................. 469

Society’s Lodging Pulse, and others. In addition to speaking at events, he sat on

Our conversation on this walk usually focused on the progress of his

Chapter 1 begins with a broad introduction to hotel revenue manage-

Te various fundamentals of hotel revenue management are then pre-

Further investigation into hotel segmentation leads to distribution chan-

With the current environment in mind, there is likely no chapter more

Among the unique features of this textbook is the inclusion of a compre-

Te fnal chapters of the text expose the reader to additional areas of

Signifcant ancillary spend, fxed embarkation and debarkation dates,

—Barry A.N. Bloom, PhD

Hospitality Revenue Management: Concepts and Practices provides an

Trough its real-world approach, students are placed in the role of a

Tis book has been designed with distinctive features:

• A self-contained structure that allows for greater teaching

Because each chapter is self-contained, the sequence of chapters can be

• Multi-author, collaborative approach

Given the constant changes in the feld of revenue management and to

information, multiple authors contributed to this textbook. Te purpose of

Once we identifed the contributors, we established the emphasis of each

• Pedagogical features that keep students engaged and

Distinguishing pedagogical features defne the overall tone of any textbook.

Learning Objectives: Each chapter opens with a list of learning objectives

• So What?—An opener designed to draw the student into the chapter

• ˜ink Historically—A refection on historical events intended to

• Real People—A presentation of diﬃcult situations that real manag-

• Pros/Cons—Features that present opposing views on a relevant issue

Spreadsheet Exercises: Profciency with spreadsheets is a great advantage to

Discussion Questions: Questions challenge students to think critically about

Glossary: Te glossaries provide students with an accessible reference tool

Te password protected instructor area is available for qualifed instructors

• Instructor’s Manual: Te comprehensive instructor’s manual con-

• Test Bank: Te exam test bank contains 20 multiple choice questions

I would also like to express my gratitude to the following undergraduate

We are especially grateful to Nicholas Catalfamo, Director of Revenue

We owe special thanks to Timothy Kenney, Director of Revenue Man-

Hotel Revenue Management:

Hotel revenue management (HRM) focuses on how a hotel can produce

organizations. Proper communication of the HRM strategy throughout

Mastering the basic principles and components of HRM is critical in

°e goal of any business is to create a valuable product or service and

Figure 1.1: The Revenue Cycle

°e revenue manager (RM) is not directly responsible for executing

QUALIFICATIONS FOR APPLYING REVENUE MANAGEMENT

Fixed Costs versus Variable Costs

• Hotels generally have high ÿxed costs in proportion to their vari-

• A hotel has a ÿxed number of rooms or “keys” that are sold on a

to sell a room rather than let it go empty, even at a price discount.

• In most cases, a hotel has ˝uctuating demand by day of week and

Source: Tulsa Daily Dorld, June 17, 1917, p.8.

What are your initial impressions of °e Hotel Boswell’s revenue man-

target customers in speciÿc groups based upon their characteristics, behav-

Segmenting customers allows a revenue manager to take advantage of