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Chapter 1 note HTM 381
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This 12 page Study Guide was uploaded by Alicia Yan on Sunday September 25, 2016. The Study Guide belongs to HTM 381 at Purdue University taught by Dr. Fan in Fall 2016. Since its upload, it has received 5 views. For similar materials see Hospitality revenue management in Hospitality Managementt at Purdue University.
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Date Created: 09/25/16
HTM 381 Chapter 4 Note 1. Ten Principles of Managing Revenue a. Businesses exist only to create wealth (value) for their customers. b. Successful businesses are careful to focus externally; on their customers’ needs, rather than internally; on their own needs. c. Consumers make rational buying decisions based on their perceptions of the value they receive for the prices they pay. d. The true value of a product or service is equal to what a buyer will willingly pay for it. e. Product quality is important, but service quality is just as important when delivering value to buyers of hospitality products and services. f. Any change in product quality, service quality, or price will have a direct impact on buyers’ perceptions of value. g. While it may be viewed simply as a number, a price is a very powerful message sent by sellers to buyers. h. Different buyers place different values on the same products or services, and as a result are willing to pay different prices for them. i. Strategic pricing is the application of data and insight to effectively match prices charged with buyers’ perceptions of value and willingness to pay. j. Revenue managers are those individuals or teams directly responsible for optimizing a business’s income and profits. 2. Value based (pricing): The practice of establishing prices for a firm’s products and services based primarily on the buyer’s perceived value of those products and services 3. Two Approaches of Price Control Differential pricing: The practice of a seller charging different prices to different buyers for the same product or slightly different versions of the same product. (This is sometimes referred to as demandbased pricing, segmented pricing, price differentiation, or price discrimination.) (To realize more potential value) Demand/Timebased Pricing or Variable Pricing The overall demand varies by time of the week, holidays, and seasons> changed perceived value When variable pricing is practiced constantly in real time, it is called dynamic pricing Demandbased pricing does not focus on each individual market segment, but on the demand of all segments ay certain time period 4. Fixed pricing: The practice of a seller charging the same price to all buyers. (This is sometimes referred to as flat or single pricing.) 5. Two fundamental pieces of information because they will determine both your RevPAR and GOPPAR: 1. How many rooms are sold each night (i.e., your occupancy rate) 2. The average room rate at which those rooms are sold (i.e., your ADR) 6. Inventory management: The process of allocating and modifying the number of products available for sale at various prices and through various distribution channels. 7. Branded (hotel): Industry jargon for a hotel affiliated with a national chain 8. ADR= Total room revenue/ total room sold 9. Consumer surplus: The difference between the amount a buyer would be willing to pay for a product or service and the amount they are charged. a. Consumer surplus= WTP Actual purchase price 10. GOPPAR = (Total RevenueManagement controllable expense)/Total room available for sell 11. RevPAR= Total Revenue / Total room available for sale 12. FOM: The individual responsible for administration of a hotel’s front office/front desk area. This is an industry term for front office manager. 13. Overcoming four pricingrelated challenges: Imperfect knowledge. Cannibalization: A significant threat to the implementation of profitable price differentiation strategies is the tendency for “high willingness buyers” to masquerade as “low willingness buyers” and thus avoid paying higher prices. Arbitrage: The nearly simultaneous purchase of a product at a low price and reselling of it at a higher price with the intention of keeping the difference in price. Questions of legality or ethics: 14. Price fence: The specific requirements that describes who is and is not eligible for a special pricing offer 15. Rate fences: are designed to allow customers to segment themselves into appropriate rate categories based on their needs, behaviors, or WTP a. Physical rate fences i. Based on room characteristics: standard vs. deluxe, onebed vs. doublebed b. Physical rate fences i. Based on flexibility, transaction, or customer consumption characteristics 16. Rate fences in Hotel 17. Implement pricing a. Market segmentation b. Product versioning c. Self selection 18. Rewards program: A formalized system of granting special pricing or other benefits for a company’s best customers. 19. Rate fence mistakes: a. Too much focus on discounts b. Not effective c. Too difficult or complicated d. Insufficient price differentials e. Wrong segmentation criteria 20. Service charge: A mandatory amount added to a guest’s bill for services performed by the seller. 21. Central reservation system (CRS): The structure used to accept hotel guests’ reservations and communicate them to an individual hotel’s property management system (PMS) 22. Property management systems (PMS): The hardware and software used to record reservations, guest stay information, and payments, as well as to record and store other relevant hotel operations data 23. Direct channel: A system of selling to consumers without the use of an intermediary. 24. Intermediary: An entity that acts as a communication or service link between buyers and sellers that are unable or unwilling to deal directly. 25. Indirect channel: A system of selling to consumers utilizing one or more intermediaries. 26. Communication costs (pricingrelated): The cost of printing and distributing new prices to buyers (for example, on brochures, flyers, or price lists) 27. Net ADR yield: The proportion of the standard rate (ADR) for a room sale that is actually realized by a hotel after subtracting the cost of fees and assessments associated with the specific distribution channel responsible for the room’s sale 28. Selfselection Both high & low prices are available to all customers, but it takes additional time, effort, or flexibility (customer acquisition cost) to obtain the low price Process by matching products with market segments through distribution channel management and rate fences Avoid discrimination and perceived unfairness Allow customers to selfselect, depending on the value they place on time, effort or flexibility Example: low season room rate will be lower but the timing is not good. 29. Product versioning: the practice of varying the form of the product or service and then varying price. (A series of similar products/service serving the same general market but sold at different prices) a. Tailor products for each segment b. Difference can be virtual or real c. Very low marginal cost to produce all versions d. Prices are driven by WTP, not by cost e. Allow customer selfselection f. Use rate fences to create different “versions” of the same product/service g. Minor differences enable the seller to exploit differences in price sensitivity among customer segments 30. Room types: A lodging term used to identify specific guest room configurations. For example, king bed versus queen bed rooms, suites versus standard rooms, and ocean view versus garden view or standard view rooms. 31. Price band: The span from lowest to highest price in a range of prices. 32. Ways to product versioning: a. Add features: b. Subtract features: c. Add a service to a product: d. Offer a menu of choices: 33. Bundling: Combining individual products and/or services into groupings that are sold for a single price, usually lower than the sum of the prices charged if the same included items were purchased individually. 34. Prix fixe: French for fixed price. A meal offered with several courses for sale at a single price. Also know as table d’hôte. 35. Package: The lodging industry term for a group of bundled products and services offered at one price. 36. Discount fees: Charges assessed to sellers for their customers’ use of a credit, debit, or entertainment card to pay for purchases. 37. Limits to price differentiation a. Imperfect segmentation/RM knowledge>incorrect pricing b. Arbitrage (buy in a cheap price then sell to other in higher price, can be prevented by increasing the cost of arbiter) c. Cannibalization i. Customers in highprice segments have strong motivation to move to low price segments (Can be reduced by proper rate fences) ii. 38. 39. HTM 381 Chapter 3 note 1. Seller’s view of a sale: Selling price Costs = Organizational profit (a tangible benefit) 2. Buyer’s view of a purchase: Perceived value (an intangible benefit) Selling price = Personal profit 3. Intangible (benefit): Lacking material qualities, not able to be touched or seen, but nonetheless received. 4. Perceived value: Consumers purchase products or services to satisfy their needs, wants, and desires and assign value to the purchases based on how much they are satisfied 5. Acquisition cost: price paid, time spent, and other costs 6. Four Alternative Value Formulas You pay for you: the greatest amount of personal profit, or value, possible is their goal You pay for other: the buyer’s hope is that the gift recipient is pleased, or at least not disappointed, with the gift given. Other pay for you: often less incentive for buyers to economize than to increase the level of their purchases. Other pau for other: purchases made by professional meeting planners and travel agents, 7. Reimbursable expense account: An arrangement in which a buyer is fully reimbursed by another entity for agreed upon purchases that have been made by that buyer. 8. Three factors that affect buyer’s perceptions of value received: quality, service, price 9. The relationship between quality and price: Quality: The degree of excellence of something as measured against other similar things. Examples include the USDA grade assigned to a cut of meat or the thread count of bed sheets. 10. Service: Intangible activities or benefits provided to buyers either alone or in conjunction with the purchase of a product. An example is the concierge services that are provided to registered hotel guests. 11. The relationship between service and price: Four “I”s of service: (four unique characteristics of service) Intangible: cannot be held, touched, or even seen before they are purchased. Inconsistency: the quality of service often depends on the individual who supplies it. Inseparability: the tendency of consumers to equate the quality of service provided with the actual person who provides it Inventory: inventory perishability and providing services during periods of little demand 12. To address each of the Is, what can we do? a. To address intangibility: communicate your value and quality efficiently, make intangible tangible, service guarantee b. To address Inconsistency standardization, quality ensure, service guarantee c. To address Inseparability invest in employees, especially frontline employees who have direct contact with customers d. To address Inventory: forecasting 13. (Perceived tangible product benefit + Perceived intangible service benefit) Price = Value (profit) 14. Ways to increase customers’ perceived value: Add value for customers (benefit not feature, transfer companies’ features to customers’ benefit) Enhance the perceived value (marketing) Understand your customers and their needs, wants and desires 15. Risks of slashing price (reduce price, discount) Give customers the impression of overprice, inferior product Delay consumption Increase customers’ negotiation power 16. Market segmentation Companies use to divide large heterogeneous markets into small markets that can be reached more efficiently and effectively with products and services that match their unique needs 17. Purpose of market segmentation To offer products or use marketing approaches tailored for different groups 18. Segmentation categories Geographic segmentation o Countries, regions, states, counties, or cities Demographic segmentation o Age/generation, gender, family size, family life cycle, income occupation, education, religion, race, nationality Psychographic segmentation o Social class, lifestyle, personality traits (e.g. need for status) Behavior segmentation (how consumers use a product/service) o Occasions (e.g. wedding), benefits sought (e.g. deal seeker), loyalty status (e.g. golden membership o A common basis for rate fences used in RMs 19. HTM 381 Chapter 2 Note 1. Price: A measure of the value given up (exchanged) by a buyer and a seller in a business transaction. 2. Customer’s perspective – the amount a customer pays for the product/service received. Service provider’s perspective – the amount a service provider collects for the product/service given. Acquisition cost: price paid, time spent, and other costs Total Customer Value = Perceived Value – Acquisition Cost 3. Twotiered price: A pricing strategy in which the buyer must pay a price for the ability to make additional purchases. (guests come to restaurant for 2 choices: enjoy the dinner alone or enjoy the dinner and wine together; airline to charge you more for upgrade) 4. Consumer rationality: The tendency to make buying decisions based on the belief that the act is of personal benefit. 5. Value: In a buyer or seller transaction, the amount of perceived benefit gained minus the price paid. Expressed as a formula: Value= Perceived value price 6. Value proposition: A statement describing the good or service to be received and the price to be paid for it. 7. Marketing: The process of providing a seller’s value proposition to a market. 8. Market: The set of current and potential buyers for a seller’s product or service. 9. 4 P’s” of the marketing mix Product: The product or service delivered to the buyer Promotion: The means of communication between buyer and seller Place: The location or means of delivering the product or service to be sold Price: What is given up in exchange for the product or service 10. Price point(s): The specific point at which a price falls on a range of low to high prices. (Westin hotels introduced its “Heavenly Bed.” Guests loved the significantly improved quality of this product offering. Competitors at all price points were forced to copy it) 11. Two alternative observations: Supply and demand should not be a major determinate of price. Costs should not be allowed to be a major determinate of price. 12. Supply (law of): The higher the demand for product, the more of it will be produced by sellers. 13. Demand (law of): The higher the price of a product, the less of it will be wanted by buyers. Price Quantity 14. Equilibrium price: The point at which the amount of a product supplied and the amount of it demanded are in balance. 15. Factors affecting buyers to make decision (Determinants of Demand): ability to pay & willingness to pay 16. Cost: The price paid to obtain the items required to operate a business. 17. Cost accounting: The specialized branch of accounting that focuses on recording and analyzing the expenses incurred by an organization. 18. Breakeven point: The point at which a firm’s revenues exactly equal its expenses. 19. Variable (cost): An expense that generally increases as sales volume increases and decreases as sales volume decreases. (cost of food, beverages) 20. Fixed (cost): An expense that remains constant despite increases or decreases in volume. 21. Minimum sales point (MSP): The revenue level required to achieve the breakeven point within a specific time period. 22. Costbased pricing: A pricing philosophy that involves summing product (or service) costs incurred, with a desired profit, to arrive at an item’s selling price. Expenses Desired profit = Selling price 23. Strategic pricing: The application of data and insight to effectively match prices charged with buyer’s perceptions of value. 24. Examples of factors that influence customer demand Income (ability to pay) Taste and preference (willingness to pay) Expectation about priceswillingness to pay Reference pricewillingness to pay (price war) The number of consumers in the marketcreate desire (willingness to pay, celebrity chief restaurant) 25. Willingness to Pay (WTP) The maximum price a customer is willing to pay for a product or service Customers will purchase if and only if the price is less than their WTP. WTP is a proxy of customers’ “perceived value” HTM 381 Chapter 1 note 1. Revenue: The total amount of sales achieved in specified time period. Number of unit sold X Union price = Revenue 2. Hospitality business: An organization providing food, beverages, lodging, travel, or entertainment services to people away from their homes. 3. Profit: The net value achieved by a seller and a buyer in a business transaction. (both seller and buyer gain) a. Accountant’s profit formula: Profit = Revenue Expense 4. Barter system: A trading system in which goods and services are exchanged without the use of money. 5. Money: An acceptable medium of exchange used as the measure of the value of goods and services. (In order to solve the limitation of barter system) a. Money have not inherent value (you can not eat coin or currency) 6. Economics: The area of study concerned with the production, consumption, and transfer of wealth. a. Economist’s Profit Formula: Profit = the reward of risk 7. ROI (Return in investment): the reward to investment for taking an investment risk. 8. The purpose of revenue management: To significantly increase company profits and owners’ ROIs through advanced revenue management and strategic pricing techniques. 9. Revenue manager: The individual or team responsible for ensuring that a company’s prices match a customer’s willingness to pay. Abbreviated in this book as RM. 10. Channel: A source of business customers. Also, a vehicle used to communicate with a source of customers. 11. Average daily rate (ADR): The average (mean) selling price of guest rooms during a specific time period, such as a day, week, month, or year. 12. Occupancy percentage: The number of rooms sold during a specific time period; expressed as a percentage of all rooms available to sell during that same period. 13. Revenue per available room (RevPAR): It is the average revenue generated by each available guest room during a specific period of time. 14. Revenue per occupied room (RevPOR): the average revenue generated by each occupied guest room during a specific period of time. 15. Gross operating profit per available room (GOPPAR): This is the average gross operating profit (GOP) generated by each available guest room during a specific period of time. Also written as GoPAR. 16. Revenue Per Available Seat Hour (RevPASH): It is the revenue generated during a specified time period divided by the number of seat hours available during that period. 17. Necessary conditions for RM: a. Relatively fixed capacity b. Perishable inventory c. Timevalue demand d. Relatively low variable cost to fixed cost e. Segmentable markets Difference pricing/ Heterogeneous customer with different needs and request f. Advance reservation 18. Revenue management in hospitality is: To apply the right pricing strategy to right product or service for the right customers at right time within the right duration and capacity through the right channel 19. Differences from airline YM: a. More uncertainties: varying length of stay, arrival and departure time, and situation of noshow b. More group business c. Other revenue generation unites (e.g, food & beverage, playing important roles for the hotel) d. More distribution channels e. Relatively less control of some distribution channels such as the third party online travel agency (e.g., Expedia) 20. Yield management: A demandbased revenue management strategy, first initiated by commercial airline companies. It seeks to maximize income via manipulation of selling prices. 21. Revenue management: strategicorientedseek to increase the overall demands and then optimize the revenue under that demand 22. Strategic RM involves: Understand different customer groups and market segmentations Emphasize profits, not occupancy rate onlyincorporate group and other revenue generation business into the RM system Manager distribution channels 23. Prevent high price customer switching to low priced seats: Rate fence (purchase restriction): book 30 days before departure, nonchangeable, nonrefundable Capacity control (availability restriction): limit the number of discount seats sold on each flight 24. Revenue Manager job description: Establish prices Forecast demand Manage inventory Manage distribution Evaluate results Provide recommendations Communicate with other departments and management about RM strategies and decisions
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