HFT3424 Exam 3 Study Guide Chapter 7 Revenue Management Revenue Management Definition o The application of information systems and pricing strategies to allocate the right capacity to the right customer at the right place at the right time o Setting prices according to predicted demand levels so that price sensitive customers who are willing to purchase at off peak times can do so at favorable prices while price insensitive customers who want to purchase at peak times still can o 4 Antecedents 1 Relatively Fixed Capacity 2 Perishable Inventory Thought of as time 3 Appropriate Costing Structure High fixed costs and low variable costs Examples hotels golf courses airlines 4 Demand that is variable or uncertain Examples of Highly Variable Demand i Mornings ii Weekends iii Tournaments iv Holidays o 2 Primary ways of Maximizing Profits 1 Maximize revenues 2 Control and minimize expenses o 7 Core Concepts of Revenue Management 1 Focus on price rather than costs when balancing supply and demand 2 Replace cost based pricing with market based pricing 3 Sell to segmented micromarkets not mass markets 4 Save your products for your most valuable customers 5 Make decisions based on knowledge not supposition 6 Exploit each product s value cycle 7 Continually reevaluate your revenue opportunities RevPAR o Revenue Per Available Room o 2 formulas RevPAR Total Room Revenue Total Rooms RevPAR Occupancy Percentage x Average Room Available Rate o Why is RevPAR the best measurement of maximizing total room revenue It identifies the hotel s ability to manage both occupancy rooms sold and room average rate in maximizing room revenues o Measured in dollars and cents o Will always be lower than the Average Room Rate Only exception is if the hotel is running at 100 occupancy then RevPAR and Average Room Rate would be the same o How is RevPAR used 1 As a measure of the hotel s management team s ability to maximize total room revenue 2 To compare the performance of the hotel to their competitive set similar hotels in the same market area 3 To measure the progress of the hotel in consistently increasing total room revenue compared to previous year s results and the approved budget 4 Project future room revenue and cash flows o Who uses RevPAR Owners Outside investors Other financial institutions Market Segments o Customer groups defined by Preferences Behaviors Buying Patters Behavior Patterns o Enable hotels to create promotions packages and rates that will meet the different expectations of each market segment Rate Structures o Range of room rates that a hotel determines for different market segments o Can be year round or seasonal room rates o Published and used to attract customers o Establishing Rate Structures Several factors are used in establishing hotel room rates 1 Rates of primary competitors 2 Age of the hotel including recent room renovations and improvements 3 Location 4 Perceived value of the products and services delivered by the hotel 5 Cost of the hotel and the Return on Investment ROI required by investors 6 Any competitive advantages that the hotel might have over its competitors Yield Systems o Also called Demand Tracking o Programs that possess several years of historical room rate and rooms sold information and utilize this information to assist managers in projecting future demand and rooms sold Selling Strategies o The actions and decisions of the senior management of a hotel in opening and closing room rates arrival dates and length of stay to maximize total hotel room revenues o Examples nights Open and close discounted room rates Require a minimum length of stay 2 or more Chapter 8 Comparison Reports and Financial Analysis Profitability o The best measure of financial performance The Impact of Department Profits on Total Hotel Profits Variation Analysis o Identifying the difference between actual operating performance and established standards Standards can be last year s actual performance the previous month s actual performance the budget for this year the most current forecast STAR Market Reports o Enables a company to compare its performance with the average performance of its competitive set the company s competition within their primary market o by the Smith Travel Research Company o Part of the STR Global Review of Financial Statements What statement is electricity on Answer Income Statement under Expenses Balance Sheet Income Statement o Also called the Asset and Liabilities Statement o Measures the net worth of a company or business at a specific time o Assets Liabilities Member Equity o What is on it Answer Assets accounts receivable cash inventory etc Liabilities depreciation accounts payable etc owner equity o Also Called P L Profit and Loss Statement o Measures financial performance over a period of time Measures the operating success and profitability of a business o What is on it Answer Income Revenue liquor sales food sales merchandise room space rental Expenses COGS labor wages Overhead Utilities Rent Mortgage o If there are two identical properties but one owns the building and one leases the building the one that owns their property even if they are paying mortgage will look more profitable because rent is an expense and mortgage goes into the principle o Records the amount of cash and cash equivalents entering and leaving a company o Distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit o For investors cash flow reflects a company s financial health the more cash available the better o Cash Flows from Operating Activities Money the company received from its actual business operations Statement of Cash Flows o Cash Flows from Investing Activities Money the company has received or lost from its investing activities o Cash Flow from Financing Activities Money that it took in and paid out in order to finance its activities o Free Cash Flow Considered by some experts to be a better indicator of a company s bottom line Are not subject to accounting tricks that can artificially boost the bottom line like earnings reports are Negative free cash flow is not necessarily an indication of a bad company o You can be profitable with Negative cash flow There are things that take cash out of the business that don t classify as expenses and therefore don t appaear on your P L Statment Key Formulas Profits Revenue Expenses Profits Department Profit All of a Department s