BSM781 - Financial Performance and Revenue Management Assignment Help
Write a paper discussing the approaches and techniques used when managing and maximizing revenue in hospitality businesses. Your response should address the range of revenue management techniques used in controlling costs, marketing and pricing strategies, yield management, capacity allocation and in the management of capacity. Your response should include examples of these techniques which are used by hotel, restaurant and bar operations that you are familiar with, either through your work experience or as a customer.
Critically evaluate processes involved in the management of revenue in hospitality enterprises.Design a revenue management strategy for a hospitality enterprise.
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Introduction
Every business whether the same is a profit making business or a non-profit organization needs to maximize the resources it has and act in a competitive manner. Some organizations might have larger fixed costs and some might have lower fixed costs but some might have lower variable costs than others. So no every business is alike and thus management of these organizations would need to understand the business model in an appropriate model and plan for maximization of the available resources to grow revenue and profitability. Some organizations can just lower their pricing model to attract new buyers and clients and increase capacity utilization and revenue(Talluri & Ryzin, 2009).
It must be remembered that revenue optimization models are practised by most companies in almost all business sectors. However, the model varies from sector to sector and firm to firm. Revenue maximization models hinge on the fact that these are techniques of increasing a firms revenue while offering the same amount of products and services for sale. The revenue management strategy can include a pricing strategy or creating a better product mix to compete better in the industry they are in(Berger, 2016).
Revenue management techniques are generally used by those companies which have inventory which can perish if not used (it can be a good and service) and also they have fixed costs irrespective of their capacity utilization. For example, a Hospital can have a definitive no of beds which can be used by the patients and the fixed costs would be used and incurred irrespective of whether the patients are actually using those services or not. The same applies to the hotel and hospitality industry as well.
a) This approach can be used more frequently if the variable costs related to units of goods or service is lower but fixed costs are much higher and users do consider the costs of the services on offer.
b) These firms can also use the technique of price discrimination to fill additional units or additional capacity not utilized. For example, some hospital beds can be sold at a higher price but if there are many vacancies management might consider providing a discount to attract more patients to their hospital.
In this research assignment, the various models of revenue management adopted by the hospitality and hospital industry would be discussed along with measures which were taken to reduce the costs and increase profitability.
Literature Review
Revenue Management in Practice
Every seller of a product or for that matter a service would be required to take a very fundamental decision regarding how to sell and to whom to sell. When the market is favorable, it is relatively easier to push services to clients and has a good margin. But with time ticking the market would be more competitive and if the economy is in a bad shape then a seller would need to make sure it is ready to face the music. In the future, there would be more competition and there would be pressure to perform as per previous track record. This pressure on the management necessitates the need for making innovative products and services which suits the needs of the clients and also provide them value for money. The success of the seller would lie in fact as to how the client considers the product or service on offer and this is where most business organizations and their management needs to take complex decisions regarding selling and pricing(Drury, 2006 ).
Revenue management in this scenario can be defined as the collective strategy of a firm aimed at managing the growth of revenue and creating demand for the product or service offerings. Revenue management has originally used by the airline's industry but gradually it has spread to other hospitality and health sectors.
The primary reason behind the revenue management practice is to innovate ways to increase capacity utilization and increase revenue. Various innovation are considered and sued by authorities to increase revenue. For this hospitality sector management often considers introducing new products, new product mix, and pricing differently. Various innovative measures undertaken can increase revenue as the sources might not have been considered before and can become new and sustainable sources of revenue. Revenue management on the part of the management of a large hospital can lead to an increase of 10% or more in a short period. higher impacts can be experienced if the management stays focused and bring in additional services to complement the current product and service mix.
However, it must be noted that revenue management is just a method which focusses on dynamics of the organization to increase revenue and incomes. However, it can only be successful in the long run if the management is able to inculcate a culture of learning through different perspectives and make is a culture to keep innovating. For these several innovative and informative information, the system can be helpful. For example, data analytics can help in knowing where the system is lagging and how the same can be pugged to increase the revenue and utilization of resources. Focusing on the innovation measures is key to developing a culture which puts emphasis on new measures for better growth(Horngren, 2014).
It must also be noted that the culture of revenue management needs certain methods and metrics to be developed for better results in the long term. These methods are not readymade and would be fully dependent upon the organization's structure and skilled manpower. A fully developed cost management structure helps the management to drive down the costs and increase chances of higher profitability.
Categories of Revenue Management
Revenue management (RM) is the collective strategy of a firm aimed at managing the growth of revenue and creating demand for the product or service offerings and for the purpose of its facilitation the same can be divided into following categories:
a) Structural Decisions
Structural decisions under revenue management is related to the bundling of products and services for better growth orientation and decisions as to how the selling format can be used to increase growth and use of capacity. The management also further needs to take decisions regarding proper segmentation and also might consider product differentiation as a tool to attract more users and buyers.
b) Pricing Decisions
Pricing decisions are often complex. Prices can be individually set or clients can be offered a bundled offer for higher growth. The management also must undertake research and lay down policies as to how the firm would provide discounts in lean periods to attract more users and all and sundry needs to follow a decision wholeheartedly. Pricing decisions or bundling done correctly can be extremely beneficial in the long term.
c) Quantity related decisions
Quantity related decisions include the decision as to the acceptability of a buy offer and the decision to allocate resources to a particular user. Which product channels and marketing segmentation must be used to increase visibility and attract buyers. How and when a product or service must be discontinued as the same is no more profitable and which product or service must replace the older ones(Jagels, 2013).
Conditions for RM to Work
When specific and advanced health care is concerned the value of the service lies in the benefits the user derives and how successfully the provider manages to categories the segments. Revenue management can be made successful if the service is perishable in nature. For example, the service to be provided to the patient is perishable in nature if not used in time.
Successful revenue management needs the correct definition of the services on offer, their segmentation and demand forecasting of the services both in the short and long term. Pricing analysis and client analysis is also important for the management of revenue growth. If the data is analyzed correctly then the right product can be made available to the buyers and users for maximizing the sales. This can result in better growth of revenue.
Demand forecasting is key for the success of Revenue management. Collection of data and compiling of the data from industry sources and from previous year's sales records is key. These data can be combined with the economic condition which are prevailing in the market at present and forecast if the demand would rise and exceed the supply or not. If the demand is expected to rise above supply then the firm's management needs to carefully plan to arise on the prices and if the demand is lower than the supply of the services then new pricing methods and consider discounts and rebates must be considered for increasing users interest. Costs associated with the service supply can also be forecasted to analyze the profits and various budgets can be made to increase supply and get the benefit of high demand by charging a premium(singh & Ginny Kaushal, 2015).
Revenue Management Models and Techniques
a) Dynamic Pricing Models
Dynamic Pricing model involves the varying of the prices over a time horizon to maximize total revenue generation. Under this method, the firm keeps changing the prices depending upon the demand and supply mechanism. If the demand is in excess of supply then the price is increased within a band. This method needs frequent price updating. Similar customers can be charged different prices depending upon the segment of the market they are in. for example, a hospital chain in New York might charge double the price for the same surgery than what they change in Wisconsin. This is because of the location and the capacity to pay. A majority of the hostile chains apply this principle for price optimization and revenue optimization in US and Europe. One of the reasons behind the decision is that the costs also vary in different locations(Horngren, et al., 2011).
b) The product leader Model
Under this model, hospital management is solely focused on creating a service differentiation and strive to create advanced and best care to the clients. Core efficiency of the hospital is not found anywhere else and hence the client is not in a position to make an effective comparison and hence might be willing to pay a very high price. Under this method, the low cost and whole care is not in focus and sole focus is placed on the specific product category. The patient feels that the service is top notch and it is not available anywhere else and hence the pricing can be upwards and maximizes the revenue. The caregiver is able to clearly focus on the category and able to make a brand out of the same. The model can be replicated by others but the provider has already been able to derive benefit revenue wise and build a brand which would attract clients on a long term basis. This can include specific machinery and equipment and caregivers who are skilled to provide the care.
c) The integrator model of Revenue maximization
A hospital chain can also act like that of an integrator. Under this model, the hospital can consider providing the clients and users with the best value pricing model through better rationalization of prices and increasing the scope of the treatment and care. Top focus is not given to a brand of services rather the focus is provided to the low cost general services provided to the population. Economic incentives are provided to the users for keeping the costs down and to attract more users. This method increases the volume of service takers and increases capacity utilization and keeps the costs down.
Another form of this model is that of being the health manager of the population. Under this method more emphasis is provided to have a socially inclusive provider of healthcare and the focus is to drive down the costs to the rock bottom and provide huge no of services to the population. However, this model is very difficult to implement as a broader understanding of the needs of the population is necessary among with huge investment in infrastructure. This model needs mental and logistics to support to the patients and care for the overall wellbeing of the population. This model can successful if the providers have a no of installations each of which is equipped with high scale equipment and also capable of managing huge volumes if incoming patients(Longest, et al., 2014).
Cost management in Hospitals for effective RM
In this aspect it can be said that the Revenue management of the hospital Firm can succeed only if they use the following cost management techniques to supplement the revenue management aspects of the business as described above:
1.Budgeting
Budgeting is a mechanism under which both revenue targets and cost targets are met and fixed. Budget can be prepared after the demand forecasting is done and accordingly, the supply standards and manpower requirement is done. hiring decision can be taken once the production and human resource budget is matched. Labor budgets and cash budgets can be made once revenue and production budgets are made and cash inflows and cash outflows can be analyzed to find where costs can be further minimized and surplus cash can be generated for further investment.
If the Budget allows for investing in new assets from internal funds then there would be no need to borrow. However, if the internal funds are not sufficient then the same can be filled in from either issuing new debts and bonds or through taking new bank loans. Controlling of costs and investing can be possible only through budgeting done rightly.
2.Activity-based costing method
The activity-based cost method issued for finding and allocating the right costs (overheads) to the services and products correctly and the same is aimed at eliminating the cost imbalances and predetermined cost allocations. Activity-based costing method use activity drivers for allocating costs (expenses) and is considered much better than the traditional methods which allocate costs on the basis of either machine hours used or labor hours.
This involves the following steps for using the ABC :
a) major cost related activities has to be identified.
b) Costs would be assigned to cost pools identified and allocated as per the activity no's
c) Determine the exact and precise cost drivers for the activity identified.
d) Assign costs related to overheads incurred to that activity.
The allocation of costs to the cost pools involved would reduce the prices of some and increase the prices of others showing their exact cost and help the management taking cost-related pricing decisions and also decide if the service is profit making or not (Horngren, et al., 2011).
3.Cost volume profit Analysis
Cost volume profit analysis is widely used by hospital managers for determining the level of use and capacity utilization for breaking even and profit planning. Once the costs (variable and fixed) related service is known then the same can be used for understanding the level of (no of services) to be administered for breaking even and how much units of the service is required for making a desired level of profit. Each unit of the hospital can make different CVP analysis of their own and can plan accordingly to make the business do better and rationalize both the level of quality and profit. However, segregation of the costs into variable and fixed is a difficult task and the same must be done after understanding the true nature of the costs involved. Once the CVP analysis is employed in the desired manner the same can be quite fruitful for overall revenue management and cost control and profit planning in the short run (Horngren, 2014).
How to RM for Competitive Advantage?
For making sure the Revenue management methods work the best the hospital managements all over the world must ensure they evaluate the market they are operating more carefully. Understanding the exact needs of the customers is the key to developing the right products and build a brand. Flexibility in administering the service can prove to be the key to the managing of the resources and keeping the costs down.
Based on the requirements identified above, the next step would be to segment the market and decide the product differentiation. Once the product differentiation is done then the pricing can be fixed as per the product segment. Also, the management would need to identify the revenue target from each area or segment. Forecasting can be done through the application of data gathered and an appropriate pricing mechanism can be used. If the demand is found to be on the lower side then further rationalization of prices and providing discounts etc. can be considered too. It also be however noted that it is quite necessary and essential for the management to integrate the supply chain management with that of revenue management(Jagels, 2013).
Conclusions
RM is now being accepted as a very highly developed means of scientific optimizing technique. More and more advanced techniques have been increasingly being adopted for sales and profit maximization. It has often been highlighted by researchers that in most of the cases firms have limited resources and the same won't be able to provide unlimited services or produce unlimited goods. Hence it must be remembered that the management of organizations be able to classify their products and services on the basis of usability and profitability. Some of the services can't be eliminated at all in the health sector as they are essential even if not that profitable. However, some of the more advanced services are costly to produce and administer and profitable. These services require huge investments and skilled manpower is employed to administer it. Hence revenue management is working towards greater utilization of these equipment's and services to maximize the benefits and generate higher returns. However, profitability in some cases can be sacrificed because of the urge to maximize revenue as more market share means more capacity utilization and lowering of individual costs which would automatically lead to higher profits. However, the management of a firm ( a hospital) would be required to recognize the urge to classify these services on the basis of urgency, profitability, and salability. Revenue management in a particular institution can be useful only if the management is aware and is also able to create an atmosphere and culture of maximizing the resources.
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