REVENUE MANAGEMENT: DEVELOPMENT OF A CASE STUDY FOR

HIGHER EDUCATION

A Project

Presented to the

Faculty of

California State Polytechnic University, Pomona

In Partial Fulfillment

Of the Requirements for the Degree

Master of Science

In

Hospitality Management

By

Thu Le

2017

 SIGNATURE PAGE

PROJECT: REVENUE MANAGEMENT: DEVELOPMENT OF A

CASE STUDY FOR HIGHER EDUCATION

AUTHOR: Thu Le

DATE SUBMITTED: Spring 2017

The Collins College of Hospitality Management

Linchi Kwok, Ph.D.

Committee Chair
The Collins College of
Hospitality Management

Margie Ferree Jones, Ph.D.

Committee Member
The Collins College of
Hospitality Management

Eddie Mao, Ph.D

Committee Member
The Collins College of
Hospitality Management

ii
 ABSTRACT

Revenue management has become an important concept in service operations. For

the purpose of maximizing the profits, hotels managers are now highly recommended to

apply the revenue management concepts to lodging operations. As such, many hospitality

programs include revenue management in their curriculum, aiming to prepare their

students with the skills sets that are highly desired by the industry. Among many teaching

methods in revenue management, case studies are recognized as one the most effective

approaches and have been widely adopted in graduate and executive educations. This

study reports an analysis of the current status of how revenue management is taught in

universities and presents a case study in revenue management, which can be used by

university professors in teaching relevant content. In particular, the case study is built

upon a stimulation of three "real-world" revenue management scenarios. Students are

expected to use pricing-setting methods, dynamic pricing principle, and overbooking

strategies to solve the questions raised in each of the three scenarios. Teaching notes and

possible solutions to the questions are also provided. Based on the learning outcomes of a

course and the level of students, professors may choose to use one, two, or three

scenarios in teaching or as a take-home assignment. Through an in-depth analysis of the

case study, it is expected that students will be able to apply the revenue management

concepts to solve similar issues emerge in a real hotel and make rationale decisions for

the management.

Key words: hotel revenue management, revenue management tools, pricing tools, non-

pricing tools, overbooking, case studies.

iii
 TABLE OF CONTENTS

SIGNATURE PAGE......................................................................................................... ii

ABSTRACT...................................................................................................................... iii

LIST OF TABLES ........................................................................................................... vi

LIST OF FIGURES ........................................................................................................ vii

CHAPTER 1: INTRODUCTION ................................................................................... 1

1.1 Research background ............................................................................................ 1

1.2 Revenue management and teaching revenue management in the US................... 2

1.2.1 Revenue management .................................................................................... 2

1.2.2 Teaching revenue management in the US ..................................................... 3

1.3 Significance of this study...................................................................................... 4

1.4 Purpose of study.................................................................................................... 4

CHAPTER 2: LITERATURE REVIEW ........................................................................ 6

2.1 Revenue management tools .................................................................................. 6

2.1.1 Pricing tools ................................................................................................... 6

2.1.2 Non-pricing tools ......................................................................................... 11

2.2 Case study method .............................................................................................. 22

2.2.1 Definition of case study ............................................................................... 22

2.2.2 Types of cases .............................................................................................. 23

2.2.2 Effectiveness of case studies........................................................................ 25

2.3 Case study method in teaching revenue management ........................................ 27

iv
 CHAPTER 3: METHODOLOGY ................................................................................ 31

CHAPTER 4: CASE STUDIES.................................................................................... 33

4.1 Case background ................................................................................................. 33

4.2 Exercises ............................................................................................................. 36

4.3 Teaching notes .................................................................................................... 39

CHAPTER 5: CONCLUSION ..................................................................................... 53

REFERENCES................................................................................................................ 54

APPENDIX: Two Samples of Syllabi for Revenue Management Classes ................. 62

v
 LIST OF TABLES

Table 1: Four price-setting approaches ............................................................................. 10

Table 2: Hotel A's overbooking experience ...................................................................... 16

Table 3: Hotel A's estimated overbooking cost ................................................................ 18

Table 4: Hotel A's no-shows data ..................................................................................... 19

Table 5: Hotel A's no-shows data in 60 days - Cumulative probabilities ......................... 20

Table 6: Revenue management training in top 15 Hospitality Research Universities in the

US ........................................................................................................................ 28

Table 7: Rose Hotel's competitive set ............................................................................... 35

Table 8: Historical Hotel Market Growth 2009-2015 (Source: Smith Travel Research) . 35

Table 9: Rose Hotel's booking data .................................................................................. 37

Table 10: Learning objectives ........................................................................................... 41

Table 11: Questions for discussion ................................................................................... 41

Table 12: Rose Hotel's proposed room rates .................................................................... 44

Table 13: 1st set of booking order .................................................................................... 45

Table 14: Sample data for a simulation run for a fixed pricing round .............................. 45

Table 15: 2nd set of booking orders ................................................................................. 46

Table 16: Sample data for a simulation run for a dynamic pricing round ........................ 47

Table 17: Rose Hotel's no-shows data in 40 days ............................................................. 47

Table 18: Rose Hotel's estimated overbooking cost ......................................................... 49

vi
 LIST OF FIGURES

Figure 1: Challenges facing revenue management.. ........................................................... 2

vii

 CHAPTER 1

INTRODUCTION

1.1 Research background

Revenue management has long been seen as an important tool for maximizing

profit in the hospitality industry. The airlines industry first adopted revenue management

in late 1980s. Since then, revenue management has expanded to its current state as a

common practice in a wide range of businesses where perishable goods and services are

involved, including hotel rooms, restaurant seats, cruise line rooms, hospitals and health

care clinic beds, spa and car rental. With no significant capital expending, firms

employing revenue management have seen between three and seven percent increase in

revenue (Cross, 1997). American Airlines reported $1.4 billion in revenue over a three-

year period from 1988 to 1991. This represented a four to five percent increase in revenue

over that time period (Smith, Leimkuhler, Darrow, 1992). Intercontinental Hotels Group

(IHG) cited a 2.7% increase in revenue per available room (RevPAR) attributable directly

to price optimization in their 2009 annual report. That was a $400 million revenue impact

across the IHG hotel portfolio.

Recent research has indicated a shortage of trained and skilled revenue managers

as one of the most challenging issues facing hotel managers (Kimes, 2010). This concern

has revealed an increasing demand for revenue management training. In response to the

lodging industry’s demand, many hospitality programs are now offering courses in

revenue management. Among many teaching methods, case studies have been seen as an

effective approach due to its ability to bridge the gap between theory and practice.

Therefore, there is a need to develop case studies in revenue management for educational

purposes.

Figure 1: Challenges facing revenue management. Adapted from “The future of hotel revenue

management” by Kimes, S. E, 2011, Journal of Revenue and Pricing Management, 10, p. 64.

1.2 Revenue management and teaching revenue management in the US

1.2.1 Revenue management

Revenue management is a sophisticated form of supply and demand management

that helps a firm maximize revenue by balancing pricing and inventory controls. Kimes

(2004) defined revenue management as the application of information system and pricing

strategies to allocate the right capacity to the right customer at the right price at the right

time. In practice, revenue management has meant determining pricing according to

predicted demand levels so that price sensitive customers can buy at favorable price

during off-peak times, while price-insensitive customers are still able to purchase at high

demand periods (Kimes and Wirtz, 2013).

The primary purpose behind the adoption of revenue management and its

development in the hotel industry is the ability of maximizing revenue and benefit.

According to Goldman, Freling, Park (2002); Law (2004); Cinjarevie and Lamija (2010),

revenue management assists organizations in:

 Finding optimal inventory allocation and price setting for various services in

attempt to create the highest profit possible.

 Improving firms’ forecasting ability for future booking demand.

 Allowing lodging companies to leverage price discrimination through market

segmentation.

 Controlling cost by providing more accurate forecast which enables better

optimizing manpower and other resources for periods of higher demand while

avoiding overstaffing and unnecessary expenses during low demand periods.

1.2.2 Teaching revenue management in the US

The increasing recognition of revenue management’s economic benefit has led to

a growing number of revenue management courses; which majorly focus on hotel, spa

and restaurant revenue management. With the increase in the number of revenue

management courses, new teaching methods such as case studies, experimental exercises,

guest speakers, article analyses and group discussions have been introduced to classes to

make revenue management more approachable and understandable to students. The case

study method is considered the most popular in teaching revenue management due to its

ability to connect theoretical context with practice in real world business. Syllabi of

revenue management classes available on Internet (appendix 1) reveal that the majority of

schools are using the case study method for teaching revenue management.

1.3 Significance of this study

Revenue management has attracted considerable attention in recent years. Despite

the growing number of revenue management courses, the lodging industry is still facing a

lack in well-trained revenue managers (Kimes, 2010). Even though case study teaching

has been proven to be an effective method in many business schools (Popescu, 2009;

Guess, 2014), there are not many case studies available in hotel revenue management.

Therefore, the researcher believes that this study will contribute to the better quality of

revenue management training in an attempt to prepare students with the skill sets that are

highly desired by the industry. The study will also be a useful tool for both educators and

students. The educators will find the case in this study a valuable approach to deliver

revenue management theory to students and to get students more excited and involved in

the training. Students will benefit from experiencing a real-world situation that makes

revenue management more understandable and applicable while also developing their

critical thinking, analytical reasoning, decision-making, and communication skills.

1.4 Purpose of study

This study is conducted to develop a case study in two areas of hotel revenue

management for the purpose of teaching. The goal of every hotel revenue manager is to

achieve the best possible revenue per available room (RevPAR) by determining the

optimal price for a room using revenue management tools. The case study consists of

three different exercises which stimulate the application of multiple revenue management

tools, including both pricing and non-pricing tools, in order to find the solutions for the

case’ problems; however the focus is on pricing and overbooking because of their

popular use in hotel revenue management practice. The first exercise presents a scenario

in pricing; the second exercise features the practice of dynamic pricing while the third

one covers the practice of overbooking in the hotel business. These cases will simulate

real-world revenue management scenarios on which students are required to make

decision. The study is expected to achieve the following objectives:

1. To create a case study that requires using pricing and overbooking tools to solve

the real-world problem in hotel revenue management.

2. To help students understand revenue management tools and how to use them in

hotel business.

3. To provide an effective educational material for revenue management training.

 CHAPTER 2

LITERATURE REVIEW

For the purpose of this study, revenue management tools and the case study method will

be reviewed.

2.1 Revenue management tools

2.1.1 Pricing tools

Pricing tools are among the most effective variables that managers can manipulate

to encourage or discourage demand in the short run, as well as regulate inventory and

production pressures. Industry experts indicate that 95% of revenue growth through rate

flows to the bottom line while only 50% of revenue increase through occupancy goes to

the bottom line (Cullen & Helsel, 2010).

Price discrimination

Price discrimination is considered to be the heart of pricing tools (Hanks, Cross &

Noland, 2002; Kimes & Wirtz, 2003; Ng, 2009; Shy, 2008; Tranter et al., 2008). From its

most basic definition, price discrimination means that customers are charged different

prices for the same product and service. Such fluctuations in price arise from hotels’

intention to target different segments of customers. Higher rates are set for less price

sensitive customers while discounts are offered to attract more price elastic ones. Kimes

(2010) suggested that it is a common practice in the hotel industry to use multiple prices

to increase revenue. A hotel that only offers one rate to all customers is not optimizing its

revenue because that rate may be unaffordable to some potential customers while other

customers are probably willing to pay a higher price.

Hotel guests usually fall in one of these three customer segments: business, group

and leisure travelers. Each of these three segments features dissimilar needs and wants as

well as different level of price sensitiveness, based on which the hotels are able to charge

different customers different prices for the same rooms. According to Kimes and

Anderson (2011), price discrimination or sometimes called variable pricing, is to set

multiple price points for distinct market segments. For instance, business travelers tend to

value convenience, travel during the weeks, focus on service levels and could afford to

pay higher price while transient travelers tend to be price sensitive, travel on weekends

and pay much attention to cost. Many hotels offer discount rate to large traveling parties

to attract more group demand; however normal rate is still set to individual travelers.

Rate fences

Rate fences are conditions or restrictions under which specific rates are offered on

the market (Zhang & Bell, 2010, 2012). When a company deploys price discrimination to

different customers for the same products and services, it is necessary to differentiate

those prices so that customers feel like they are paying different rates for different

products. For example, customers paying higher rate may receive additional services such

as free breakfasts, more desirable rooms, late check out while those paying the

discounted rate may be required to make reservations well in advance with restricted

cancellation terms and receive less desirable rooms. In other words, rate fences should be

placed between high-value customers and low-value customers to stop the guests from

switching to low price rooms (Kimes, 2013). Essentially, a rate fence is the reason why

customers pay different price. Rate fences have been used as a tool to avoid migration

from high to low priced products and to differentiate hotel customers by prices (Ivanov,

2014). Well-designed rate fences allow customers to self-segment based on their

willingness to pay and different service characteristics. Additionally, rate fences allow

companies to restrict lower prices to customer segments that are willing to accept certain

restrictions on their purchase and consumption experiences (Lovelock and Wirtz, 2011).

In the hotel industry, rate fences are integrated into the booking terms and

conditions and determine the validity of a specific room rate. Common rate fences

include room types, arrival day of the week, duration of stay, guest characteristics, guest

loyalty, group size, distribution channels, time of booking, booking terms, cancellation,

payment terms (Kimes, 2011). For example, in order to attract more leisure guests a

business hotel offers discount for guests whose arrival days are on Fridays or Saturdays.

The rate fence used here is the arrival day of the week. It is noticed that customers who

arrive at the hotel on weekdays (Sundays to Thursdays) tend to be business travellers,

who are less price sensitive and willing to pay higher prices than leisure travellers, who

tend to arrive at weekends (Fridays and Saturdays) and are more price sensitive. Offering

discounts for guests arriving on Fridays and Saturdays ensures that business travellers do

not take advantage of discounted rates offered while hotels are still able to attract more

leisure travellers.

Dynamic pricing

Dynamic pricing involves changing prices over time in response to changes in

level of demand and occupancy rate (Ivanov, 2014; Kimes, 2011). Dynamic pricing

means that a hotel will change its room rates daily or even within a day whenever the

market reveals the need of adjustment. The reason for this adjustment is the recognition

that the right rate for a room night is what the customers are able and willing to pay

(Ivanov, 2014). A very popular dynamic pricing principle is demand-based pricing. In

practice, hotels usually decrease their rates in an attempt to stimulate demand, or increase

prices when the demand grows strong. Customers, therefore, are charged different prices

even for the same booking detail (period of stay, number and type of room) depending on

the time of reservation.

The key to dynamic pricing is to understand the projected demand for the hotel,

the performance of competitive set and the movement of the market (Forgacs, 2010).

When a demand changing event ever occurs, for example group bookings, severe

weather, holidays, at a hotel or its competitors, it is important to determine the impact of

the event and modify the rate fences, hence, adjust the price in order to keep the hotel

competitive and ensure the highest profitability possible. By allowing the hotel to

determine the optimal price that the market is willing to pay, dynamic pricing can be an

effective approach to maximize the hotel profit.

Price-setting methods

Nagle and Holden (1995) and then Collins (2006) distinguished different

approaches to pricing, which are presented in the table 1 below. According to Nagle and

Holden, value-based pricing is a more profitable approach to pricing. Instead of starting

with a product and then determining what price should be charged for the product, value-

based pricing is set based on the value that customers perceive from the product. The

revenue is decided by the difference between the value created for the customers and the

cost to create that value. The challenge is how to convince different groups of customers

to pay different price level for a given product. To address this problem, it is

recommended that price discrimination and rate fence should be applied.

Table 1: Four price-setting approaches

Approach Explanations Pros Cons

It’s hard to price correctly
Occurs when pricing is
to costs, because costs
driven by financial It ensures that hotel
Cost – change with the volume.
motives, such as achieves contribution
based This leads to under pricing
equitable profit beyond margins targeted by
pricing when demand is strong and
all costs associated with financial executives.
over-pricing in times of
the sales of the product.
weak demand.
Can be view as reversed Correctly
cost based pricing, implemented can The biggest challenge is to
because value-based bring higher revenues raise customer willingness
Value –
pricing is initiated than competitors’, to pay a price that reflects
based
before investments, and because higher product true value, rather
pricing
then customers are perceived value of than passively accept their
provided with a certain products and will.
value. services.
Customers are not honest
Is driven by demand for with their willingness to
Pricing is fitted to
a service at certain time pay and the purpose of RM
Customer – customers’
and it is the most should not only be
driven willingness to pay –
fluctuating approach as listening to customers
pricing the biggest possible
demand can change preferences but also raise
revenue.
very rapidly. their willingness to pay a
product’s true value.

Occurs when hotel Focus on market share can

It usually comes
Competition- wants to achieve a lead to inappropriate price-
together with big
driven targeted market-share cutting and when followed
revenue and high
pricing and price their services by competitors will create
occupancy
to achieve this level. downward spiral of prices.

According to Kimes (2006), in practice most hotel prices are set either with

competitive pricing or through negotiation. Competitive prices can be obtained from

three sources: phone calls to other hotels, third-party data providers (i.e., Travelclick and

10

Smith Travel Research) and through distribution channels (i.e., Expedia and Travleocity).

2.1.2 Non-pricing tools

Forecasting

Forecasting has a significant effect on revenue management system as it leads to

an efficient planning and decision making to all departments. Forecasts feed the

mathematical models that produce recommendations for the optimal levels of prices, rate

structures, overbooking and help the revenue manager make proper decisions (Ivanov,

2014; Weatherford & Kimes, 2003). The more accurate the forecast is, the better the

hotel can optimize its resources and generate revenue. In hotel management, forecasts are

made on the results of revenue management analysis and influenced by the hotel’s

competitors and changes in external macro- and micro- environment. Accurate

forecasting enables hotel managers to identify future high and low demand periods in

order to take prompt; for example, to avoid accepting low revenue generating group

booking for high demand periods and stimulate demand during slow periods.

Ivanov (2014) mentioned three levels of forecasting: strategic forecasting, tactical

forecasting and operational forecasting. Strategic forecasting focuses on long-term

competitiveness of the destination as a whole to attract travelers rather than dealing with

forecast at property level. Factors are put into consideration in strategic forecasting

process include:

 Future demand: number of arrivals and overnights, travelers’ expense.

 Room supply: number of rooms, changes in room capacity of the destination,

changes in the structure of room capacity by category.

11

  Destination’s attractiveness and accessibility: transportation, opening or closing

of major tourist resources (theme park, convention center, enterprises, events,

holidays, etc.), destination image.

 Revenue metrics of the hotel – RevPAR, ADR, occupancy, GOPPAR (Gross

Operating Profit Per Available room and other revenue management metrics used

by the revenue managers.

Tactical forecasting deals with property level to provide forecast on demand by

segments, distribution channel, occupancy, price levels, length of stay, competitors’ price

and actions, distributors’ performance. Operational forecasting, on the other hand, is a

forecast about revenue management metrics used by hotel revenue managers such as

ADR, RevPAR, occupancy by date, room type, market segment and distribution channel.

According to Weatherford & Kimes (2003) forecasting methods fall into one of

three types: historical, advanced booking and combined methods. The historical method

is based on analysis of historical data to know how a certain variable has changed

overtime, then to generate forecast on how this variable will change in the future. This

method only considers the final number of rooms or arrivals on a particular stay night.

The advanced booking method forecasts the number of booked rooms on a particular

arrival day on the basis of the number of booked rooms on a previous day (called reading

day) and the pick up of rooms (increase in the number of booked rooms) between the

reading day and the arrival day (Phumchusri & Mongkolkul, 2012; Weatherford &

Kimes, 2003; Zakhary, El Gayar & Atiya, 2008). This method is based on the number of

bookings on the reading day multiplied by the average historical pick up ratio, therefore,

it reflects the build-up of reservations over time for a particular stay night. The main

12

disadvantage of historical method and advanced booking method is the disregard of

influences of other factors like demand, competitors’ actions or special events at the

destinations that stimulate demand. Combined forecasting method uses either regression

models (Burger et al., 2001; Chen & Kachani, 2007; Weatherford & Kimes, 2003) or

weighted average between historical data and advanced booking forecasts (Chen &

Kachani, 2007) to develop forecasts (Gayar et all, 2011). This method allows the

inclusion of additional variables in the forecasting models (e.g. special event in the

destination) and, therefore, might provide better forecasts compared to preceding ones.

Capacity management

Capacity management refers to a set of activities involving in controlling a hotel’s

capacity. A hotel’s capacity can be understood as the rooms division capacity such as the

total number of overnights the hotel can serve at any given date, in addition to the

capacity of food and beverage outlets, golf courses, function rooms and other revenue

centers. Pullman & Rogers (2010) distinguish between strategic and short-term (tactical)

capacity management decisions. Strategic capacity management covers capacity

expansion, carrying capacity (the optimal use of physical capacity before tourist’s

experience deteriorates, e.g. optimal occupancy rate), and capacity flexibility (a hotel’s

ability to respond to fluctuations in demand by changing its capacity by closing or

opening wings/floors). Tactical decisions relate to managing capacity on a daily basis –

work schedules, guest arrival/departure times, service interaction time, application of

queuing and linear programming models to service processes, customers’ participation in

the service process.

13

Inventory allocation

Inventory allocation is a method to help hotel managers achieve the most

profitable mix of demand for a given capacity. In narrow perspective, inventory

allocation helps reservation agents decide whether to accept or reject a reservation

request. In both airlines and hotel industry, bid price methods are widely used.

Sophisticated revenue-management systems apply an inventory-allocation algorithm to

make the best allocation decisions, which are then communicated to customers in the

form of restrictions at each rate level. Inventory allocation decisions for a given future

arrival day depend on the demand forecasting for that day. Since allocation decisions are

typically made by room rate category and length of stay, demand forecasts are required

on those criteria. Allocation decisions are typically updated nightly for the next 90 arrival

days through a rerun of the inventory-allocation algorithm based on updated demand

forecasts and overbooking decisions.

Overbooking

Overbooking, a well-known practice in the hotel industry, can be defined as

accepting more room bookings than the available capacity of the hotel (Cinjarevie &

Lamija, 2010). Overbooking is based on the assumption that some of the guests whose

room reservations have been booked with the hotel, cancel their requests or do not show

up or prematurely departing from the hotel due to unpredictable illness, personal reasons,

traffic or bad weather. In order to protect themselves from losing revenue on those

unused rooms, hotel managers allow bookings to exceed the hotel capacity in anticipation

that the number of overbooking will match the number of no shows, last minute

cancellations and changes in length of stay. This strategy is expected to increase the

14

hotel’s level of occupancy and hence the revenue due to higher capacity utilization.

Netessine & Shumsky (2002), Koide & Iishi (2005) and Ivanov (2004, 2006,

2014) indicated one challenge of overbooking is how to balance the revenue loss due to

empty rooms and the financial penalties for upgrading or walking guests as well as guest

goodwill reduction when the hotel faces more guest arrivals than its available room.

Firms practicing overbooking are faced with the trade-off between the opportunity cost of

unused inventory and the cost of customer displacement (Kimes, 2013). Enhagen and

Healy (1996) have identified the following six costs of overbooking: (1) the labor costs in

finding alternative accommodation for the guest; (2) transportation costs in transferring

guest to the alternative accommodation; (3) the actual cost of the alternative

accommodation; (4) the administrative and labor costs of preparing goodwill letters; (5)

the cost of premiums and coupons given out as a means of gaining guest satisfaction; and

(6) the staff- training cost that might be incurred in handling matters such as walking a

guest. The cost of walking the guests and failure of customer goodwill could be

enormous, including the potential of future lost business and poor word of mouth.

McGuire (2001) suggested that the key to a successful overbooking policy is to obtain

accurate information and forecasts on no-shows, cancellations and last minute

amendment in room reservations. This triggers a question to many hotel revenue

managers about how much to overbook.

In order to answer that question, Metters, Pullman and Walton, (2008) introduced

three mathematical methods to help determine the level of overbooking in a hotel.

Revenue managers can use those three methods to calculate the optimal overbooking

15

level based on the hotel’s historical data and come up with the most profitable

overbooking policy.

Overbooking approach 1: Using average number of no-shows.

Since the reason of overbooking comes from the anticipation of no-shows, it is

ideal for a hotel to overbook at the number of no-shows. If a hotel can estimate the most

accurate number of no show and set its overbooking level at that number, it will be able

to achieve the highest revenue possible by making sure all the rooms go occupied.

The average number of no-shows is calculated by:

Average number of no-shows =

∑ ¦­¥šª §ž ¦§ − « §¯« Ÿ­«¬« – ¦§ − « §¯« ¨ª§š™š¡¤¡¬±

¬Rë

§››­ª¦›¡« §ž ¬  ¦­¥šª §ž ¦§Q« §¯ Ÿ­«¬«

Probability =
¬§¬™¤ ¦­¥šª §ž œ™±« ª›§ªœœ

Example: A hotel’s overbooking experience is recorded in table 2.

Table 2: Hotel A's overbooking experience

No-shows data in 60 days

No-shows Number of occurencies Probability

0 6 10%
1 12 20%
2 12 20%
3 15 25%
4 9 15%
5 6 10%
Total 60 100%

The hotel’s average number of no-shows =

16

 0x10% + 1x20% + 2x20% + 3x25% + 4x15% + 5x10% = 2.55

Since the average number of no-shows is 2.55, there is good chance that the hotel

has 2.55 no-show guests everyday. It seems reasonable to take 2.55 or 3 overbookings.

Overbooking approach 2: Using spreadsheet analysis

This method allows hotel revenue managers to picture the expected cost for every

possible scenario. All the relevant costs are calculated and put into a spreadsheet for

considering. The overbooking level with the lowest expected cost will be selected. When

the number of overbooking is lower than the number of no-shows, a hotel lose revenue

from those unoccupied rooms. The cost of a no-show guest is usually the room rate.

When the number of overbookings is higher than the number of no-shows, the cost of a

walking guest includes all the expenditure for an alternative accommodation,

transportation and satisfaction of the guest.

Example: If the costs of a no-show and a walking guest of a hotel are relatively

are $100 and $200. The total cost at the bottom sums up: $0x10% + $100x20% +

$200x20% + $300x25% + $400x15% + $500x10% = $245. The overbooking cost is

presented in the following spreadsheet.

The spreadsheet shows that the lowest estimated cost is at 2 overbookings. The revenue

managers therefore can make decision of accepting 2 overbookings per day.

17

Table 3: Hotel A's estimated overbooking cost

Hotel A's estimated overbooking cost

No- Number of reservation overbooked
Probability
shows 0 1 2 3 4 5
0 10% $0 $200 $400 $600 $800 $1,000
1 20% $100 $0 $200 $400 $600 $800
2 20% $200 $100 $0 $200 $400 $600
3 25% $300 $200 $100 $0 $200 $400
4 15% $400 $300 $200 $100 $0 $200
5 10% $500 $400 $300 $200 $100 $0
Total cost $245 $175 $165 $215 $340 $510

Overbooking approach 3: Marginal cost approach

This method is based on the reasoning that a hotel should keep accepting

bookings until the expected revenue is less than or equal to the expected loss from the last

booking. Mathematically, a hotel should stop accepting booking when:

Revenue of next booking ≤ Cost of next booking

Revenue of filling a room x Probability that there are more no-shows than overbooked

rooms ≤ Cost of dissatisfied customer x Probability that there are fewer or the same

number of no-shows than overbooked rooms.

7F : revenue of filling a room (cost of an empty room)

7𝑠 : cost of a dissatisfied customer (walking guest)

P: Probability

7F x P(no-shows > overbookings) ≤ 7𝑠 x P(no-shows ≤ overbookings)

7F x [1 - P(no-shows ≤ overbookings)] ≤ 7𝑠 x P(no-shows ≤ overbookings)

𝐶0
𝐶0 P 𝐶𝑠
≤ P(no-shows ≤ overbookings)

18

 Converted from above formula, a hotel should stop overbooking when the

probability that there are more or same number of overbookings than no-shows is higher

than or equal to the overbooking ratio:

ë
P(overbookings ≥ no-shows) ≥ 
ë P «

Example: Back to an example of hotel A.

Table 4: Hotel A's no-shows data

No-shows data in 60 days

Cumulative probability of no-shows =
No-shows Number of occurencies Probability Probability (no-shows ≤ overbookings)
0 6 10% 10%
1 12 20% 30%
2 12 20% 50%
3 15 25% 75%
4 9 15% 90%
5 6 10% 100%
Total 60 100%

7F (revenue of filling a room): $100

7𝑠 (cost of a dissatisfied customer or a walking guest): $200

Hotel A should stop overbooking when:

𝐶0 GFF
P(no-shows ≤ overbookings) ≥ 𝐶 = GFFPHFF = 33%
0 P 𝐶𝑠

The cumulative probability of no-shows reflects the probability that there are

fewer or same number of no-shows than overbookings. For example, if the hotel does not

overbook, the probability of having less or equal number of no-shows than overbooking

(zero no-shows) is 10%. If the hotel overbooks by 1 room, the probability of having less

or equal number of no-shows than overbookings (1 or 0 no-shows) is 30%

19

 Looking at Table 4, the smallest number of overbooking at which the

accumulative of no-shows experience is larger than 33% is 2. That means hotel A’s

optimal overbooking level is 2.

Overbooking approach 4: Overbooking ratio method

Kimes (2013) introduces the forth method to find a hotel’s optimal overbooking

level by calculating overbooking ratio and identifying the historical distribution of no-

shows. This method is explained in 4 steps as below:

Step 1: Calculate the overbooking ratio

7F : cost of an empty room

7𝑠 : cost of a walking guest

𝐶𝑠 HFF
Overbooking ratio = 𝐶
0 + 𝐶𝑠
= = 0.67 or 67%
HFFPGFF

Step 2: Find the distribution of no-shows based on historical no-shows data

Step 3: Calculate the cumulative probabilities of no-shows

Table 5: Hotel A's no-shows data in 60 days - Cumulative probabilities

No-shows data in 60 days

Cumulative probability of no-shows = Cumulative
No-shows Number of occurencies Probability Probability (no-shows ≤ overbookings) No-shows Probability
0 6 10% 10% 0 or more 100%
1 12 20% 30% 1 or more 90%
2 12 20% 50% 2 or more 70%
3 15 25% 75% 3 or more 50%
4 9 15% 90% 4 or more 25%
5 6 10% 100% 5 or more 10%
Total 60 100%

Step 4: Use the overbooking ratio to recommend the overbooking level

The overbooking level is the number of no-shows at which the cumulative

probability is either the same or larger than the overbooking ratio. Looking at Table 5, the

20

number of no-shows at which the cumulative probability is larger than 67% is 2. It is

recommended that hotel A should overbook by 2.

Distribution channel management

The development of the Internet has provided hotels with wider exposure to

clients and more choice of distribution channels, including direct sales (without the use of

intermediaries), global distribution systems (Amadeus, Sabre, Travelport with the brands

Worldspan and Galileo), travel agents and online travel agencies (OTAs) like

Booking.com, Venere.com, Expedia.com, Orbitz.com (Ivanov, 2014). According to

Carroll and Siguaw (2003), electronic distribution has changed how people reserve hotel

rooms. More and more bookings are being made through online channels. The number of

available channels has increased dramatically, and each channel varies in revenue

characteristics, costs, and levels of control (Helsel & Cullen, 2005). The cost of a

booking through these various channels can vary from nearly nothing to $35 or more

(Kimes, 2013). According to Helsel & Cullen (2005), direct Internet channels like hotels’

websites are cheaper than indirect channels; however more than half of all online

bookings are made through intermediaries, whose transaction costs begin at around 10%

(PhoCusWright, 2006). As most hotels use a portfolio of channels to reach customers

(Buhalis & Laws, 2001), sophisticated yield management must balance each channel’s

rate against that channel’s distribution cost (S. Choi & Kimes, 2002). Doan et al (2013)

also mentioned the challenge to keep the price consistent across all channels due to the

fact that internet’s transparency makes it easy for customers to compare prices. If prices

vary illogically, perceived unfairness will possibly lead to customers’ dissatisfaction,

defeat, negative words of mouth and initiate other actions that damage the hotel’s

21

business (Xia, Monroe, & Cox, 2004).

Revenue management is a complex management science because it blends

elements of marketing, operation and financial management into its practice. The

sophistication of revenue management tools requires a teaching method that enables

students to understand how to apply those tools in real life. In that case, case study

method is seen as an effective teaching tool.

2.2 Case study method

2.2.1 Definition of case study

Case studies have a long history in law and medical education, but the credit for

popularizing case-based teaching method in management and business goes to the

Harvard Business School back around 1910 (Shivakumar, Kirti, 2012). Harvard Business

School’s cases are sold to 4,000 schools globally and account for 80% of case studies

used (Levy, 2015). Today, case-based teaching method is used widely in science

education, management and employee training.

Michiel R. Leenders, Louise A. Mauffette-Launders and James Erskine in

“Learning with cases” (fourth edition, 2014) defined a case as “a description of an actual

situation” and explained that it usually involves a challenging situation or a dilemma,

which requires analysis of the situation and the environment and leads to decision-

making. Developed from this definition, Shivakumar and Kirti (2012) stated a case study

is documentation of events and situations containing a problem, an issue, or a conflict

that needs to be solved. Most cases tell a story because they are either based on real

events and situations, or are a construction of events that could reasonably take place.

22

The information contained in a case study might be complex (including charts, graphs,

and relevant historical background materials) or as simple as a human story that

illustrates a difficult situation requiring a decision. Traditional case studies in fields such

as economics, public policy, or international affairs can contain detailed historical

information, including statistical data, relevant legal or governmental policy, and the

arguments by various agencies for actions to be taken. However, a case study never

carries opinion of the author as the purpose of the case study method is to stimulate

readers to think from their own perspective. The case study does not focus on getting the

right answer; in fact there is never a single right answer for the case unless it is a

mathematical problem. Emphasis is laid on the manner in which the solution is arrived at,

the deliberations involved and the practicality of the solution (Shivakumar, Kirti, 2012).

A basic case structure includes:

 One or more scenarios

 A statement of the issues

 An assignment to be required

The case study method, which is also referred to as a case-based teaching method

is an active teaching strategy in which students read, discuss complex, real-life scenarios

in the cases and use their analytical thinking skills to make decision.

2.2.2 Types of cases

Harvard Business School (HBS case development, n.d.; Writing a case study,

2016) introduces three popular types of cases: field cases based on onsite research;

library cases written solely from public sources and armchair cases developed from

researchers’ knowledge and experience.

23

 A field case: is usually written with the cooperation of managers or insiders in the

industry who experienced the events and problems described in the case. Information

contained in these cases includes insights of the business; hence, field cases involve

extensive interviews with employees, managers in the host organization. Published

information and descriptions of events in the newspaper may play a role in establishing

key facts, but the sequence of events and managerial options for the case are often

unknown to the public. Careful examination of business records and data can provide

background and context for the events. However, sometimes the cooperation of a

company is the only way a case author finds out exactly what problem happened. In order

to write a field case, an author needs to gain access to the company’s premises,

employees, data and records. A field case is preferred over a library or an armchair case

because a field case can provide insights into an organization that a library or an armchair

case can rarely access.

A library case: is built on published information from company’s website, annual

reports, newspaper, research articles, Internet. Unlike a field case, a library case does not

involve special access to the organization that the case tells about, for instance,

interviews with employees, company’s historical data and operation. In addition to stories

produced for broadcast, print and online news organization, writers can find material for

the case from library, published annual report such as 10-Q and 10-K forms.

An armchair case: is based on generalized experiences and knowledge of the

case writer. The author creates fictional companies that do not really exist and events that

have never really occurred. While the case bears some resemblance to real cases, there is

a lack of authenticity and richness of detail of real events. Armchair cases are produced

24

when authors fail to get access to a real company, people and data or when they wish to

simplify complex events into a series of specific situations in attempt to make it easier for

students to understand and make decision. This type is not the main stream of teaching

cases, but mostly used to introduce the basic concepts to students or to provoke a

discussion about key issues confronting businesses.

2.2.2 Effectiveness of case studies

Case studies have been classroom-tested at a number of leading universities,

including the University of Alberta, Babson College, the University of Calgary, Emory

University, INSEAD, The Wharton School of the University of Pennsylvania, the

University of Southern California, Southern Methodist University, Stanford University,

and Vanderbilt University. Its effectiveness has been found on several different levels of

learning as Metters, Vargas and Weaver (2009) indicated on evaluation of their cases’

effectiveness. The result shows that at the lowest level of learning, it provides an

entertaining and enjoyable way for students to gain practice in what they have learnt from

the lessons. During the discussion, more integrated learning occurs. Finally, students

engage in critical thinking. Students perceived the case studies as helpful in enhancing

learning of the course material and as interesting, providing a welcome deviation from

the typical lectures and PowerPoint (Metters, Vargas and Weaver, 2009).

The biggest advantage of the case studies is the ability to “bridge the gap

between theory and practice and between the academy and the workplace” (Barkley,

Cross, and Major 2005, p.182). Butler et al (2006) shared the same view that case studies

help students connect theoretical concepts to practice in real world contexts. While

lectures and PowerPoint have proven to be effective methods for teaching and learning,

25

they may limit students’ experiential learning. Case studies serve as a teaching tool that

enables students to participate in the learning process in an active way, rather than as

passive receptacles for knowledge, and they give students the opportunity to study real

life situations to solve problems (Kolb, 1984).

The case method allows the student to gain experience in dealing with the

situations or events that they may not have the opportunity of experiencing. This type of

learning environment develops the skills necessary for life-long learning and the ability to

adapt to a complex and ever changing business environment (Guess, 2014). Since the

case study method requires students to analyze the case and make their own decision, it is

useful to develop students’ critical thinking skills, such as analysis, discrimination

between/among concepts, application of standards, logical reasoning, searching for

information, and prediction of outcomes (Sandstrom, 2006). Case studies encourage

interaction, active participation, team work and exchanging ideas via discussions; which

eventually improves interpersonal and communication skills of students. Further, they

relieve the boredom students may experience when repeatedly exposed to the same

teaching methods, they enable students to share viewpoints, and they facilitate learning

both process and content, while utilizing the thinking processes of the cognitive,

affective, and moral domains (Sandstrom, 2006). Additionally, case studies are useful for

developing self-reflection, peer collaboration, and processes of inquiry for self-directed

learning (Askell-Williams, Murray-Harvey, & Lawson, 2007), and the experiential

learning experience provided through case studies facilitates students’ assimilation,

synthesis and application of course concepts (Brannan, White, & Bezanson, 2008).

26

2.3 Case study method in teaching revenue management

Nine out of fifteen top US hospitality schools from the list of Hospitality

Research Rankings by University (Park et all, 2011) are offering separate courses in

revenue management as shown in table 6 below. Cornell University, School of Hotel

Administration tops the list with wide range of courses focusing on specific aspects of

revenue management: Yield Management, Restaurant Revenue Management, Managing

Hospitality Distribution Strategies, Hospitality Pricing and Analysis and Nontraditional

Revenue Management. The courses currently cover forecasting, optimization methods,

overbooking, pricing, distribution management, training and management issues and an

overview of the various hotel revenue management systems in use. Anderson, Kimes and

Carroll (2009) mentioned that case-based teaching method was highly deployed in

teaching revenue management at Cornell school of Hotel Administration. Course content

is structured around relevant case examples and interactive exercises, giving students the

experience needed to translate theory into practice. The course is project-based and

students work in groups to develop a functioning Excel-based revenue management

system for a 200-300 room hotel with three to four rate categories and three different

lengths of stays. Students are given simulated daily booking and overbooking data for a

three-month period. A variety of articles are assigned and discussed. Industry guest

speakers add an update and insight from the hotel business.

27

Table 6: Revenue management training in top 15 Hospitality Research Universities in the US

Additionally, Nicola Secomandi (2009) described the course of Demand

Management and Price Optimization, which he had been teaching in the MBA program at

the Carnegie Mellon University, Tepper School of Business that started as a pure revenue

management course but then evolved to feature a broader perspective on the interface

between the operations and the marketing functions of a firm. The course covered

revenue management, booking control, overbooking, price-response functions and

28

constrained supply pricing, markdown pricing, customized pricing, competitive analysis,

additional joint supply and demand management decision. The professor used a list of

case studies that spans different topics from revenue management in airline,

transportation and hospitality contexts to markdown pricing in retailing and dynamic

pricing in manufacturing. Case discussions are interspersed with lectures throughout the

course. The course simultaneously features the use of simulator named Easy Profit of

Popescu (2006). This airline simulator allowed students to play the role of a revenue

manager of a single flight, whose seats are sold over time to two customer classes. This

tool received great excitement from his students because it made the potentially abstract

concept of revenue management booking limit concrete. Support activities included

external speakers and videos of effective managerial practices that leveraged relevant

quantitative models.

Kimes, Verma and Hart (2010) also introduced the case study method was

implemented in revenue management courses at Nanyang School of Business at Nantang

Technology University in Singapore. The courses cover applications of revenue

management in non- traditional settings such as restaurants, theaters, golf courses, and

spas. The undergraduate students typically are analytical in their approach, whereas the

participants in master programs attack the cases more from a strategic perspective.

Currently, Wharton Business School at the University of Pennsylvania and Santa

Clara University are providing both undergraduate and master program versions of a

service operation elective course that has three to five class sessions devoted to revenue

management. Typically, the topics covered in this segment include: introduction to

revenue fundamentals; network effects and bid-price linear programing formulations;

29

expected marginal seat revenue booking limits; overbooking; integrating bid prices,

booking limits and over booking in a network while case study and experimental exercise

are applied (Metters, Vargas, Weaver, 2009).

30

 CHAPTER 3

METHODOLOGY

This research employs case study writing to simulate real world scenarios

regarding revenue management practice in the hotel business. The writing method is

developed based on the review of previous literature on writing a teaching case and

follows the format of the Harvard Business School case method. The type of case is the

hybrid of a field case and an armchair case. The case studies are built on the case writer’s

knowledge and experience from a three-month internship at a hotel. The scenarios in the

case studies are developed from situations that the case writer observed from the hotel

revenue manager’s daily duty. In addition to attending the hotel daily revenue

management meetings, the case writer shadowed the revenue management professional

and also conducted interviews with the revenue managers and the sales team. All the

tools and scenarios regarding revenue management mentioned in the case study are

therefore well explained and insightful. However, all the data and details about the hotel

in the case studies are fictitious and do not relate to any real hotels. To ensure the

authenticity and realism of the case studies, two consulting meetings were arranged with

two experienced revenue managers from two different hotels. The purpose of those

meetings is to gain the industry inputs for the cases. The case studies are formatted into

two sections.

The first section is an introduction about the hotel in the case study. A fictional

hotel is created, including the hotel’s background, supporting data and documentation as

well as market situations. Supporting data features the hotel’s current and historical data

31

of individual and in-group bookings, occupancy and no-shows. Information about market

situation and the hotel’s competitive set is provided. This data could be achieved from

real hotels’ websites, public reports, newspapers and lodging market reports provided by

Smith Travel Report. The room rate and occupancy ratio of the competitive sets is

sourced from online travel agents’ (OTA) websites: booking.com and expedia.com. All

the identifying information about hotel in the competitive set is kept confidential to

ensure that the company is anonymous and untraceable. This data was then modified in

order to generate historical data for the case, including historical reservation numbers,

occupancy ratios, no-shows ratios, room rates, competitive set and competitors’ pricing.

The second section is three exercises simulating three real world scenarios that

feature revenue management issues. In this section, the scenarios are designed in role-

play set up, in which students act as the hotel revenue manager and attempt to solve the

problems mentioned in the cases. An open-ended question at the end of each exercise is

the assignment for students. The students are asked to analyze the hotel’s historical data

and use revenue management tools to propose the best revenue management strategy for

the hotel.

Additionally, a teaching note, which is a supporting tool for instructors to use the

case studies for teaching is also attached in each case study. It features the purpose of the

case study, the case summary, an explanation of the teaching objective and target

audience, statement of the problem, a list of possible solutions and outcomes and a plan

for teaching the case.

32

 CHAPTER 4

CASE STUDIES

4.1 Case background

Introduction

The Rose Hotel is a family owned full service hotel in Pasadena, California. The

hotel, which is a 10 – story, 300 - room property, was originally built in 2000. The

current owners acquired it in 2005 for $45 million and invested $10 million in property

improvements in 2015. The hotel is located in an urbanized area of Pasadena, generally

surrounded by a mix of retail, commercial and residential uses. Due to the variety of the

surroundings, the hotel attracts demand from different market segments, including

commercial, groups and leisure travelers. The predominant market segment is the

commercial travelers. The hotel’s guest rooms include 180 double queen rooms, 100 king

rooms and 20 suites, distributed on 9 floors. The hotel’s public space features 3

restaurants, 15 meeting rooms, of which the largest can accommodate to 600 guests, an

outdoor heated pool and a fitness studio.

Pasadena is a satellite city to the city of Los Angeles. The city’s economic

strengths come from its leading scientific institutions, a large international engineering

base, a regional health care cluster, and a broad retail sector. Additionally, the city draws

millions of visitors annually that significantly feed the demand for hotels in the city. This

leisure guests include mainly city visitors, families and friends visiting students and

faculty at California Institute of Technology or patients at the hospital, and individuals

attending events such as the Rose Parade and any other events happening in Pasadena

33

33
throughout the year.

Hotel revenue management at Rose Hotel

The Rose Hotel is family-owned and employs a third-party professional

management company that is responsible for day-to-day operation. Sarah is a newly

recruited revenue manager. She is the head of the reservation department with two

reservation staff members. She is also in charge of pricing, inventory allocation and other

booking issues. Before Sarah joined the company, the hotel did not have a specific

pricing strategy. The prices were made one year in advance and increased by a

percentage rate at the minimum equal to the inflation rate. The room rate was proposed

by the sales manager, passed by the general manager before being sent to the owners for

final approval. Rates change during the year according to seasons and months of the year.

As a new revenue manager, Sarah works closely with the sales department, online travel

agencies as well as other distribution channels. In order to get engaged with sales

activities for better demand forecasting and pricing, Sarah holds a revenue meeting every

morning with the attendance of the hotel’s general manager, sales managers and all sales

representatives. For every group sale, sales representatives have to seek approval from

Sarah for a price decision. The owners of the Rose Hotel just spent a great amount of

money on its recent renovation in 2015 and now expect to see a revenue increase in the

hotel.

Competitive hotels

Sarah has defined five main competitors for the Rose Hotel from the nearby

hotels, given their similarity in services, quality and market orientation. After conducting

some research about the performance of the five hotels in the last two years, Sarah found

34

that Rose Hotel has been performing a little under the rest of the market. The total

competitive supply features 1,400 guest rooms, estimated average occupancy of 84.7%

and estimated ADR of $161.65 for 2015-2016 period. At the moment, the Rose Hotel

falls in the pricier end compared with its competitors, while the hotel’s occupancy rate is

below the market average. The historical data from 2009-2015 in table 8 also reflects the

healthy growth of the competitive hotels in the area; which convinces Sarah that an

increase in revenue for Rose Hotel is achievable. The hotel’s competitive set is presented

in table 7.

Table 7: Rose Hotel's competitive set

Competitive set
Hotel # of rooms Hotel Type ADR 2016 ADR 2015
Hotel 1 296 Upscale $160 $150
Hotel 2 350 Upscale $180 $157
Hotel 3 314 Select-service $167 $149
Hotel 4 311 Upscale $132 $125
Hotel 5 129 Boutique $188 $160

Table 8: Historical Hotel Market Growth 2009-2015 (Source: Smith Travel Research)

Historical Hotel Market Growth 2009 - 2015

Occupied Available
Year Occupancy ADR RevPAR
Rooms Rooms
2009 329.368 463.915 71,00% $ 140,19 $ 99,53
2010 346.800 463.915 74,80% $ 133,75 $ 99,99
2011 370.607 463.915 79,90% $ 134,47 $ 107,43
2012 404.366 463.915 87,20% $ 139,86 $ 121,91
2013 405.092 463.915 87,30% $ 145,44 $ 127,00
2014 406.205 479.775 84,70% $ 161,65 $ 136,86
2015 448.153 511.120 87,70% $ 165,93 $ 145,49
CAG '09-'15 5,27% 1,63% 2,78% 6,53%
% '14 - '15 10,3% 6,5% 2,6% 6,3%

CAG: Compound Annual Growth

35

4.2 Exercises

Exercise 1: Determine the optimal price for the hotel rooms

Sarah holds a daily revenue meeting at 8 am. Peter, one of the sales

representatives, arrived with good news. He just got a call from the leader of Road

Scholar group requesting a proposal. The group of 60 people will attend a conference at

the Pasadena Convention Center on 25th and 26th of May 2017 and they are looking for

accommodations for May 24th and 25th. As they will attend the conference most of the

time, they do not have any demand for catering and any other hotel services. This is the

first time this group has approached Rose Hotel and Sarah knows for sure that they are

shopping at their competitive hotels as well. Sarah also feels the pressure from the

owners who, she knows, are no longer patient about expecting the revenue to increase

after they spent $10 million on the hotel’s renovation two years ago. When everyone is

present and the meeting starts, Sarah decides that the hotel pricing strategy needs to be

changed to better respond to market demand and draw more bookings to the hotel. Before

ending the meeting, Sarah gives an announcement that starting from tomorrow, the hotel

will employ new room rates for both group and individual guests.

Going back to her office, Sarah looks at the hotel’s performance and starts

thinking of the new pricing strategy to obtain the best possible revenue per available

room. The hotel’s booking data is presented in table 9 as below.

Question: Considering market factors like supply and demand, historical data, market

position, competitor’s pricing, forecasted occupancy and using four price-setting

methods as well as pricing tools to propose the best room rate scheme for Rose hotel?

36

 Table 9: Rose Hotel's booking data

17-Apr - 24-Apr - Week to 17-Apr 24-Apr- Week to Last year Year to

Day of Leisure Leisure Week Group Group Week Rooms Occupanc Last year occupancy Year Room Last year
Week Date Book Count Book Count variance Block Block Variance sold y rate room sold rate Variance available No show
Mon 24-Apr 127 167 40 23 53 30 220 73.3% 187 62.3% 33 80 0
Tue 25-Apr 104 120 16 10 55 45 175 58.3% 200 66.7% -25 125 1
Wed 26-Apr 97 112 15 10 55 45 167 55.7% 246 82.0% -79 133 1
Thu 27-Apr 74 83 9 57 57 0 140 46.7% 155 51.7% -15 160 2
Fri 28-Apr 42 105 63 109 109 0 214 71.3% 289 96.3% -75 86 5
Sat 29-Apr 32 120 88 44 56 12 176 58.7% 298 99.3% -122 124 0
Sun 30-Apr 62 70 8 58 88 30 158 52.7% 165 55.0% -7 142 2
Mon 1-May 93 110 17 44 89 45 199 66.3% 175 58.3% 24 101 3
Tue 2-May 74 89 15 34 34 0 123 41.0% 267 89.0% -144 177 0
Wed 3-May 66 76 10 53 89 36 165 55.0% 148 49.3% 17 135 1
Thu 4-May 59 63 4 200 200 0 263 87.7% 183 61.0% 80 37 3
Fri 5-May 52 87 35 113 123 10 210 70.0% 199 66.3% 11 90 4
Sat 6-May 54 68 14 170 170 0 238 79.3% 199 66.3% 39 62 2
Sun 7-May 54 59 5 10 10 0 69 23.0% 244 81.3% -175 231 3
Mon 8-May 72 81 9 39 39 0 120 40.0% 281 93.7% -161 180 0
Tue 9-May 91 97 6 41 41 0 138 46.0% 182 60.7% -44 162 5
Wed 10-May 99 104 5 29 29 0 133 44.3% 169 56.3% -36 167 1
Thu 11-May 71 73 2 131 131 0 204 68.0% 158 52.7% 46 96 2
37

Fri 12-May 67 70 3 175 175 0 245 81.7% 135 45.0% 110 55 6

Sat 13-May 61 64 3 165 165 0 229 76.3% 174 58.0% 55 71 1
Sun 14-May 61 74 13 7 7 0 81 27.0% 161 53.7% -80 219 5
Mon 15-May 56 71 15 2 2 0 73 24.3% 175 58.3% -102 227 2
Tue 16-May 55 68 13 61 61 0 129 43.0% 111 37.0% 18 171 4
Wed 17-May 43 56 13 176 176 0 232 77.3% 138 46.0% 94 68 3
Thu 18-May 36 49 13 185 185 0 234 78.0% 139 46.3% 95 66 0
Fri 19-May 37 41 4 191 191 0 232 77.3% 280 93.3% -48 68 3
Sat 20-May 38 44 6 182 182 0 226 75.3% 270 90.0% -44 74 3
Sun 21-May 50 68 18 110 110 0 178 59.3% 177 59.0% 1 122 2
Mon 22-May 38 52 14 133 133 0 185 61.7% 176 58.7% 9 115 1
Tue 23-May 41 51 10 156 156 0 207 69.0% 172 57.3% 35 93 3
Wed 24-May 36 46 10 117 117 0 163 54.3% 156 52.0% 7 137 4
Thu 25-May 52 73 21 110 167 57 240 80.0% 219 73.0% 21 60 2
Fri 26-May 46 53 7 93 140 47 193 64.3% 299 99.7% -106 107 1
Sat 27-May 62 73 11 131 131 0 204 68.0% 282 94.0% -78 96 4
Sun 28-May 30 40 10 66 66 0 106 35.3% 123 41.0% -17 194 5
Mon 29-May 34 49 15 0 0 0 49 16.3% 183 61.0% -134 251 4
Tue 30-May 29 39 10 0 0 0 39 13.0% 269 89.7% -230 261 2
Wed 31-May 20 26 6 0 0 0 26 8.7% 187 62.3% -161 274 1
Thu 1-Jun 28 55 27 150 187 37 242 80.7% 235 78.3% 7 58 7
Fri 2-Jun 36 37 1 170 170 0 207 69.0% 133 44.3% 74 93 6
Additional pricing exercise: A simulation of dynamic pricing

After coming up with the new room rate scheme, Sarah wants to test its

effectiveness. Sarah spends a day with the reservation team to see how the new pricing

works. At 10 am, bookings start coming in with the detail of the date, the length of stay

and the price request. She now has to make decisions on whether to accept or not and

what price to set for each booking.

Students are divided into groups of four. The sales are made when the group

accepts the booking order and the room rate is equal or lower than the amount that the

guests are willing to pay. Once the booking order comes, any group that wants to accept

the booking and meets the price condition can close the sale. It is noted that every team

has the right to accept or reject a booking before the next one comes out.

The group’s job as a revenue manager is to control the sale of inventory in order

to maximize the total revenue collected during the sale period. The teams are not

competing to each other but the goal is to achieve the highest revenue as possible. The

team with highest revenue will be announced at the end of each round of the game.

Exercise 2: Calculate optimal overbooking level

At 2pm, the phone continues to buzz and Laura reports that she is having a

customer with a request for 2 rooms on May 25th waiting on the phone. As the room

block of 60 rooms is now reserved for Road Scholar group, if she accepts that booking,

the hotel may be overbooked by two rooms. Laura is asking Sarah if she should make

that reservation or turn the guest away. Rose Hotel never accepted overbooking before

because the management team was afraid of losing reputation and customer good will.

38

Noticing that the hotel frequently turns down guests’ booking orders because rooms are

reserved for guests who never show up, Sarah feels the need to examine the hotel’s

overbooking level and see if she should accept two room in excess of the hotel’s capacity.

Rose Hotel’s no-show data is summarized in table 9 above.

The average room rate is $140. If no overbookings are allowed, each no-show

will cost the hotel $140. If the hotel overbooks too much and filled up early in the night,

guests with reservations who arrive later to find no room available will be unhappy. The

cost of a walking guest to another hotel, including a free night stay as compensation, is

$300.

Question: Using four methods of calculating overbooking level to decide if Sarah should

accept that booking request of 2 rooms for May 25th or not.

4.3 Teaching notes

Case study summary

Rose hotel is a 300-room family owned hotel in Pasadena, California. The owners

paid $45 million to acquire the hotel in 2005 and invested another $10 million to improve

the property in 2015. Despite the huge investment for the renovation, the hotel fails to

generate the revenue that the owners expect. Occupancy was on the decline for more than

2 years. Competition in the hotel market is getting tough with the participation of strong

competitors. The price discount and promotion campaigns did not help in attracting new

bookings and the owners are putting pressure on the management team to increase

revenue. In an attempt to improve the hotel performance, a new revenue manager - Sarah

is hired. After identifying the hotel’s competitive set, Sarah finds out the Rose Hotel is

39

achieving lower occupancy while setting higher price than its competitors. She also

notices if she accepts a new booking for May 25th, her hotel will be overbooked by 2

rooms. At the end of the daily revenue meeting, Sarah decides it is time to make a change

in hotel’s pricing scheme and overbooking level.

This case features 3 exercises to highlight three tools that are frequently used in

hotel revenue management. Exercise 1 asks students to set the room rates for the hotel

using price-setting methods. Additional activity for exercise 1 uses simulation to

demonstrate the practice of dynamic pricing and price discrimination. Exercise 2 focuses

on methods to identify an optimal overbooking level. If applied effectively, pricing

methods, dynamic pricing and optimal overbooking method can create a remarkable

increase in a hotel’s revenue.

Target audience

This case is designed for graduate level students in hospitality, hotel managers,

revenue managers and other hospitality professionals who want to know and apply

revenue management tools in their hotels. The exercises in the case study, including the

analysis, calculations and additional readings require a certain level of hotel business

background that makes it more suited for graduate level work. The instructors can use

this case in classroom for hospitality graduate students or in training workshops for

hotels’ managers and staffs.

Learning objectives

Presented in this case study are real-world scenarios that a hotel revenue manager

comes across at their daily work. The simulations focus on issues in pricing and

40

overbooking practice at the hotel. After discussing the case, students will be able to:

Table 10: Learning objectives

Learning objectives

Apply four pricing tools to set an optimal room rate Exercise 1

Compare the difrence between fixed pricing and dynamic pricing Additional exercise
Utilize price discrimination and dynamic pricing tools to vary price Exercise 1,
options and push up revenue Additional exercise
Determine the optimal overbooking level for a hotel Exercise 2

Questions for discussion

Table 11: Questions for discussion

Questions for discussion

What is the most appropriate pricing method for Rose hotel? Why? Exercise 1

What is the best price scheme for Rose hotel? Exercise 1

What are the differences between fixed and dynamic pricing? Additional exercise

What is the optimal overbooking level for Rose hotel? Exercise 2

Teaching plan

Before-class preparation: Before the class, students will be asked to read about

hotel revenue management to have a general understanding and be able to discuss the

following topics:

- Price discrimination

- Rate fences

- Dynamic pricing

- Pricing methods

41

 - Demand forecasting

- Capacity management

- Inventory allocation

- Overbooking

- Cost of walking a guest

Instruction: It is best to divide a class into groups of three or four students to

encourage group discussion, idea exchange and multidimensional views to solve the

issue. This case can be taught in a variety of ways. For example, two separate class

periods can be utilized to address two tools of revenue management. The first class

period will focus on pricing issues and the second one will work on overbooking policy.

If time allows, one class period could address all three issues. Regardless, each topic of

discussion requires at least 30 minutes to explore, discuss and make decision. Instructors

can also take it a chance to talk, check students’ understandings and guide groups through

steps in each method of calculating the price and overbooking level. Alternatively, each

exercise mentioned in this case can be assigned as individual homework or group

projects.

Instructional solutions: are analysis and suggested solutions for the problems

mentioned in each exercise.

Exercise 1: Pricing strategy

Instructors will remind students of four price-setting methods, including: cost-

based pricing, value-based pricing, customer-driven pricing and competition-driven

pricing. However, it is important to guide students away from cost-based pricing and

direct their thinking of how customers value the products and how much they are willing

42

to pay; how the forecast demand is; what demand generators are and if there are any

upcoming demand generating events; as well as how their competitive sets are

performing in the market.

Some students may notice factors to estimate the demand and set the price, if not,

instructors should ask questions to guide them to look at signs as below:

 The competitive set’s average ADR of $165 in 2016 is a good starting point to set

the price.

 Added value from new renovation makes it reasonable to bring their price higher

than the average ADR of the competitive set. Price range from $150-$190 could

be acceptable.

 There is steadily high demand on the weekends from now until the end of May.

The weekend rate can be set higher than weekday rate.

 There will be a long weekend holiday at the end of May as Memorial Day is on

Monday, May 29th. It is expected to see the demand increase sharply for this

specific weekend.

 There should be price discrimination for different types of customers.

 The room rate should be set as detail as below table:

43

Table 12: Rose Hotel's proposed room rates

PRICING KEYS

Rate available until Weekend

Room rate 1-3 nights 4 nights
Occupancy Number of rooms sold (Fri & Sat)
Rack rate 68% - 100% 200-300 170 160 190
Discount 1 (AAA, regular,
0-100% 1-300 153 144 171
government - 10% discount)
Disount 2 (Group from 10 rooms -
0 - 67% 1-200 128 120 143
25% discount)
Discount 3 (20% discount) 21%- 50% 61-150 136 128 152

Discount 4 (30% discount) 0% - 20% 1-60 119 112 133

Each group then will have 5 minutes to present their price-setting method in class

and explain how they come up with their price scheme.

Additional exercise: Simulation - Dynamic pricing

Each group has their own spreadsheets to record the sales and prices at which the

sales are made. The students are not told how many bookings are coming. The sales are

made when the group accepts the booking order and the room rate is equal or lower than

the amount that the guests are willing to pay. Once the booking order comes, any group

that wants to accept the booking and meets the price condition can close the sale. It is

noted that every team has the right to accept or reject a booking before the next one

comes out.

The first round: the price is fixed.

Each team input their price in their spreadsheet. Price is not changeable in the first

round of the game. The first set of booking orders comes as table 13. The instructor

randomly picks any booking order from the set and put it into the market. Once the

booking falls into the team’s price set, the team then can decide to accept or reject that

booking order and records their sales in the spreadsheet. Instructors need to remind each

44

group to calculate their number of available rooms for sales after each booking is

completed. At the end of the first round, each team will calculate their number of sales

and total revenue. Every team is required to report their total revenue to the instructor

who will announce the highest revenue generating team. Table 14 shows a sample

simulation run of one group.

Table 13: 1st set of booking order

BOOKING SET 1
Date 23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 29-Apr Total
Sun Mon Tue Wed Thu Fri Sat
Room for
Willing to sales 132 91 177 119 35 42 67
pay Fixed price x x x x x x x
$200 Booking 1 1 1 1 1
$120 Booking 2 20 20 20
$110 Booking 3 15 15
$230 Booking 4 7 7
$215 Booking 5 10 10 10 10 10
$115 Booking 6 30 30 30
$95 Booking 7 20 20 20 20 20
$180 Booking 8 3
$165 Booking 9 5 5 5
$190 Booking 10 2 2
Room sold
Room available
Revenue

Table 14: Sample data for a simulation run for a fixed pricing round

Date 23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 29-Apr Total

Sun Mon Tue Wed Thu Fri Sat

Room for sales 132 91 177 119 35 42 67
Fixed price $150 $150 $150 $150 $150 $150 $150
Booking 1 1 1 1 1
Booking 2
Booking 3
Booking 4 7 7
Booking 5 10 10 10 10 10
Booking 6
Booking 7
Booking 8 3
Booking 9 5 5 5
Booking 10 2 2
Room sold 11 11 11 11 18 14 14 90
Room 121 80 166 108 17 28 53 573
Revenue 1650 1650 1650 1650 2700 2100 2100 13500

45

The second round: Dynamic pricing - the price can be changed at any time and any

number of times.

Dissimilarly to the first round, the students can now change their price at any time

before each booking order is issued. To ensure the transparency, the instructor will record

the price of each group for each booking on blackboard. A second set of booking orders

is used for the second round of the game as per table 15. The instructor randomly puts

each booking order into the market. If the requested price is lower or equal to the hotel’s

room rate, each group will make decision to take that booking or not and input the sale in

the spreadsheet. Each team then sums up their revenue and reports to the instructor to

find out what team achieves the highest revenue. A sample of a report sheet for second

round is presented as in table 16.

Table 15: 2nd set of booking orders

BOOKING SET 2
Date 23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 29-Apr Total
Sun Mon Tue Wed Thu Fri Sat
Willing to Room for
pay sales 132 91 177 119 35 42 67
$215 Booking 1 3 3 3 3
$155 Booking 2 5 5 5 5 5
$220 Booking 3 2 2
$120 Booking 4 25 25 25 25
$95 Booking 5 16 16 16
$140 Booking 6 10 10 10 10 10
$170 Booking 7 5 5
$145 Booking 8 6 6
$130 Booking 9 3 3 3
$125 Booking 10 6 6 6
Room sold
Room available
Revenue

46

Table 16: Sample data for a simulation run for a dynamic pricing round

BOOKING SET 2
Date 23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 29-Apr Total
Sun Mon Tue Wed Thu Fri Sat
Room for
Price sales 132 91 177 119 35 42 67
$180 Booking 1 3 3 3 3 12
$180 Booking 2 0
$150 Booking 3 2 2 4
$150 Booking 4 0
$135 Booking 5 0
$135 Booking 6 10 10 10 10 10 50
$155 Booking 7 5 5 10
$165 Booking 8 0
$120 Booking 9 3 3 3 9
$120 Booking 10 6 6 6 18
Room sold 6 19 19 16 15 20 8 103
Room available 126 72 158 103 20 22 59 560
Occupancy 58% 76% 47% 66% 93% 93% 80%
Revenue $14,300

At the end of the second round, instructors will ask students about the difference

between a fixed and a dynamic pricing and which one they think is more appropriate for

Rose hotel.

Exercise 2: Optimal overbooking level

Rose hotel historical data of no-shows are summarized in below table:

Table 17: Rose Hotel's no-shows data in 40 days

Rose hotel's no-shows data in 40 days

Cumulative probabilities
Cumulative probability of no-shows = of no-shows
Probability (no-shows ≤ overbookings)
No-shows Frequency Probability No-shows Probability
0 5 13% 13% 0 or more 100%
1 8 20% 33% 1 or more 87%
2 8 20% 53% 2 or more 67%
3 7 17% 70% 3 or more 47%
4 5 13% 83% 4 or more 30%
5 4 10% 93% 5 or more 17%
6 2 5% 98% 6 or more 7%
7 1 2% 100% 7 or more 2%
Total 40 100%

47

Overbooking approach 1: Using average number of no-shows

Method:

Since the reason of overbooking comes from the anticipation of no-shows, it is

ideal for a hotel to overbook at the number of no-shows. If a hotel can estimate the most

accurate number of no show and set its overbooking level at that number, it will be able

to achieve the highest revenue possible by making sure all the rooms go occupied.

The average number of no-shows is calculated by:

Average number of no-shows =

∑(¦­¥šª §ž ¦§ − « §¯« Ÿ­«¬«) – (¦§ − « §¯« ¨ª§š™š¡¤¡¬±)

¬Rë

§››­ª¦›¡« §ž ¬  ¦­¥šª §ž ¦§Q« §¯ Ÿ­«¬«

Probability =
¬§¬™¤ ¦­¥šª §ž œ™±« ª›§ªœœ

Rose hotel’s average number of no-shows:

0x13% + 1x20% + 2x20% + 3x17% + 4x13% + 5x10% + 6x5% + 7x2% = 2.27

The optimal overbooking level is 2.

Answer: Sarah can accept that booking order for 2 rooms on May 25th.

Overbooking approach 2: Using spreadsheet analysis

Method:

This method allows hotel revenue managers to picture the expected cost for every

possible scenario. All the relevant costs are calculated and put into a spreadsheet for

considering. The optimal overbooking level is the overbooking number at which the

48

expected cost is the lowest. When the number of overbooking is lower than the number of

no-shows, a hotel lose revenue from those unoccupied rooms. The cost of a no-show

guest is usually the room rate. When the number of overbookings is higher than the

number of no-shows, the cost of a walking guest includes all the expenditure for an

alternative accommodation, transportation and satisfaction of the guest.

7F (revenue of filling a room/cost of an empty room): $140

7𝑠 (cost of a walking guest): $300

The estimated cost at zero overbooking is calculated by:

$0x13% + $140*20% + $280*20% + $420*17% + $560*13% + $700*10% + $840*5%

+ $980*2% = $359.80.

Similarly, the estimated cost at one overbooking is calculated by:

$300x13% + $0*20% + $140*20% + $280*17% + $420*13% + $560*10% + $700*5%

+ $840*2% = $277.

Rose hotel’s estimated overbooking cost is calculated as per following

spreadsheet:

Table 18: Rose Hotel's estimated overbooking cost

Rose hotels' estimated overbooking cost

No- Number of reservation overbooked
Probability
shows 0 1 2 3 6 7
0 13% $0 $300 $600 $900 $1,800 $2,100
1 20% $140 $0 $300 $600 $1,500 $1,800
2 20% $280 $140 $0 $300 $1,200 $1,500
3 17% $420 $280 $140 $0 $900 $1,200
4 13% $560 $420 $280 $140 $600 $900
5 10% $700 $560 $420 $280 $300 $600
6 5% $840 $700 $560 $420 $0 $300
7 2% $980 $840 $700 $560 $140 $0
Total $359.80 $277.00 $282.20 $375.40 $1,037.80 $1,329.00

49

 The spreadsheet shows that the overbooking level with the lowest expected cost is

to overbook 1 room, with an expected cost of $277. That indicates Rose Hotel’s optimal

overbooking level is 1.

Answer: Sarah should not take that booking order of two rooms for May 25th.

Overbooking approach 3: Marginal cost approach

Method:

This method is based on the reasoning that a hotel should keep accepting

bookings until the expected revenue is less than or equal to the expected loss from the last

booking. Mathematically, a hotel should stop accepting booking when:

Revenue of next booking ≤ Cost of next booking

Revenue of filling a room x Probability that there are more no-shows than overbooked

rooms ≤ Cost of dissatisfied customer x Probability that there are fewer or the same

number of no-shows than overbooked rooms.

Converted from the above formula, Rose hotel should stop overbooking when:

𝐶0 GKO
P(no-shows ≤ overbookings) ≥ 𝐶 = GKOPIFF = 35%
0 P 𝐶𝑠

Looking at Table 17:

 At zero overbooking, the probability of having less or equal number of no-shows

than overbooking (zero no-shows) is 13%.

 At 1 overbooking, the probability of having less or equal number of no-shows

than 1 overbooking is the probability of having 0 and 1 no-shows: 13% + 20% =

33%.

50

  At 2 overbookings, the probability of having less or equal number of no-shows

than 1 overbooking is the probability of having 0; 1 and 2 no-shows: 13% + 20%

+ 20%= 53% > 33%. The smallest number of overbooking at which the

accumulative of no-shows experience or the probability that there are less no-

shows than overbookings is larger than 35% is 2. That means Rose hotel’s

optimal overbooking level should be set at 2 overbookings.

Answer: Sarah should accept that booking order of 2 rooms for May 25th night.

Overbooking approach 4: Overbooking ratio method

Method:

Step 1: Calculate the overbooking ratio

7F : cost of an empty room

7𝑠 : cost of a walking guest

IFF
Overbooking ratio = 𝐶0𝐶+𝑠𝐶𝑠 = IFFP GKO = 0.65 or 65%

Step 2: Find the distribution of no-shows based on historical no-shows data

Step 3: Calculate the cumulative probabilities of no-shows (table 17)

Step 4: Use the overbooking ratio to recommend the overbooking level

The overbooking level is the number of no-shows at which the cumulative probability is

either the same or larger than the overbooking ratio. Looking at Table 17, the number of

no-shows at which the cumulative probability is larger than 65% is 2. It is recommended

that Rose Hotel should overbook by 2.

Answer: Sarah should accept the booking order of 2 rooms for May 25th night.

51

Recommended readings

Collins, M., & Parsa, H. G. (2006). Pricing strategies to maximize revenues in the

lodging industry. International Journal of Hospitality Management, 25(1), 91-107.

Kimes, S. E. (2010). Strategic pricing through revenue management.

Kimes, Sheryl. (2013). The cheapest and best approach to overbooking. Retrieved from

http://blog.ecornell.com/overbooking-ratio-method/

Metters, R. D., King-Metters, K. H., Pullman, M., & Walton, S. (2008). Yield

management, Successful service operations management (pp. 234 – 257). South-Western

College Publishing.

Ivanov, S. H. (2008). Management of overbookings in the hotel industry-basic concepts

and practical challenges

52

 CHAPTER 5

CONCLUSION

This study developed a case study with pricing and overbooking scenarios that

hotel revenue managers are likely to experience in their day-to-day routine. The case is

expected to be a useful tool for university professors and professional trainers in training

hotel revenue management and relevant topics.

A literature review on revenue management tools and case study teaching method

was conducted. The case was built following the format of Harvard Business School case

method and in the hybrid form of a field case and an armchair case. The scenarios in the

case study are developed from situations that are observed in daily routine of a hotel

revenue manager. Two exercises demonstrated in the case address the challenges of price

- setting and overbooking and help guide students to use both pricing and non-pricing

tools in hotel revenue management to solve similar issues in revenue management.

The study is a significant contribution to revenue management training and also

helps to provide the hotel industry with well-trained revenue managers. Revenue

management has been one of many business and revenue optimization techniques that are

gaining increasing attention in the hotel industry. This fact has raised a high demand for

qualified hotel revenue managers as well as revenue management training. This study

provides trainers and professors an effective teaching tool while building students’

knowledge in various revenue management subjects by dealing with “real world”

problems featured in the case. Through an in-depth analysis and practicing with revenue

management tools in order to answer questions in the case, students will be able to apply

revenue management concepts to solve similar problems in a real hotel.

53

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 APPENDIX

Two Samples of Syllabi for Revenue Management Classes

Approved by the SHRM area on 01/09/2013

Accepted by the curriculum committee on 11/21/2013

MASTER SYLLABUS

HA 415 Revenue Management for Hotels (3 units)

I. Catalog Description:

Presents revenue management concepts and the systems utilized to maximize revenues

and profits in resorts, and corporate and convention hotels.

II. Prerequisites:

Courses: Prerequisite or Corequisite: HA 260 or Business Professional Program

Justification: HA 260, Hospitality Accounting, is a foundational course for HA 415. The

Business

Professional Program requirement is for Business Majors completing the Hospitality for

Business

Majors Certificate.

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III. Course Learning Goals: Upon completion of the course, students will be able to:

A. Use revenue management tools for maximizing total hotel revenues and profits.

B. Describe the importance of trends and comparisons in using revenue management

terms, formulas, and measurements.

C. Analyze weekly and monthly revenue management reports and apply them to daily,

weekly and monthly hotel operations.

D. Analyze and interpret trends in different market segments.

E. Develop effective weekly selling strategies to maximize total hotel revenues and

profits.

F. Pass the Hotel Industry Analytics test and earn the Certificate in Hotel Industry

Analytics.

G. Explain how Revenue Management works in corporate hotels, group hotels, and

resorts.

H. Analyze an actual hotel case study, develop and recommend an effective course of

action, write a clear Executive Summary, and prepare an Effective Revenue

Management Powerpoint Presentation.

IV. Course Materials:

Texts related to revenue management, such as Revenue Management, Cross (1997), and

Revenue Management for the Hospitality Industry, Hayes & Miller (2010).

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V. Teaching Methods:

The course material is presented in a lecture format utilizing the instructor and guest

speakers from the hospitality industry. Powerpoint presentations from different

hospitality companies are used and are available on the Blackboard Learning System. In

class exercises and discussions of actual revenue management situations are used

throughout the semester.

VI. Mechanisms for Feedback to Students/Interaction Between Students and

Professors:

Tests are returned to students and reviewed in class. Group projects result in discussions

demonstrating different aspects of revenue management systems and how they work.

The professor is involved during group project work giving feedback and observing

student interaction and progress. Office hours are also available for students.

VII. Evaluation Tools:

Evaluation of student performance will be based on:

 Class attendance.

 In-class group assignments.

 Quizzes.

 Group project.

 Midterm exam.

 Final exam.

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Exams, group project, class assignments, and attendance.

Grading System

Grade Scale
A 90-100%
B 80-89.9%
C 70-79.9%
D 60-69.9%
F 0-59.9%

VIII. Use of Technology and Information Systems

Students access Vista for power point presentations and it is optional to use Excel for

some of the assignments.

IX. Collaborative or Team Activities

Students work in teams of 3-4 on several in-class projects and the final project.

X. Projects

Students work in groups on several projects. First, they work in class on some practice

exercises that require the group to implement a selling strategy day by day over the

course of a week. Second, students will work in groups of 3-4 on their final project,

which is a group project that uses an existing hotel and develops a competitive set, rate

structure and selling strategies for that hotel.

XI. Statement Regarding Academic Dishonesty

Students are responsible to inform themselves of university policies regarding Academic

Integrity. In general, students found to be in violation of the code (e.g., cheating,

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fabrication, fraud, and plagiarism) are awarded a grade of F in the course. The complete

policy on academic integrity is in Appendix F of NAU’s Student Handbook.

XII. Course Content:

A. Topics

1. The culture of revenue management

2. The importance of customers and the Market in revenue management

3. The components of revenue management

4. Revenue management practices in corporate and group hotels

5. Maximizing revenues on the day of arrival.

B. General Knowledge and Management Skills *

Supporting Targeted Course

Program Learning Outcome Course Learning Outcomes
Performance Level: I,D,or M

Communication Skills ACD G D

Technology Skills ABCD E F G D
Problem Solving Skills ABCD E F G DM
Analytical Skills ABCD E F G DM
Conceptual Skills CDFG D
Ethical Skills I
Global Skills
Human Relation Skills
Career and Life Skills
Technical Skills AB C D E DM

*I = Introduced, D = Developed and Practiced with Feedback, M = Demonstrated at the

Mastery Level, Blank = Not Treated in this Course

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Definitions of Student Mastery Levels (1). These set performance levels that are

somewhat parallel to Bloom’s Taxonomy.

I = The student can identify examples (and non-examples) of the desired outcome, name

the elements involved, and answer "objective, multiple-choice, fill-in the blank"

type of test questions showing awareness. (Objective tests are not necessarily

simple, but they are most likely to be used at this introductory level.)

D = The
student can describe, demonstrate or construct an example of the desired

outcome but with guidance about each step. In some cases, the steps to learn the

outcome may be spread among more than one course or activity within a course.

Also included here is evaluation of existing examples of the outcome (pro's and

con's, etc.) Essay questions and short projects would be used as evidence.

M = The student can demonstrate the outcome given a problem statement and appropriate

data and tools. The student would need to synthesize skills learned previously in

isolation. The skill demonstration would be sufficiently rigorous that an outside

stakeholder (future employer) would be satisfied with it for an entry level position

after graduation. Term papers, senior projects and research papers, senior

portfolios, case studies, and capstone coursework would be used as evidence.

(1) Source:

http://business.uhh.hawaii.edu/documents/documents/MasterSyllabusMKT310revF

eb2012.pdf.

PROGRAM LEARNING OUTCOME DEFINITIONS

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 Communication Skills*: Use oral and written communication skills necessary to

function effectively in the hospitality industry.

 Technology Skills: Use technological tools while presenting and interacting with

data and information.

 Problem Solving Skills: Use leadership and management skills when solving

problems and conflicts.

 Analytical Skills: Use financial and accounting management knowledge when

evaluating the profitability of different business decisions.

 Conceptual Skills: Apply strategic and conceptual principles when analyzing

business decisions at the property and corporate level.

 Ethical Skills: Identify ethical dilemmas and are able to recognize and evaluate

alternative courses of action.

 Global Skills: Demonstrate the ability to work collaboratively with others from

different cultures and backgrounds and to identify factors affecting international

hospitality businesses.

 Human Relation Skills: Use emotional intelligence skills when interacting with

guests and employees.

 Career and Life Skills: Participate in personal and professional development

learning activities for successful career and life planning and management.

 Technical Skills: Demonstrate core competencies in the hospitality field.

Skill: the ability, coming from one's knowledge, practice, aptitude, etc., to do

something well.

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 HM 420 – Revenue Management and Pricing - Syllabus

Instructor: Todd Montgomery, College of Business – Hospitality Management

Email: [email protected]


Cell: 541-598-6791


Profile: http://osucascades.edu/people/todd-montgomery

Schedule: TBD

Office Hours: Graduate & Research Center 234
 Office: Monday – Thursday 9:00 –

10:00 am

Virtual (Skype): By appointment

Prerequisites: N/A

Students will learn to:

 Describe the components of revenue management and pricing. 


 Explain the benefits of revenue management. 


Course Overview: Revenue management is the process of offering the right product to

the right customer at the right time for the right price. Revenue Management started with

the airline industry in the early 1980s and is now a mainstream business practice used by

many of today’s top travel companies such as Southwest Airlines, Walt Disney Resorts to

Avis/Budget Car Rental.

Revenue Management is critical to the hospitality industry due to the perishable nature of

a service based product. The fundamental principles and concepts of revenue

management that we will cover in this course are capacity management, duration control,

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demand and revenue forecasting, discounting, overbooking practices, displacement

analysis, channel management, and pricing execution.

Learning Outcomes

 Evaluate historical price/demand data to identify distinct customer segments and

target them with the right product at the right time and at the right price. 


 Develop demand and revenue forecasts and measure their accuracy. 


 Apply tools and techniques to make revenue management decisions in a simulated

environment. 


Tentative Schedule 


Texts & Supplemental Material

 Recommended: Hayes, D.K., Miller, A. (2011), Revenue Management for the

Hospitality Industry, New Jersey: John Wiley & Sons Inc, ISBN: 978- 0-470­

39308-6. 


 Required: Additional readings posted on Canvas each week under the Modules

tab. 


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 Week #
Monday Wednesday Notes
Begins on
Introduction to Revenue
Welcome, Course
1 Management and Pricing
Introduction
Hayes, Miller Ch. 1
Supply & Demand Case Study /
Pricing Strategy
2 Guest Speaker (CFO Oxford
Hayes, Miller Ch. 2 Hotels)
Calculating Value in a Dynamic Simulation:
The Value Proposition
3 Environment Groups
Hayes, Miller Ch. 3 Pricing Simulation Review assigned
Differential Pricing Day in the Life of an RM /
4
Hayes, Miller Ch. 4 Midterm Review

Demand Forecasting
5 Midterm Exam
Overview Hayes, Miller Ch. 6

Revenue Forecasting
6 Overview Hayes, Miller Ch. Round 1: Pricing Simulation
6
Capacity Management / Sim Capacity Management / Sim
7
Review Hayes, Miller Ch. 7 Rd 2 Hayes, Miller Ch. 7
Distribution Management /
Pricing Technology Lab PROS
8 Sim Review Hayes, Miller
Pricing / Duetto / Ideas
Ch. 8
Measurement and F&B Pricing
9
Control Hayes, Miller Ch. 9 Hayes, Miller Ch. 9 & 10
Group Project Presentations:
Pricing Strategies for
10 Simulation Recap / Course
Ancillary Revenue
Recap
Final TBD: Final Exam

Course Policies

Group Assignments: Some of your course work will be completed in a group. Each

team member is expected to contribute equally to the project, and this will require

initiative. See the course project for more specific instructions.

Academic Dishonesty: According to OSU student conduct regulations, academic

dishonesty is defined as an intentional act of deception in which a student seeks to claim

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credit for the work or effort of another person or uses unauthorized materials or

fabricated information in any academic work. Refer to the OSU Student Conduct code

(576-015-0020) for a comprehensive definition of academic dishonesty. All cases of

suspected academic dishonesty will be handled in strict accordance with OSU policy and

College of Business policy.

Student Conduct Code:

http://studentlife.oregonstate.edu/sites/studentlife.oregonstate.edu/files/student_

conduct_code_1.pdf
 Student Conduct and Community Standards:

http://studentlife.oregonstate.edu/studentconduct

Student Conduct – Offenses: http://studentlife.oregonstate.edu/studentconduct/offenses­

0
 College of Business Policy: http://business.oregonstate.edu/college-business­

academic-and-professional-standards

COB Code of Honor:

A code of honor represents the moral commitments of those abiding to it. While each

person lives by his or her personal code, the establishment of collective values creates a

universal goal to which we can aspire. It is through the pursuit of these professional

attributes that we reduce the possibility of immoral actions ourselves.

In order to uphold our personal character and the organization that we proudly call our

own, we take this oath.

Integrity

The quality of being honest and having strong moral principles, integrity stands as the

backbone of character and is essential for success.

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Respect

Respect for others and yourself is a commitment to the fair treatment of and the fair

competition with others. Through respect we embolden the character of others and

ourselves.

Responsibility

We are held accountable for our words and actions as professionals to embed a steadfast

commitment to honor in our decisions.

Behavior in class: Behavior in class should be professional at all times. People must treat

each other with dignity and respect in order for scholarship to thrive. Behaviors that are

disruptive to learning will not be tolerated and may be referred to the Office of the Dean

of Students for disciplinary action. Please keep the side conversations to a minimum and

turn your cell phones off during class. No headphones may be used during class. If you

need to leave during class, please exit quietly. Computer/Cell Phone usage in class

should support the learning environment, such as reviewing the lecture slides, taking

notes, etc. Please do not distract yourself, or others by surfing outside websites, carrying

on electronic conversations with someone outside of class, etc. If your behavior is not in

keeping with the expectations set here, I may ask you to leave class.

Discrimination and harassment: Discrimination and/or harassment will not be tolerated

in the classroom. In most cases, discrimination and/or harassment violates Federal and

State laws and/or University Policies and Regulations. Intentional discrimination and/or

harassment will be referred to the Affirmative http://ds.oregonstate.edu.

Action Office and dealt with in accordance with the appropriate rules and regulations.

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Attendance: I will not take attendance every class, but when I do take attendance, it will

be a roll call or based on a quiz or in-class exercise. One or two absences will not hurt

your grade, but repeated absences will affect your comprehension of the material and

your grade negatively. If you are unable to attend a class session, it is your responsibility

to acquire the class notes, assignments, announcements and so on from a classmate.

Disability Accommodation: Accommodations for students with disabilities are

determined and approved by Disability Access Services (DAS). If you, as a student,

believe you are eligible for accommodations but have not obtained approval please

contact DAS immediately at 541-737-4098 or at

DAS notifies students and faculty members of approved academic accommodations and

coordinates implementation of those

accommodations. While not required, students and faculty members are encouraged to

discuss details of the implementation of individual accommodations.

Syllabus: This syllabus and schedule is a guide, not a contract. They will change during

the term as I attempt to provide the most compelling and useful learning experience

possible. If things do not make sense, please talk with me. As changes are made, I will

announce them in class. You should check the syllabus at least once a week for course

updates. Not reading the syllabus does not constitute a valid excuse for missing a

milestone.

Grading

Announcements: I will use Canvas to communicate announcements, changes in schedule

or assignments. Students are expected to check Canvas and e-mail daily.

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Before class preparation: The class schedule will indicate the required reading and any

deliverable due for that day. Lecture slides are also available and valuable for exam

preparation. Late submissions will be deducted 10% and submissions more than 2 days

late are usually not accepted.

Quizzes & class exercises: Quizzes will be given in class and there will be no make-ups

for missed quizzes. However, I often drop the lowest quiz grade so missing one quiz

should not hurt your overall grade. However, frequent absences can significantly lower

your grade. There are also class exercises which can impact your quiz score.

Project deliverable: Start your project early! Frequently, students that wait until the day

prior end up getting stuck and fail to complete the project component on time. Start as

soon as these are discussed in class so you can get assistance if

needed and complete them on time. Ask questions in class if you are unsure of anything.

Working in Groups: I encourage you to work with someone else. However, you are

required to do your own work. You may not copy from someone else. Allowing someone

else to copy your work is also a violation of the academic honesty policy. If you work

heavily with another person, I expect a note on your assignment that says "I worked with

Stephen Gradellia to complete this assignment and he helped me with the SQL queries.

Otherwise, this is my own work."

Course Grades: Letter grades will be assigned according to the number of points

accumulated on activities and exams. The following table will give you a general sense of

how I intend to evaluate your performance.

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 Activity Percentage of total

Quizzes & Class exercises 20%
Project: Hotel Simulation 35%
Midterm Exam 20%
Final Exam 25%
Total 100%

Participation: At the end of the course I often decide whether to adjust grades that are

borderline (e.g. adjusting an 89.5 to a 90) based on your participation assessed by the

value of in-class contributions. Good attendance, being prepared for class and

participating in discussions are examples of how you can get a good participation score.

Being late, frequently absent, disruptive, sleeping, leaving class before it has ended or not

participating in discussions are examples of behavior that may lower your participation

grade.

Grades will be assigned based on the following scale:

Grade Percentage Grade Percentage

A >=92% C+ 78-79%
A- 90-91% C 72-77%
B+ 88-89% C- 70-71%
B 82-87% D 60-69%
B- 80-81% F <60%

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