HTM 4337

Revenue
Management
Session 2
Introduction of Revenue Management

Instructor Yun (Yvonne) Yang ( 楊韻 ; 杨韵 ), Ph.D.

Room TH611
Consultation Tuesday 15:30-17:30, or by appointment.
Email yvonne-y.yang@polyu.edu.hk
 Updates

Semina Time TA
r
SEM00 Mon 16:30- Emma
3 17:30
SEM00 Tue 10:30- Emma
5 11:30
SEM00 Tue 11:30- Yixin
2 12:30
SEM00 Tue 12:30- Emma
6 13:30
SEM00 Thu 14:30- Yixin
Agenda
• Performance Indicators of Revenue Management
• Internal Metrics
 Historical figures
 The budgeted figures
• External Metrics
 Competitive Sets
 Market Share & Fair Share
 Index Numbers
 Perceptual Mapping
What does this mean to you

Vs.

US$ 1,500 US$ 300

What does this mean to you

Vs.

US$ 1,500 US$ 300

What does this mean to you

Vs.

US$ 1,500 US$ 300

Now US$ 1,050
What does this mean to you

Vs.

US$ 1,500 US$ 300

Now US$ 250
History of Revenue Management
• After the deregulation of the U.S. airline industry in 1978, competition level
increased.
• American Airlines introduced the first true RM system, Sabre, that allowed
it to dynamically adjust fares based on historical and current booking
patterns.
Different prices for the same product?

Examples:

• Ingredients: $5
• Salary expense: $5
• Rent & other: $2
Different prices for the same product?

Examples:

• Starbucks: $25
• A1 bakery: $15
• Hotel Icon: $45
Different prices for the same product?

Examples:

• Morning: $30
• Afternoon: $20
• Evening: $15
The Purpose of Revenue Management

Ensuring that customers receive true value

• Right products
RevSIM
• Right quantities
• Right channels
• Right times
• Right Guests
Performance Indicators

• Occupancy Rate (OCC)

• Average Daily Rate (ADR)

• Revenue per Available Room (RevPAR)

Total Room Inventory

• Occupancy Rate (OCC)

Total number of rooms available

• Total Room Inventory approach of OCC

Total number of rooms in the market

Total Room Inventory

• Occupancy Rate (OCC)

Total # of rooms – # of rooms that are offline

• Total Room Inventory approach of OCC

Total # of rooms – # of rooms that are offline for more than 6 months
TRI approach consider those temporary closed rooms in the base, therefore provide a more
realistic description of the market during the crises (e.g., the COVID-19 pandemic).
 Total Room Inventory
Northern Europe
Western Europe
North America 2019 (STD) 81.9
2019 (STD) 74.0
2019 (STD) 71.3 2020 (STD) 45.5
2020 (STD) 43.6
2020 (STD) 47.6 2020 (TRI) 40.4
2020 (TRI) 37.8
2020 (TRI) 45.5 Eastern Europe
Southern Europe Northeast Asia
2019 (STD) 76.2
2019 (STD) 77.7 2019 (STD) 75.1
2020 (STD) 38.6
2020 (STD) 40.1 2020 (STD) 58.2
2020 (TRI) 35.0
2020 (TRI) 28.0 2020 (TRI) 56.7
Caribbean
2019 (STD) 61.9 Northern Africa Middle East
Central America 2019 (STD) 68.8 Central & South Asia
2020 (STD) 19.8 2019 (STD) 63.2 2019 (STD) 60.0
2019 (STD) 54.0 2020 (STD) 26.4 2020 (STD) 42.6 Southeast Asia
2020 (STD) 14.0 2020 (TRI) 9.6 2020 (STD) 22.4
2020 (TRI) 22.7 2020 (TRI) 35.6 2019 (STD) 73.2
2020 (TRI) 5.8 2020 (TRI) 18.4
2020 (STD) 36.9
2020 (TRI) 31.8

Southern Africa
2019 (STD) 59.1
South America 2020 (STD) 23.2 Australia & Oceania
2019 (STD) 60.3 2020 (TRI) 14.7 2019 (STD) 75.8
2020 (STD) 20.4 2020 (STD) 39.1
2020 (TRI) 14.8 2020 (TRI) 36.2

Occupancy Rates (Aug 2020)

Source: STR. (2020). Asia Pacific Hotel Review, Industry performance for the month of August 2020.
16 for the month of August 2020.
STR. (2020). Asia Pacific Hotel Review - TRI, Industry performance
Understand how to do the calculations

[Supply]
# of rooms [Demand] Total Room Occupancy
available # of rooms sold Revenue Rate ADR RevPar 1 RevPar 2
Sept 7 200 100 $20,000 50% $200 $100 $100

Occupancy Rate = 100 / 200 × 100% = 50%

ADR = $20,000 / 100 = $200

RevPAR 1 = $20,000 / 200 = $100

RevPAR 2 = $200 * 50% = $100
Understand how to do the calculations
8 Sept
[Demand] # of rooms sold 250
[Supply] # of rooms available 1000
Room on renovation (more than 6 month) 100
Room on temporary closure due to COVID-19 (less than 6 month) 500
PRACTICES
Hotel A:
• The hotel has 100 rooms and sold 80 rooms a day.
• The total revenue of this hotel after 30 days was $240,000.
• What is ADR, Occupancy %, and RevPAR of this hotel?

Total rooms Total room sold Room

ADR Occupancy % RevPAR
= 100 rooms x 30 days = 80 rooms x 30 days Revenue

Hotel A 3,000 2,400 $240,000

PRACTICES
Hotel B:
• The hotel has 300 rooms.
• The ADR of this hotel was $90.
• And Occupancy % was 90% after 30 days.
• What is Room revenue, Room sold, and RevPAR of this hotel?

Total rooms Room

Total room sold ADR Occupancy % RevPAR
= 300 rooms x 30 days Revenue

Hotel B 9,000 $90 90%

PRACTICES
Hotel C:
• The hotel has 200 rooms and sold 150 rooms a day (30 days).
• The ADR of this hotel was $110.
• What is room Revenue, Occupancy %, and RevPAR of this hotel?

Total rooms Total room sold Room

ADR Occupancy % RevPAR
= 200 rooms x 30 days = 150 rooms x 30 days Revenue

Hotel C 6,000 4,500 $110

Contribution Margin

A contribution margin is the amount of revenue from a sale that goes to pay
fixed costs and ultimately contributes to profit.

Contribution Margin = Room Rate − Variable Cost

• Variable costs arise only when a unit is sold.

• Traditionally, these have been the housekeeping labor and materials
costs to clean and restock a guestroom.
• Distribution Costs also apply only when a room is sold, so they are a
type of variable cost.
Gross Margin vs. Contribution Margin

Gross Margin Contribution Margin

• = Gross Profit Margin; • Can be used to examine variable
• A percentage; production costs and is usually
expressed as a percentage;
• The amount of money left after
subtracting direct costs; • Measures the profitability of
individual products;
• Does not include operating
expenses, taxes, or loan interests;
• Encompasses an entire
company’s profitability. • Is a per-item profit metric;
 Revenue Performance in RevSim

Variable Costs for

Premium Room
$22 + $25 = $47
Identical Net Revenue

A hotel manager considering a price change may want to know what

occupancy percentage at the new rate would produce the same net revenue that
the current price and occupancy produce.
The formula is:

This calculation gives the manager an idea of sales effort it will take simply to
match the current situation.
Identical Net Revenue
Suppose a revenue manager is considering the following price reduction:
Current occupancy percentage: 72%
Current ADR: $140
Proposed ADR: $125
Current
Variable Margin = $140 – $14 = $126 $14
costs:

New Margin = $125 – $14 = $111

The revenue manager must determine whether the price change will allow the hotel to drive
occupancy to at least 81.7%.
Identical Net Revenue
Suppose a revenue manager is considering the following price reduction:
Current occupancy percentage: 72%
Current ADR: $140
Proposed ADR: $104
Current
Variable Margin = $140 – $14 = $126 $14
costs:

New Margin = $104 – $14 = $90

The revenue manager must determine whether the price change will allow the hotel to drive
occupancy to at least 100.8%.
Identical Net Revenue
Suppose a revenue manager is considering the following price reduction:
Current occupancy percentage: 72%
Current ADR: $140 Is 98% occupancy
Proposed ADR: $106 rate achievable?
Current
Variable Margin = $140 – $14 = $126 $14
costs:

New Margin = $106 – $14 = $92

The revenue manager must determine whether the price change will allow the hotel to drive
occupancy to at least 98.6%.
Two Common Standards for Internal Metrics
• Internal metrics look solely at a business’s own data rather than at a
comparison of its data with the data of other similar or competing
businesses.

• Internal metrics are most commonly compared with two general standards:
 Historical figures from comparable earlier periods
How the company perform in comparison with the past

 The budgeted figures

How the company perform in comparison with the plan
Historical Figures from Comparable Periods
Performance of Hong Kong Hotels
1600 100
1400 90 Performance of Upper-scale Hotels in Hong Kong
80
1200 2500 100
70
1000 90
60
2000 80
800 50
70
600 40
1500 60
30
400 50
20
200 1000 40
10
30
0 0
1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 500 20
Q
018 018 019 019 020 020 021 021 022 10
2 2 2 2 2 2 2 2 2 0 0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
OCC ADR RevPAR
018 018 019 019 020 020 021 021 022
2 2 2 2 2 2 2 2 2
OCC ADR RevPAR
Historical Figures from Comparable Periods

How does a hotel know whether its current ADR of $1150 is good?
1. Look at what the ADR was in comparable earlier periods:
• If the historical ADRs were $1200 and $1240 for the past two
years:
• The current ADR may be problematic 

• If the previous ADRs were $1100 and $1090 for the past two
years:
• The current ADR may be a good sign 
Budgeted Figures

How does a hotel know whether its current ADR of $1150 is good?
2. Look at what the ADR was budgeted to be.
• If the hotel built its budget on the assumption that the ADR
would be $1100
• It appears to be exceeding expectation 

• If the hotel built its budget on the assumption that the ADR
would be $1250
• It is failing to meet expectations 
External Measurement Metrics
• Competitive Set
• Market Share & Fair Share
• Index Numbers
• ADR Index
• Occupancy Index
• RevPar Index
• Perceptual mapping
Competitive Set
• Minimum of 4 reporting hotels
• Usually similar hotels in similar price level Who will be your
• Usually hotels in close proximity competitors in the
comp set?
• Similar rating
• Similar product (e.g., size of the convention center) Other hotels
managed by your
classmates

Competitive sets should be reevaluated

at least once a year.
Market Share

Tell you how you are doing relative to the others

• Fair market share: 关注 supply
• Divide your capacity by total capacity in the product class
• This is assuming every competitor performs equally well

Assuming in your RevSIM project, there are 8 hotels in your competitive set,
and each hotel has 125 rooms. What is the fair market share?

• Total Capacity = 125 × 8 = 1000

• Fair Share = 125 / 1000 = 12.5%
Market Share

Tell you how you are doing relative to the others

• Actual market share: 关注 demand
• Divide your actual occupancy by total competitive set occupancy
For a specific night in your RevSIM project, your hotel sold 100 rooms. The
entire comp set sold 400 rooms. What is the actual market share?

• Actual Share = 100 / 400 = 25%

Q1: What should be your goal for your actual market share?

Actual market share meets or exceeds your fair share

Given by the
system

Your projected/
forecasted share

Remember, this is your FORECAST, not actual performance!

To achieve your forecasted number, the decisions in the other 6
areas all need to align with your goal.
 For Premium W/D
Fair share: 86 – Given by the system
Given by the
system
On the books: 24
No show: 1
Est Pickup: A
Total Room Nights Sold = 24 – 1 + A

A = Total Room Nights Sold – On the Books + No Show

Currently, you have zero Est Pickup, so your Total Room

Nights Sold = 24 – 1 + 0 = 23

Your projected/
forecasted share
 For Premium W/D
Fair share: 86 – Given by the system
Given by the
system
On the books: 24
No show: 1
Est Pickup: A
Total Room Nights Sold = 24 – 1 + A

A = Total Room Nights Sold – On the Books + No Show

Assume: your team want to project your market share at

67
90, a bit higher than fair share
Then your “Est Pickup A” = 90 – 24 +1 = 67

90
Your projected/
forecasted share
Index Numbers
• The Index numbers compare the performance of the subject property to the
Competitive Set
• We commonly calculate penetration indexes for occupancy, ADR, and
RevPAR.

• Formula:

小于 100 ， 等于 100 ，大于 100

• A number greater than 100 means the subject property outperformed the
comp set.
• A number below 100 means the comp set outperformed the subject
property.
RevPar Index Example

A ratio measure computed as:

RevPar of a Selected Hotel
________________________ × 100 =
RevPar
RevPar of that Hotel’s Competitors Index

For a specific night in your RevSIM project, your hotel RevPar was
$1100. The comp set RevPar was $1000. What is your RevPar Index?
• RevPar Index = 1100 / 1000 × 100 = 110

• Who does a better job? Your hotel or your competitors?

 Revenue Performance in RevSim

69
65.7
123
87 60.3
87.7

Which segment has the

Where is the problem? biggest problem?
- ADR?
- Occupancy?
A Quality vs. Price Revenue Performance in RevSim
Perceptual Map

Q: How do you
interpret the position
of Hotel 4?
The Balanced Scorecard

45
The Balanced Scorecard
Business Performance Report

46
 Q&A
Please Read Ch1
Thank you!