Chapter 1: Intro to Revenue Management EVOLUTION OF REVENUE MANAGEMENT THOUGHT

WHAT IS REVENUE MANAGEMENT (RM)?

The strategy and tactics used by several industries to
manage the allocation of their capacity to different $
rate classes over time in order to maximize revenue.

RM is used in various service industries to describe

techniques to sell and allocate limited resources, such
as airplane seats or hotel rooms, among various
customers, such as business or leisure travelers.

RM takes into account the available inventory of a

product or service and sets a price in an attempt to
“sell it all” for the maximum price.

This right price also attempts not to set the price so

high that customers do not make a purchase or,
maybe even worse, make a purchase from the
competitors.

The earliest generation of airline revenue

management systems “focused on maximizing
expected revenue, hence the name revenue
management
Five Practical Steps in Hotel Revenue Management
1. Right CUSTOMERS
2. Right DISTRIBUTION CHANNEL
3. Right FORECASTING
4. Right WEBSITE
5. Right TEAM APPROACH
RM utilizes the Law of Supply and Demand.
Revenue management is selling “the right product to
the right customer at the right time to the right price”
(Cross, 1997)
It reflects a detailed understanding of what has
happened before and forward-looking of what is
happening now and in the future.
RM utilizes established economic theories combined
with the power of historical information to help
formulate a strategy for setting the correct price that
encourages the maximum amount of sales and, in
turn, provides the most significant profit for a
business.
EVOLUTION OF REVENUE MANAGEMENT
YIELD MANAGEMENT IN AIRLINES
“Yield and revenue management helps balance
supply and demand. It allows a company to ‘forecast’
by making decisions based on knowledge and not just
assumptions. When discussing consumer behavior, it
is essential to predict and to exploit all opportunities
arising in the marketplace. Better forecasts lead to
better business decisions, and better business
decisions mean more profits.”
Robert G. Cross (1998)
Revenue Management - Hard-Core Tactics for Market
Domination
REVENUE MANAGEMENT DEFINED
“the strategy and tactics used by several industries—
notably the passenger airlines—to manage the
allocation of their capacity to different fare classes
over time in order to maximize revenue.”
Phillips (2005), Pricing and revenue optimization.
 HISTORY OF REVENUE MANAGEMENT
The airline industry was the pioneer of modern
revenue management, which evolved in conjunction
with the advancements in computer technology
during the 1980s.
US Airline Deregulation -> open competition
• American Airlines – Super Saver Rates
• Saturday Restrictions
• Online Travel Agencies (OTA)
• GDS: SABRE; Galileo…
RM IN THE AIRLINE INDUSTRY
The airline industry, before deregulation, maintained
the policy of the same price for all customers traveling
on the same flight.
After deregulation in the 1970s, airlines developed
revenue management systems, offering differential
fares (i.e., discount fares, standard fares) to
customers taking the same flight.
HISTORY OF REVENUE MANAGEMENT
Influenced by the use of revenue management
systems in the airline industry, the lodging industry
slowly introduced the multi-tier room rate system.
It connected them with various discounts and
restrictions.
REVENUE MANAGEMENT IN THE HOTEL INDUSTRY
This multi-tier room rate system offered various
discounts for various travelers and at the same time
and attached restrictions to these discounted rates
(i.e., minimum length of stay or stay must include a
weekend night).
Revenue Management is Moving Into Other
Industries
• Rental Cars
• Amusement and Theme Parks
• Casinos
• Food & Beverage Operations
• Golf Clubs
• Non-Hospitality Businesses
o Gas Stations
o Retail
o Sporting Events
Yield Management
Yield Management (YM) breaks the random first-
come-first-served selling approach and starts with a
detailed analysis of past performance.
YM was primarily focused on inventory control with
overbooking and pricing in the airline industry.
The goals were to maximize yield by accepting more
reservations than capacity with the expectation of no
show/cancelations and only late-bookings for high-
yield passengers.
YM was typically one dimensional or singularly return
focused.
Revenue Management
Revenue Management is a product of IT advances
with a dynamic process that tries to balance variables
occurring at different levels such as:
❑ Competition
❑ Seasonality / Days of the week / cycles of demand
❑ Demand elasticities
❑ Customers segmentation
❑ Room rates and rooms available in hotels
❑ Guest check averages in restaurants
❑ Capacity in restaurants
ELEMENTS OF REVENUE MANAGEMENT
- Forecasting
o RM basic (fearless) technique
- Inventory Control and Overbooking
- Price Fences
o Those rules and regulations that go
with the pricing…
- Price Discrimination
o “…charges a different price to
different customers for an identical
or near-identical product/service,
such as a standard hotel room”
(Kimes & Wirtz, 2003)
Revenue Management is Multidisciplinary EMERGING TRENDS IN RM
• Revenue Analytics
• Forecasting Methods
o Quantitative Methods
o Qualitative Methods
• Artificial Intelligence
• Machine Learning
• Internet Driven Strategies
• Web Supported Revenue Mgmt.

THE RM “SOFTWARE SOLUTIONS” MARKET

EVOLVING COMPONENTS OF REVENUE MANAGEMENT • IDeaS Revenue Solutions
- Marketing • Game Changer by Duetto
- Economics • Atomize
- Sales Operations • Room Price Genie
- Consumer Psychology • Pace Revenue
- CIS – Computer Information Systems • Beon Price
o Artificial Intelligence • Spot Pilot
o Quantitative Analytics • Rate Board
- Ethics • RevControl
- Financial Mgmt. • Spider by KriyaRevGEN
- Communications incl. Data Visualization
- Strategic Management REVENUE MANAGEMENT SYSTEMS IN…
- Statistics and Analytics • Casino Hotels Industry
INFORMATION TECHNOLOGY AND REVENUE o A different approach than others in the
MANAGEMENT lodging industry.
Artificial Intelligence (AI) is the ability of a computer • Hotel Industry
to follow a program or series of instructions for a • Car Rental Industry
desired outcome and attempts to mimic natural or • Airline Industry
human intelligence. • Visitor Attractions Industry
Algorithms which analyze, learn & report data and o Typically represented by zoos,
take guest-centric and revenue generating decisions museums, theme park, and amusement
parks
Capture detailed transaction level purchase data from
POS/Kiosque

Information Technology (IT) is a process of using

integrated computer technology to manage systems
in an attempt to maximize efficiency and productivity.

NEW TOOLS IN REVENUE MGMT.

• Big Data
• Computation
• Algorithmic Process
• Revenue Management
 Chapter 2: The Role of the Revenue Manager - Facilitate and lead business review meetings
INTRODUCTION:
2. Monitor Daily Activity
- Revenue Management is a function that is
- Manage/monitor Internet systems to
practical in many segments of the hospitality
maintain consistency with property
industry.
strategies
o Lodging
- Maintain property website
o Restaurants
- Develop reports, memos, other written
o Spas
communications
o Golf Courses
- Mentor/coach front office staff on revenue
o Convention Centers and Meeting
management strategies
Space
- Timely completion of all revenue
- Goals
management reports
o Optimize revenues.
o Manage Space Inventory 3. Revenue Team Leadership
o Maximize profit. - Establish order and consistency in revenue
strategy.
RM AS KNOWLEDGE WORK
- Determine strategic courses of action
- Defined by Drucker, 1966
- Promote effective communication
- Non routine problem solving.
- Remain and follow up on project until
- Specialized information search
completion
- Identification of Trends
o Industry 4. Analyze Trends
o Market - Interpret market trends as they relate to the
o Customer hospitality operation
- Recognize the importance of those trends. - Analyze and identify trends
- Broad thinking - Match group and transient market needs
with hotel needs (displacement analysis)
WHAT DOES A REVENUE MANAGER DO?
- Work closely with sales management to
- Manage group blocks.
determine viability of long and short-term
- Manage and monitor Internet systems to
bookings from a pricing and availability
ensure rate integrity and parity.
perspective
- Manage the hotel’s web portal.
- Maintain relationships with third-party 5. Demonstrate Professionalism
market managers. - Demonstrate professionalism and
- Analyze accurate occupancy and revenue composure during meeting with
forecasts. stakeholders
- Develop tactics and strategies to manage - Continuous development of skills and
group and transient market needs. abilities in revenue optimization and data
analysis
SIX TASK CLUSTERS
- Development of skills needed to “tell the
1. Communicate Effectively
story” of recent operational performance.
- Develop and deliver effective presentations
to all stakeholders 6. Develop Effective RM strategies
- Demonstrate flexibility in verbal debate - Generate and organize short-term strategies
regarding strategies and tactics - Generate and organize long-term strategies
- Influence others to accept your ideas - Develop and implement revenue strategies
- Establish credibility with hotel’s Executive
Committee
- Articulate complex strategies or topics in a
clear and concise manner
 ETHICAL ASPECTS OF RM
• Questions to ask
o Are my questions ethical?
o Are the outcomes of my actions ethical?
o Are the prices of my hospitality
organization represented fairly?
o Are the prices my organization presents
perceived fair by the customer?
• Ethical Situations
o Coercion and control
o Conflict of Interest
o Personal Integrity

LEGAL ASPECTS OF REVENUE MANAGEMENT

- The Sherman Anti Trust and Clayton Acts
o Designed to prevent hospitality
operators from restraining trade
through price fixing, manipulate
bids for group contracts, or allocate
customers to competitors for the
purpose of discrimination.
- Robinson Patman Act
o A hospitality operator charging
different prices for the same
“product” or discriminating in the
provision of “allowances”—may be
violating the Robinson-Patman Act.
Price discriminations are generally
lawful, particularly if they reflect
the different costs of dealing with
different buyers or are the results
of attempts to meet a competitor’s
offering.
 Chapter 3: Key Economic Concepts for Hospitality
Revenue Management
A Crash Course in Supply and Demand
https://youtu.be/g9aDizJpd_s
What factors influenced your last hotel decision?
Issues facing RM Managers
Why is the market price stable?
- The invisible hand
o Competition
o Self-interest
- Equilibrium of demand and supply
- Example; Stock prices are set by the market
- In the hotel industry, supply is fixed in the
short term. Therefore, prices are mostly
determined by demand
DEMAND
- The relationship between prices and
quantities demanded
o A continues curve showing the
quantities that consumers are
willing and able to purchase at
various prices during a given time
period.
- The law of demand: the quantity demanded
of a product is negatively related to its price,
ceteris paribus.
o Income effect: When prices are
lower consumers can afford more
for a given income
o Substitution effect: When prices
rise, consumers will buy less costly
alternatives
QUANTITY DEMANDED VS. DEMAND
Price => change in quantity demanded
Determinants => Change in demand
DETERMINANTS OF DEMAND
- These are the “things” in all things being equal.
- Income
o Normal goods vs. inferior goods,
examples?
- Expectations about prices
- Tastes and preferences
- Price of related goods
o Substitutes vs. complements
o How are the demand affected?
Examples?
- The number of consumers in the market
- How do we use these to increase hotel demand?
SUPPLY
- Supply is a schedule that shows the quantities of
a product that producers are willing and able to
offer for sale at various prices.
o Quantity supplied is a specific quantity
the supplier will produce for a given
price on the supply curve.
- The law of supply prescribes an upward sloping
supply curve. Producers will supply a larger
quantity at higher prices than at lower prices.
o One special trait of hotel room-night
supply is that the supply is fixed in the
short term. Hotels cannot increase the
 supply overnight to respond to the
demand, like manufacturers do.

DETERMINANTS OF SUPPLY
- Technology
o Technology is used as a general term to
refer to the know-hows or knowledge
of producing products. Technological
advances allow producers to supply a
higher quantity at any given price,
moving the supply curve to the right
- Resource prices
o The decrease of production cost will
EQUILIBRIUM PRICE & PRICING DECISIONS
induce producers to increase supply
- If the price is decided by the market demand
quantity at given prices, moving the
and supply, there are no pricing decisions in
supply curve to the right.
perfectly competitive markets.
- The number of producers in the market
o If additional producers enter the Fortunately, the real world is messier
market, more products will be - Why would anyone buy the $2 milk?
produced at the same price, moving the - How can sellers charge different prices for the
supply curve to the right. same product?
- Expectation of future prices
PROS AND CONS OF TRADITIONAL PRICING METHODS
o When suppliers expect the market
price to go up in the future, they would
have incentives to increase the supply
quantity in order to maximize the
revenue, moving the supply curve to
the right.
o This rationale could lead to
overbuilding in the hotel industry
because of investment lag (Corgel,
2005). It takes years to build a hotel.
The economy could have turned south
by the time the hotel is completed. WILLINGNESS TO PAY (WTP)
- The maximum price a person is willing to pay for
WHAT CAN CHANGE THE EQUILIBRIUM PRICE? a product or service. A proxy of “perceived value
- In competitive markets, prices are determined o A person will purchase if and only if the
by the impersonal forces of demand and supply, price is less than his WTP
not by manipulations of powerful buyers or o Example: the quantity demanded at
sellers. $10 = the number of customers who
- The equilibrium price will be maintained so long are willing to pay more than $10
as the basic supply and demand conditions o Also called reservation price
remain unchanged. - Willingness to pay vs. willingness to accept
o What can change the equilibrium price? o Buyers vs. seller
- For the same product, your WTP can change
from one seller to the next
- Surplus = WTP – price
o Consumer will only purchase a product
when there is surplus.
 MEASURING WTP ELASTICITY’S EFFECT ON REVENUE
1. Observation of prices being paid or revealed • Example: Suppose a hotel sold 2,000 room-
2. Offers to buy in auctions or bidding nights during the past month at an average rate
3. Asking customers what they are willing to pay of $70. The revenue was $70 x 200 = $140,000.
4. Conjoint analysis Consider two scenarios when the hotel
increases its price from $70 to $77.
The first two are ‘revealed preference.’ The third one
o Demand is sensitive to price change
is ‘stated preference.’ The fourth one is ‘hypothetical
and the room-nights drop to 1700.
preference.
o Demand is not so sensitive to price
WILLINGNESS TO PAY AND DEMAND CURVE change and the room-nights drop to
- Each person has a maximum willingness to pay 1900
(WTP) for a product or service.
ELASTICITY AND TOTAL REVENUE
o A person will purchase if and only if the
price is less than his WTP –
o d(10)=the demand at $10 = the number
of customers who are willing to pay
more than $10 = the demand at $10
o If we collect the data of the number of
customers (demand quantity) who are
willing to pay at each price level and
plot each demand quantity-price pair
on a chart. The line that connects all
dots is the demand curve.
REVENUE AND ELASTICITY
ELASTICITY OF DEMAND
• The responsiveness of demand to price changes
o All measured in %
• Elasticity of demand = Δquantity demanded in %
/ Δprice in %
• Elastic demand: > 1
• Inelastic demand: < 1
• Unit elasticity: = 1
• Perfectly inelastic: = 0
• Perfectly elastic DETERMINANTS OF ELASTICITY
1. The number of available substitutes
APPLE DODGES IPHONE X WORRIES a. Think McDonald’s and Starbucks
• iPhone X, priced at $1,000, is the most expense b. Will you be sensitive to Big Mac’s
Apple smartphone price if there are a lot substitutes?
• 2018 first quarter data: 2. The importance of the product in
o Boosted iPhone’s average price to consumers’ budgets
$796, 15% jump from the same quarter 3. Luxury or necessity
last year 4. Time to purchase
o iPhone unit sales, 77.3 million units a. Short-run elasticity (business) <
during the quarter, declined 1% year- long-run elasticity (leisure)
over-year b. Customers booking further out are
o iPhone revenue popped by 13% to hit more price sensitive.
$61.6 billion during the quarter 5. Definition of the market
• What is iPhone’s elasticity? a. More narrowly defined market is
o 1% / 15% = 0.067 more elastic.
 EXAMPLES OF PRICE ELASTICITY surplus from the customers who were
already buying the product under the
first price.

PRICE DISCRIMINATION
• The practice of charging different prices for the
same product.
• It extracts “consumer surplus” to improve the
firm’s profit.
• Effective price discrimination requires:
o The ability to recognize and assess the
differences in willingness to pay
o Mechanisms (rate fences) to prevent
customers with high WTP from having
access to the discounted prices
THREE LEVELS OF PRICE DISCRIMINATION
1. Perfect price discrimination
a. The firm is able to charge the
highest possible price for every
unit in its inventory.
2. Second degree price discrimination
a. The firm groups the units and
charges different prices for these
groups of units.
3. Third degree price discrimination
a. Customers, not units, are grouped
based on their willingness to pay.
b. The most feasible, thus common,
practice
PRICE DISCRIMINATION AND ETHICAL CONSIDERATIONS
• Price discrimination does not always reduce
consumer surplus for the benefits of suppliers.
o If the second price is lower than the
first price, the firm creates additional
consumer surplus by making the
product available to customers who
could not have afforded the product
when there was only the first price.
o Price discrimination reduces customer
surplus when the second price is higher
than the first price. It takes away the
 CHAPTER 4 FORECASTING • Quantitative forecasting analyzes historical data
FORECASTING to estimate trends and patterns using statistics
• Forecasting is the initial first step in the revenue and mathematics for prediction.
management o We will focus on quantitative methods
a. Predictions lead to rate • In general both types should be used
recommendations o Example: Quantitative creates baseline
b. Accurate forecasts provide confidence while market event allow for subjective
of future demand and pricing decisions adjustment

WHY DO WE NEED FORECASTS FORECASTING DATA

• Room inventory is capacity constrained and • Historical data – the number of rooms sold on a
perishable date in the past
• The demand for hotel rooms is not the same for o How many rooms did I sell last
every day. week, or last year?
• Rooms that are not sold today cannot be resold • Current data -the number of reservations
tomorrow. booked for a date in the future
• The revenue management profession utilizes o At any point in time you know how
forecasts to: many rooms are sold for a future
o Understand the expected demand date
o Adjust pricing o This data represents a portion of
o Manage inventory the final demand!
o Determine how many rooms to sell at • Exogenous Information – Other data points that
each price level can be captured and utilized in the model
o Example: Time of year,
FACTORS AFFECTING DEMAND
promotions, market events
• The industry tends to experience seasonality
where demand patterns fluctuate based on the QUANTITATIVE FORECASTING
time of the year • There are 3 classes quantitative classes
o Seasonality • Advance Booking Models: rely on reservations
o Market Segment OTB and patterns of reservation requests
• These patterns are readily known in advance leading up to the date of stay
and can be leveraged when estimating our • Time Series Models: utilize a sequence of data
forecasts.. points taken in time order such as the final
MACRO FACTORS number of rooms sold over a range of dates
• Travel restrictions • Combined Models: independent predictions
• Economic conditions / Exchange Rates from time series and advance booking models
MICRO FACTORS are weighted together to generate a forecast
• Marketing promotions
ADVANCED BOOKING MODELS
• Local events
• Goal: Estimate the remaining bookings to come
• Competition (New Hotels)
over the remainder of the booking window
• Booking Window: How far in advance the
FORECASTING CATEGORIES reservations are made prior to the date of stay
• Qualitative forecasting focuses on our intuition • Booking Curve: The accumulation of these
and experience bookings as they are received
o It generally serves as the best choice
when there is little to no data
o Valuable when Macro and Micro events
may significantly impact demand
 ADVANCE BOOKING MODELS -ADDITIVE
• Additive models use the historical average
remaining demand to predict final demand
• This is done by adding the average
remaining reservations that are picked up
over the remainder to the booking window
to the current reservations OTB
• Model: 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡t = 𝑂𝑛 − 𝑡ℎ𝑒 – 𝑏𝑜𝑜𝑘t +
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝐷𝑒𝑚𝑎𝑛𝑑t
ADVANCE BOOKING MODEL - ADDITIVE
EXAMPLE
• Hotel is trying to determine how many
rooms sold 1 week (7 days) in advance.
• Current Number Reservations: OTB7 = 85
• The average number of reservations
received during the last week of window: 22
• (Average of difference between final rooms
sold and reservations OTB 7 days in
advance)
• 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡7 = 𝑂𝑛 − 𝑡ℎ𝑒 – 𝑏𝑜𝑜𝑘7 + 𝐴𝑣𝑔
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝐷𝑒𝑚𝑎𝑛𝑑7
• Forecast = 107 = 85 + 22
ADVANCE BOOKING MODELS - MULTIPLICATIVE
• Multiplicative models uses the historical average
booking rate to estimate final demand
• This is done by determining the proportion of
remaining reservations
• Booking Rate: Avg Reservations OTB / Avg Final TIME SERIES MODELS
Demand • Time series models leverage historical demand
• Model: 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑡 = to infer future demand
𝑂𝑛−𝑡ℎ𝑒−𝑏𝑜𝑜𝑘t/𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝐵𝑜𝑜𝑘𝑖𝑛𝑔 𝑅𝑎𝑡𝑒t • These models use values from the previous day,
week, or year to make predictions for the
ADVANCE BOOKING MODEL – MULT. EXAMPLE forecasted date.
• Hotel is trying to determine how many rooms • General inclination is that historical patterns
sold 1 week (7 days) in advance. such as day of the week (business vs. leisure
• Current Number Reservations: OTB7 = 85 travelers) or seasonality (summer vs. winter) will
• The average booking rate during the last week replicate into the future.
of window: 0.80
• Forecast = 94.4 = 85/0.9
 TIME SERIES MODELS – MOVING AVERAGE
• Moving averages are the simplest type of time
series forecast and are useful for constant
pattern data with no clear trend or seasonality.
• These models are denoted by the term m, which
is simply the arithmetic mean of the m most
recent observations.
• As is the actual observation (rooms sold) for
period s • The forecast made in period t for
period t+1 is:
•
TIME SERIES MODELS – MOVING AVERAGE
EXAMPLE
• Your manager asks you to make a prediction for
1/1/2022.
• The number of rooms sold for the same date for
the last 3 years is:
TIME SERIES MODELS – EXPONENTIAL SMOOTHING
• Exponential smoothing is a sophisticated
weighted averaging method, where the weights
decay exponentially as observations get older.
• Model is a weighted average between the most
recent observation At and the previous forecast
Ft
• α is the smoothing parameter ranging between
0 and 1
Model: 𝐹t+1 = 𝛼𝐴t + 1 − 𝛼 𝐹t’ 0 ≤ 𝛼 ≤ 1
• Hotel asks to make a forecast using the
exponential smoothing method with alpha = 0.2
EXPONENTIAL SMOOTHING - NOTES
• You may be wondering why we would assign
weights to the prior forecast
• This is due to the construction of the
exponential smoothing formula.
o The weighted average form of the
equation, Ft+1= αAt+(1- α)Ft, contains
the forecast (Ft) made in the previous
period.
o This previous forecast (Ft) also contains
the previous actual At-1
• Ultimately, it is a recursive equation and the
past observations At, At-1, At-2 ,…, are included in
the predictions from the prior forecasts and are
utilized in the current prediction.
COMBINED MODELS
• Combined models are widely accepted to
increase forecasting accuracy.
• Goal is to blend predictions from different
methods to generate the final forecast.
• Different techniques utilize different pieces of
information such as advance booking (current
data) and time series (historical data).
• When combining together a more complete
picture may be obtained.
• Typically each method can be weighted with w MEAN ABSOLUTE ERROR (MAE)
• 𝐹𝑖𝑛𝑎𝑙 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 = 𝑤 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡1 + 1 − 𝑤 • The simplest way to calculate error across
𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡2, 0 ≤ 𝑤 ≤ 1 observations is to average them together
• The MAE is the average of the individual errors
UNCONSTRAINED DEMAND
• It is important to take the absolute value of the
• It is important to note that in the forecasting errors so positive and negative errors do not
methods we discussed the physical capacity of a cancel out.
hotel limits the observed historical demand.
• Once a hotel sells out of rooms, it stops taking
reservations, and data is censored.
• Unconstrained Demand: The number of rooms
that can be sold assuming no capacity
constraints
• Unconstrained Demand is a revenue managers
best friend – prices can be increased until
demand reaches capacity

MEAN ABSOLUTE PERCENTAGE ERROR

Many advanced approaches to estimating
unconstrained demand exist (Weatherford, 2016).
Interested readers should consider time-series
forecasting models such as double exponential
smoothing and timeseries linear regression that can
be utilized for estimating unconstrained demand (see
Hyndman & Athanasopoulos, 2018 p. 109, p. 171).
The basic concept is that the observed constrained
demand is treated as a time series, and we estimate
the unconstrained demand (illustrated as a dotted
line in Figure 4) by projecting the time series pattern
further in time.
• Mean Absolute Percentage Error is a commonly
used error metric
• The only difference from MAPE is that the error
is divided by the actual rooms sold
• One of its advantages is that it allows for
forecasting performance comparison across
properties.
o This is because the error is scaled by
the actual number of rooms sold
o Therefore error is not specific to the
size of the hotel

FORECAST ACCURACY
• Forecast accuracy is how we determine which
forecast is the best
• Forecast accuracy is defined as the difference
between the actual and forecasted values
• 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝐸𝑟𝑟𝑜𝑟𝑡 = 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑡 − 𝐴𝑐𝑡𝑢𝑎𝑙𝑡
• Your forecast was 100 rooms for last Thursday
and you sold 95 rooms, what was the error?
• Error = 100-95 = 5
 TECHNOLOGY IN FORECASTING
• Many large hotel chains have employed their
own revenue management systems (RMS)
• Independents may employ a revenue
management system manually or through a
third-party provider (Ex. Duetto, IDeaS)
• Many times these systems incorporate the
techniques discussed here as well as other
methods to make predictions.
• It is important for revenue managers to:
o Monitor the system forecasts (compare
with your own)
o Make qualitative adjustments based on
market forces

Forecasting is a critical component of the revenue

management cycle. The predictions dictate the rate
decisions made in the optimization process. The more
accurate a revenue manager can anticipate future
demand, the better their pricing, overbooking, and
other revenue management decisions. It is essential
to realize that no forecasting algorithm will be perfect
all the time, and it is the revenue manager’s job to
monitor, adjust, and improve the forecasting process.
The advancement of computers and technology have
made forecasting more advanced and applicable for
the hotel industry, and as these methods continue to
develop, revenue management recommendations
will continue to improve.
 CHAPTER 5 PRICING BASICS
PRICE DEFINITION
• Price is the amount of money charged for a
good or service.
• Can be considered the sum of all the values that
clients renounce in order to gain the benefits of
owning or using a good or a service.
RELATING PRICE, QUALITY AND VALUE
concept constituting functional, emotional, price and
social value (Walsh et al., 2014).
IT CONCEPTUALIZES PRICE BOTH AS AN ATTRACTING
AND AS A REPELLING ATTRIBUTE. THAT IS, IT IS AN
INDICATOR OF QUALITY AS WELL AS SACRIFICE.
FOUR PREMISES OF THE CONCEPT OF PRICE

REALITY – price has an objective and subjective

sense. Price denotes an absolute (e.g., numerical)
independent value as well as a relative interpretive
value (e.g., high/expensive).

TIME – price has an initial sense and a final sense.

The final price to be paid can be identical to the price
initially offered (e.g., a fixed offer), but an initial
price offer can also be (re)negotiated

EVALUATION – price represents a seller’s (i.e.,

receive) as well as a buyer’s (i.e., sacrifice) value
PRICING PRINCIPLES: CONCEPTS AND SIGNIFICANCE
perspective.
It is common to consider price as a ‘give’ rather than
a ‘get’, and thus a sacrifice (Ahtola, 1984). This
CONTENT – price contains both tangible (e.g.,
perceived sacrifice often is a monetary kind,
money) and intangible (e.g., search time cost)
although time and search costs, for example, also
components
enter the consumer’s definition of ‘sacrifice’ (e.g.,
Downs, 1961).
Price is about setting value and not price (Leszinski &
Marn, 1997). Being ‘value-informed’ involves careful
Figure 1 illustrates the role of price in the formation
measurement of guest perceptions and developing
of a guest’s perception of sacrifice. The conceptual
effective strategies and tactics to manage these
model suggests that this sacrifice impacts a guest’s
perceptions toward the true value of a hotel’s
perceived value judgment, and with that behavioral
(room) service product (Monroe, 2003).
intention – such as booking a room. This judgment
involves an assessment of the quality or benefits the
EVOLUTION OF PRICING IN HOTEL REVENUE
guest perceives in that room relative to the
MANAGEMENT
perceived sacrifice required to make the booking. In
• Technological improvements, new managerial
this context it should be noted that perceived value
tools and new market factors have changed the
is not only a complex concept, “relative by virtue of
way hotel apply pricing.
its comparative, personal, and situational nature” as
• Advanced database analytics, as well as the
well as “preferential, perceptual, and cognitive-
extensive use of internet transactions, have
affective in nature” (Sánchez-Fernández & Iniesta-
Bonillo, 2007, p. 427), but also a multidimensional
 allowed firms to collect and process detailed
customer information on a large scale.
• From cost-based pricing to value-based pricing
COST-BASED PRICING
• Cost-based pricing consists in setting prices
mainly considering the costs for producing and
selling the product plus a profit quota (markup).
• Hotels usually operate at high proportions of
fixed costs and relatively high contribution
margins.
VALUE-BASED PRICING
• Value-based pricing uses the clients’ perceptions
of value, their willingness to pay, and not the
sellers’ cost, as the way to decide to prices.
• Value-based pricing is customer driven while
cost-based pricing is product determined
• In a hotel this strategy generally includes a
combination of segmented pricing and dynamic
pricing. As a result, hotels set multiple prices for
multiple segments, dynamically varying them
according to expected changes in demand.
COMPETITION-BASED PRICING
• In the widest sense of the word, competition
stands for rivalry between hotels.
• An optimal price may thus be no longer relevant
if competitors change their prices. For this
reason, market intelligence is a key issue;
monitoring competition and knowing demand
• Rate shoppers are tools that help hotels to
analytically monitor in real-time their
competitors' rate decisions in various
reservation channels.
• Pricing in hotel revenue management, as it is in
hospitality and tourism in general, tends to be
rather competitors- focused.
HEDONIC PRICE
• Hedonic price theory starts from the idea of
approaching goods and services as a bundle of
objective attributes.
• In the hospitality industry, it is possible to
consider the whole hotel experience as a
homogeneous product or unpack it into several
components, such as the value of a convenient
location, the quality of breakfast, a good wi-fi
connection, etc.
RATE FENCES AND MARKET SEGMENTATION
• Fences based on transaction characteristics
• Fences based on consumption characteristics
• Fences based on buyer characteristics
FOUR BASIC PRICING PROCESSES WITH CAPITAL
REQUIREMENTS
PERCEIVED FAIRNESS
• Customers may perceive value-based pricing as
an opportunistic behavior of the firm and then
judge these practices as unfair.
• As a result, customers’ trust and loyalty towards
the hotel brand may deteriorate significantly.
TECHNIQUES
• UP-GRADES
• UP-SELLING
• COMPLIMENTARY ROOMS
• CROSS-SELLING
• DOWN-SELLING
1. What would properly described revenue management as True || False
knowledge of work?
9. This is one of the six task clusters by a revenue
a. None of the choices manager which promote effective communication.
b. It requires narrow thinking
c. It is a routine problem solving a. Analyze Trends
d. It recognize the importance of trends (industry, b. Monitor Daily Activity
market and customer) c. Communicate Effectively
d. Lead the Revenue Team
2. This is one of the six task clusters by a revenue manager
which demonstrate flexibility in verbal debate regarding 10. At what level of price discrimination if the firm
strategies and tactics. groups the units and charges different prices for
these groups of units.
a. Lead the Revenue Team
b. Monitor Daily Activity a. Third degree price discrimination
c. Analyze Trends b. Fourth degree price discrimination
d. Communicate Effectively c. Perfect price discrimination
d. Second degree price discrimination
3. These are determinants of demand except
11. The following are emerging trends in revenue
a. Tastes and preferences management except
b. The number of producers in the market
c. Expectations about prices a. Forecasting methods
d. Price of related goods b. None of the choices
c. Revenue analytics
4. It is selling “the right product to the right customer at d. Artificial intelligence
the right time to the right price”
12. This is one of the legal aspect of revenue
a. Marketing Management management that is designed to prevent
b. Business Management hospitality operators from restraining trade
c. None of the choices through price fixing, manipulate bids for group
d. Revenue Management contracts, or allocate customers to competitors
for the purpose of discrimination.
5. This is one of the six task clusters by a revenue manager
which pertains to matching group and transient market a. Robinson Patman Act
needs with hotel needs b. Price Act
c. The Sherman Anti Trust and Clayton Acts
a. Lead the Revenue Team d. None of the above
b. Analyze Trends
c. Monitor Daily Activity 13. A disadvantage of this traditional pricing method
d. Communicate Effectively is it is inwardly focused and not reflecting
internal & environmental changes.
6. The airline industry, after deregulation, maintained the
policy of the same price for all customers traveling on a. Market pricing
the same flight. b. Cost pricing
True || False c. Value pricing
d. None of the choices
7. Continuous development of skills and abilities in
revenue optimization and data analysis means 14. This system offered various discounts for various
travelers and at the same time and attached
a. None of the choices restrictions to these discounted rates.
b. Analyzing trends
c. Demonstrating professionalism a. property management system
d. Developing effective RM strategies b. multi-tier room rate system
c. none of the choices
8. When suppliers expect the market price to go down in d. differential fares
the future, they would have incentives to increase the
supply quantity in order to maximize the revenue. 15. The more narrowly market is defined the more it is
elastic.
 True || False maximize efficiency and productivity.

16. This is one of the six task clusters by a revenue manager a. Information Technology
which pertains to determining strategic courses of b. Programming
action. c. Artificial Intelligence
d. None of the choices
a. Lead the Revenue Team
b. Communicate Effectively 23. RM takes into account the available inventory
c. Analyze Trends of a product or service and sets a price in an
d. Monitor Daily Activity attempt to “sell it all” for the minimum price.
True || False
17. This is one of the six task clusters by a revenue manager
which pertains to mentoring/coaching front office staff 24. What is an example of an ethical situation that
on revenue management strategies. revenue management may face with?

a. Monitor Daily Activity a. Coercion and control

b. Analyze Trends b. Personal integrity
c. Communicate Effectively c. Conflict of interest
d. Lead the Revenue Team d. All of the choices

18. Influenced by the use of revenue management systems
in the lodging industry, the airline industry slowly
introduced the multi-tier room rate system.
True || False
19. Jesse admires the beautiful dress displayed in a store
near their house. She is willing to pay for the dress for
an amount not exceeding 1,200 pesos. The dress sells at
a bargain price of 1,000 pesos this week only. The
regular price of the dress is 1,500 pesos. How much
would Jesse's surplus be if she decides to buy the dress
next week?
25. At what level of price discrimination if the firm
is able to charge the highest possible price for
every unit in its inventory.
a. Second degree price discrimination
b. Perfect price discrimination
c. Fourth degree price discrimination
d. Third degree price discrimination
26. It reflects a detailed understanding of what has
happened before and forward-looking of what is
happening now and in the future.

a. Zero a. None of the choices

b. Three hundred pesos b. Yield management
c. Two hundred pesos c. Revenue management
d. Five hundred pesos d. Operations management

20. A hotel sold 1,000 room-nights during the past month at 27. This is the ability of a computer to follow a
an average rate of $90. The revenue was $90 x 1,000 = program or series of instructions for a desired
$90,000. If the demand is sensitive to price change and outcome and attempts to mimic natural or
the room nights drop to 800. What is the hotel's human intelligence.
elasticity of demand if the price is increase to $110?
a. Artificial Intelligence
a. 0.9 inelastic b. None of the choices
b. 1.2 elastic c. Software program
c. 0.9 elastic d. Automated instructions
d. 1.2 inelastic
28. The practice of charging different prices for the
21. The importance of the product in consumers’ budgets is same product.
a determinant of
a. Price discrimination
a. Supply b. Price elasticity
b. Price c. Price control
c. Demand d. None of the choices
d. Elasticity
29. A disadvantage of this traditional pricing
22. This is a process of using integrated computer method is it is constrained by arbitrage and
technology to manage systems in an attempt to
 competition. d. Analyze Trends

a. Cost pricing 37. The decrease of production cost will induce

b. Value pricing producers to decrease supply quantity at given
c. None of the choices prices, moving the supply curve to the right
d. Market pricing True || False

30. This is one of the six task clusters by a revenue
manager which pertains to working closely with
sales management to determine viability of long
and short-term bookings from a pricing and
availability perspective.
38. YM goals were to maximize yield by accepting
more reservations than capacity with the
expectation of no show/cancelations and only
late-bookings for high-yield passengers.
True || False

a. Lead the Revenue Team 39. At what level of price discrimination if the firm
b. Monitor Daily Activity grouped the customers, not units, based on their
c. Analyze Trends willingness to pay.
d. Communicate Effectively
a. Second-degree price discrimination
31. This is one of the six task clusters by a revenue b. Fourth degree price discrimination
manager which pertains to developing reports, c. Third degree price discrimination
memos, other written communications. d. Perfect price discrimination

a. Lead the Revenue Team 40. The following are RM solution software
b. Analyze Trends available in the market except
c. Monitor Daily Activity
d. Communicate Effectively a. Spot pilot
b. Revcontrol
32. The law of demand states that the quantity c. None of the choices
demanded of a product is negatively related to d. Room price genie
its price, ceteris paribus.
True || False

33. What does a revenue manager do?

a. Prepare accurate occupancy and revenue

forecasts
b. Manage the hotel's web portal
c. All of the choices
d. Analyze financial statement and market data

34. Which does not belong in the group?

a. Quantitative analytics
b. Artificial intelligence
c. Data visualization
d. None of the choices

35. The equilibrium price will be maintained so

long as the basic supply and demand conditions
changes.
True || False

36. This is one of the six task clusters by a revenue

manager which articulate complex strategies or
topics in a clear and concise manner.

a. Monitor Daily Activity

b. Lead the Revenue Team
c. Communicate Effectively
Question 1 This pricing technique uses Question 5
the client's perception of value and their The predictions dictate the rate decisions
willingness to pay. made in the optimization process.
a. value-based pricing T
b. cost-based pricing True
c. competition-based pricing F
d. rule of thumb pricing False

Question 2 Question 6
What is the average final demand if the It is the number of rooms that can be sold
average cumulative booking (OTB) is 150 assuming no capacity constraints.
and the average remaining demand is a. Unconstrained demand
150? b. Peak demand
a. 100 c. None of the choices
b. 200 d. Lean demand
c. 150
d. 300 Question 7
Which of the following premises of the
Question 3 concept of price contains both tangible
Which is not a micro factor affecting the and intangible components.
demand? a. Time
a. marketing promotions b. Content
b. exchange rates c. Reality
c. competition d. Evaluation
d. local events
Question 8
Question 4 A forecasting data that refers to the
The average booking rate during the last number of rooms sold on a date in the
week of window is 0.90. Using the past.
multiplicative advance booking model, a. Exogenous data
what is our forecast if the hotel is trying to b. Historical data
determine how many rooms sold 1 week c. None of the choices
(7 days) in advance when current number d. Current data
reservations: OTB7 is 85?
a. None of the choices Question 9
b. 90.4 Which of the following premises of the
c. 92.4 concept of price has an initial and final
d. 94.4 phase.
a. Concept
b. Time
c. Reality
d. Evaluation
Question 10 T
This pricing technique consists of setting True
prices mainly considering the cost of F
producing and selling the product plus a False
mark-up.
a. rule of thumb pricing Question 15
b. competition-based pricing Which is not a macro factor affecting the
c. value-based pricing demand?
d. cost-based pricing a. competition
b. economic conditions
Question 11 c. exchange rates
Additive models use the current average d. travel restrictions
remaining demand to predict final demand
T Question 16
True Which of the following premises of the
F concept of price has an objective and a
False subjective sense.
a. Evaluation
Question 12 b. Concept
The average number of reservations c. Time
received during the last week of window is d. Reality
22. Using the additive advance booking
model, what is our forecast if the hotel is Question 17
trying to determine how many rooms sold What is the average remaining demand if
1 week (7 days) in advance when current average final demand is 300 and the
number reservations: OTB7 is 85? average cumulative booking (OTB) is
a. 85 180?
b. 63 a. 480
c. 22 b. 180
d. 107 c. 120
d. 300
Question 13
It is the average of the individual errors. Question 18
a. Mean Error Percentage What is the average booking rate if the
b. None of the choices average cumulative booking (OTB) is 250
c. Mean Absolute Percentage and the average final demand is 300?
d. Mean Absolute Error a. 0.93
b. 0.83
Question 14 c. 0.73
Quantitative forecasting serves as the d. None of the choices
best choice when there is little to no data.
 d. Value
Question 19
What is the average final demand if the
average cumulative booking (OTB) is 180 Question 23
and the average remaining demand is A forecasting data that refers other data
120? points that can be captured and utilized in
a. 60 the model.
b. 180 a. None of the choice
c. 300 b. Current data
d. 120 c. Historical data
d. Exogenous data
Question 20
Your manager asks you to make a Question 24
prediction for 1/1/2022. The number of Why does the revenue management
rooms sold for the same date for the last 3 profession utilizes forecasts?
years is January 1, 2019 (210 rooms a. To manage inventory
sold), January 1, 2020 (184 rooms sold), b. Both choices are correct
and January 1, 2021 (206 rooms sold). c. None of the choices are correct
What is our forecast using the time series d. To determine how many rooms to
model - moving average? sell at each price level
a. 200
b. 206 Question 25
c. 210 Which of the following premises of the
d. 184 concept of price represents seller's and
buyer's value perspective.
a. Reality
Question 21 b. Evaluation
It is defined as the difference between the c. Time
actual and forecasted values. d. Concept
a. Forecast difference
b. Forecast variance Question 26
c. None of the choices These are tools that help hotels to
d. Forecast accuracy analytically monitor in real-time their
competitor's rate decisions in various
Question 22 distribution channels.
It is considered the sum of all the values a. rate parity
that clients renounce in order to gain the b. rate shoppers
benefits of owning or using a good or a c. rate fences
service. d. none of the choices
a. Price
b. Expense
c. Cost
Question 27 Question 31
The average booking rate during the last If our forecast was 100 rooms for last
week of window is 0.70. Using the Thursday and you sold 95 rooms, what
multiplicative advance booking model, was the error?
what is our forecast if the hotel is trying to a. -5
determine how many rooms sold 1 week b. 5
(7 days) in advance when current number c. 0
reservations: OTB7 is 102? d. Noe of the choices
a. 145.71
b. None of the choices Question 32
c. 154.71 What is the average remaining demand if
d. 90.4 average final demand is 400 and the
average cumulative booking (OTB) is
Question 28 100?
Time series models leverage future a. 200
demand to infer historical demand. b. 500
T c. 300
True d. 400
F
False Question 33
The average number of reservations
Question 29 received during the last week of window is
This refers to the accumulation of these 40. Using the additive advance booking
bookings as they are received. model, what is our forecast if the hotel is
a. booking window trying to determine how many rooms sold
b. booking curve 1 week (7 days) in advance when current
c. booking reservation number reservations: OTB7 is 94?
d. booking pattern a. 54
b. 94
Question 30 c. 134
This pricing technique consists of setting d. 40
prices requires market intelligence like
monitoring competition and knowing the Question 34
demand. These patterns are readily known in
a. cost-based pricing advance and can be leveraged when
b. value-based pricing estimating our forecasts.
c. rule of thumb pricing a. Seasonality
d. competition-based pricing b. Pricing
c. Competition
d. None of the choices
Question 35 Question 39
What is the average booking rate if the Accurate forecasts provide confidence of
average cumulative booking (OTB) is 250 past demand and pricing decisions.
and the average final demand is 300? T
a. 0.73 True
b. 0.93 F
c. 0.83 False
d. None of the choices
Question 40
Question 36 A forecasting data that refers the number
Statement 1 - Room inventory is capacity of reservations booked for a date in the
constrained and non-perishable. future.
a. None of the choices
Statement 2 - Rooms that are sold today b. Historical data
cannot be resold tomorrow. c. Current data
d. Exogenous data
Which statement is correct?
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are incorrect
d. Both statements are correct

Question 37
This refers to how far in advance the
reservations are made prior to the date of
stay.
a. booking pattern
b. booking window
c. booking curve
d. booking reservation

Question 38
A forecasting category that analyzes
historical data to estimate trends and
patterns using statistics and mathematics
for prediction.
a. Quantitative forecasting
b. Qualitative forecasting
c. Both choices are correct
d. None of the choices