Revenue Management For Hospitality Industry – Case Study

Analysis of Market Segmentation

Discuss about the case study Revenue Management for Hospitality Industry.

“Revenue management for the Hospitality Industry should be inimitable part of the study and is an area best studied by those with a concrete understanding of how services and products are sold in the thrilling hospitality industry” (Kimes & Wirtz, 2016). As it indeed to develop, the management of revenue will certainly develop more of its own principles, theories and practices.  Therefore, the revenue managers need to know information and a basic understanding about “why and how consumers use scarce financial resources to make purchasing decisions”. There are several fundamental approach such as “supply”, “pricing”, “demand”, “consumer rationality” are conventional topics for revenue managers and for this reason, this report will discuss several economic concepts, giving more prominence on the sensitive relationship between premeditated pricing, and an efficient management of the revenue.

Based on the above concepts of revenue management, the revenue manager of Novotel Sydney on Darling harbor will present a report to the hotel general manager that recommends a revenue managements strategy for the financial year 2016-2017. The critical considerations would be the analysis of market segmentation, the competitive aspects, forecasting of demand and lastly, the global distribution channel analysis. The purpose of this report is to understand how hospitality industry determines prices and how their consumers recognize prices. Thus, the fundamental understanding of principles and concepts of revenue management will be discussed and analyzed throughout this assignment to develop the appropriate strategies for the Novotel Sydney. The report will address changes in the company’s business practices and attempts to demystify the management of revenue as an “uncommon business practice”.

Business details:

Being the part of almost four hundred hotels around the world, Novotel is perfect for family vacations and weekends away. Novotel Sydney is engaged in high profile hotel business operations with background of the beautiful views of Darling Harbour and the Sydney city skyline. This is the perfect destination for delivering the spacious accommodation ad newly transformed concept bar and restaurant (Ovchinnikov et al. 2013). This hotel itself is situated in the heart of Darling Harbour which is within walking distance to many of best attractions of Sydney. On the other hand, the location of the hotel has great transportation facilities. This premium hotel destination is known for its luxurious 4.5 star accommodation facilities. In addition to stunning views, the hotel provides a gym, pool and floodlit tennis court. Incorporating all this services, Novotel Sydney offers the most feature-rich Smartphone application in the Australia’s hospitality industry. With providing all this exposures, Novotel Sydney has recognized as one of the best restaurants in Sydney. Large portion of the success is superior human resource management services as they ensured that their customers felt welcome.

Environmental Analysis

Political factors: Novotel is one of the hotels in the Accor group (Novoteldarlingharbour.com.au, 2016).  In globalized environment, Novotel Sydney hospitality service provider is widely affected by the legislative and political conditions of Australia. The major political factors that could affect Novotel Sydney are the danger of terrorism, the political climate and the danger of the terrorism. On the other hand, legislations have the important effect on the structure of the Novotel as the regulation is imposed at the state level; the business effects due to the structure of the industry can vary considerably across jurisdiction.

Economic factors: Presently, hotels of Australia collectively employ around 300000 people in over 6000 hotels and successfully generate between $11 billion and $14 billion per year in domestic financial activity (Butler et al. 2013). Thus, the hospitality industry has the capacity to grow and contribute more to the national economy. Novotel Sydney has followed the right policy framework and considered to be a large contributor of the market. Tourism Australia’s long term strategy has identified a need for new investment in infrastructure, including hotel accommodation, in order to capitalize on the opportunities presented by the rising economies of Asia.

Social factors: Novotel Sydney has followed the collaborative framework of Australia Hotel Association and the government of Australia. This has ensured that the hotel has maintained a fair and equitable workplace relations that helps to make a better accommodations at the 24/7 culture of this industry (Novoteldarlingharbour.com.au, 2016). The simple and fair social dealing or accessibility makes easy to employ overseas workers by Novotel Sydney. Current situation indicates that Novotel provide good service for customer by using seven language through the online, maps also adding value to booking experience due to the reason of the varies of the social changes (Vulcano & Weil, 2014). Due to demographic demands and changes of the ageing population, the company believes an equal exposure at the heart of the strategy of Novotel.

Technological factors: To hold the maximum customer satisfaction of this hospitality industry of Australia, Novotel Sydney has used several technologies including the development of the hotel booking and design of websites, updating system  and electronic media card and many other cases.

The premium hotel industry has grown over the last five years.  This industry has recovered from subdued demand conditions in the wake of the financial crisis globally. Industry of the hospitality has faced heavy competitions from other forms of accommodation over the last five years. The growing desire to adopt more westernized standards of living and holidaying potential for the domestic and inter-religious tourism markets  across the Asian field. “Emerging domestic business travel which is the major revenue streams for larger hotels has further supported the industry over the period and as a result, revenue of the industry is expected to grow at an annualized 4.8 over  through 2016 to 2017” (Butler et al. 2013). According to the survey, hotels of Australia are provided a ranges of services, both for racing and other entertainment, pool and billion tables, entertainment values and conference and meeting facilities.

Trend Analyses

(Source: Butler et al. 2013)

Majority of the hotel and resorts of Australia are locally owned. Thus those hotels are often contributed in the local communities financial and other activities. The most common area for financial support and sponsorship provided by the hotel manufacturers is for sporting teams/clubs. This supporting figure has been reached $8792 per hotel in 2015. In relation to the group of communities, the average level of support was $4733. On the contrary, few of the hotel companies have provided their supports towards health, religious, health, education and other groups.

(Source: Butler et al. 2013)

Over the year-to-date Dec 2014, the trend ensured that major Australian city hotels saw revenue per available room accommodation increase by an average of 2.8 per cent with a huge divergence in the performance of individual market (Lorna Wang, 2012). Furthermore, there are general trend has been improving revenue and a tightening in capitalization rates especially at the top end of the market.

The Australian hotel industry has grown at an extraordinary rate becoming more competitive as international hotel groups make inroads in the growing number of destinations. Thus there is a huge competitive pressure Novotel Sydney is surviving with and this has led to a pressing need for establishment to provide a high quality service to patrons.

According to the STR Global research data, there has been shown a steady growth in the sales activities in the hospitality industry. However, Sydney hotels have been ensured the highest occupancy rate which included 80 percent occupancy in 2014 similar to 2013. Thus Novotel Sydney is always trying to trade close to capacity. The average tariff of their room accommodations were the highest in the country, but relative growth was modest at 3.5 percent approximately. It is estimated that there are nearly 21500 hotel rooms available within Sydney. The biggest competitors of Novotel are Meriton Haymarket, The Darling Hotel, QT State Theatre.

(Source: Novoteldarlingharbour.com.au, 2016)

In the service industry, it is indeed requires to modify the service structure and constantly evaluate the process of delivering services. Thus it is significant to maintain a competitive advantage over its existing competitors. Being providing the strong performance, Novotel Sydney’s greatest competitive advantage is its passion for hospitality. Complementing the Accor’s Network in Australia, Novotel Sydney provides range of tourist services including:

• Blue line cruises: Sydney Awarded Showboats and the Mejestic Cruises
• The Summit Restaurant and Orbit Lunge Bar in the Centre business district of Sydney
• Novotel premier Vocational club
• Sydney Convention and Darling Harbour’s Exhibition centre

To increase the competitive advantages and generating more customer acceptance, Novotel has the extensive involvement in Travel distribution, catering and the service provision client and public authorities.

Analysis of the Competitor Set

New Entrant Barrier’s –Low

• Operating license of the hotel
• Requirement of capital
• Building distribution network
• Requirement of human resource

Rivalry- High

• Availability of the premium hotel services at Sydney
• High exit barrier

Power of Suppliers- Low

• Multiple suppliers’ availability
• Low switching costs
• Advance technology

Substitutes –Low

• Readily available and price attractiveness
• Low comparability

	Novotel Sydney	Meriton Haymarket	The Darling Hotel
Star Rating	4	4	5
No of Rooms	96	247	171
Last renovation	N/A	2011	2004
Meeting rooms	3	6	5
Restaurants	1	1	2
Room service	24/7	24/7	24/7
Bars	1	2	2
Free WIFI	YES	YES	Only in public area
Fitness/Pool	Fitness only	Fitness+ Pool	No
Facilities of leisure	Yes-play ground, SPA, bar (changeable for all)	Yes SPA treatment, Casino, free bar for members	No
Car parking	YES AUD 12  a day	Free	Free

(Source: Escudero et al., 2013)

Strengths Ø  High brand reputation and top market presence Ø  Luxurious service provider ensuring high quality Ø  Well trained and skilled human resource Ø  Management control and discipline Ø  High occupancy rate among others	Weaknesses Ø  High competitive price challenges and revenue management space Ø  High labor turnover Ø  Low affordability  Ø  Associated with high repair and maintenance costs
Opportunities Ø  Industrial growth of  Sydney Hotel business Ø  Primary market from Asia Pacific region Ø  Emerging tourism market in China and India Ø  Usage of high technological exposure	Threats Ø  Consumer demand fluctuations Ø  Volatile customer needs for cheap hotels (Vulcano & Weil, 2014).   Ø  High market competitiveness

(Source: Masiero et al., 2016).

Strengths:

Internal resources of Novotel Sydney are the biggest strength of the hotel which is operating in the Sydney hotel market (Masiero et al. 2016). This market is the largest in the country so it won’t be hard for the company to maintain high occupancy rates. Currently, Novotel Sydney represents 80 percent occupancy rates.

Weaknesses:

The higher fixed costs other than businesses may create problems when the demand in hotel decline (Wang, 2012). Improving technological exposures into their services, Novotel Sydney is likely to be requirement to remain competitive but the competitive price challenges and revenue management space can become the biggest problem for this luxurious hotel (Kimes, 2016). Furthermore, the luxurious services of the hotel are not affordable for everyone. Thus, the company has been served for the limited consumer base.  On the other hand, the nature of the work in hotel tends a regular job which creates little challenges to staffs and results in the growing number in employee’s turnover rate.

Opportunities:

Novotel Sydney has the opportunity to exploit their international business more effectively. The company has developed the sponsorship actions; it ensures more primary market opportunities in the Asian market (Novoteldarlingharbour.com.au, 2016). On the other hand, the advancement of the technological services increases integrated communication system which will help to develop add-on services of the hotel.

Threats:

Due to Novotel operated in high turbulence environment maintaining the standards, this company may require flexible and flattens structure of the organization to follow the flexible consumer’s demand. However, the availability of several competitors such as The Darling Hotel, Barangaroo, Darling Harbour South, makes the entire hospitality industry more competitive.

Before discussing the development process, it is need to be understood that revenue management is of particular value in situations where the proportion of fixed costs is high compared to proposition of variable costs. Thus the strategy will be to maintained less variable cost to add more revenue which will contribute to overall profit. To maximize the revenue and stay competitive in the market, Novotel Sydney needs to increase occupancy percentage. For this reason, the company needs to expand their infrastructure to increase the number of rooms for their customers.

Secondly, Novotel System needs to provide their car facilities and leisure facilities at free of costs for their members to establish long term customer base. This would be counted as the competitive advantages for Novotel Sydney

This is the core element of revenue management approach and application. According to Bayoumi et al. (2013), pricing and yield tactics cannot be effectively applied if the company does not consider an accurate forecasting into their management policies. Novotel Sydney will propose their demand forecast to calculate by taking the actual number of reservations on hand (actual number of rooms books at a date) and adding the predicted number of rooms that will be booked (Pereira, 2016).  By considering the rate of average occupancy percentage, and the volume of loyal customer, the company needs to identify the demand and estimated service requirements of Novotel Sydney.

Using the Percentage Growth method, Novotel Sydney will forecast their demand:

For calculation, the assumption underlying this method is that data in hand follows the volatility of trend.

Now the value of the Room Night of the last five years is as follows:

Year	Room Nights
2011	900
2012	1100
2013	1250
2014	1200
2015	1340

The total percentage change in Room Nights is (1340- 900)/900 = 48.88%

The yearly percentage change = 48.88% / 5 = AUD 9.776

Therefore, the forecasted Room Nights for year 2016 is for Novotel Sydney,

AUD 1340 *(1+.09776) = AUD 1470 Room Nights

The above figure indicates that Novotel Sydney needs to fix up their Room nights rate at AUD 1470 for the financial year 2016-2017.

On the other hand, the hotel needs to forecast their number of client’s availability by assessing the demand for product or service that the hotel provided for sale. Here it is important to consider each segment willing to pay. This willingness is all about price sensitivity which driven by the value hat each consumer places upon the service or product (Ivanov, 2014). To evaluate an effective yield tactic, the hotel needs to apply some fundamental changes in their ongoing service facilities provided to their customers.

Firstly, the room reservation will be restricted to a minimum duration. However, the room limit availability will be discounted for special occasions such as Christmas. This will increase the revenue and ensure highest occupancy rate.

Secondly, the reservations shall not be permitted with arrival on a particular day. In this way, the hotel can reduce the risk percentage which is associated with long stay false bookings.

The term “distribution” identifies to how sell their inventory and the different channels that a client can use to book (Koupriouchina et al. 2014). The proper distribution channel is all about electronic channels. Novotel should maintain the direct voice channels and the global distribution system.  According to Lorna Wang (2012), there are variety of distribution channel and increase their competitive reach. The strategy should be provided for communication to each client of Novotel Sydney through the suitable channels and with the right message. The strategy will be taken for accurate message segmentation that the hotel message does not become confused or distorted.

Reservation evaluation:  To make an effective revenue strategy, Novotel Sydney shall permit advance reservation for their local as well as international clients. Such reservation shall be taken at one day in advance. However, the reservation process will not consider valid till the payment process completed by the client.

GDS: In this competitive hospitality industry, Novotel Sydney needs to maintain a centralized and computerized network which is all about single point access. This will be used for booking rooms and the services for their clients. By using this, the company will provide their services more efficiently.

System of property management: In this next fiscal year, Novotel Sydney will use Optima PMS for enhancing the quality of customer service. This is a Window based “Property Management System” that includes the latest in advanced technologies. This would be perfect for Novotel to manage their large customer base because Optima PMS consists with sophisticated Front office system which is linked with hotel computerized hotel application (Abrate & Viglia, 2016). 

Cost of the distribution: The cost of the distribution will be managed by reducing the variable cost and increasing the occupancy percentage in the next fiscal year (Mauri, 2016).

Channel selection: Connected through internet distribution sites will be maintained by mentioning room rates, clauses, and availabilities. This must offer a wide network which will be handled by tour operators, specialist, and online travel agent and so on. Thus the real time data will be maintained for keeping track of demand.

Conclusion with recommendation:

Based on the above discussion this can be concluded that the revenue management for the hospitality industry is a challenging task for revenue manager. However, this is an emerging field of study and certain tools and practices must be maintained to manage it properly. In this assignment, the certain revenue strategies are considered for Novotel Sydney for the fiscal year 2016-2017. The report has recommended several new strategies for critically considering four aspects including market segmentation, competitor set, forecasting of demand, and channel management system. As per the recommendation, the hotel must improve their occupancy rate for reducing the variable costs. Delivering advanced customer services, the hotel needs to forecast their room rates considering the on0going trends of the market. Furthermore, the advanced technologies shall also be incorporated to maximize the revenue of hotel.

References:

Abrate, G., & Viglia, G. (2016). Strategic and tactical price decisions in hotel revenue management. Tourism Management, 55, 123-132.

Bayoumi, A. E. M., Saleh, M., Atiya, A. F., & Aziz, H. A. (2013). Dynamic pricing for hotel revenue management using price multipliers. Journal of Revenue and Pricing Management, 12(3), 271-285.

Butler, J. R., Wong, G. Y., Metcalfe, D. J., Honzák, M., Pert, P. L., Rao, N., … & Brodie, J. E. (2013). An analysis of trade-offs between multiple ecosystem services and stakeholders linked to land use and water quality management in the Great Barrier Reef, Australia. Agriculture, ecosystems & environment, 180, 176-191.

Escudero, L. F., Monge, J. F., Morales, D. R., & Wang, J. (2013). Expected future value decomposition based bid price generation for large-scale network revenue management. Transportation Science, 47(2), 181-197.

Ivanov, S. (2014). Hotel revenue management: from theory to practice. Zangador.

Kimes, S. E. (2016). The evolution of hotel revenue management. Journal of Revenue and Pricing Management, 15(3-4), 247-251.

Kimes, S. E., & Wirtz, J. (2016). Revenue Management in Restaurants: Unbundling Pricing for Reservations from the Core Service.

Koupriouchina, L., van der Rest, J. P., & Schwartz, Z. (2014). On revenue management and the use of occupancy forecasting error measures.International Journal of Hospitality Management, 41, 104-114.

Lorna Wang, X. (2012). The impact of revenue management on hotel key account relationship development. International Journal of Contemporary Hospitality Management, 24(3), 358-380.

Masiero, L., Pan, B., & Heo, C. Y. (2016). Asymmetric preference in hotel room choice and implications on revenue management. International Journal of Hospitality Management, 56, 18-27.

Mauri, A. G. (2016). Pricing and revenue management in hotel chains. The Routledge Handbook of Hotel Chain Management, 262.

Novotel Sydney on Darling Harbour | Darling Harbour Hotels. (2016).Novoteldarlingharbour.com.au. Retrieved 9 August 2016, from https://www.novoteldarlingharbour.com.au/

Ovchinnikov, A., Boulu-Reshef, B., & Pfeifer, P. E. (2013). Revenue management with lifetime value considerations: balancing customer acquisition and retention spending for firms with limited capacity.Forthcoming in Management Science.

Pereira, L. N. (2016). An introduction to helpful forecasting methods for hotel revenue management. International Journal of Hospitality Management, 58, 13-23.

Vulcano, G., & Weil, A. (2014). Joint Optimization of Virtual Capacities and Bid-Prices for Revenue Management.

Wang, X. L. (2012). Relationship or revenue: Potential management conflicts between customer relationship management and hotel revenue management.International Journal of Hospitality Management, 31(3), 864-874.