Linking RM to Profit Optimisation

Kate Varini

Senior Lecturer

Profit Optimisation Training & Development Services

RM Definition

• Tell me when you want to come and I will tell you the price

• Tell me what you are willing to pay, and I will tell you when you can come

• Tell me who you are, and I will tell you the price

A focus on what maximization of opportunities  in different

demand periods

High Fixed - Low Variable (Marginal)

Units

Definitions

• Inventory is distressed when expected to remain unsold thus generating zero revenue

• Revenue Dilution is caused by customers buying inventory at a price (much) lower than their forecasted willingness to pay

• Profit Erosion occurs when profits from busy times have to be utilised to cover fixed costs in low demand periods

Opportunities

• Surveys show that consumer confidence is on the rise

• Leisure demand is rebounding and is mostly comprised of price aware, value driven consumers who spend more time looking

• Only 16% of customers already know what they want

• Social Media is becoming important • Online Travel Agencies can promote profit if

used intelligently

Discounting Issues

• Distressed inventory causes….• ……significant profit erosion. To alleviate this…• Promotions are put on the market causing …..• …(significant?) revenue dilution…causing …..• ….frames of reference to change…….and then

prices go back to normal and……..• Customers question fairness and ultimately….• …. the lack of marked difference between

products (no star and 5 star products)

•A 26-sq.-metre room / Modern furnishings / Work desk, •A bath with ecologically friendly shower, fast-fill tub and hot towel rail. •Complimentary amenities: mini-bar, local phone calls• Wired and wireless Internet access and bath robes. •Windows that open •Eames chair and Jacobson lamp •Iron and ironing boards available •25 inch flat screen TV •Video on demand / iPod docking station •Dual line telephones with Voicemail and Speakerphone •Individual air conditioning and heat control •Express checkout / Morning newspapers•Rollaways upon request /  Hairdryer / 24-hour room service •Cable/satellite TV channels / Satellite Radio •High-speed Internet access / Safe / Bathroom toiletries

?

Optimisation of Long-Term Profitability….

• Increase revenue – Increase price and/or volume

• Decrease costs – Technology / channel strategies / product development

• Get into the consumers evoked set– SEO / channel strategies / Price– Online reviews to upsell

• Add value

Customer Profitability Analysis or

Transaction Profitability Analysis?

Transaction ProfitabilityWhat we know

• How they buy/book • Length of stay, play• Number in party• Price / Product

– Inclusions• Booking costs (commissions, fees etc.)• Total spend• Method of payment

• How much value customers add• Do they cause displacement or …..• proce minus cost of production• Auxilliary – What else do they contribute?• High demand Vs. low demand

– Which transactions consume more and contribute less?

– Which transactions consume less and contribute more?

Transaction ProfitabilityWhat we don’t know

Research - Step 1

• Identify transaction types• Identify if patterns exist

– Spending– Booking behaviour– Consumption of resources– Contribution to

• Short/longterm profitability• Brand image• …anything else?

Profit Optimisation: Objectives

• Raise willingness to pay

• Save inventory for customers with higher contribution

• Use price signalling to help customers know when to purchase

Analysis

• Analyse the data and provide evidence to show transactions that are:– Most profitable – Least profitable

• Take into account opportunity cost & contribution from– room rate – auxilliary spend……………………………………..Other?

Channel Strategy

• What type of strategy for different forecasted demand periods?

• How should it be monitored

• When should the strategy be put in place

• How can relationships with partners be managed?

SELLOUT

HIGH

MEDIUM

PROMO1

PROMO2

70-81.99%

<70%

82-89.99%

>95%

90-94.99%

Direct Web

• The channel that promotes profitability?– Only if the traffic generated/conversion

exceeds the cost of maintaining an attractive website

• Which type of business should not invest in an interactive ecommerce website?

Innovative products – Control Costs

• High (Hotel) Cost inclusions– Signature (Premium) breakfast– Personalised transfer– Fitness– Premium service – Room service – Unlimited Food & Drink – Amenities– Linen change every day– Upgrade to Executive– Room Service

Low (Hotel) Cost Inclusions– Assigned room – Electric Bike (sunk cost)– Internet, Minibar– Garage – Room size/view– 24 hour stay– Change checkin times for diff

booking types– Early bird booking– Cxx policies, pay in advance,

non refundable etc.– Limited food & drink– Luggage storage– Upgrade to superior

• Analyse data on future business– Understand the trends– Look for high LRV early on to determine strongest

days– Pricing/ Channel strategy should be determined by

LRV floors– In low demand periods, encourage no-shows

especially from channels with high commission

• When charging high prices, improve price-value perception

• When offering inclusions ensure costs can be controlled

To Do List

   Linking RM to Profit Optimisation

Kate VariniSkype: kvarini

www.youtube.com: rmprofessionalLinkedin: kvariniTwitter: kvarini

kvarini@brookes.ac.ukkate@betterrevenue.com