Revenue Management techniques in hospitality industry

27th May 2008

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NB. This paper written by : Vani Kamath*, Shweta Bhosale* and Dr.Pradip Manjrekar

Revenue Management Techniques in the Hospitality Industry

The hospitality industry is part of a larger enterprise known as the travel and tourism industry. It is one of the oldest industries in the world. In early days, traders, explorers, missionaries and pilgrims needed a break in their journeys requiring food, shelter and rest. People opened their homes and kitchens to these weary travellers, and an industry was born. Although accommodation today is varied and their services have changed and expanded over the ages, one thing about the hospitality industry has remained the same, guests are always welcome! From a friendly greeting at the door, room service, breakfast, to a host of facilities’ the hospitality industry offers travellers a home away from home.

What is the Hospitality Industry?

Hospitality is defined as “the friendly reception and treatment of strangers”. For most people, hospitality means entertaining guests with courtesy and warmth. Hospitality is also an industry made up of businesses that provide lodging, food and other services to travellers. The main components of this industry are hotels, motels, inns, resorts and restaurants.

In a broad sense, the hospitality industry might refer to any group engaged in tourism, entertainment, transportation or lodging including cruise lines, airlines, railways, car rental companies and tour operators. However the two main segments are:

  1. The lodging industry also called the hotel industry
  2. The food and beverage industry also called the restaurant industry

The lodging industry is made up of businesses providing temporary housing, and such a business is called a lodging establishment and the people who stay in it are called guests or clients.

What is Revenue Management?

Revenue Management is a technique to optimize the revenue earned from a fixed, perishable resource. The challenge is to sell the right resources to the right customer at the right time. Revenue Management implements the basic principles of supply and demand economics in a tactical way to generate incremental revenues. There are three essential conditions for revenue management to be applicable:

  1. That there is a fixed amount of resources available for sale.
  2. That the resources sold are perishable. This means that there is a time limit to selling the resources, after which they cease to be of value.
  3. That different customers are willing to pay a different price for using the same amount of resources.

Revenue Management is of especially high relevance in cases where the constant costs are relatively high compared to the variable costs. The less variable costs there are, the more the additional revenue earned will contribute to the overall profit.

To illustrate this, we can take the example of the luxury hotel which charges different prices for different customers. In India it is generally practiced in star hotels to maximise the revenues. The customer who is price sensitive and time conscious generally pays lesser tariffs than a customer who is willing to pay more and books the room one or two days before