The customers' view on hotel revenue management

The customers’ view on hotel revenue management Author: Laura Geenen Class: SOKI0915 University College of Northern Denmark Service, Hospitality and Tourism Management

Hotel & Restaurant Management Specialization Exam

Number of Characters: 24.388 Hand-in Date: June 7, 2016

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

CONTENT 1

INTRODUCTION ........................................................................................................................ 3

2

METHODOLOGY ........................................................................................................................ 3

3

LITERATURE REVIEW ................................................................................................................. 4

4

REVENUE MANAGEMENT ......................................................................................................... 4

5

CUSTOMERS ............................................................................................................................. 6

6

PREDICTIONS FOR THE FUTURE ................................................................................................ 8 6.1 6.2

PREDICTIONS MADE IN THE PAST ...................................................................................................... 8 PREDICTIONS FOR THE FUTURE ......................................................................................................... 9

7

DISTRIBUTION (OTA’S) .............................................................................................................. 9

8

CONCLUSION AND FUTURE RESEARCH .................................................................................... 10

9

REFERENCES ........................................................................................................................... 10

2

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

The customers’ view on hotel revenue management Author: Laura Geenen

Abstract: Revenue management is becoming more and more important in the hotel industry. It is used to increase the revenue in hotels by adapting the rates to the demand, the booking date, the date of stay and many more. This results in a lower perceived fairness by the customers.

The perceived fairness can be higher when information is given about the pricing strategies.

When the point of reference is another customer, the perceived fairness is lower than when they use their own experience as a reference point. Online travel agencies can also be a source of perceived unfairness, but more research must be done on this aspect.

Keywords: Revenue management, Fairness, Customer-value-based revenue management, Online Travel Agencies, OTA’s

1 Introduction Revenue management is an important tool used in the hotel industry. It finds its origin in the aviation industry where the tactics to increase revenue are more widely used. Revenue management can be used in variable ways. In contrast to the aviation industry, the customers in hotels are not all familiar with the revenue management concept. That could result in a lower perceived fairness towards the hotel rates.

The central subject of this paper is the customers’ view on hotel revenue management and how hotels can modify their operations to make the customers feel more positive about revenue management.

2 Methodology This paper is a literature review of papers that researchers have written about revenue management, customer relationship management in co-operation with revenue management and the fairness customers perceived when it comes to revenue management. First I will present what revenue management and customer relationship management is and what they are used for. Secondly I will link the perceived fairness and how the customers think to revenue management and which effects and consequences are for the use of revenue management in hotels. I will continue with examining if the predictions about revenue management that were made ten years ago have come true and what we can expect in the next years. Finally, I will talk about online travel agencies within this subject.

3

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

3 Literature review I have based this literature review on three main articles about revenue management and perceived fairness. The first article is Hotel revenue management and its impact on customers’ perceptions of fairness. This article was published in 2004 in the Journal of Revenue and Pricing Management and was written by Sunmee Choi and Anna S. Mattila. They did an empirical study of the impact of revenue management on the perceived fairness and researched the effect of information about pricing practices given to the customers. They found that practices of revenue management can result in perceptions of unfairness. Choi and Mattila also stated that the perceived unfairness can be solved by providing the customers with information about revenue management practices at the time the reservation is made.

Secondly I looked into Revenue management and customer centric marketing – How do they influence travellers’ choices? written by Christine Mathies and Siegfried Gudergan and published in the Journal of Revenue and Pricing Management in 2007. Mathies and Gudergan looked into where this perceived unfairness comes from. In other words, which reference point do they have to see whether they feel treated unfair or not. Three years after the article of Choi and Mattila, customers are well-informed and used to large price variations. Mathies and Gudergan found out that customers have negative feelings about revenue management because promotions and special deals are rarely available and they feel that high rack rates are used to increase the customers’ reference prices. A strong influence on the customers’ reference point is found to be the personal past experiences and indirect knowledge of others, when an offer is presented as a discount or if there are contextual offers advertised at the moment of purchase.

The third main article is The effect of brand class on perceived fairness of revenue management.

The authors of this article are Wayne Taylor and Sheryl E. Kimes and it was published in the Journal of Revenue and Pricing Management in 2009. Taylor and Kimes concluded in the study that brand class does not affect the perceptions of fairness or interact significantly with familiarity or information. They proposed a model that reaffirms the importance of familiarity when it comes to perceptions of fairness and it showed that giving information does not impact the perceived fairness when it comes to brand class and familiarity.

4 Revenue management Revenue management practices finds its origin in the airline industry but it has expanded to a common business practice in a wide range of industries (Ivanov & Zhechev, 2012). Kimes (1989) and Wirtz, Kimes, Theng and Patterson (2003) concluded in their research that an essential contribution can be noticed when using revenue management in businesses with a perishable inventory, restricted capacity, volatile demand, micro segmented markets, availability of advanced reservation and low variable to fixed cost ratio (Ivanov & Zhechev, 2012). These characteristics do not need to be fulfilled to have a successful implementation of revenue management (Schwartz, 1998: (Ivanov & Zhechev, 2012)).

Since hotel companies started to implement revenue management in their hotel, many researchers have tried to make a comprehensive definition of what revenue management exactly 4

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

is. According to El Haddad, Roper and Jones (2008) revenue management is an essential instrument for matching supply and demand by dividing customers into different segments based on their purchase intentions and allocating capacity to the different segments in a way that maximizes a particular firm’s revenues (Ivanov & Zhechev, 2012). Inge (1998) and Smith (1999) however, state that revenue management for a hotel is the science of using past history and current levels of booking activity to forecast demand as accurately as possible to maximize revenue (Avinal, 2004). Choi and Mattila (2004) have a short definition for what revenue management is; the business practice of selling a relatively fixed amount of perishable inventory to the most profitable mix of customers to maximise profit.

Von Martens and Hilbert (2009) have given a definition for customer-value-based revenue management, which is key to have satisfied customers without losing revenue, they say that customer-value-based revenue management aims at utilising capacity efficiently and establishing profitable customer relationships through an integration of transaction-focused capacity control and customer relationship management.

Although many researchers use revenue management and yield management as interchangeable words, Holthof (2007, own translation) says that the yield management is based on the price setting depending on time and revenue management is based on supply and demand (Holthof, 2007).

Badinelli (2000) defined the basic idea of yield management as the willingness of different customers to pay different prices for the service (Okumus, 2004).

Avinal (2004) has summed up some examples of ways that revenue management is used in hotels. The first possibility is the arrival day of the week. Customers who arrive on weekdays in a business hotel are usually business travellers and they are more willing to pay higher prices than the leisure travellers who arrive in general at weekends and are more price-sensitive. A second pricing rule is the length of stay, which means that guests that want to stay at a busy day have to pay more than customers who stay on the busy day and on slow days around that busy day. Sometimes it is even better to reject a room request that is only for a busy day so that a request for more days at a lower price can be accepted. The last pricing rule Avinal mentioned is the reservation date. For this rule the hotel will look at when the reservation is made. The difference between business and leisure travellers is clearly visible in how far in advance the reservation is made. Business travellers tend to book the rooms only a few weeks or days in advance, whereas leisure travellers book far in advance. In this way, leisure travellers can be stimulated to book in slow weekends when the hotel offers cheaper rates. Leisure travellers are very price sensitive, which can be seen in the higher demand when the rates are lower, in other words we speak about price elasticity. The price elasticity is the change in sales measured when the price is changed (Vinod, 2004). Vinod (2004) concluded that leisure customers are elastic, a small change in rate can result in a significant demand shift, and that business customers are in general inelastic, a small change of rate will only cause a small change in demand. The overall conclusion was that a critical success factor for revenue management is a well-defined end-toend process from customer segmentation through measuring performance.

5

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

Anderson and Carroll (2007) take it a step further and talk about demand management. They say demand management involves dynamically managing overall demand by optimising the use of distribution channels to reach target customer segments, leveraging and enhancing existing customer relationships, and taking effective revenue management actions. The most important thing in demand management is not only controlling the revenue, but controlling the demand.

In other words, the hotel has to make sure that by using the right methods the customers they want to have are asking for the rooms. The activity to optimise this process is testing various demand sources to determine if access volume can be generated and if that volume produces incremental net contribution. They also take into account how to generate future demand, it involves marketing to past customers so they will recommend you to others and treating loyal customers more favourably when yield management is implemented.

A simple form of implementing revenue management goes as follows. First the hotels need to identify the price sensitivity of the different customers then the customers are segmented according to the price they are willing to pay. They must forecast the demand of these segments and allocate available rooms to these segments in decreasing price that the customers are willing to pay (Choi & Mattila, 2004).

5 Customers It is important to look at revenue management from the customers’ point of view because the increased revenue due to the revenue management may be only for a short term when customers perceive the revenue management as unfair (Kimes, 2002: (Choi & Mattila, 2004)). The feeling of being treated unfair comes from, according to Kahneman et al. (1986b), an unbalanced relationship between a reasonable price for the customer and a reasonable profit for the firm in favour of the latter (Choi & Mattila, 2004). Price is the main concern of hotel customers and it is crucial for the unfairness issues in the hotel industry (Anderson & Simester, 2004; Campbell, 1999a; Diaz, 2004; Maxwell, 1995, 2008b; Xia, Monroe, & Cox, 2004: (Ahmat, et al., 2011)).

Choi and Mattila (2004) have set up an experiment to test the effect of variable pricing strategies on customers’ perceptions of fairness when it comes to hotel reservations. A second point the investigated was what the effect was of the type of reference for the perception of fairness. They surveyed travellers at the Washington, DC Airport which were randomly selected at the gates.

They have a total of 240 responses from 240 different people for 12 different scenarios. They used six scenarios under two conditions: a better-than-expectation, equal-to-expectation, worsethan-expectation, better-than-others, equal-to-others or worse-than others. The two different conditions were: customers are informed about the hotel’s variable pricing practices or no information about the pricing practices is given to the customers. They found that when no information was given at the time of reservation, the customers who compared the room rate with the room rate they had last time there was no significant difference in any of the situations.

However, when there was no given information and they compared to other customers’ rates, there was a significant difference in the differences in mean perceived fairness. When their rate was better than others they did not have any higher perceived fairness than when they received 6

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

the same rate as the others. They concluded that when information was given at the time of reservation, it moderated the negative effect of perceived fairness towards demand-based variable pricing. The perceptions of fairness were significantly lower in case of social comparison (compared to other customers) than in expectation-based comparison (previous quotes for the customer) when the rate was higher. A rate can be perceived more fair when a justification for the negative outcome is provided than when no justification is given (Taylor & Kimes, 2009). We should keep in mind that managers and employees should be trained first in order to educate and inform customers about yield practices (Okumus, 2004).

Karadjov and Hornick (2000) say that a revenue management model with a rate and available inventory dictated by forecast demand does not take the specific characteristics and value of the customer into account. It is important to consider that it causes that the long-term revenue may not be optimal (Noone, Kimes, & Renaghan, 2003).

When using revenue management and customer centric marketing at the same time in a service firm, it can cause conflicts and customers may perceive it as unfair. Examples of customer centric marketing are loyalty programs, special offers and other beneficial treatments. It is used to increase the value for the customer and increase the demand (Mathies & Gudergan, 2007).

Mathies and Gudergan (2007) examined the framework they proposed to explain customer choices by use of a focus group. They investigated the choice behaviour of the customers when they were confronted with the fairness implications of using customer centric marketing and revenue management at the same time. The research confirmed that there is a complex decisionmaking process and that the fairness is linked to a reference point. Customers are well-informed and are accustomed to large price variations, associated restrictions and a limited availability of favourable rates. However, there is a perceived unfairness when it comes to promotions and special deals that are rarely available. High rack rates used to increase the reference prices also result in a higher perceived unfairness. The fairness the customers perceived influences the likelihood that customers come back, also customers who perceived the practices as unfair are less likely to support the firm in the future (Kahneman et al, 1986a; Campbell, 1999: (Taylor & Kimes, 2009)). Customer-centric revenue management is used to develop the customer base of the most valuable customers in terms of profitability and lifetime value. Social media is an important tool that can be used put the customer in the centre. It can be used to make the consumers engaged and build trust. Social media can also be used to know what the customers want, websites like TripAdvisor.com and WikiTravel.com show the hotel what customers like and what they are willing to pay for and why. This data can be used to become a customercentric approach to revenue management. The hotel should interact in a genuine and transparent manner and they should keep in mind that the content is perceived credible by the consumer.

(Noone, McGuire, & Rohlfs, 2011) Taylor and Kimes (2009) have examined whether brand class has an influence on the perceived fairness towards revenue management or not. They presented a model that included brand class, familiarity and the provision of information to determine in which way the brand class affected the perceived fairness. The model included brand class as a predictor of revenue management pricing practices and the familiarity and the provision of information. Previous research has already showed that familiarity with revenue management and provision of information have an impact on the perceived fairness (Choi and Mattila, 2005; Wirtz and Kimes, 2007: (Taylor 7

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

& Kimes, 2009)). There were three hypothesises proposed considering brand class. The first hypothesis was that revenue management pricing practices will be perceived as more fair by customers of lower-level brands than customers of higher-level brand classes. In the second hypothesis they investigated whether the perceived fairness stays the same when the customers are provided additional information about revenue management, regardless of the brand class.

The last hypothesis about brand class says that the perceived fairness stays the same when the customers are familiar with revenue management pricing practices, regardless of the brand class. A fourth hypothesis that is discussed is that consumers who perceive revenue management pricing practice to be fairer will have a higher intent to return. The method they used to investigate these hypothesises was a nationwide survey. It was a scenario-based survey, the respondents read a paragraph about a hotel stay and then had to answer questions related to the scenario. The researchers found that customers of higher-level brand classes and customers of lower-level brand classes do not perceive the fairness towards revenue management different.

The second hypothesis was also not supported; the perceived fairness did not stay the same when the customers are provided additional information about revenue management, regardless of the brand class. Also the last hypothesis about brand class, customers who are more familiar with revenue management pricing practices will consider the fairness of these practices the same, regardless of the brand class, was not supported. The last hypothesis was proven to be correct. When customers perceive the revenue management practices as fair, their intent to return is higher. The overall conclusion of Taylor and Kimes (2009) was that brand class had no significant impact as an individual variable. It also did not influence the effects of familiarity or information.

Ahmat, Radzi, Zahari, Muhammad, Aziz and Ahmad (2011) have done an empirical study in a Malaysian hotel to investigate the factors that influence the perception of price fairness towards customer response behaviours. They tested four factors: treatment experience, price knowledge, price expectation and price information. Information helps the evaluation and judgment on price fairness and knowledge and expectation and is influenced by the overall treatment experience received from the hotel. They found that treatment experience and price knowledge significantly influence the hotels customers response behaviours as compared to price expectation and price information.

6 Predictions for the future 6.1 Predictions made in the past Milla and Shoemaker (2008) looked back at the start of revenue management in 2008 and then discussed their predictions for the future based on interviews with industry leaders. I will now see if in the last eight years these predictions have come true. There were four areas with the greatest growth potential in hotel revenue management: integration of customer relationship management and revenue management, pricing, segmentation and packaging, group revenue management and the organizational structure.

Many of the interviewees stated that companies needed to focus more and more on the total customer value. In the other articles I discussed, we can see that since 2008 there have been 8

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

some improvements in this aspect. This implies that hotels indeed focus more on the customer value than on the revenue alone. This change is still an ongoing process and will be used even more in the future.

James Rutley (Milla & Shoemaker, 2008) says that it will be important that customers feel that the product, service and price they are given are based on their needs. Tim Coleman adds that the hotel needs to create the perception that customers are treated in a unique way. These statements are actually a part of the customer relationship management. When the pricing and packaging is adapted to the customer, it will build a relationship. Due to the segmentation process, pricing can be adapted to specific customers. The segment of business 9ravellers has different prices than the leisure 9ravellers, so we can see that this prediction also has come true.

When we talk about group revenue management, we need to take the total value of the group into account and not just the room revenues. John Higbie (Milla & Shoemaker, 2008) argues that for groups there are technological limitations. Revenue management systems are not so powerful and are not fully suitable to compare the profitability of two groups. Also quoting groups through an online booking is a challenge. When we look at Booking.com, we can see that bookings can be made till groups of thirty, so there is already an improvement. However, groups with specific requests that want personalized attention still have problems booking online.

Some interviewees were in favour of having a centralised revenue management structure, while others preferred a local revenue management team. No real predictions were made towards one of these options. There were some advantages in favour of both organizational structures, so most of all it is a preference and choice of the hotel group. Customers also have a higher perceived unfairness when special rates and promotions are not available.

6.2 Predictions for the future The predictions for the future are that the service will be even more personalized than now.

There will be more hotels that integrate customer relationship management in revenue management so that the hotel ends up with a revenue management system that is based on the customers’ value. When we compare to the start of revenue management in hotels we can see that the perceived fairness is higher than in the beginning. If this follows the trend of the airline industry, the perceived fairness will still increase.

7 Distribution (OTA’s) Distribution is the bridge between the producer and the consumer (Alcázar, 2002: (de Carlos, Araújo, & Fraiz, 2016)) and is an important aspect to keep in mind when we look at how the customers perceive the price of the hotel they book. Of all travel reservations that are made, 57% is made on the internet (Internet Travel Hotel Booking Statistics, 2016), so online travel agencies (OTA’s) are an important part of hotel bookings. It is simpler and easier for consumers to be aware of the market prices and to compare these prices online. Sellers are more able to differentiate prices on the Internet and the consumers have different tools to compare prices from different vendors, that is why perceived fairness has become more important. (AndrésMartínez, Gómez-Borja, & Mondéjar-Jiménez, 2014) 9

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

8 Conclusion and future research Revenue management finds its origin in the airline industry, but is already very well integrated in the hotel industry. There are hotels and revenue management that prefer a central revenue management system, but others like small local revenue management systems, both have advantages and disadvantages.

Customers have different aspects they take into account when they judge the fairness of the price. When information about pricing strategies is given, customers perceive the price as more fair. When the customers compare the rate to the rate another customer received, they found it less fair than when they compared to their own previous received rates. It is important to keep the perceived fairness of the customers high, because a higher perceived fairness results in a higher number of customers that want to come back. The brand class of the hotel does not have any effect on the perceived fairness of the customers.

Online travel agencies generate a lot of the hotel bookings and it makes it easier for the customers to compare the prices. There is almost no research about perceived fairness in online travel agencies. That is something that needs to be examined in further research papers.

9 References Ahmat, N. C., Radzi, S. M., Zahari, M. S., Muhammad, R., Aziz, A. A., & Ahmad, N. A. (2011).

The effect of factors influencing the perception of price fairness towards customer response behaviors. Journal of Global Management.

Anderson, C. K., & Carroll, B. (2007). Demand management: Beyond revenue management.

Journal of Revenue and Pricing Management, 260-263.

Andrés-Martínez, M.-E., Gómez-Borja, M.-Á., & Mondéjar-Jiménez, J.-A. (2014). A model to evaluate the effects of price fairness perception in online hotel booking. Springer Science+Business Media.

Avinal, E. A. (2004). Revenue Management in Hotels. Journal of Foodservice Business Research, 51-57.

Choi, S., & Mattila, A. S. (2004). Hotel revenue management and its impact on customers' perceptions of fairness. Journal of Revenue and Pricing Management, 303-314. de Carlos, P., Araújo, N., & Fraiz, J. A. (2016). The new intermediaries of tourist distribution: analysis of online accommodation booking sites. The International Journal of Management Science and Information Technology, 39-58.

Holthof, C. (2007). Bedrijfseconomie voor de hotelsector. In C. Holthof, Bedrijfseconomie voor de hotelsector (pp. 99-100). Antwerp: Garant.

Internet Travel Hotel Booking Statistics. (2016, April 26). Retrieved from Statistic Brain: http://www.statisticbrain.com/internet-travel-hotel-booking-statistics/ Ivanov, S., & Zhechev, V. (2012). Hotel revenue management - a critical literature review.

Tourism Review, 175-197.

Mathies, C., & Gudergan, S. (2007). Revenue management and customer centric marketing How do they influence travellers' choices? Journal of Revenue and Pricing Management, 331-346.

Milla, S., & Shoemaker, S. (2008). Three decades of revenue management: What's next?

Journal of Revenue and Pricing Management, 110-114.

10

Hotel & Restaurant Management Specialization Exam Laura Geenen Service, Hospitality and Tourism Management - SOKI0915

Noone, B. M., Kimes, S. E., & Renaghan, L. M. (2003). Integrating customer relationship management and revenue management: A hotel perspective. Journal of Revenue and Pricing Management, 7-21.

Noone, B. M., McGuire, K. A., & Rohlfs, K. V. (2011). Social media meets hotel revenue management: Opportunities, issues and unanswered questions. Journal of Revenue and Pricing Management, 293-305.

Okumus, F. (2004). Implementation of Yield Management Practices in Service Organisations: Empirical Findings from a Major Hotel Group. The Service Industries Journal, 65-89.

Taylor, W., & Kimes, S. E. (2009). The effect of brand class on perceived fairness of revenue management. Journal of Revenue and Pricing Management, 271-284.

Vinod, B. (2004). Unlocking the value of revenue management in the hotel industry. The Journal of Revenue and Pricing Management, 178-189.

Von Martens, T., & Hilbert, A. (2011). Customer-value-based revenue management. Journal of Revenue and Pricing Management, 87-98.

11