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Revenue Management Strategies Assignment Help
The hospitality industry is one of the biggest ventures in the world (Mok et al. 2013). This industry contributes significantly towards influencing the economy and it is an essential part of the service segment. In 2015, the Tour and Tourism, contributed 9.78% to the worldwide GDP, producing US $7.2 Trillion (Legohérel, 2013).
Palazzo Versace is the first fashion brand hotel management, which was established in the year 2000 (Li et al. 2017, p.65). Inspired by the vision of Gianni Versace, the hotel was developed by the Sunland Group Ltd. in Gold Coast, Australia. Situated in an outstanding waterfront setting, each part of design, ambience, decor and ornamentation reflects a level of extravagance (Mok et al. 2013). Lavishly beautified spaces have the marvelous quality of Italian design (Palazzo Versace Gold Coast, 2017). The luxurious hotel has 200 rooms and suites, 72 condominiums, 4 restaurants, 3 meeting venues and an underground car parking space for more than 300 cars (Li et al. 2017, p.65). The hotel welcomes all the guests with a complimentary welcome drink and all the accommodation is non-smoking (Legohérel, 2013). There are different kinds of rooms like Superior Room, Lagoon Room, Deluxe Suite, Superior Suite, Lagoon Suite and Broadwater Suite. The exquisite Rolls-Royce Phantoms are also available to the guests for luxurious transportation service (Legohérel, 2013).
Revenue Management Strategy helps to predict the behavior of the consumers and optimize the availability of product and cost to maximize the revenue growth (Li et al. 2017, p.65). In case of hotel industry, the revenue management definition is- "Selling the right room at the right price at the right moment at the right price on the right distribution channel with the best commission efficiency" (Legohérel, 2013).
Key Elements of Revenue Management
Forecasting is a basic decision-making tool utilized by numerous organizations to help in planning, arranging, and assessing the future development (Mok et al. 2013). The forecasting techniques of the hotel revenue management can be categorized into three sorts - Historical, Advanced and Combined booking models (Li et al. 2017, p.65).
The unpublished hotel industry use the historical booking methods which includes exponential smoothing method for the long term prediction and for the historical forecast they use the number of rooms for the same day, last year (Mok et al. 2013).
The advanced forecasting models can be categorized into two models - one is additive model and the other is multiplicative model (Mok et al. 2013). The additive booking models accept that the amount of reservations available at a specific day before entry is independent of the last number of rooms sold, while the multiplicative booking models expect that the number of reservations, which are yet to come, is reliant on the present number of booking on hand (Queenan et al. 2011, p.180).
The combined forecasting models can utilize the regression method or the weighted average of either historical or advanced forecast model.
The advantages of forecasting techniques are-
Marketing Strategy - As hoteliers utilize the technique of forecasting to arrange their promotion offers, the interrelation between the forecasting of rooms and the advertising technique is very evident. Therefore, the teams of Sales and Marketing of Palazzo Versace can activate deals and promotion activity to create demand and promote based on this strategy (Mok et al. 2013).
Maintenance of the hotel - Hotels are likely to use the forecast of low occupancy time for periodical maintenance. Example- when the forecast shows a low occupancy for a long time, Palazzo Versace can carry out the renovation of rooms, halls and maintain their Italian interior design (Ivanov, 2014, p.156).
Business Growth - Through utilization of proper data, forecasting can help the hoteliers to make decisions regarding the future business deals. This would also help Palazzo Versace to decide about their expansion of the business (Ivanov, 2014, p.156).
The disadvantages of forecasting technique are -
The numbers of periods to be included - Hotels face different level of seasonality every time. This engages the exchange between including very less data against including too much of data (Ivanov, 2014, p.156). Including minimum data can lead to unstable forecast and including many data would result in any productive forecast (Queenan et al. 2011, p.180).
Accuracy- The effect on the decision making process of the hotels and its monetary outcomes must be considered while calculating the accuracy of the forecast (Ivanov, 2014, p.156). There can be errors, which are crucial and the hotels can hardly rely on the data fully (Revenue Impact - There are high chances that a forecast is not accurate and the assembled is poor for further analysis (Queenan et al. 2011, p.180). If the hotels take any decision based on such forecast, it might cost them financial risk and destroy the current business plan (Queenan et al. 2011, p.180).
Another important element of revenue management is overbooking (Padhi and Aggarwal, 2011, p.728). Overbooking is a notable practice in the hotel business, which could be characterized as confirming more number of rooms than the accessible limit of the hotel (Xiao, 2012, p.122). The ideal overbooking level adjusts the lost income because of empty number of rooms, the compensation and loss of client goodwill when the firm is confronted with more request than accessible limit (Padhi and Aggarwal, 2011, p.728). The hypothetical and the practical issues in computing the ideal number of overbooking concerning the forecast of demand, indirect expenses of overbooking and the booking limits (Kimes, 2011, p.76). This strategy helps the hotels to increase the revenue from the extra room bookings only when the number of extra reservations achieves full occupancy (Padhi and Aggarwal, 2011, p.728). In order to calculate the optimum level of overbooking, the total number of available rooms the following statistical data should be stored by the revenue manager- historical data about no-shows versus confirmed reservation, expected cancellations, number of expected walk-in-guests, the type of room for overbooking level, guaranteed reservations and predicted under stays and stay over (Queenan et al. 2011, p.180). Overbooking management is opted by many of the hoteliers as it is connected with the revenue establishment of the hotels. It is difficult to predict the number rooms that can be occupied on a particular date (Xiao, 2012, p.122).
The advantages of overbooking techniques in revenue management are-
1. Overbooking can help the hotels to have full occupancy by cancelling the reservation of the guests who do not show up (Padhi and Aggarwal, 2011, p.728).
2. Overbooking can help in increasing the expected revenue
3. It can increase the profitability and optimize the efficiency level of the operations
4. Overbooking is beneficial for the long term as it generates more profit
5. This technique is the most widely utilized technique in the hotel revenue management. The risk involved is low and it is one of the most commonly used technique to increase profitability (Ivanov, 2016, p.19).
6. The chances of miscalculation is less when the overbooking is based the past statistical data
7. Even if the hotels have to pay compensation, it is still much lower in terms of expenditure than keeping any room empty
The disadvantages of overbooking techniques in revenue management are-
1. This strategy might result in awful customer experience and bad reputation if the hotels fail to meet the expectation level of the guests (Fasone and Faldetta, 2013, p.83)
2. Extra financial loss may incur. For instance, the visitors staying who are at the hotel may have utilized other hotel services and facilities (Pullman and Rodgers, 2010, p.177).
3. More trained professional staffs are required to calculate the overbooking, which may cost the hotels extra money (Fasone and Faldetta, 2013, p.83).
4. Guests can be adversely affected by if the forecast of overbooking is not done in the right way and this would have a negative impact on the hotels, which can lead to negative surveys and reviews on websites like Tripadvisor and OTA's reviews (Ivanov, 2016, p.19).
5. The decision of overbooking can be extremely costly if any walking guests arrive. If these walking guests are unsatisfied with the services, the hotels might face future business loss from them (Padhi and Aggarwal, 2011, p.728).
6. All the reservations must be nearly checked to control overbooking. Skipping one booking can affect the entire procedure of overbooking (Ivanov, 2016, p.19)
Seat inventory control measures
Another important element of hotel revenue management is inventory allocation (Li et al. 2017, p.65). The theory of hotel revenue management is applicable to fixed capacity of perishable goods like rooms and seats (Pullman and Rodgers, 2010, p.177). In the hotel industry, the hotels offer their rooms at premium price and as well as at a concession price (Schwartz et al. 2016, p. 543). Normally, the customers, who are price-sensitive, tend to book their hotel reservations much early, while the demand for the premium room arrives much later (Li et al. 2017, p.65). Hence, the industries, which adopt the revenue management, need to set a booking breaking point to limit the extreme number of rooms to be sold at a concession cost. If this limit is fixed at very high level, the industry may face huge loss by being compelled to dismiss some of their top-notch customers (Schwartz et al. 2016, p. 543). On the other hand, if the limit is set at a very low level, the hotels might have to face the loss of those rooms that are not reserved (Fasone and Faldetta, 2013, p.83). The expected generation of marginal revenue affects the booking limit, which is created from offering an extra room (Pullman and Rodgers, 2010, p.177). Hotels characterize floor price, which is the minimal sufficient price for the subsequent extra room to be sold (Schwartz et al. 2016, p. 543). This floor cost is inferred by utilizing estimation of the normal minor income of the last room. The deal is satisfactory the length of asked for cost is above expected minimal income floor cost (Ivanov, 2016, p.19). The inventory control practice should be done in such a way that the guests do not feel this practice to be unfair (Ivanov, 2016, p.19). The hotels at times sell their inventory at a low price when the amount is very large (Pullman and Rodgers, 2010, p.177).
Advantage of Seat inventory control measures-
1. There are several reasons why hotels adapt the controlling measures of their seats and rooms. One of them is maximizing the revenue (Schwartz et al. 2016, p. 543)
2. Right application of this method can yield more profit (Ivanov, 2016, p.19)
3. It can help during the low demand days by maximizing the occupancy opportunity
4. It can also help during the high demand days as it would maximize the opportunity if revenue (Pullman and Rodgers, 2010, p.177)
Disadvantage of Seat inventory control measures-
However, this strategy could have a bad implication on the existing customers and the future customers (Palazzo Versace Gold Coast, 2017). In case of Palazzo Versace Gold Coast, it is one of the most luxurious hotels, which has potential customers and have influential guests during the year (Schwartz et al. 2016, p. 543). If they sell their rooms at a low price and include some other products with their hotel room price, it might affect the decision of the consumers, as the actual cost of the room would be difficult for the customers to evaluate (Pullman and Rodgers, 2010, p.177).
In any business, the price plays the most important role for both the seller and the buyer. Pricing is important for the financial factor and as well as the operational factor (Schwartz et al. 2016, p. 543). Correct determination of the price can help the business run smoothly and attract more customers, but a slight mistake in the pricing decision can ruin the business structure (Palazzo Versace Gold Coast, 2017). In the hotel revenue management, the pricing strategy is mostly dynamic as the hotel industry has high start-up expenditure, perishable capacity and faces demands, which are price sensitive (McMahon-Beattie, 2011, p.45). The pricing strategy can include the current market demand and market supply determinants, market penetration approach and price set according to the competitor's price. The pricing is also based on understanding the segment of customer value (Li et al. 2017, p.65). The luxurious hotels can apply different pricing strategy to their rooms and suites, which has different specification and duration. Mostly, the prices are constructed on two factors (Ivanov, 2016, p.19). One of them is Price discrimination. The hotels tend to charge different amounts from different customers (Palazzo Versace Gold Coast, 2017). They might charge a rich customer double the general price of the room as they know these customers are not price-sensitive (McMahon-Beattie, 2011, p.45). On the other hand, the hotels may charge comparatively less from a large group of customers who are price-sensitive, this is the other pricing construct which is called demand-based pricing (Ivanov, 2016, p.19). As the number of heads is huge (high demand), the hotels are ready to sell their rooms at a lower rate. The pricing strategy also impacts the RevPAR (revenue per available room). RevPAR is calculated by multiplying the occupancy rate of the hotel by the average daily room rate of the hotel. So in order to avoid low RevPAR, the hotels should consider right kind of price index for their room rates (Schwartz et al. 2016, p. 543).
Even though the pricing strategy would help the hotels to maximize their revenue, they should also consider the impact of high rates on the customer and the customer satisfaction (Schwartz et al. 2016, p. 543). In case of Luxurious hotels, even if they charge very high rates from the customers, they always try to meet the expectations of their customers (McMahon-Beattie, 2011, p.45). In case of Palazzo Versace, the charges of the rooms and suites are high since it is a fashion brand hotel, but it has been successful in satisfying their potential customers by giving them the best service (McMahon-Beattie, 2011, p.45). They invest a lot in their interiors, which attracts the customers, and make their stay a memorable one. They also provide luxurious dining experience and transportation experience. Their prices might be one the high end, but the customers always feel more than satisfied after checking out from the hotel (Ivanov, 2016, p.19).
Revenue management is very essential for any business as it is beneficial in terms of revenue maximization and other strategies, which helps any business to excel (Legohérel, 2013). With the proper revenue management, the hotels can have control over their pricing strategy and supply of their stocks (rooms and suites) (Mok et al. 2013). Almost all the hotels have adopted this management strategy to sustain in the market and develop the level of business dynamics. This strategy helps in both quantity and quality approach (Queenan et al. 2011, p.180). The hotels tend to hire experienced professionals to measure different elements of the hotel revenue management (forecasting techniques, overbooking strategies, seat inventory control measures and pricing models) (McMahon-Beattie, 2011, p.45). The luxurious Palazzo Versace Gold Coast, which is located in the magnificent waterfront setting, provides the best experience of five star hotels (Queenan et al. 2011, p.180). By observing the interiors, quality service and all other customer services, it can be concluded that hotel has a great revenue management strategy. Without this strategy, it would be difficult for any business to manage their expenses and incur good amount of revenue (Mok et al. 2013).
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