Revenue Management in the Hotel Industry

Revenue Management in the Hotel Industry

Anna Hawkins (University of Winnipeg, Canada) and Jing Chen (Dalhousie University, Canada)
Copyright: © 2014 |Pages: 10
DOI: 10.4018/978-1-4666-5202-6.ch183

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The beginnings of yield management dated back to 1972 when Littlewood from the British Overseas Airways Corporation first proposed the idea that airlines aim to maximize the revenue rather than the number of passengers on each flight (Vinod, 2009). Following the deregulation of the US domestic airline industry in the 1970s, competition from new charter airlines, PEOPLExpress in particular, threatened the survival of established carriers (Vinod, 2009). American Airlines (AA), led by CEO Robert Crandall at the time, responded to the threat posed by new carriers offering exceptionally low prices by implementing a yield management system (Haley & Inge, 2004). Yield management systems allocated a certain number of seats on each flight, which would have otherwise flown empty, to be sold at deeply discounted prices (Cross et al., 2009). This allowed American Airlines to effectively compete against the new charter carriers and put PEOPLExpress out of business.

Key Terms in this Chapter

Fence: A device that is designed to preserve market segmentation and limit spillover between segments.

Yield Management: An intelligent approach to the dynamic reservation control and pricing of a perishable asset across customer types

Revenue Generation Index (RGI): The ratio of the hotel’s RevPAR divided by the RevPAR of the competitive set.

Overbooking: The selling of a volatile good or service in excess of actual capacity. Overselling is a common practice in the travel and lodging industry.

Market Segmentation: A marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs (and/or common desires) as well as common applications for the relevant goods and services.

Big Data: A collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications.

Revenue Per Available Room (RevPAR): A performance metric in the hotel industry, which is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate. It may also be calculated by dividing a hotel's total guestroom revenue by the room count and the number of days in the period being measured.

Revenue Management (RM): The application of disciplined analytics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth.

Expected Marginal Seat Revenue (EMSR): Belobaba came up with this concept. The idea behind the heuristic is to add the protection limits that are calculated by applying Littlewood’s rule to successive classes.

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