Revenue Management

Topics: Marketing, Price discrimination, Management Pages: 9 (2628 words) Published: February 27, 2006
There are some common characteristics of the service products which can be described as intangibility, inseparability, variability, perishablity and the inability ( Kandampully,Z et al:2000;Palmer, A:1994; Rust et al:1996)). In addition, Zeithaml& Bitner(1996) indicates that fluctuating demand should be considered in hospitality industry. Additionally, Lee- Ross and Johns (1997) claims that yield management could be used to assist the service organization to maximize revenue when the demand is fluctuating and product is perishable. Thus, due to the perishablity of the service products fluctuating demand, the hoteliers could apply yield management system in order to maximize the revenue.

Kimes (2000) claims that Yield (or revenue) management is a method for managing capacity profitably and the term ¡¥yield¡¦ refers to yield (or revenue) per available time-based inventory unit. It refers on the revenue per available room nights in hotel and revenue per available seat hours in the restaurant. In addition, Kimes (2000:4) defines that ¡§yield management is 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.¡¨ She suggest that Yield Management are applicable where the following conditions predominated: ƒÜCapacity is relatively fixed

ĆDemand can be predicated separated in to distinct market segment ĆInventory is perishable
ĆProducts is sold well in advance of consumption
ĆDemand fluctuates substantially
ĆMarginal sale costs are low and production costs are high Moreover, Kimes (1998, 2000) suggests that the following factors are the necessary ingredient for a yield management system: ĆMarket Segmentation

ĆHistorical Demand and Booking Patterns
ĆPricing Knowledge
ĆOverbooking Policy
ĆInformation System
Furthermore, Jones and Kewin (2000:234, cited in Ingold et al.) extended the definition of ¡§Yield Management to incorporate historical performance, demand forecasting and decision-making to enable revenue optimization.¡¨ Lieberman (2000:234, cited in Ingold et al) considers that Yield Management is a management tool with the capacity to yield a net result of enhancing revenue and customer service capability through a melding of information system, technology, probability, statistics, organizational theory and business experience and knowledge.¡¨

According to the above definition and conditions, yield management can be applied to many different industries. Due to the scale of this essay, the author will only discuss the hotel industry.

The above definitions have identified that historical performance, accurate forecasting, information system, technology and management knowledge are vital to success yield management. However, these definitions fail to address how to operate the yield management system effectively. There are some models have been proposed by different authors in regarding about successful implement yield management in the hotels.

The goal of hotel management is to generate revenue with the hotels¡¦ available resource and the key factors in determining room revenue are occupancy and average room rate (Donaghy et al: 1995). Yield management aims to optimize both these variables simultaneously (McMahon-Beattie and Donaghy: 2000) and this can easily be seen in Orkin¡¦s (1988) efficiency statistic:

In addition, Orkin (1988) realized revenue is ¡¥actual sales receipts¡¦ and potential revenue is ¡¥income that could be secured if 100 per cent of available rooms are sold at full rack rate¡¦ (Cited in McMahon and Donaghy 2000: 235)

However, Donaghy et al (1995) and McMahon and Donaghy (2000) challenged Orkin¡¦s definition, they points out due to many hotels are rely on discounted leisure and/or conference guests and there are no industry specific criteria for the establishment of the rack rate, the use of the yield efficiency statistic result may be unrealistic and...
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