Exam 1 Study Guide Revenue Management Chapter 6 o Strategies and tactics used by companies hotels airlines ect to manage the allocation of their capacity to different fare classes over time in order to maximize revenue Pricing theory suggest that hospitality operations should price rooms and food and beverage items at a price to maximize their profit and to control cost while allowing customers to receive something at the proper cost o Intuitive method Requires no real knowledge Prices are placed on items because the operator assumes people will buy at these prices No advantages for the company Disadvantage is that prices charged consume no profit for the company Had validity at one point in time but cannot be relied upon in today s highly o Rule of thumb method competitive market o Trial and Error Method Prices are changed up and down to see what effect they have on the revenues and profits Ignores the fact that there are other variables that affect sales revenue apart from prices Can be confusing to customers during the price testing period o Price cutting method When prices are reduced below those of competitors Risk if it ignores costs because if variable costs are higher than prices then profit will be eroded Some restaurants do this assuming that it will be more than made up in alcohol sales Done deliberately but then they have to have product differentiation and Might encourage customers to move elsewhere if they don t think it s worth the o High price method emphasize quality price o Competitive method Matching the prices to those of the competition but then differentiating in other areas Risky if differentiation is not made between the markets o Mark up Difference between the cost of the item and its selling price Used when a restaurant s traditional food cost percentage is applied to determine the price of any new menu item offered Long Run Pricing o Price is determined in the long run in a marketplace as a result of supply and demand o Must be set with the establishments overall long term financial objective o Objectives are subject to change in the long run Short run or tactical pricing Restaurant Pricing o Pricing policies that take advantage of situations that arrive from day to day o Tax operating income before tax X tax rate o Average Check Tells us the average amount each customer will spend in the restaurant over the next year to meet our required total sales revenue objective Average check total annual sales revenue Seats X seat turnover X operating days o Average check by meal period Most restaurants will have a different average check for each meal period Extremely useful to determine the average check for each meal period to supplement the total daily average check information Necessary to know what percentage of total sales revenue and seat turnover each meal is generating Average check per meal period Meal period sales revenue X total sales revenue Seats X Meal period seat turnover X Operating days Total sales revenue Seats X turnover X average check X days Do this for both meals then add together and you get the overall total sales revenue for the day o Pricing menu items Most common method used to determine the selling price of menu items is to use cost percentage Selling price menu item cost cost The variety of items people choose from the menu o Sales revenue mix Menu engineering o A separate worksheet needs to be used for each meal period and each meal category appetizers soups entrees ect o Uses each menu items contribution margin or gross margin o Ignores food cost percentage since the contribution margin is presented in dollars not o Defined as high or low when compared to the average contribution margin for all items o Popularity is also defined as high or low when comparing its sales revenue mix to the o An example of the chart and description of each column can be found on pages 258 and o The variance and availability of a balanced menu is not insignificant from the viewpoints of the customers book mentions that this is very important percentages sold average sales mix percentage 259 of chapter 6 o Classifications of menu items Stars Managers would prefer to sell this menu item whenever possible Usually since this item is so popular prices on this item can be raised Placed in a favorable spot on the menu Should not be removed from the menu unless there is a reason without affect the public Most popular item on the menu Plowhorses Though popular with customers this menu item provides a low contribution margin Should be kept on the menu but the manager should try to raise the contribution margin without affecting demand Lowering their prices is not a good idea Should not be suggested or placed in a favorable spot because then it could take away from menu items that could provide a better profit Must be analyzed very carefully Puzzles Higher than average contribution margin but lower than average popularity Should generally be kept on the menu but managers should try something different when suggesting them to make them seem more appealing Price may be reduced but not too much If a puzzle item remains unpopular then it should be removed from the menu and replaced with a more profitable item Dogs Lower than average contribution margin and lower than average popularity Should generally be replaced on the menu o Recap of menu engineering 3 variables Customer demand analysis of the menus items sales revenue mix to determine the popularity of individual menu items item contribution margin Any changes made to menu engineering should be reviewed Emphasize stars and reduce the dogs Menus need to be balanced because if a menu is filled with items that have a high contribution margin that means the items price will be high and could deter customers if there are not some lower price items on the menu to choose from Integrated pricing Room Rates o Products should not be priced independently of each other o Food and beverage prices should complement each other to achieve profit objectives o The more food sold the higher beverage sales will be known as derived demand o Room turnovers are not like seat turnovers whereas seat turnovers can happen multiple times a day but room turnovers can only happen once every 24 hours Seat turnover can happen let s say 300 times in a 100 seat restaurant in a day but in a hotel if there are 100 single beds only 100 people can occupy the hotel for that one day o If sales revenue on a room is not obtained in that night then it