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Hotel Revenue Management: Relationships vs Revenue Returns

Posted by PriceBeam on July 21, 2017

hotel revenue management

In recent articles, we have focused on how hotel managers can maximize revenue and profits through their pricing. In this article, however, we’ll look at something that is rarely touched upon within the field of revenue management: the negative impact it has on customer relationships.
Don’t worry, we’re not going to claim you should drop your revenue management practices, not at all -- revenue management will, after all, increase revenues by up to 8%.

Rather, we’d like to emphasize the importance of integrating customer relationship management with revenue management, and make sure that employees in both fields work together and take a holistic approach to optimization. 

How Revenue Management Affects Customer Satisfaction
Research by London School of Hospitality and Tourism has found that a clear trade-off exists between short-term revenue maximization and customer satisfaction. 

#1: Firstly, revenue management in the hotel industry often involves dynamic and differential pricing strategies, which causes some customers to feel unfairly treated, thus lowering their satisfaction. This unfairness perception is further exacerbated by a lack of information and procedural transparency, especially since this is accompanied by pricing decisions that, to the customer at least, seem irrational.

#2: Secondly, the dynamic pricing strategies employed by hotels are demand-oriented, which leads to severe price fluctuations, especially during peak seasons. Such fluctuations can lead to mistrust between the customers and companies, especially when accompanied by the aforementioned lack of information and procedural transparency. Customers don’t know if they can get a better deal tomorrow, and thus, their perceived risk of making an unwise purchase increases.

#3: Thirdly, due to capacity-constrained nature of the hotel industry, allocation and availability control restrictions are often applied to ensure that only the most profitable customers are served. For example, when capacity is about to run out, hotels will often enforce a length-of-stay requirement because it makes sense from a revenue management perspective. However, customers who are denied because of such restrictions will obviously be unhappy about it.


Conflicts between CRM and RevM
Revenue Management (RevM) and Customer Relationship Management (CRM) differs in 2 main areas; goals and time-horizon. The goal of the RevM is to generate immediate revenue returns, while the goal of the CRM is to main and develop customer relationships, which should eventually turn out to be profitable. 
For example, a loyal business traveller who has been frequenting Hotel X for several years may be denied a one-night stay during the peak season, due to availability control restrictions imposed by RevM. In the short-term, this makes perfect sense as giving out the room to someone else will generate greater revenue return.
However, the CRM will understandably throw a tantrum as such restrictions create a huge risk that this traveller will book his rooms elsewhere in the future; from CRM’s long-term perspective, this restriction is not profitable.
Moreover, CRM and RevM often have different performance indicators as a result of these different goals and time-horizons. RevM often uses RevPAR (revenue per available room), while CRM will use performance indicators such as RevPAC (revenue per available customer). This further underscores how, from a CRM perspective, the goal is to increase repeat purchases and ‘add-on purchases’ during the stay, while RevM does not take this into consideration. Also, this highlights the different ‘religions’ that are present within RevM and CRM; CRM focuses on spurting growth through increasing revenue per customer, i.e. accepting room capacity as fixed. On the contrary, RevM accepts revenue per customer as fixed, and aims to grow through revenue management and increasing room capacity.


Addressing the Conflict
The different foci should be addressed by a targeted effort at integrating both in the optimization process, so that both perspectives are considered. Focusing entirely on revenue management may have a positive impact on the financial performance at first sight, but research shows that such performance improvements are only short-term improvements.
Of course, you’re still running a business, and focusing entirely on customer relationship management is not ideal either; revenue management does produce long-lasting financial improvements, but to optimize over the long-term, considering the negative effects can help you fine-tune your revenue management.

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Written by PriceBeam

PriceBeam posts regular guides, articles and news related to pricing and strategy. Go have a look!

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