Mr. Shoemaker

Revenue Management

Revenue Management and CRM: A Conflict of Strategies?

By Stowe Shoemaker, Associate Dean of Research, Conrad Hilton College of Hotel and Restaurant Management

Hospitality managers have paid much attention to the practice of both revenue management and customer loyalty over the last few years. Unfortunately, these managers often come from different departments; and as a result, they often have different goals and different financial targets. For instance, those in marketing are measured by increases in repeat purchase, word of mouth, and satisfaction, while those in revenue management are measured by REVPAR index and yield index. While in an ideal world these goals would be complimentary, this is often not the case. Rather than being a zero sum game, it is a winners take all game, where the win is the incentives that come from reaching specified targets. For example, in one of my executive education classes a sales manager of a large international hotel company told me the following story:

We had very large meeting client that accounted for about $250,000 a year in revenue and visited three to four times a year. At one meeting we had booked a music awards ceremony in the room next door. Unfortunately the sound proofing was not the best and the meeting for our big client was ruined. When the meeting planner asked for a $35,000 refund I was told by both the executive chef and the general manager to say no. The chef was worried about his food cost, the figure that his bonus was based upon. The general manager was concerned about quarterly profitability, as his bonus based was upon that figure. The meeting client was not happy and never booked again.

This story is an example of why I call revenue management and customer loyalty a potential conflict of strategies. Focusing on revenue management without regard to the customer often destroys loyalty. In the same way, focusing totally on customer loyalty without knowledge of the customer's worth can often have a major impact on revenue.

This and future articles will argue that revenue management and customer should and can go hand in hand. The thesis is that the old definition of revenue management - "tell me when you want to arrive and I will tell you what to pay" or "tell me what you want to pay and I will tell you when to arrive" should now be "let me identify who you are, and then you tell me when you want to come and I'll tell you what to pay." The difference - let me identify who you are - is the key that ties marketing and revenue management together. For it is the person's behavior (known in the airline business as personal name record or PNR), that determines the price the customer will pay.

In the casino industry, the behavior is measured by "theoretical win," which is the amount of money the casino will win from the customer. For one large casino company the actual room rate the customer will pay is determined by subtracting the theoretical win from the room rate determined by the revenue management system. Therefore, customers with high theoretical win will pay less for the room than those who have a lower theoretical win. For instance, if the revenue management system says that the room should sell for $400 and the theoretical win of the customer is $200, then the room cost to the customer is $200. For the customer who stays at the casino and is not a gambler (a theoretical win of $0) the room will be $400. The system used for this one casino company also estimates how many rooms should be held for the top players.

Non gaming properties, such as hotels do not have theoretical win as a financial measurement, but they do have frequent guest programs that can be used to determine a customer's worth, visit frequency, and the like. In addition, if the reservation comes through a central reservation line management can also help identify the potential long-term value customers. Those who are coming to attend a wedding in the area have much different long term potential than those who are salespeople visiting a local client. The customers are different and should be treated as such. This may be considered hearsay by some, but it is the foundation of customer loyalty. All customers are treated well, but those loyal customers are treated better.

In order to classify customers, it is useful to use a typology first suggested by Reinartz and Kumar in a 2002 Harvard Business School piece and adapted by Noone, Kimes, and Renaghan in a 2003 article in the Journal of Revenue and Pricing Management. This is shown in Figure 1.

Notice that customers are classified by their profitability (high or low) and their potential length for a business relationship (short or long). Needless to say, the "true friends" are the customers hotels want to keep happy.

The "true friends" are exemplified by the group that booked approximately $250,000 a year in revenue. They are also exemplified by those customers with high theoretical win in the casino business and customers in the top tier status of the loyalty program. Those in revenue management do not want to indiscriminately practice revenue management on this group, for doing so would violate the trust that those in marketing have spent much time and effort developing. This is the group that gets last room availability and consistent pricing.

As mentioned earlier, true friends can easily be recognized by their membership status in the loyalty program, or in the case of a casino, by their theoretical win. Members of this group can also be identified by their reason for being in the area. The business generated by business people calling on the firms located in the area fall into this category.

The Butterflies are those guests that have high profit potential, but for a variety of reasons will not be long term guests of the hotel. It is not because the hotel does not meet their needs, but rather it is because their reason for needing the hotel is based upon a short term situation. The use of a hotel by the international media to cover a major event falls into this category. Guests who are Butterflies are the least price sensitive. The rationale is that the hotel meets all their needs. This is the group that should pay the maximum prices.

Questions one should ask to help identify this group include:

The third group is called the Strangers. They are Strangers because there is little fit between what the hotel offers and what they actually want. They stay at the hotel most probably because it is convenient to where they need to be for the specific visit. This group can be considered utilitarian; that is, they just want the basics. If they truly wanted more, they would find a hotel that better fit their needs. Like the Butterflies, it is possible to maximize the yield on this group. However, unlike the Butterflies, this group is price sensitive. They are price sensitive because the hotel does not really fit their needs. Opaque channels are most likely to attract members of this group, as are tour operator rates.

The fourth and final group is the Barnacles. Like the Strangers, there is little fit between what the hotel offers and the customer's actual needs. This group stays with the hotel over the long run, despite the fact that the hotel does not specifically cater to his groups' needs. This group may consist of airline crews or other lowed lower rated business. This group is needed, as they act as filler business for the hotel. Because of the price sensitivity of this is the group, the standard question should be "tell me when you want to pay and I will tell you when to come." The rate the Strangers pay should be highly fenced so that more profitable groups cannot use the hotel at the lower rates.

It should be clear from the segmentation scheme presented that all customers are not equal. Therefore, firms should not offer the same prices to their customers and instead base pricing upon the consumer's behavior. This goes against traditional marketing that says that all customers are equal.

Customer loyalty should work hand-in-hand with pricing and revenue management. To do otherwise would be to destroy the trust marketing has been fighting to maintain. To ensure that loyalty is not destroyed while at the same time ensuring that revenue is maximized, firms must understand their customers and develop pricing strategies that reflect this knowledge.

Stowe Shoemaker is the Associate Dean of Research at the University of Houston's Conrad Hilton College of Hotel and Restaurant Management. He is also on the faculty at Cornell teaching strategic marketing, revenue enhancement through pricing, and customer loyalty. Stowe's major rearch clients have included Taco Bell, Foodmaker, Marriott, Carl's Jr., Baker's Square and Bob Evans Farms Restaurants. He holds a Ph.D. from Cornell University in the School of Hotel Administration, an MS from the University of Massachusetts and BS from the University of Vermont. Mr. Shoemaker can be contacted at 713-743-7371 or sshoemaker@uh.edu Extended Bio...

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