HOTEL YIELD MANAGEMENT

Through a long time in the war and over one-decade thereafter under the policy of central planning, the tourism industry in Vietnam was almost completely stagnant.

Acknowledgement

First and foremost, I would like to express my deepest gratitude and sincere appreciation to

Dr Do Ba Khang, research advisor and chairman of the research committee, who patiently gave his continuos guidance, construction suggestion and enthusiastic help during the

research period His concern, consideration and understanding deserve a special note of thanks and appreciation

I am also indebted to Prof John C S Tang and Dr Hans Stoessel for serving as committee members Their comments and suggestions have substantially improved this work

Moreover, special and unlimited gratitude is also expressed to the Government of Switzerland who provide the author scholarship to do MBA at the SAV program and AIT

Special thanks to Mr Nguyen Duy Bot who is kindly enthusiastic about writing an introduction letter to help me more easily to access to Huunghi Hotel

I also would like to express my thanks to those who provided data for the completion of this study such as Mr Mai Xuan Thang, Manager of Huunghi hotel, Mr Dung - Manager of

Dienluc hotel, who spend their precious times for lengthy interview sessions and company visit

No words could possible to express deepest gratitude to my beloved parents, brother for their inspirational and moral support

Last but not least, sincere thanks to all the faculty members at AIT and SAV and friends for their help and boundless inspiration

Abstract

While Vietnamese hotel companies are looking for solutions for the current stagnation,

managing revenue is one area that has been paid less attention The purpose of this study is

to explore possibility of appropriately using Yield Management technique to help a domestic hotel increase revenue Huu nghi hotel, the best hotel in Haiphong has been chosen as a case for the study

First, through a review of literature on the Yield Management and its practical implementation, benefits, conditions and limitations when the techniques are applied in the hotel industry are highlighted

Second, through a problem solving approach involving: (1) understanding the context in which the hotel is operated, goals and constraints (2) investigating of practices relevant to managing and improving revenue in the hotel (3) analyzing the hotel’s demand, difficulties in the operating process are pointed out

Finally, a more appropriate segmentation scheme and a pricing proposal are given to help the hotel overcome the difficulties in boosting its revenue

Table of Contents

Acknowledgement i

Abstract ii

Table of contents iii

List of tables v

List of figures vi

1 Introduction 1

1.1 Background 1

1.3 Objectives of the study 1

1.4 Research framework 3

1.5 Research methodology 4

Data collection 4

Method of analysis 4

1.6 Scope and limitations of the research 5

1.8 Organisation of the study 5

2 Hotel Yield Management 6

2.2 General issues in managing revenue in hotel 6

Main operating activities directly affect revenue management 6

The nature of problems in managing revenue in hotel 7

2.4 Basic concepts of yield management 9

Concepts of Yield management 9

Appropriate situation for effective yield management application 10

Main Components of yield management system 10

Hotel industry applications 11

Managerial implications of yield management systems 13

2.6 Yield management solutions for hotel problems 14

The overbooking problems 15

The pricing problems 16

Capacity allocation problems 16

Segmentation problems 17

Conclusion 17

3 Overview of the Huu Nghi hotel 18

3.2 Overview of hotel industry in HaiPhong city 18

HaiPhong City 18

The hotel industry 18

3.4 The HuuNghi hotel: 19

General description 19

Analysis of revenue performance: 29

Evaluation of current operating practices 29

Identification of areas for improvement 31

4 Demand analysis for the hotel 32

4.1 Customer profile 32

Segmentation 32

Average rate and contribution of each segment 33

Guest Characteristics 33

4.2 Effects of the current segmentation practice on operational decisions 35

4.3 A modified segmentation scheme 35

4.4 Demand pattern 36

Seasonal pattern 36

Daily pattern 39

4.5 Conclusion 40

5 Proposed yield management applications for hotel 41

5.1 Assess conditions for applying Yield management 41

Favourable conditions: 41

Constraints: 41

How should yield management be applied in the hotel? 42

5.2 A pricing policy proposal 42

General issues 42

Pricing policies: 43

5.3 Managerial implications 44

Group room sales 44

Transient room sales: 45

6 Conclusions and Recommendations 46

List of Tables

Table 4-1: Average room rate and contribution by segments (1998)

33

Table 4-2: Demand by segments

List of Figures

Figure 4-5: Daily demand of group tours, transient vacationers and business segments 40

The economic reform launched in 1986 initiated fast and radical changes in the country’s business environment The changes have in turn created great opportunities for hotel industry when many foreign companies came to look for business opportunities Development of tourism industry several years later also attracts more foreign visitors Demand for hotel services, especially for hotels of international standard, significantly increased, leading to a shortage in both quantity and quality of hotel rooms.

In response to the demand surplus situation as well as optimistic prospect of tourism industry, investors rushed to enter the hotel industry In a short time many new hotels were built with various kinds from very big and luxury hotels with hundreds of rooms, to mini hotels with a small number of room tens of rooms In an attempt to meet the demand as soon as possible, investors mostly emphasized on physical aspect of the service, they try to build nice building with comfortable rooms that meet international standard

After 1995, the number of hotel rooms still strongly increased while the growth in tourist arrivals has significantly slowed down Surplus in hotel supply has started, and competition becomes more and more fierce Operational inefficiency and service quality problems at the majority of hotel, especially domestic ones, just aggravate the struggle for survival and

development

Occupancy rates at most hotels keep on decreasing, despite the effort by the hotels to

reduce, often indiscriminately and without a clear strategy, the room rate to attract guests The revenue of these hotels decreased drastically, putting the payback on investments and survival of the hotels at risk

At the same time, a quick look out side of the country of reveals a new approach to improve hotel productivity and increase revenue, has been adopted rather successfully by large

international hotel chains This approach commonly called Yield Management or Revenue management consists of a range of several techniques and strategies, from single to intuitive one to sophisticated mathematical models to an integrative computer-assisted revenue

management system

It is therefore desirable to explore possibility of applying such approach to the hotel industry

in Vietnam to help improving its competitiveness, at least through operational efficiency

1.2

1.3 Objectives of the study

The main objective is to find an operational solution to increase revenue for the hotel To achieve the main objective, the following objectives will be reached:

- To review the various concepts and techniques for improving hotel revenues commonly known as yield management techniques Benefits, conditions and limitations are

highlighted when the techniques are implemented in the hotel industry

pricing policies to help an actual domestic hotel in Vietnam to overcome its difficulties in boosting its revenue in increasingly competitive market

The first objective will be achieved through a thorough review of literature on the yield management and its practical implementation However, sophisticated mathematical modeling will not be covered Instead, the general issues and approaches, as the actual problems and difficulties will be presented

The second objective is achieved through a problem solving approach involving several stages:

EVALUATION OF THE CURRENT PRACTICEDEMAND ANALYSIS

YM APPLICATION FOR THE HOTEL

1.5 Research methodology

With problem solving approach, the aim of the study is to identify problems in Yield

management practice at actual hotels under study and suggest a way to solve them The analysis will be both qualitative and quantitative

Six hotels were approached; they are allocated in Hanoi, Hochiminh City, Vungtau, and Haiphong Of which two are joint-ventured hotels, the others are state-owned Hanoi hotel, Amara hotel and Rex hotel refused to provide information because of disclosure information Kimlien hotel and Dienluc hotel has not done any thing remotely related to yield management Finally, thanks to the author’s relationship with the hotel, Huunghi hotel agrees to cooperate Therefore, this research will concentrate only on investigating the problems and possible solutions at Huunghi hotel

In depth interviews are conducted with the general manager, front office manager and

receptionists to get information and understand policies of the hotel, system and procedures Difficulties in managing revenue are determined here The management have no ideas

specifically to improvement of revenue management activities Hence, instead of asking focusly on yield management practice, the questions are expanded to include some other managing issues such as marketing, accounting

Personal observation is carried out to get more understanding of procedures and policies of the hotel It helps to define and confirm the real problems By observation, information of guests: characteristics and behaviors can be obtained

Historical data are collected from several sources: receptionists’ notebook, accounting book and daily reports The data helps to determine demand pattern of the hotel, characteristic of groups of customers and their behavior The data also helps to confirm the determined

problems and new problems may be found Solutions can be derives and tested on the data.Secondary data were collected through Vietnamese tourist magazines, annual report of Haiphong Tourist Company, Internet

Method of analysis

The research starts by reviewing of literatures on issues related to revenue managing in hotel, concepts of yield management, frequent problems of hotels, and yield management solutions Search will be made to provide a base for approaching the hotel, to expose

problems, and find direction for possible solutions

The current yield management practices are qualitatively investigated based on information from the interviews and observation The market and demand pattern was analyzed by

quantitative and qualitative methods The analysis bases mostly on historical data

1.6 Scope and limitations of the research

Scopes:

The research focuses only on room function of the hotel Other activities such as restaurant, bar, laundry, etc, will be ignored Only problems related to managing revenue are considered Others such as problems in accounting department or marketing department will not be discussed in this paper

Limitations:

The research mostly bases on qualitative analysis, sophisticated mathematical modeling and computer system development are not focused Hence, the recommendations for the hotel lack specific; they serve as guidelines only

However, it is hoped that the results obtained can provides some insights to help hotel

management to adjust the practice to compete better in the market

1.7

1.8 Organisation of the study

This study will be organized as follows:

Chapter 1 is the introduction including the rational of the research, background and

identification of the problem, objectives, and scope and limitation of the study

Chapter 2: a literature survey pertaining to the topic being considered by the research

proponents There are three parts as follows:

operating activities that affect revenue management with problems often arise

management, conditions for implementing yield management, components of yield management, hotel applications, and managerial implications of yield management

Chapter 3 is an investigation of revenue management practice in the hotel An over view of

the hotel industry, company profile will be mentioned in order to state the context in which the hotel was run Analysis of yield management practice will focus on pricing, booking practice; segmenting, demand forecasting and information system

Chapter 4 will analyze the demand pattern of the hotel, how demand pattern and other

operating policies may bring difficulties and how they affect revenue

Chapter 5 bases on literature on necessary conditions for applying yield management, and it

considers the current condition on components of Yield management system, an assess of those conditions will be carried out This chapter also answers for the question how should

YM be applied in the hotel A pricing proposal will be suggested with managerial implication

Chapter 6 will be conclusions.

Chapter 2

2 Hotel Yield Management

This chapter discusses about issues in managing revenue of hotel and approaches to

increase revenue based on literature

2.1

2.2 General issues in managing revenue in hotel

Main operating activities directly affect revenue management

2.2.1.1 Rate setting

Hotel practitioners have been making room-rate pricing decision for years As all pricing decision, rate setting decisions for hotels are based on the economic principles of supply and demand More specifically, demand relative to available supply on any given day determines the price in the market place The essential elements of price theory include demand,

competition and cost These parameters offer a framework from which hotel room-rate

decision can be made Demand determines the highest rate that can be charged Rate will vary tremendously depending on the market; thus the particular target market of a hotel needs to be clearly defined when making a pricing decision for it Competition is a key

element in putting a cap on the relevant range of prices At peak demand periods, when competition is low, the relevant rang is higher and conversely at off peak periods Cost

structure is a base for setting different price levels in different demand situations

As customers become more sophisticated in manipulate the current pricing system, hotels eventually are forced to modify their pricing structure Denny G.Rutherford (1995) listed three possible pricing strategies as follows:

A single rate: offer a single rate for all transient inventories That rate can change according

to the season or the day of the week This approach is easy to explain to customers and easy

to administer, however, it fails to respond to customers’ willingness to pay

Rates by room type: This approach is currently used by many hotels It is also easy to

explain to customers because there maybe a perceptible different in the rooms offered at different rates It improves on the one-rate approach by allowing the hotel to offer different rates on the same day, thereby realizing more revenue But this approach certainly wouldn’t work for a hotel that comprises just one type of room Even if it had different kinds of rooms, a hotel would be limited by its actual physical inventory in the number of high-price rooms it could sell, so that potential revenue is limited by product levels and not demand levels This approach to segmentation will not work in markets where customers are unwilling to pay for upgraded rooms, and it is operationally difficult for the front desk clerks and reservations sales agents to manage

Rates with “fence” discounts: Customers can segment themselves into appropriate rate

categories based on their needs, behavior or willingness to pay Such fences include

advance reservations and non-refundable advance purchases Those policies allow sensitive customers to gain a lower rate in exchange for reduced flexibility On the other hand, traditional full-rate customers can have a room whenever they please The important

price-aspect of fences is that they allow a hotel to sell discount rooms to one segment of customers without allowing higher-rate customers to trade down.

Rates with fences are easy to explain to customers and every rate has a rationale The

downside of rate fences is that they are more difficult to manage than other approaches Rate fences require sophisticated reservation and revenue management systems, moreover, a hotel must have regular rates that are correctly positioned for the marketplace

Fences must be combined with inventory control procedures to maximize revenues That requirement goes beyond the yield management currently practice by many hotels

2.2.1.2 Reservation policies:

Reservations are the lifeblood of any hotel operation, their value is clear both to guests and to hoteliers Customers are benefited from assurance of room available and hoteliers lure by active scheduling rooms The policies have strong influences on occupancy rate Reservation policies includes three basic areas (Denney G Rutherford):

Reservation acceptance: conditions to accept a reservation

Collections and recourse: ways to deal with guests who fails to honor a reservation.

Overbooked houses: policies regarding nonaccommodation guests.

The nature of problems in managing revenue in hotel

Hotel managers have traditionally accepted the notion that a full house is a gamble Even the language of the front desk reflects the uncertainty of the reservation system, using such terms

as “expected arrivals” and “expected departures” When rooms are scare, reservation

managers gamble on these expectations, using history and instinct to make a rough estimate

of how many reservations will be no-shows, how many expected departures will stay beyond their checkout date, and how many unexpected guests, or walk-ins, will arrive seeking

accommodation Hotel managers also have to answer for questions of how to price rooms The more guests be satisfied the more revenue hotels can get from existing demand,

therefore, pricing policy must satisfy as many guest as possible The following subsections will list problems often faced in hotel management

2.2.1.3 Fixed capacity

Fluctuating in demand results in under utilization capacity sometimes and over capacity sometimes It’s difficult to face with fluctuating demand while rooms can not be inventoried How to control demand? How to increase occupancy rate when demand off peak? When to minimize loss due to not satisfy all customers on peak demand periods?

2.2.1.4 No-show and late cancellation

Problem of not utilized capacity while refuses other customers If customers fail to honor their reservations, the reserved rooms will be waste A hotel may refuse reservations on that day because all rooms were booked, but at the end of the day nobody come to occupied the rooms, hotel can not fill the rooms by other customers

2.2.1.5 Overbooking

To protect themselves from the problem related to no-shows and late cancellation, hotel accepts over-booking However, this may lead to bumping problem, hotel may dishonor the reserved customers and will lost customers good will if number of overbooked rooms is greater than number of no-shows.

2.2.1.6 Sooner leaving and stay extension:

Sooner leaving may lead to situation similar to no-show or late cancellation, customers who leave sooner then initial intention create unoccupied rooms; stay extension makes difficulties

in reservation process, especially in demand peak days because may be the room already be schedule for an other guest How to deal with the situation if all rooms were booked? Of course hotel can not refuse the extension to build customer good will

2.2.1.7 Willingness to pay

Different groups of customers have distinct willingness to pay for the same room If hotels offer one price they will lose the opportunity to charge high price for customers who can pay higher than the price offered Some guests will be paying less than they are willing to pay, while some others will find the rate too high and go else-where, possibility leaving the hotel with rooms it could have filled by using another strategy

2.2.1.8 Discount price classes

Offer different prices for different groups of customers is one way to increase revenue The number of discount price classes refers to the number of distinct groups of customers who are willing to buy rooms at discount prices, which also equals the number of discount price levels that can be offered However, how many price levels is enough?

2.2.1.9 Reservation demand

Each distinct class of discount or full-price customers may have demand that is deterministic,

or random and correlated with other classes How to determine demand of these distinct classes?

Distinct classes are not completely separate from each other, customers who are willing to pay full price would also take a discount room if it were available Difficulty is how to allocate room inventory, how many discount rooms are enough?

Group reservations are highly variable probability of cancellation, group often negotiate significant discounts off the regular price The trade-off between group business and transient business is often one of occupancy versus rate How to treat group reservations in

consideration with other customers?

If demand levels for each day are different, and therefore room rate also different, how to treat with customers who have multiple-night stays?

2.2.1.13 Asset control mechanism

Whether a hotel can ever turn down a request for a high price room if discount rooms are available? Of course they never want to let this happen However, if segments are separated with a distinct inventory and the limit is reached for high price segment before the limit is reached for discount-price segment, it will happen Is distinct or nested inventory?

2.3

2.4 Basic concepts of yield management

Concepts of Yield management

Yield management, a method for managing capacity profitably, has gained widespread acceptance in the airline and hotel industries Yield management is a method, which can help

a firm sell the right inventory unit to the right type of customer, at the right time, and for the right price with the purpose of maximizing revenue to the firm Yield management guides the decision of how to allocate undifferentiated units of capacity to available demand in such a way as to maximize profit or revenue The problem then becomes one of determining how much to sell at what price and to which market segment (SHERYL E.KIMES 1989)

The concept of yield management originated in the airline industry Most travelers know that passengers on the same flight often pay different fares Super-saver discounts, three-day advance-purchase plans, stay-over-Saturday-night packages, and so fourth have become the norm for airline pricing What is not as widely known is the potential application of yield

management to other service industries Yield management has proven successful in the lodging, car rental, cruise line, railroad, and touring industries – basically, in situation where reservations are taken for a perishable commodity

Yield management is based on supply and demand The key to successful implementation appears to be an ability to monitor reservations and to develop reliable forecasts Proper pricing adjustments, which take existing demand into account and can even influence it, appear to be the key to profitability

Extending the airline definition of yield to hotel industry, yield for a hotel would be measured

as revenue per available room Yield is a straightforward measure of the effectiveness of practices and policies applied to generating revenue from room sales This tactics can be expressed as follows:

Revenue realizedYield = -

Revenue potentialRevenue potential is the income that could be secured if 100 percent of available rooms are sold at their full rack rates Revenue realized is the actual sales receipt

The Yield is closely related to the industry standbys of occupancy rate and average rate The occupancy percentage, of course, is actually a ratio of the number of rooms sold to the room available for sale Average rate can be expressed as a simple dollar figure or as a ratio of actual rate to potential rate So, the yield is closely related to the combination of occupancy and average rate The only difference is that average rate is converted into a ratio But the yield is more flexible and consistent way to judge a hotel’s performance Yield thus, combines two factors: room’s inventory and pricing policies

Appropriate situation for effective yield management application

Sheryl E.Kimes (1989) analyzed situations in which yield management is practiced and showed characteristics are necessary conditions for the proper adoption of yield

management

Relatively fixed capacity:

The focus of yield management is efficient allocation of shared fixed capacity, it is only

appropriate for firms which can not quickly adapt available capacity to available demand

Ability to segment markets:

Yield management aims at sell products for right price, that means the price fit with

customer’s value perception To be effective, the firm must segment its market into different groups, which have similar perception of value Basically, the business must know which customers are most likely to use variously-priced classes of service, and must develop

different marketing strategies for each market segment

Perishable inventory:

The product or service can not be stored, unsold products represent spoiled or wasted

inventory If a firm can minimize its inventory spoilage, it will operate much more efficiently

Product sold in advance:

One of the capacity management tools that service business use is a reservation system in which units of inventory are sold in advance of actual use This characteristic of product makes firms easier to meet demand with constraint of fixed capacity It also creates

opportunities for higher revenue: manager has time to wait for higher paying customers, of course with uncertainty

Fluctuating demand:

Yield management can be used to help temper some of the demand fluctuations by

increasing utilization during slow demand times (by decreasing price), and by increasing revenue during times of high demand (by increasing price)

Low marginal sales costs/ high marginal capacity change costs:

If cost of selling an additional unit of inventory is high and cost of providing additional capacity

is not very expensive proposition, yield management may not very useful

Main Components of yield management system

In order to achieve the goal maximize yield, two key questions must be answered are:

the optimal pricing levels?)

According to SE KIMES (1989), to answer the above two questions, yield management must address following elements:

2.4.1.1 Demand patterns

Information on demand patterns for each rate class gives better understanding of the

behavior of different customers Demands for different rate classes help determine the

possibility of correlation among rate classes By knowing the interaction between rate

classes, a firm can better understand how many inventory units, which could have been sold

at a high price, may be cannibalized by selling to many units at a lower price To know about demand patterns, information on historical demand patterns for various classes must be available

2.4.1.2 Demand elasticity

Making pricing decisions almost always have to take into account the reactions of

competitors To fully use the potential of a yield management system, management must know the elasticity of demand for various rate classes and be able to make corresponding changes

2.4.1.3 Overbooking policy

Overbooking policies must be assessed and include information on historical no-show rates and current policies on overbooking The overbooking policies must be integrated with the yield management program or sales will be limited to an arbitrary low level

2.4.1.4 Information system

Availability and accuracy of historical data is critical, without a good information system, the yield management system will be doomed to failure It’s not necessary that good information system must enclose with computerize system, the most important things is value of

information (usefulness, accuracy, availability)

Hotel industry applications

2.4.1.5 Conditions for infrastructure

A hotel’s effectiveness in improving yield is based on its infrastructure in the following four areas (Denny G.Rutherford, 1995 )

Forecast must consider both transient and group demand In evaluating whether to book a group two years in advance at a marginal rate, the sales managers must determine the likelihood of displacing other groups, as yet unknown to the hotel, that might be willing to pay higher rates Computer-assisted forecasting methods can facilitate the necessary data

handling and analyses

Systems and procedures

Daily demand forecasting, regardless of accuracy, is not sufficient to enhance yield Policies, procedures, and personnel trained for yield maximization must be in place to take advantage

of the forecasts and act in ways that enhance the property’s revenues It’s important that every one in hotel understand what yield management is and process of implementing yield

management Procedure in operating activities must support to make easier for managing yield by providing information like price-value relationship, demand pattern and so on To be assured of systems and procedures that encourage yield maximization, that purpose must be designed specifically into the system.

Strategic and tactical plans

Appropriate planning is integral to yield management Planning for maximum yield determines goals by asking questions like “What would be our mix of market segments if we were to maximize yield?” Many critical decisions are made by a casual continuation of past practices, rather than an analysis of and choice for the future Example of such inertia include

commitments to base accounts, levels of participation in citywide conventions, discounted rates for local organizations that have the potential to produce a certain volume of business, and a desired ratio of transient to group room-nights

A clear strategic will head and co-operate efforts of all departments for the final goal A proper tactical plan has all of its decision making oriented toward the same goal of yield

maximization Departments work in concert supported by actions and decision rules

appropriate for current and forecast market conditions As a result, all departments

co-ordinate-and contribute to optimization yield

Feedback system

Systematic feedback is needed to assess the effectiveness of forecasts, the impact of tactics, and the performance of individuals and departments in their effort to raise the hotel’s yield Regular and likely feedback provides encouragement, set priorities, and enables the use of yield management techniques that otherwise would be impossible

2.4.1.6 Applications

All hotel companies have a common problem: they produce a mix inventory of perishable products that can not be stored if unsold by a specific time The commodity that hotels sell is time in a given space If a room goes unsold on a given night, there is no way to recover the time lost and therefore the revenue lost Therefore, these products are typically sold for varying prices that depend on the timing of the transaction and the proposed of date delivery

In the hotel industry, yield management is composed of a set of demand-forecasting

techniques used to determine whether room rates should be raised or lowered, and whether

a reservation request should be accepted or rejected in order to maximise revenue

Yield management seeks to maximise revenue by controlling forecast information in three ways: capacity management, discount allocation, and duration control

Capacity management

Capacity management involves various methods of controlling and limiting room supply Capacity management balances the risk of overselling guestrooms against the potential of loss of revenue arising from room spoilage Other forms of capacity management include determining how many walk-ins to accept on the day of arrival, given projected cancellation, no-showns, and early departures Capacity management strategies usually vary by room type That is, it might be economically advantageous to overbook more rooms in lower-priced categories, because upgrading to higher-priced rooms is an acceptable solution to an oversell problem

Discounting allocation

Discounting involves restricting the time period and rooms available at educed or discounted rates The primary objective of discount allocation is to protect enough remaining rooms at a higher rate to satisfy the projected demand for rooms at that rate, while at the same time filling rooms that would otherwise have remained unsold Implementing such a scheme requires a reliable mechanism for demand forecasting.

A second objective of limiting discounts by room type is to encourage selling In an selling situation a hotel attempts to place a guest in a higher rated room This technique requires a reliable estimate of price elasticity and/or the probability of upgrading

up-Duration control

Duration control places time constrains on accepting reservations in order to protect sufficient space for multi-day requests This means that, under yield management, a reservation for one-night stay may be rejected, even though space is available for that night

Managerial implications of yield management systems

Very little has been written on the managerial implications associated with yield management Yield management can give a firm a competitive edge, but it could also result in (1) a loss of competitive focus, (2) customer alienation, (3) severe employee morale problems, (4) a change in reward systems, and (5) a need for intensive employee training As with any new approach to business, (6) proper organization and (7) a firm commitment from top

management are essential (SHERYL E KIMES, 1989)

2.4.1.7 Loss of competitive focus

Since most yield management systems focus on maximizing revenue or yield, firms using such a system may develop an undue focus on short-term profits and ignore long-term profits which could result from managerial attention to producing and delivering good service As Hayers and Abernathy (1980) point out, although financial success is imperative to any firm,

an over emphasis on short-term financial gains may leads to disastrous results Many service firms are successful because they offer very high quality services, which are in high demand The focus on efficient resource use that yield management may take managerial attention away from customer service, and fundamentally change the service concept The net result may well be a loss of customers at considerable financial cost

2.4.1.8 Customer alienation

Consumers seem to be resigned to the fact that airlines charge different prices depending on how far ahead a ticket was bought, and on what restrictions were met, but will customers of other types of services do the same? In industries with a large number of competitors like the hotel industry, customers often do not willing to pay different prices for the same room, they may decide to patronize the competition Likewise, customers may find it unfair to be paying a higher price for a service than someone who reserved it a few weeks earlier Firms adopting yield management programs may face consumer education problems

2.4.1.9 Employee morale problems

Yield management systems take much of the guesswork out of how many items of inventory

to sell at what price, but they also take some of the judgement out of the jobs of

reservationists Unless properly structured to allow for some judgement, yield management systems could be met with resentment from people having to use them

2.4.1.10 Incentive and reward systems

Yield management systems could also cause a problem for group sales departments

Typically, sale-people in such departments are rewarded by the amount of sales they make With a yield management system, it might not be beneficial for the business to accept a group sale at a low rate when that block of inventory could be sold at a higher rate Unless incentive system is changed, group sales workers might find that yield management works against them

In a similar vein, managers are often rewarded on the basis of capacity utilization or average rate With a yield management system, the manager needs to be concerned with both of these factors Unless incentive system is changed to reflect this, managers may resent using yield management

One of the major problems confronting most firms adopting yield management system is degree of centralization of reservation systems This problem can be overcome by developing

a strong information system which integrates both central and branch reservations systems

Without commitment from top management, yield management systems may be doomed to failure Unless all employees know that the yield management system is considered essential

to the success of the success of the firm, they may be inclined to treat it less seriously than top management may prefer

2.5

2.6 Yield management solutions for hotel problems

Yield management has been applied in hospitality industry, it helps many hotels achieve the goal of consistently maintain the highest possible revenue Yield management techniques has been used to solve hotel problems: determine policies for overbooking and allocating hotel capacity to customers of different revenue-generating potential through discriminatory pricing

The overbooking policy deals with likelihood of cancellations and no-shows and the

consequent loss revenue Balancing the expected lost revenue due to unoccupied rooms against the loss of goodwill caused by not honoring overbooked reservations is the essential consideration in determining an over booking policy

The pricing problem can be identified in two forms, the cases of revealed-price and hidden price Reveal-price is the case in which a customer calling in a reservation is assumed to be able to identify his/her customer class, thereby receiving a certain rate The booking policy that must be determined is usually expressed in the form of booking limits for each customer

class Since this problem deals with demand from different market segments with a different price charged to each segment, one can view determining a room allocation to each segment

as a pricing decision Hidden price is the case in which the hotel’s reservation system doesn’t have ability to identify the market segment to which a customer belongs when the customer made a reservation In such situation, it is impossible to set booking limits for different

customer classes explicitly

The overbooking problems

Up to now many researches has been done on overbooking problem The overbooking

problem has been extensively researched in isolation from the pricing problem Rothstein (1971), (1974), (1985) shows the overbooking problem as a stochastic decision process This means that the decision of how many reservations to take is updated as the rental date draws nearer and actual demand as opposed to forecast demand manifests itself His focus is upon how to adjust booking limits at various decision points that lead up to a target date Request for reservations, cancellations, and show rates are all sources of uncertainty In his model, Rothstein assume that only one discount price class The model seems so sophisticated that may not be justified by the profitability it creates

Williams (1977) demonstrates the necessity of applying optimization methods to the

overbooking and pricing problems as opposed to using simple, approximate decision rules

He models a particular date that represents a peak in demand He assume that demand for rooms on this date comes from three sources, listed in decreasing order of priority: stay-overs ( guests occupying rooms on the day preceding the critical date); reservations (guests

arriving on the critical date with reservations); and walk-ins (guests arriving without

reservations) He further assumes that the occupancy of the day before the critical one is known with certainty, and calculate the expected costs of forgone revenues and overbooking that are associated with various numbers of reservations Although Williams’ suggests

method of designing decision aids, his model is concerned more with estimating the cost of specific policies than with optimization

Ladany (1976) derives models for the overbooking decision process in combination with the reveal-price decision (also referred as the inventory allocation problem) This latter aspect of the yield management problem reflects the issue of setting aside a certain amount of hotel capacity for each of reservation customer classes such as travel groups, single-room

customers, double-room customers, etc Each customer class is given a different room rate Lieberman and Yechialli (1978) introduce a discount to a standard room price as a “cost of acquiring a reservation” However, their models do not allow for uncertainty in the response of the market to the discount Hence, the realistic price elasticity of demand is not incorporated

in any of the afore-mentioned papers

Rex S Toh (1985) introduce an overbooking model whose operations and applications can

be understood and subsequently implemented by hotel managers, whether or not they have access to sophisticated computerize reservation systems The model allows hotels to

determine optimum booking level with consideration of uncertainty in no-shows and

cancellation Limitation of the model is assumption of one price for all customer classes The model excludes room rate side, only focus on avoiding not honor reservations

SE Bodily and PE.Perfeifer (1992) approach overbooking problem as the inverse of

newsvendor, adjust the distribution of demand (survivals) in order to match a fixed inventory The decision rule maximizes expected payoff, which includes the cost of both spoilage and oversales Again, this model assumes there is only one price and all customers are treated as the same

Other models, such as Belobaba’s, allow discount price classes Alatrup et al.(1986) treats the overbooking decision as a Markov decision process and is solved as a two dimensional stochastic dynamic program However, these models do not allow diversion.

The pricing problems

The pricing policy requires updating in the face of uncertain demand It is generally more profitable to change price over time in order to sell some of the hotel capacity at higher price and to capture a large number of higher-yield customers Orkin (1988), Relihan (1989)

describe the nature of this problem in general terms and critique various proposed

approaches to solving it

Belobaba (1989), for the case of reveal-pricing policies, and Pfeifer (1990) for the case of hidden pricing policies, give sub-optimal methods for solving these problems by using a concept called “marginal revenue”(MR) The essence of the MR methods is that the marginal value of allocating one unit of capacity to a higher-yield customer can be based on the

difference in threshold prices between customer classes and the probability that the unit of capacity will be demanded by the customer class with the higher threshold price The MR approach has been applied by Brumelle et.al (1990) in the case of airline booking when demand is correlated across fare class Curry (1990) extends the MR approach to the airline booking problem of incorporating the itineraries as well as the fare class of customers in setting booking limits Both of these papers assume the reveal-price pricing policies along with rather restrictive assumption about the demand process

A more accurate model is derived by Badinelli (1990) The performance of this model in comparison to the MR methods is encouraging in terms of yield as well as computing time The model and its results apply to hidden-price pricing policies with consideration of many related factors, such as cancellation, overlapping day stay, and so on The work is made with assumptions of deterministic demands - a set of market segments are defined based on willingness to pay; a single, critical booking date, only one types of room Model simulation requires demand data, it’s really difficult to capture the data

In 1996, Ralph published an article in this field His research mentioned especially the field of hidden price The work covers many basic assumptions of yield management, such as

overlapping demand of different segments customers (diversion), uncertainty of no-show, cancellation, and so on Especially, the model considers profit that would be generated from guests as a packaging, not merely as quoted price The model works on the idea of mixing of overbooking and pricing policy Only one assumption that simplifies the model is one type of room

Capacity allocation problems

The generic allocation problem was first solved for the airlines by Littlewood and then

Belobaba and others Bodily and Weatherford developed a generic problem that can be used

by other industries The assumption is deterministic full-price demand and one discount price level Brumelle et al (1990) provides a solution with consideration of stochastic dependence between demands in the two customer classes However, the level choice for booking limit of discount rooms is assumed to have no effect on full-price demand This model ignores

diversion issue

Perfeifer (1989) provides a decision rule that tells when to stop offering discount rooms The rule is defined in terms of two probabilities: probability that the next customer is discount-price customers and the probability that there are enough room for all full-price customers Pfeifer’s model makes an assumption that there are two groups of customers: discount-price

customers and full-price customers, but the observable distinction is blurry (full-price

customers will buy at discount price but are willing to pay for full-price if no discount rooms are available One major draw back of this approach is the estimation of the two probabilities

SE Bodily and LR Weatherford (1994) introduce another approach to allocation problem with consideration of diversion matter The model does not assume independent demands for the price classes This model can be applied for multiple price classes, and also it treats the joint overbooking/discount optimal allocation decision

reliability of the result depends on quality of the survey and many subjective adjustments

Conclusion

Of all approaches to solve problems in managing revenue in hotels, the gaps between

theoretical models and practical application is considerably wide Application of these

solutions requires revising models to fit with operating practice in hotels Many solutions seem very difficult to apply for real problem due to a lot of strict assumptions This research study tries to apply appropriate models to solve real problems of a specific hotel, to see how can theoretical model be utilized in practice

HaiPhong City has a port on the Cam River, 20 km from the sea It plays an important role in international trade relations For all this, so far HaiPhong has been a major port and the gate

to outside world for northern provinces

HaiPhong is an industrial city with traditional industries such as cement, engineering, ship, building, glass manufacturing, maritime products processing and fine arts and handicraft The city of HaiPhong has the potential to develop maritime industry including frozen see food, vegetables, and marble

HaiPhong also possesses many tourist spots and landscapes Do Son beach is a gift of Nature to HaiPhong Do Son is a small peninsular formed by the stretch of Rong Mount to the sea only 20 km away from the city From Do Son tourists can go boating to Cat Ba Island, to

Ha Long bay, to Den Bien, Long Chau and Hon Dat" islands

The hotel industry

In Vietnam, while almost all large cities and tourism centers such as Hanoi, Hochiminh City, Nhatrang, Vungtau have experienced a hotel boom that is historically unprecedented, it is interesting to note that Haiphong is out of the main stream

Being the area of strategic economic development in the North of Vietnam and one of big trade center, Haiphong has strong potential for luring international travelers as well as local travelers However, the number of visitors arrived in Haiphong annually is much lower than other big cities Because of poor infrastructure, and inadequate tourist promotion programs, Haiphong is considered as an ill-favored market for hospitality business That is why number

of hotel room in the city is so small Right now, there are just over 1000 hotel rooms in the market (compared with more than 60000 rooms across country), of which about 450 rooms meet international standard, rating from one to three stars Table3-1 lists hotels of

international standard in the city

In the years from 1990 to 1995, along with the economic development of the country, number

of visitors arriving in Haiphong, especially international business travelers, significantly

increased Growth in visitor arrivals and tourist receipts had never been higher than in 1996 During the last two years, Vietnam has experienced a decrease in tourism receipts and foreign investment Haiphong has been, inevitably, affected by the situation Nevertheless, because of progresses in relationship between governments of China and Vietnam, the simplification of procedure for Chinese to visit some areas in Vietnam, a new market for Chinese tourists has emerged

In 1997, there were nearly 20 000 Chinese tourists visiting Haiphong, in 1998 the number is

35000 The new market has filled up the gap left by the decrease in demand from the old markets In the years 1997 and 1998, demand for hotel in Haiphong market is maintained, even increases slightly

Table 3-1: List of international standard hotels in Haiphong

Regarding development potential of the market in Haiphong, recently a number of

joint-venture hotels have started construction process In the next two years, there will be four new luxurious hotels that will enter the marketplace, including Haiquan hotel, Habour view hotel, Tray hotel, and Sun Flower village Estimate number of added rooms is 500, which meet international standard (at least three stars) “ In the near future, visitors arriving in Haiphong will not increase much and the participation of new players in the market will lead to a

situation of conflict between demand and supply Doing business in the hotel market will become very hard”, said Mr Mai Xuan Thang, general manager of Huu Nghi hotel

operating with 30 rooms The remaining parts were completed at the end of 1995 From 1996 the hotel started operating with full capacity of 126 guestrooms

Huunghi hotel is classified as a three-stared hotel by Vietnam Tourism It is the best, biggest hotel in HaiPhong All the guest rooms are fully equipped with modern facilities such as high quality king size beds, TV, VCR system and IDD telephone, separate shower and bath tub, room safe and twenty four hours service It is a full-service hotel, with a wide range of

conveniences for guest These service include: swimming pool, tennis court, fitness center, karaoke and sauna, massage, souvernir shop, business center, baby-sitting service, and so

on

The hotel was located in the center of the city, near trade center, five minutes drive to Hai Phong port by car, fifteen minutes drive to Cat Bi airport, half an hour drive to DoSon casino and an hour to Halong bay by boat With the height of eleven floors, the hotel offers very nice view of the harbor and a whole picture of the city

General manager provides leadership to meet organizational goals of profitability and service

He holds a major responsibility in developing and executing plans developed by the corporate owner (Hai Phong Tourism Company) Because of simple organization structure, the General manager in this hotel also plays the role of operation manager; he supervises all daily

operating activities

Maintenance team has 17 staff, they are responsible for equipment maintenance and

environmental control The team includes electricians, plumbers, air-conditioning contractors and general repair people As required, maintenance staff have to help housekeeping

attendants and assist with safety and security of personal comfort to the guest Housekeeper

is responsible for guestrooms and public areas, maintaining and controlling an endless

inventory, which includes linens, soap, guest amenities, live and artificial plants In-house laundry service also belongs to housekeeper department The department has 55 staff

Marketing and sales department has only 4 members and their duty is quite heavy: seeking for new market, forecasting demand, maintaining relationship with guest, working with

community, encouraging new guests These works are also shared by general manager and front office department

Front office directly deals with guest, is the place guests make reservation, register and check out The department has 20 staff

Food and beverage department, which consists of 29 staff, provides food and drink to hotel’s guests

Accounting department takes care of recording financial transactions, providing management with timely reports of operating results The department and front office cashier keeps track of all charges to guest accounts Responsibilities of the department also include payroll

preparation There are 8 staff in accounting department

Security department consists of 22 employees and it is responsible for guest safety

3.4.1.3 Front office department:

The front office department is central to hotel’s various functional and supportive components Front office and its staff are the central focus of the hotel’s interactions with its guests

Currently the department has 18 staff and 1 manager, 1 assistant manager The staff

includes three positions: receptionist, cashier, bellmen (Figure 3-1)

Receptionist has responsibilities of verifying guest reservations, registering guests, assigning rooms, distributing keys, answering telephones, communicating with housekeeping staff The duties of cashier include processing guest check out and providing change for guests

Bellmen are people who open the front door, lift and carry the baggage, familiarize guests with their new surroundings