Total Revenue Management (TRM): Case Studies, Best Practices and Industry Insights [1st ed.] 9783030469849, 9783030469856

This book explores total revenue management (TRM), an emerging concept in revenue management that incorporates existing

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Table of contents :
Front Matter ....Pages i-xxv
Total Revenue Management (TRM) (Marc Helmold)....Pages 1-12
Pricing Elements and Price Elasticity (Marc Helmold)....Pages 13-27
Pricing as Part of Corporate Strategy (Marc Helmold)....Pages 29-42
Pricing Strategies (Marc Helmold)....Pages 43-59
Supply Chain Management and Distribution Channels (Marc Helmold)....Pages 61-69
Value Drivers in Revenue Management (Marc Helmold)....Pages 71-77
Audits as Tool to Evaluate Value (Marc Helmold)....Pages 79-82
TRM for Services (Marc Helmold)....Pages 83-88
Creating the Value Proposition (Marc Helmold)....Pages 89-94
TRM in Companies with Financial Difficulties (Marc Helmold)....Pages 95-105
Pricing in the Automotive Industry (Marc Helmold)....Pages 107-113
Pricing in the Hospitality Industry (Marc Helmold)....Pages 115-127
Pricing in the Aviation Industry (Marc Helmold)....Pages 129-137
Pricing in the Healthcare Sector (Marc Helmold)....Pages 139-159
Pricing Strategy in the Beer Industry (Marc Helmold)....Pages 161-174
Outlook: Full Revenue Management (FRM) (Marc Helmold)....Pages 175-183
Back Matter ....Pages 185-191
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Management for Professionals

Marc Helmold

Total Revenue Management (TRM) Case Studies, Best Practices and Industry Insights

Management for Professionals

The Springer series Management for Professionals comprises high-level business and management books for executives. The authors are experienced business professionals and renowned professors who combine scientific background, best practice, and entrepreneurial vision to provide powerful insights into how to achieve business excellence. More information about this series at http://www.springer.com/series/10101

Marc Helmold

Total Revenue Management (TRM) Case Studies, Best Practices and Industry Insights

Marc Helmold IUBH International University Berlin, Germany

ISSN 2192-8096     ISSN 2192-810X (electronic) Management for Professionals ISBN 978-3-030-46984-9    ISBN 978-3-030-46985-6 (eBook) https://doi.org/10.1007/978-3-030-46985-6 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

The key is to set realistic customer expectations and then not to just meet them, but to exceed them. Preferably in unexpected and helpful ways. César Ritz, Entrepreneur and Hotel Owner

v

Acknowledgements

In today’s world, people, enterprises, organisations and countries are competing with each other and striving for creating sustainable revenues, profit and shareholder value. Revenue Management (RM) is a proven method and way to increase revenues by anticipating and forecasting market movements and demands, in order to increase revenues and incomes. A new and more integrative approach with the emphasis on centrally integrating processes, products and services to achieve the optimum revenues across the value chain has changed RM towards Total Revenue Management (TRM). TRM utilizes sophisticated, flexible, adaptable and digital tools in pricing, channels and distribution areas and must be incorporated into the strategy of an enterprise. I would like to mention many experts from several industries who supported this book indirectly. The book would not have been possible without the implicit and indirect support of practitioners, academics and master’s and doctoral students on. There are a couple of groups and people I would like to mention. Firstly, I would like to thank all experts, academics and students who inspired me during the past few years to write this book on optimising a company’s performance by applying TRM. In this context I would like to name Vara Prasad Kommeseti and Agne Aleksandraviciute, who graduated with excellence in the M.B.A. and Master’s courses of the IUBH University. Mr. Prasad Kommeseti is now TRM Manager in a five-star hotel in the Middle East. Additionally, TRM experts from automotive, healthcare, service and other industries contributed directly or indirectly to this negotiation guide. Bettina Fechtner gave me insights when visiting the Hilton Hotel in Berlin with my Master’s course class of the IUBH International University. Moreover, I would like to thank Springer International, especially Dr. Mahagonkar and Ms. Nitze, for the professional and smooth completion of this project. Ms. Nisha Becker helped me in proof-reading the book. Finally, I would also like to thank my family members Takako, Ayumi and Manami for their inspiration and patience. Berlin, Germany March 2020

Marc Helmold

vii

About the Book

Total Revenue Management (TRM) is the new and advanced concept of Revenue Management, combining traditional and new revenue management principles and tools across all revenue streams. TRM focuses on developing more intelligence and services around each customer segment by applying appropriate and holistic strategies. Born in the hospitality and aviation sector, the book outlines how this concept can be successfully transferred to other industries, thus gaining a competitive advantage and achieving optimal levels of revenues and profitability. TRM focuses on a bigger picture on the traditional profit perspective and revenue perspective. Revenue Management is coming from aviation and hospitality industries, proactively anticipating demand and creating the right strategy to achieve the optimal revenue streams. Other industries like the automotive or the health sector are understanding the advantages of revenue management and applying its principles too. The book shows how the new concept of TRM can be pursued in the optimal and innovative way in order to gain a competitive advantage. It shows how TRM can be applied in companies and provides several industry examples and case studies. It is necessary for any enterprise to have an automated and sophisticated TRM system in place which uses sophisticated revenue science to create the right pricing, channel and distribution strategies. Forward-looking predictive analytics, embedded in today’s advanced revenue management systems and supported by machine learning, help hoteliers uncover emerging trends and identify more profitable opportunities. A revenue management system powered by digital tools and machine learning does not only generate prices that flexibly adapt to any market alterations, it also anticipates these variations and important trends in advance. In a competitive hotel market, slight pricing changes can have a big impact on demand. Therefore, any hotelier operating without systems that can analytically decipher the impacts of a specific price change on occupancy and the resulting revenue benefit (or lack thereof) for their property is operating at a disadvantage. A wealth of industry insights, best practices, case studies and real-world examples are used to reveal the benefits of TRM in several industries and service sectors. Readers will gain comprehensive insights into the strategies, tools and principles of TRM, including existing and new revenue streams across the entire value chain. The transparent and holistic explanation of pricing strategies, segmentation methods and distribution principles enables the reader to apply TRM easily in their own company. ix

x

About the Book

Focusing on best-in-class examples on revenue management, the book is the ideal guide for any organization pursuing the optimum revenue management across all customer segments, distribution channels and value-added services.

Contents

1 Total Revenue Management (TRM)������������������������������������������������������    1 1.1 Revenue Management and Total Revenue Management (TRM)������    1 1.1.1 Revenue Management (RM)������������������������������������������������    1 1.1.2 Total Revenue Management (TRM) ������������������������������������    2 1.1.3 Process and Elements of TRM����������������������������������������������    4 1.2 Objectives of Total Revenue Management ��������������������������������������    5 1.3 Risks of Revenue Management��������������������������������������������������������    6 1.4 Competencies of a Revenue Manager����������������������������������������������    7 1.4.1 Definition of Competencies of a Revenue Manager ������������    7 1.4.2 Business and Economics Competencies ������������������������������    8 1.4.3 Analytical Skills��������������������������������������������������������������������    8 1.4.4 Understanding Complex Data and Statistics������������������������    8 1.4.5 Spreadsheet Competencies���������������������������������������������������    8 1.4.6 Operational Knowledge��������������������������������������������������������    8 1.4.7 Internet Application Knowledge ������������������������������������������    9 1.4.8 Project Management Skills ��������������������������������������������������    9 1.4.9 Communication and Strategic Skills������������������������������������    9 1.4.10 Exploring Interest and Willingness to Take Fair Risks ��������    9 1.4.11 Winning and Entrepreneurial Attitude����������������������������������   10 1.5 Case Study: Hilton Hotel������������������������������������������������������������������   10 1.5.1 Hilton Worldwide Holdings, Inc.������������������������������������������   10 1.5.2 Optimized Tools and Expert People for Revenue Management��������������������������������������������������������������������������   10 1.5.3 Using KPI to Measure Progress��������������������������������������������   12 References��������������������������������������������������������������������������������������������������   12 2 Pricing Elements and Price Elasticity����������������������������������������������������   13 2.1 Elements Affecting Pricing Strategies����������������������������������������������   13 2.2 Demand and Supply Theory ������������������������������������������������������������   14 2.2.1 Demand and Supply Curves��������������������������������������������������   14 2.2.2 Equilibrium and Market Clearing ����������������������������������������   15 2.3 Cost, Competition and Customers: 3Cs Pricing Model��������������������   16 2.4 Marketing Mix (7Ps) to Set Up a Price��������������������������������������������   17 2.4.1 Product����������������������������������������������������������������������������������   18 xi

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2.4.2 Promotion������������������������������������������������������������������������������   18 2.4.3 Price��������������������������������������������������������������������������������������   18 2.4.4 Place��������������������������������������������������������������������������������������   18 2.4.5 Process����������������������������������������������������������������������������������   18 2.4.6 Physical Evidence ����������������������������������������������������������������   19 2.4.7 People������������������������������������������������������������������������������������   19 2.5 Pricing Elasticity������������������������������������������������������������������������������   19 2.6 Guidelines and Recommendations for Pricing Strategies����������������   20 2.7 Case Study: 7Ps of Amazon��������������������������������������������������������������   21 2.7.1 Amazon’s History ����������������������������������������������������������������   21 2.7.2 Product Strategy��������������������������������������������������������������������   22 2.7.3 Price Strategy������������������������������������������������������������������������   22 2.7.4 Place Strategy������������������������������������������������������������������������   23 2.7.5 Promotion Strategy ��������������������������������������������������������������   24 2.7.6 People Strategy ��������������������������������������������������������������������   25 2.7.7 Process Strategy��������������������������������������������������������������������   25 2.7.8 Physical Evidence Strategy��������������������������������������������������   26 References��������������������������������������������������������������������������������������������������   27 3 Pricing as Part of Corporate Strategy���������������������������������������������������   29 3.1 Strategic Management����������������������������������������������������������������������   29 3.2 Strategic Pricing Triangle ����������������������������������������������������������������   30 3.3 Strategic Pricing Strategy������������������������������������������������������������������   30 3.4 Strategic Choice��������������������������������������������������������������������������������   32 3.5 Strategic Implementation������������������������������������������������������������������   34 3.5.1 Suitability, Acceptability and Feasibility������������������������������   34 3.5.2 Suitability������������������������������������������������������������������������������   35 3.5.3 Acceptability ������������������������������������������������������������������������   35 3.5.4 Feasibility������������������������������������������������������������������������������   35 3.6 Strategic Pyramid������������������������������������������������������������������������������   36 3.6.1 Mission Statement and Vision����������������������������������������������   36 3.6.2 Goals and Objectives������������������������������������������������������������   37 3.6.3 Core Competencies ��������������������������������������������������������������   38 3.6.4 Strategies������������������������������������������������������������������������������   38 3.6.5 Architecture��������������������������������������������������������������������������   39 3.6.6 Control and Execution����������������������������������������������������������   39 3.7 Case Study: Tesla������������������������������������������������������������������������������   40 References��������������������������������������������������������������������������������������������������   42 4 Pricing Strategies ������������������������������������������������������������������������������������   43 4.1 Pricing Concepts and Strategies��������������������������������������������������������   43 4.2 Value-Based Pricing Strategies ��������������������������������������������������������   44 4.3 Cost- or Product-Based Pricing Strategies����������������������������������������   44 4.4 Break-Even-Based Pricing Strategies ����������������������������������������������   45 4.5 Dynamic Pricing (DP)����������������������������������������������������������������������   46

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4.6 Competition-Based Pricing��������������������������������������������������������������   47 4.7 Premium-Based Pricing��������������������������������������������������������������������   47 4.8 Target-Return or Target Pricing��������������������������������������������������������   48 4.9 Everyday Low Pricing����������������������������������������������������������������������   48 4.10 Good Value Pricing ��������������������������������������������������������������������������   48 4.11 Freemium Pricing������������������������������������������������������������������������������   48 4.12 Loss Leader Pricing��������������������������������������������������������������������������   50 4.13 Skimming Pricing ����������������������������������������������������������������������������   51 4.14 Bundling Pricing ������������������������������������������������������������������������������   52 4.15 High-Low Pricing ����������������������������������������������������������������������������   53 4.16 Markup Pricing ��������������������������������������������������������������������������������   55 4.17 Case Study: Microsoft����������������������������������������������������������������������   56 References��������������������������������������������������������������������������������������������������   59 5 Supply Chain Management and Distribution Channels����������������������   61 5.1 Supply Chain Management (SCM)��������������������������������������������������   61 5.1.1 Definition of SCM����������������������������������������������������������������   61 5.1.2 Distribution Channels ����������������������������������������������������������   62 5.1.3 Suppliers ������������������������������������������������������������������������������   62 5.1.4 Manufacturers ����������������������������������������������������������������������   63 5.1.5 Intermediaries ����������������������������������������������������������������������   63 5.1.6 Direct Sales and Distribution������������������������������������������������   64 5.1.7 Indirect Sales and Distribution Through Distributors and Intermediaries����������������������������������������������������������������   64 5.1.8 Wholesalers and Traders ������������������������������������������������������   66 5.1.9 How Distribution Intermediaries Add Value������������������������   66 5.1.10 Value-Adding Contribution of Channel Partners������������������   66 5.2 Case Study: Apple����������������������������������������������������������������������������   68 References��������������������������������������������������������������������������������������������������   69 6 Value Drivers in Revenue Management������������������������������������������������   71 6.1 Definition of Value Drivers ��������������������������������������������������������������   71 6.2 Identification of Value Drivers����������������������������������������������������������   72 6.3 Case Study: Hilton Hotel’s Value Drivers����������������������������������������   76 References��������������������������������������������������������������������������������������������������   77 7 Audits as Tool to Evaluate Value������������������������������������������������������������   79 7.1 Definition of Audits��������������������������������������������������������������������������   79 7.2 Audit Types ��������������������������������������������������������������������������������������   79 7.2.1 Systems Audit ����������������������������������������������������������������������   79 7.2.2 Process Audits����������������������������������������������������������������������   80 7.2.3 Product Audits����������������������������������������������������������������������   80 7.2.4 Control Audit������������������������������������������������������������������������   80 7.2.5 Special Audits ����������������������������������������������������������������������   80 7.3 Case Study: BVG Audit��������������������������������������������������������������������   81 References��������������������������������������������������������������������������������������������������   82

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8 TRM for Services ������������������������������������������������������������������������������������   83 8.1 Characteristics of and Pricing Strategies for Services����������������������   83 8.1.1 Characteristics of Services����������������������������������������������������   83 8.1.2 Intangibility��������������������������������������������������������������������������   83 8.1.3 Inseparability������������������������������������������������������������������������   84 8.1.4 Variability������������������������������������������������������������������������������   84 8.1.5 Perishability��������������������������������������������������������������������������   84 8.1.6 Heterogeneity������������������������������������������������������������������������   85 8.1.7 No Ownership ����������������������������������������������������������������������   85 8.2 Pricing Strategies for Services����������������������������������������������������������   85 8.3 Case Study: Public Service Evaluation of City Hall in Freiburg������   85 References��������������������������������������������������������������������������������������������������   88 9 Creating the Value Proposition ��������������������������������������������������������������   89 9.1 Creating Value����������������������������������������������������������������������������������   89 9.2 Market Segmentation������������������������������������������������������������������������   89 9.3 Targeting ������������������������������������������������������������������������������������������   91 9.4 Differentiation����������������������������������������������������������������������������������   91 9.5 Positioning����������������������������������������������������������������������������������������   92 9.6 Case Study: Mercedes-Benz ������������������������������������������������������������   92 References��������������������������������������������������������������������������������������������������   94 10 TRM in Companies with Financial Difficulties������������������������������������   95 10.1 Müller’s Four Phases����������������������������������������������������������������������   95 10.2 Restructuring and Turnaround Strategies����������������������������������������   97 10.2.1 Definition of Restructuring ������������������������������������������������   97 10.2.2 Strategic Restructuring��������������������������������������������������������   98 10.2.3 Structural Restructuring������������������������������������������������������   99 10.2.4 Restructuring for Profit Improvement��������������������������������   99 10.2.5 Financial Restructuring������������������������������������������������������  100 10.3 Pricing Strategies and Other Actions Affecting Balance Sheet������  100 10.4 Pricing and Other Actions Affecting P&L��������������������������������������  102 10.5 Pricing and Other Actions Cash Situation��������������������������������������  102 10.6 Recommendations��������������������������������������������������������������������������  103 10.7 Case Study: Tesla’s Financial Performance������������������������������������  104 References��������������������������������������������������������������������������������������������������  105 11 Pricing in the Automotive Industry��������������������������������������������������������  107 11.1 Introduction to the Automotive Industry in Europe������������������������  107 11.2 Pricing in the Automotive Industry������������������������������������������������  108 11.3 Outlook of Automotive Pricing������������������������������������������������������  110 11.3.1 Shared Platforms and Manufacturing Sites������������������������  110 11.3.2 Shifting Design to Suppliers ����������������������������������������������  110 11.3.3 Redesign Distribution Channels ����������������������������������������  111 11.3.4 Using Digital Sales Channels���������������������������������������������  111 11.3.5 Dynamic Pricing Concepts ������������������������������������������������  111

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11.4 Case Study: Volkswagen Premium Pricing Strategy����������������������  111 References��������������������������������������������������������������������������������������������������  113 12 Pricing in the Hospitality Industry��������������������������������������������������������  115 12.1 Introduction to the Hospitality Industry������������������������������������������  115 12.2 Seven-Step Travel Process��������������������������������������������������������������  116 12.3 Trends in Hospitality Industry��������������������������������������������������������  120 12.3.1 Transformation in Hospitality Industry������������������������������  120 12.3.2 Health and Organic Food in Hospitality Industry��������������  121 12.3.3 Sustainability in Hospitality Industry ��������������������������������  122 12.3.4 Personalization in Hospitality Industry������������������������������  122 12.3.5 Intelligent and Smart Hotels in Hospitality Industry����������  122 12.3.6 AI in Hospitality Industry ��������������������������������������������������  122 12.3.7 Robots in Hospitality Industry��������������������������������������������  123 12.3.8 Millennials in Hospitality Industry ������������������������������������  123 12.3.9 Virtual Reality in Hospitality Industry��������������������������������  123 12.3.10 Augmented Reality in the Hospitality Industry������������������  124 12.4 Pricing Optimization and Dynamic Pricing������������������������������������  124 12.5 Case Study: Dynamic Pricing in Plaza Alexandria Hotel ��������������  126 References��������������������������������������������������������������������������������������������������  126 13 Pricing in the Aviation Industry ������������������������������������������������������������  129 13.1 Aviation Industry����������������������������������������������������������������������������  129 13.2 Dynamic Pricing in Aviation Industry��������������������������������������������  131 13.3 Revenue Strategies in Aviation Industry ����������������������������������������  132 13.3.1 Dynamic and Competitive Pricing��������������������������������������  132 13.3.2 Simplified Fare Structures��������������������������������������������������  133 13.3.3 Tired Pricing ����������������������������������������������������������������������  133 13.3.4 Rate Parity��������������������������������������������������������������������������  133 13.4 Case Study: Lufthansa Group ��������������������������������������������������������  134 13.4.1 Introduction and Service Portfolio of Lufthansa Group ����  134 13.4.2 Revenue Management Strategy������������������������������������������  135 References��������������������������������������������������������������������������������������������������  136 14 Pricing in the Healthcare Sector������������������������������������������������������������  139 14.1 Global Healthcare Expenditure������������������������������������������������������  139 14.2 Healthcare Sector in Europe ����������������������������������������������������������  140 14.3 Healthcare Care Continuum������������������������������������������������������������  142 14.3.1 Healthcare Providers in Europe������������������������������������������  144 14.3.2 Healthcare Equipment and Device Makers in Europe��������  145 14.4 Pricing Strategies for Drugs in Healthcare Industry ����������������������  147 14.5 Factors Affecting Pricing Strategies for Drugs ������������������������������  149 14.5.1 Health Outcomes and Reference Pricing����������������������������  149 14.5.2 Technology Innovations Reduce Pricing in Healthcare Industry ������������������������������������������������������������������������������  150 14.5.3 Need for More Cost-Efficiency in the Healthcare Industry��������������������������������������������������  152

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14.5.4 Universal Versus Single-Payer Healthcare��������������������������  153 14.5.5 Privatization and Outsourcing Trends��������������������������������  153 14.5.6 Simplified Regulatory Standards����������������������������������������  154 14.5.7 Home-Care Equipment and Services����������������������������������  154 14.5.8 Green Medical Services and Equipment����������������������������  154 14.5.9 Stricter Reimbursement Policies����������������������������������������  155 14.5.10 Consolidation in Healthcare Industry ��������������������������������  155 14.5.11 Broadening Development and Partnering ��������������������������  156 14.6 Case Study: Pfizer ��������������������������������������������������������������������������  156 References��������������������������������������������������������������������������������������������������  159 15 Pricing Strategy in the Beer Industry����������������������������������������������������  161 15.1 Historical Overview of Making Beer����������������������������������������������  161 15.2 Beverage Industry in Germany ������������������������������������������������������  162 15.2.1 Facts and Trends in the Global Beer Industry��������������������  162 15.2.2 Distribution Channels ��������������������������������������������������������  163 15.2.3 Organizational and Operational Changes ��������������������������  164 15.2.4 Innovation as Driver for Success����������������������������������������  165 15.3 Fierce Competition in Germany and Europe����������������������������������  166 15.4 Value Chain, Operations and Distribution��������������������������������������  168 15.5 Pricing Strategies in the Beer Industry ������������������������������������������  170 15.6 Case Study: BKSB as Enterprise in the Radeberger Group�����������  171 References��������������������������������������������������������������������������������������������������  174 16 Outlook: Full Revenue Management (FRM)����������������������������������������  175 16.1 The Future of Revenue Management����������������������������������������������  175 16.2 TRM as Integral Part of the Corporate Strategy ����������������������������  178 16.2.1 TRM as Central Role in Any Company������������������������������  178 16.2.2 Change, Innovation and Continuous Improvement in TRM��������������������������������������������������������������������������������  178 16.3 Moving from TRM to FRM������������������������������������������������������������  179 16.3.1 Revenue Management Is Moving from TRM Towards FRM������������������������������������������������������������������������������������  179 16.3.2 Role of TRM Will Expand to Become the Key Strategic Function ��������������������������������������������������������������  179 16.3.3 TRM Will Be Used by Other Industries ����������������������������  179 16.3.4 TRM Will Play the Central Role in the Enterprises and Revenue Managers ������������������������������������������������������  180 16.3.5 Revenue Managers Will Focus on Customer Data and Analysis������������������������������������������������������������������������  180 16.4 Case Study: AirCargo Revenue Management��������������������������������  180 References��������������������������������������������������������������������������������������������������  183 Glossary������������������������������������������������������������������������������������������������������������   185 Index������������������������������������������������������������������������������������������������������������������  189

List of Acronyms and Abbreviations

AI Artificial Intelligence ACRM Air Cargo Revenue Management BAR Best available Rate BMW Bayerische Motorenwerke BSC Balanced Score Card BKSB Berliner Kindl Schulthiess Brewery BVG Berliner Vekehrsgesellschaft CDP Corporate Dynamic Pricing ELDP Every Day Low Pricing EU European Union F & B Food and Beverage FMCG Fast Moving Consumer Goods FRM Full Revenue Management GDP Gross Domestic Product GDS Global Distribution System GOPPAR Gross Operating Profit Per Available Room HL Hectolitre ICT Information and Communications Technology NREVPAR Net Revenue generated Per Available Room PBM Pharmacy Benefit Managers PuL Profit and Loss P5F Porter’s Five Forces Analysis R & D Research and Development REVPAR Revenue Per available Room REVPASH Revenue per available seat per hour RM Revenue Management SCM Supply Chain Management SWOT Strengths, Weaknesses, Opportunities, Threats TRM Total Revenue Management VW Volkswagen WHO World Health Organization 3C Cost, Competition, Customers 4P Product, Price, Place, Promotion 7P Product, Price, Place, Promotion, People, Process, Physical evidence xvii

List of Figures

Fig. 1.1 Fig. 1.2 Fig. 1.3 Fig. 1.4

Objectives and criteria of TRM. (Source: Author’s source) ������������   3 TRM elements for optimum revenues. (Source: Author’s source) ��   4 Revenues of a market leader. (Source: Author’s source)������������������   6 Competencies of a revenue manager. (Source: Author’s source) ����������������������������������������������������������������   7

Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 2.4

Demand and supply. (Source: Author’s source)��������������������������������  14 Shifts in supply. (Source: Author’s source)��������������������������������������  15 3Cs model. (Source: Author’s source)����������������������������������������������  16 The marketing mix (7Ps model). (Source: Author’s own figure)����������������������������������������������������������������������������������������  17 Fig. 2.5 Price elasticity. (Source: Author’s source)����������������������������������������  19 Fig. 2.6 Price elasticities. (Source: Author’s source) ������������������������������������  20 Fig. 3.1 Strategic triangle. (Source: Author, adopted from Johnson and Scholes 1997) ����������������������������������������������������������������������������  31 Fig. 3.2 Generic strategies. (Source: Helmold et al. (2019), adopted from Porter (1985)) ��������������������������������������������������������������������������  33 Fig. 3.3 Strategy Clock from Bowman. (Source: Author, adopted from Johnson and Scholes 1997)������������������������������������������������������  33 Fig. 3.4 Strategic pyramid. (Source: Author’s source) ����������������������������������  37 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5 Fig. 4.6 Fig. 4.7 Fig. 4.8 Fig. 4.9

Pricing strategies. (Source: Author’s source)������������������������������������  44 Value-based pricing strategies. (Source: Author’s source)���������������  45 Cost-based pricing strategies. (Source: Author’s source) ����������������  45 Break-even point. (Source: Author’s source)������������������������������������  46 Break-even point. (Source. Author)��������������������������������������������������  46 EDLP example in supermarkets. (Source: Author)��������������������������  49 Freemium pricing example. (Source: Author)����������������������������������  49 Loss leader strategy. (Source: Author’s source)��������������������������������  51 Bundling effects. (Source: Author’s source) ������������������������������������  53

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Fig. 4.10 Bundling strategies. (Source: Author’s source)��������������������������������  53 Fig. 4.11 Product leader and filler. (Source: Author’s source) ������������������������  54 Fig. 4.12 Unit cost determination for defining the markup price. (Source: Author’s source) ����������������������������������������������������������������  55 Fig. 4.13 Markup price. (Source: Author’s source)������������������������������������������  56 Fig. 5.1 Supply chain management. (Source: Author’s own figure)��������������  62 Fig. 5.2 Business and customer distribution channels. (Source: Author’s source) ����������������������������������������������������������������  66 Fig. 5.3 Added value through distributors. (Source: Author)������������������������  67 Fig. 5.4 Added value and waste. (Source: Marc Helmold)����������������������������  67 Fig. 5.5 Added value of channel members����������������������������������������������������  68 Fig. 6.1 Value drivers add value. (Source: Marc Helmold)����������������������������  72 Fig. 6.2 Identification of value drivers add value. (Source: Marc Helmold) ������������������������������������������������������������������  73 Fig. 6.3 Superior value drivers add value. (Source: Author’s source)������������  74 Fig. 6.4 Matching value drivers. (Source: Author’s source)��������������������������  75 Fig. 6.5 Inferior value drivers. (Source: Author’s source)������������������������������  75 Fig. 6.6 Hilton’s value drivers������������������������������������������������������������������������  76 Fig. 7.1 Audit types����������������������������������������������������������������������������������������  80 Fig. 7.2 BVG audit. (Source: Author’s source)����������������������������������������������  81 Fig. 8.1 Service characteristics����������������������������������������������������������������������  84 Fig. 8.2 Service characteristics for public services. (Source: Author’s source, adapted from Samara 2018)��������������������  86 Fig. 9.1 Value proposition. (Source: Author’s source) ����������������������������������  90 Fig. 9.2 Segmentation. (Source: Author)��������������������������������������������������������  90 Fig. 10.1 TRM in the context of the four phases of Müller. (Source: Helmold et al. 2019, adapted from Müller’s four phases model. Müller 1986)��������������������������������������������������������������  96 Fig. 10.2 Types of restructuring. (Source: Author’s source)����������������������������  98 Fig. 10.3 Balance sheet������������������������������������������������������������������������������������  100 Fig. 10.4 Balance sheet effects on pricing and revenue management��������������  101 Fig. 10.5 P&L sheet effects on pricing and revenue management������������������  102 Fig. 11.1 European sales of cars in 2018. (Source: Statista 2020, Automotive Sales)����������������������������������������������������������������������������  108 Fig. 11.2 Volkswagen Group segmentation and pricing strategies. (Source: Author’s source) ����������������������������������������������������������������  112 Fig. 12.1 Travel industry. (Source: European Commission)����������������������������  116 Fig. 12.2 Most popular countries for travel in Europe. (Source: Statista) ������  117

List of Figures

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Fig. 12.3 Reasons for travelling. (Source: Author’s source)����������������������������  118 Fig. 12.4 Seven-step travel process. (Source: Author’s source) ����������������������  120 Fig. 12.5 Pricing screen in the hospitality sector. (Source: Author’s source) ����������������������������������������������������������������  124 Fig. 12.6 Pricing strategies in the hospitality sector. (Source: Author’s source) ����������������������������������������������������������������  125 Fig. 13.1 Aviation industry in Europe in 2018. (Source: Statista (2020)) ������������������������������������������������������������������  130 Fig. 13.2 Pricing screen in the airline sector. (Source: Lufthansa)������������������  131 Fig. 13.3 Pricing strategy in the airline sector. (Source: Author’s source) ����������������������������������������������������������������  133 Fig. 13.4 Lufthansa’s revenue strategy������������������������������������������������������������  135 Fig. 14.1 Global healthcare expenditure. (Source: World Health Organisation (WHO 2020))��������������������������������������������������������������  140 Fig. 14.2 Healthcare expenditure in the European Union. (Source: European Commission (2020))������������������������������������������  141 Fig. 14.3 Healthcare continuum. (Source: Author’s Source) ��������������������������  142 Fig. 14.4 Healthcare continuum process from birth to end-of-life care. (Source: Author’s Source)����������������������������������������������������������������  143 Fig. 14.5 Healthcare equipment supplier’s market share in Europe. (Source: European Commission (2020))������������������������������������������  146 Fig. 14.6 Pricing strategies in healthcare. (Source: Author)����������������������������  149 Fig. 14.7 Global Healthcare Expenditure Forecast������������������������������������������  158 Fig. 15.1 Beer market share in Germany. (Source: Own Source, adapted from Statista (2019)������������������������������������������������������������  166 Fig. 15.2 Beer production and consumption in Europe. (Source: German Brewery Association (2020))��������������������������������  167 Fig. 15.3 Value chain in the beer sector. (Source: Author’s source)����������������  168 Fig. 15.4 Beer value chain including channel partners. (Source: Author’s source)����������������������������������������������������������������������������������������������  170 Fig. 15.5 Pricing strategies in the beer industry. (Source: Author’Source) ������������������������������������������������������������������  171 Fig. 15.6 Beer production process. (Source: Author’s source)������������������������  173 Fig. 15.7 MBA students of IUBH Internationale Hochschule at BKSB. (Source: Author’s source) ������������������������������������������������  173

List of Tables

Table 2.1 The ten commands for the right pricing strategy����������������������������  21 Table 3.1 Elements in the strategic analysis��������������������������������������������������  32 Table 14.1 Trends in the European healthcare industry ����������������������������������  156 Table 15.1 Concentration in beer industry ������������������������������������������������������  172 Table 16.1 Trends in FRM�������������������������������������������������������������������������������  181

xxiii

About the Author

Marc  Helmold, (M.B.A.)  is Professor at IUBH Internationale Hochschule in Berlin. He teaches Performance Management, Lean Management, Procurement, General Management, Strategic Management and Supply Chain Management to bachelor’s and master’s degree students as well as M.B.A. students. From 1997 until 2017, he had several positions in top management positions in the automotive and railway industry. Between 1997 and 2010, he worked in several companies like Ford, Ford-Mazda Japan, Porsche and Panasonic Automotive in managerial functions and executed lean workshops throughout the value chain. From 2013 until 2016, he was the General Manager of Bombardier Transportation in China and led the sourcing and spare parts sales activities. Since 2016, he is Professor at the IUBH and has his own consultancy. In this capacity, he improves performance of companies.

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1

Total Revenue Management (TRM)

Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves. Steve Jobs (1955–2011)

1.1

 evenue Management and Total Revenue R Management (TRM)

1.1.1 Revenue Management (RM) Revenue management (RM) is the concept of systematically increasing the revenue streams in an organization. The concept utilizes systematic analytics that predict consumer behaviour at the micro-market levels and optimize product availability and price to maximize revenue growth (Wikipedia 2020). RM is mainly applied in industries like aviation or hospitality area with service offerings. RM is associated with earnings, profits and any sort of income by the use of smart and intelligent tools or algorithms. It means the strategic orientation of product or service in the market and the long-term planning of sales and sales activities (Gallego and Topaloglu 2019). This includes cost calculations such as break-even calculations, price floor calculations, capacity analyses and sales costs. The ultimate goal is to increase earnings (Landmann 2019). Major objectives in RM are: • Maximizing revenue streams • Optimizing customer spending • Developing a revenue management culture RM is based on thorough market and competitive analyses and the product and market-oriented pricing. RM is therefore also closely linked to the marketing and © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 M. Helmold, Total Revenue Management (TRM), Management for Professionals, https://doi.org/10.1007/978-3-030-46985-6_1

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sales activities of an enterprise (Gallego and Topaloglu 2019). The basis for this is the systematic and continuous collection of data related to empirical, effective and future market developments as well as intelligent and dynamic pricing strategies. RM is a concept pursued in many industries, e.g. hospitality or aviation sectors. Patrick Landman, founder of the Xotels Group, defines in this context revenue management in the hospitality as “sell the right room to the right customer at the right time at the right place through the right distribution channel with the best commission efficiency” (Landmann 2019).

1.1.2 Total Revenue Management (TRM) In recent years, it is visible that innovative and world-class companies focus at revenue management in a holistic way across all departments or functions. The aim of this is to include the entire value chain and all stakeholders to increase revenues in the organization. As a consequence, the term revenue management has been changed into the concept of total revenue management or TRM. David Warman, executive of the Four Seasons Hotels and Resorts, defines total revenue management in the hospitality sector as the “application of RM principles and tools across each revenue generating department like rooms, function space, catering, restaurant, developing more intelligence around each customer segment to apply right strategies and looking at a bigger picture on profit perspective rather and revenue perspective as well” (Noone et  al. 2017). TRM normally utilizes sophisticated artificial intelligence methodologies and digital instruments for simultaneous and dynamic, mostly computer-­based pricing and capacity control. It is critical to have an automated revenue management system in place which uses sophisticated revenue science to produce accurate pricing, channel and distribution decisions (Landmann 2019). TRM means also that the function is the centre of all activities with the aim to anticipate customer desires and to grow on a long-term basis with all thinkable and available products or services. Moreover, TRM targets the entire value chain and all activities. Finally, all other departments and stakeholders must be aligned towards this corporate strategy and philosophy (Landmann 2019). Forward-looking predictive analytics, embedded in today’s advanced revenue management systems and supported by machine learning, help hoteliers uncover emerging trends and identify more profitable opportunities. A revenue management system powered by machine learning not only generates prices that flexibly adapt to any market alterations by anticipating these variations in advance. In a competitive hotel market, slight pricing changes can have a big impact on demand. Therefore, any hotelier operating without systems can analytically decipher the impacts of a specific price change on consumption and the resulting revenue benefit (or lack thereof) for their property. Figure 1.1 shows the objectives of TRM, also defined as the 8R principle. The eight Rs are to make the right product or service at the right time in the right quantity for the right customers (channels) at the right quality with the right employees at the right cost with the right tools.

1.1  Revenue Management and Total Revenue Management (TRM)

3

Total Revenue Management (TRM) Objectives

Criteria

1. Right Part/Service



Needed Part/Service

2. Right Time



When requested

3. Right Channels



Customer Place

4. Right Quantity



Expected Quantity

5. Right Quality



Zero Defect

6. Right Employees



Qualification

7. Right Price



Optimal Cost

8. Right Tools



Algorithms, digital Tools

Fig. 1.1  Objectives and criteria of TRM. (Source: Author’s source)

In the following section, there are three additional definitions about revenue management and its characteristics of executives of the InterContinental Hotels Group (Noone et al. 2017). Traditional RM has been all about really understanding the money that a room can make. And now we’re expanding that to think about where it is sold and the channel that’s sold and the costs associated, so it’s about profit and not just rooms. So rather than just thinking about transient room revenue, we’re expanding that to think about all segments, about all products that we’re selling and about profit rather than revenue. Craig Eister, InterContinental Hotels Group

“Hotels are not just rooms anymore”, she stated, adding that hotels in the luxury segment build a stronger brand reputation and are more successful, if they have great food and beverage (F&B) concepts and have the function space capacity to cater to profitable high-end events. She also noted that these types of hotels, spa, golf and retail become increasingly important, highlighting the revenue and profit contribution that non-room revenue streams can make: “These ancillary revenue streams become increasingly significant, which is why now we have enough demand to innovate with industry partners, and work internally to invest in systems, processes, and people”. Jeannette Ho, FRHI Hotels and Resorts

I think the holy grail of THRM is to better meet the total needs of the customer, thereby capturing a higher share of the customer’s wallet in the most profitable way possible and, at the same time, managing inventory. It’s sleeping rooms and meeting space, and it could also be time spent or money spent in a casino. It could include food and beverage outlets; it could include spa, and golf, and ski slopes, beach—anywhere that we can inventory something and sell something to our guests. So there’s the revenue and profit side, there’s the inventory side, and there’s the total customer side. Sharon Hormby, Marriott International

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1.1.3 Process and Elements of TRM TRM is the holistic concept of using sophisticated tools and methods to proactively anticipate and forecast customer values and needs. The needs and values incorporate all services and products offered by the enterprise. It also includes future business models, which might lead to revenues. The strategic objective is to put TRM into the centre of the corporate strategy and organization, so that all activities, products and processes can be ideally aligned in order to achieve the optimum market position. The process of TRM must always start from the 3Cs model as outlined in Fig. 1.2. The three categories of the 3Cs model will be described in detail in the next chapter and consist of cost, competition and customer elements. As next step, it is important to understand the price elasticity, the corporate strategy and the suitable pricing strategies. Price elasticity will be described in Chaps. 2, 3 and 4. Other elements are sales, market power, market share and other market aspects (e.g. cultural specifics). Digital tools, big data analytics, modelling systems and anticipative forecast and pricing models supplement the TRM processes. TRM must always focus on the customer and on value-added services or products, as well as the continuous optimization of cost across the value chain including channel partners and the supply chain. Revenue management is a much-discussed concept in hospitality but is more and more used in other industries. Revenue management is suitable for many sectors and incorporates some aspects: • Businesses with a limited capacity, e.g. certain number of flight seats, limited numbers of tables in restaurant or only 300 rooms in the hotel. • Perishable inventory, e.g. if the room goes empty one night, the company loses the opportunity to sell it for that night.

Optimum Reveue Management Strategy (TRM)

Cost Price Elasticity

Customer Value

Sales

Pricing Strategy

Customer Needs

Market Power

Market Share

Competition

Customers big data, analycs, forecasts, modelling, ancupave, pricing

Fig. 1.2  TRM elements for optimum revenues. (Source: Author’s source)

Market Aspects

1.2  Objectives of Total Revenue Management

5

• Segmentable demand opportunities, e.g. family travellers, business travellers and leisure travellers value the product differently. • Time variable and seasonable demand, e.g. at a business hotel, weekdays are busy, whereas weekends are slow. • A low cost of sale (compared to the cost of operating the hotel, the variable cost associated with booking one more room is relatively low).

1.2

Objectives of Total Revenue Management

TRM must be pursued in an optimal and innovative way in order to gain a competitive advantage to maximize revenue streams. Therefore, it is necessary for any enterprise to have an automated and sophisticated TRM system in place which uses sophisticated revenue science to create the right pricing, channel and distribution strategies. Forward-looking predictive analytics, embedded in today’s advanced revenue management systems and supported by machine learning, help hoteliers uncover emerging trends and identify more profitable opportunities. A revenue management system powered by digital tools and machine learning not only generates prices that flexibly adapt to any market alterations by anticipating these variations in advance. In a competitive hotel market, slight pricing changes can have a big impact on demand. The major objectives of TRM can be summarized as follows: • • • • • • •

Maximizing all revenue streams Maintaining a profitable environment Creating value add throughout all phases of the value chain Putting customers and their needs into the centre of any company Focusing on products and services that lead to acceptable revenues Enhancing areas for potential revenue increases Developing a company-wide total revenue management culture

Figure 1.3 shows the product life cycle from introduction, growth over maturity and decline phase (Meffert et al. 2018). When the company finds and develops a new product idea, product development starts. During product development, sales are zero, and the company’s investment costs increase. In the introduction phase, sales slowly grow as the product is introduced in the market. Profits are still non-­ existent, because the heavy expenses of the product introduction overweigh sales. After the introduction phase, the growth phase will follow. The growth phase is a period of rapid market acceptance and increasing profits. A company must aim to achieve this stage as soon as possible in order to increase revenues. After the growth phase, the maturity phase follows. In this phase, sales growth slows down because the product has achieved acceptance by most potential buyers. Profits level off or decline because marketing outlays need to be increased to defend the product against competition. The last phase is the decline phase, in which finally sales fall off and profits drop (Meffert et al. 2018).

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Revenues

Product Life Cycle – Market Leader

Emphasise usage based fees. Increase complexity and add variants. Gradually lower prices for mass production attraction. Introduction of complex price structures to decrease price transparency. Bundling. Add more derivatives. Differentiate offerings and pricing

Keep structural complexity low, price levels are high. Flat fees. Low complexity.

Early Innovation

Growth

Maturity

Simple Pricing

Harvesting profits with high price strategies. Increase value and add services/produ cts with features to buffer decline.

Decline

Time

Differential Pricing

Fig. 1.3  Revenues of a market leader. (Source: Author’s source)

1.3

Risks of Revenue Management

Revenue management is an excellent concept of increasing revenues across all services and products. There are, however, also some risks associated with revenue management. • Perceptions of demand characteristics are often based on fundamental concepts of buyer’s and customer’s behaviour. These, again, often reflect historical patterns of demand. However, the past may not be a good indicator of the future. • Demand forecasting, at its best, is still an aggregation of multiple segments that could be desegregated and targeted for higher revenue. • Demand can be influenced, not merely be known. It could, therefore, be more profitable to understand the buyer attributes of demand. • Standard RM tools, such as demand forecasting and overbooking to manage uncertainty, may not be the only tools on hand to obtain optimal revenues. • Relying too much on algorithms and tools might lead to wrong business decisions in the long term. • RM is a concept and not a tool. Enterprises must focus on customer satisfaction and place the customer into the centre of all activities. • RM must integrate all functions and departments. Alignment is the key responsibility of management. If not aligned, RM might lead into wrong directions.

1.4  Competencies of a Revenue Manager

7

• RM experts must have certain competencies and skills. Although mathematical and statistical skills are important, revenue managers must have complementary soft skills, e.g. team building, project management and communication skills.

1.4

Competencies of a Revenue Manager

1.4.1 Definition of Competencies of a Revenue Manager Any competency analysis starts with developing the job profile. In this stage, it is important to identify knowledge, skills, abilities, attitudes and behaviours associated with successful performance in the role of a revenue manager. This is determined by revenue management department and communicated to the human resource function (recruitment and selection). Revenue managers require some generic hard and soft skills and competencies, which are defined in the following subchapters. Figure 1.4 summarizes the most important skills a revenue manager must acquire. There are many ways to become a revenue manager. Many business

Fig. 1.4  Competencies of a revenue manager. (Source: Author’s source)

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schools offer part-time or full-time programs in hospitality management, aviation or healthcare management.

1.4.2 Business and Economics Competencies Revenue managers understand the world they operate in. How do currency exchange fluctuations affect cross-continental demand? Why are the dynamics of the market as they are? A good revenue manager reads up on economic news. Economic newspapers should be in their briefcase for a quick update on the way to work.

1.4.3 Analytical Skills Revenue management requires strong analytical skills. Revenue managers must be able to cross-analyse big data, detect trends and variations and grasp and understand complex data models.

1.4.4 Understanding Complex Data and Statistics Data, mathematics and statistics are the basis of all analyses. Subjects like statistics with weighted average, standard deviation and variance are important to understand for a revenue manager. A revenue manager does not necessarily be a mathematician, but she/he should have a basic understanding of statistics and modelling concepts. Meanwhile, there are modelling IT systems available that develop trend analyses, generate forecast models or create pricing models.

1.4.5 Spreadsheet Competencies This is where it all happens for most revenue managers. Excel or any other spreadsheet application is used to recompile data into analysable statistical overviews and legible graphs. A real revenue manager is at least capable, besides making basic formulas of developing pivot tables or dynamic tables, macros, dynamic graphs, conditional formatting, lookup references and data filters.

1.4.6 Operational Knowledge Revenue managers have strong advantages if they come from a business background and have some experience. Revenue management comprises of steering a great variety of distribution channels, online reservation systems and possibly a revenue management system. These systems have to be well understood and managed. A revenue

1.4  Competencies of a Revenue Manager

9

manager should know a lot more about systems and applications in general than your average employees in the business.

1.4.7 Internet Application Knowledge Nowadays online sales and dynamic pricing models represent a high share of revenues in industries like hospitality or aviation. The influence of the Internet is ever growing, and other segments like meetings and incentives sales have also made their introduction into ecommerce. A revenue manager needs to know what is going on online, where is the market going, which channels and models are coming up and what are their implications for online travel distribution.

1.4.8 Project Management Skills Revenue management must be centred in the value of the enterprise’s value chain and integrate all functions and departments. Therefore, revenue managers must have in-depth and advanced project management skills including planning, leadership, contract management, risk management, scheduling and negotiation skills.

1.4.9 Communication and Strategic Skills Besides being analytical, it is important that a revenue manager is capable of presenting and defending his model and decisions, based on calculation, in front of the executive management team and other stakeholders. Revenue managers should smoothly communicate ideas and plans based on experience and facts.

1.4.10 Exploring Interest and Willingness to Take Fair Risks Revenue management is business analysis and comes down to taking informed decisions based on statistical trends. Still there is a certain crystal ball part to the job as one never is truly sure about what the future has in mind for us. By using applied statistics, it is possible to define the risk levels and to reduce the risk in the decisions made. Revenue managers must experiment and take risk, without fear, with new strategies and techniques to analyse optimum outcomes. Samples dates need to be tested, decisions logged and outcome measured. A revenue manager who does not have the drive to explore new opportunities, and prefers the status quo, could very likely mean the decay and downfall of your hotel in the long run. We need to stay competitive by being ahead of the pack.

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1.4.11 Winning and Entrepreneurial Attitude Revenue managers must think like entrepreneurs, maybe more of a personality characteristic than a skill, but a good revenue manager has the drive to win. She/he must want to outperform the competition, constantly looking to improve revenues and results.

1.5

Case Study: Hilton Hotel

1.5.1 Hilton Worldwide Holdings, Inc. Hilton Worldwide Holdings, Inc., formerly Hilton Hotels Corporation, is an American multinational hospitality company that manages and franchises a broad portfolio of hotels and resorts. Founded by Conrad Hilton in May 1919, the corporation is now led by Christopher J. Nassetta. Hilton is headquartered in Tysons Corner, Virginia. As of March 31, 2019, its portfolio includes 5757 properties (including timeshare properties) with 923,110 rooms in 113 countries and territories, including 689 that are managed and 4947 that are franchised, with the combined managed and franchised properties having a total of 893,494 rooms, in addition to 68 that are owned or leased (including 59 that are wholly owned or leased, 1 that is owned by a consolidated non-wholly owned entity, 2 that are leased by consolidated variable interest entities (VIEs) and 6 that are owned or leased by unconsolidated affiliates). Prior to their December 2013 IPO, Hilton was ranked as the 36th largest privately held company in the United States by Forbes. Hilton has 15 brands across different market segments, including Conrad Hotels and Resorts, Canopy by Hilton, Curio - A Collection by Hilton, Hilton Hotels and Resorts, DoubleTree by Hilton, Embassy Suites Hotels, Hilton Garden Inn, Hampton by Hilton, Homewood Suites by Hilton, Home2 Suites by Hilton, Hilton Grand Vacations, Waldorf Astoria Hotels and Resorts, Tru by Hilton, Tapestry Collection by Hilton and Motto by Hilton. On December 12, 2013, Hilton again became a public company, raising an estimated $2.35 billion in its second IPO. At the time, The Blackstone Group held a 45.8 percent stake in the company. In October 2016, China’s HNA Group agreed to acquire a 25 percent equity interest in Hilton from Blackstone. The transaction was expected to close in the first quarter of 2017. Hilton’s largest stockholders were until 2018 HNA Group, Blackstone and Wellington Management Group, which own 25 percent, 15.2 percent and 6.7 percent of Hilton common stock, respectively. Hilton Hotels are now a standalone company (Wikipedia 2020).

1.5.2 O  ptimized Tools and Expert People for Revenue Management Excellence in revenue management is considered in the Hilton Management Services as the key success factor for outstanding performance and world class services. Revenue management is pursued across all functions and throughout the value chain

1.5  Case Study: Hilton Hotel

11

combined with robust innovation, smart concepts, expert people and suitable tools and resources (Hilton Management Services 2020). Hilton uses a revue management tool called PEAK, which is Hilton’s proprietary tool. It encapsulates accurate forecasting, efficient pricing and proficient planning and engagement and is what fuels the core of Hilton’s revenue management. The tool uses modern concepts of revenue management by analysing historic trends and by dynamically predicting future forecasts and scenarios (Hilton Management Services 2020). The tool is also used to establish performance targets and to set future expectations for hotels, uniting corporate support groups to take advantage of the full power of the Hilton Commercial Engine with customized design and deployment plans to guide hotels to achieving the best mix. A comprehensive depth chart of support behind the regional director team includes people and resources dedicated to specific areas, including distribution channel analytics, competitive analytics, pricing innovation, revenue management training, change management and more. In order to integrate a revenue management system that produces enhanced performance, it is essential to review and optimize each and every one of your revenue sources. These include, but aren’t limited to, the following: Rooms The central revenue driver of any hotel, optimization of room receipts is of course critical to the success of any enterprise in the hospitality sector. Hilton permanently investigates on questions like: • Is the room revenue performance as good as it can be? • Are periodic reviews with new industry developments executed, with the goal of driving higher revenues? • Where can improvements specifically be made? • Where can business and revenue streams diversified and extended? • Are elements like revenues, profitability and growth prioritized? • Are suitable KPI used, e.g. revenue per available room (REVPAR), net revenue per available room (NREVPAR) and gross operating profit per available room (GOPPAR)? Food and Beverage Food and beverage come from three distinct but interrelated areas like hotel restaurant, bar and room service. A review may include a guest survey, which can indicate how satisfied the patrons are and how it can improve. The more specific it is, the more insights the hotel can glean that can power a revitalized strategy. For instance, consistent feedback on food and drinks’ quality, price points, service, ambience, overall experience and potential promotions can prove crucial in the success of the food and beverage division. Conferencing and Events Conferencing and events are a great way to boost revenues of hotels and attract a constant stream of professionals and business travellers.

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Other Services Other services can be sightseeing tours and special events like weddings or golf tours. These services can be ideally utilized to diversify the revenue and service portfolio in a hotel.

1.5.3 Using KPI to Measure Progress There are certain KPI which can be used to measure performance as shown below. Based on these KPI, suitable targets can be set: • • • • • • • • •

Revenue per available room (REVPAR) Net revenue per available room (NREVPAR) Gross operating profit per available room (GOPPAR) Time per table turnaround Number of customers in restaurants Seating efficiency and turn of tables Basket and package analysis Staff productivity (front of the house and kitchen) Developing menu according to the menu engineering method

References Gallego, G., & Topaloglu, H. (2019). Revenue management and pricing analytics. Heidelberg: Springer. Hilton Management Services. (2019). Revenue management. Retrieved 4 Jan 2020. https://www. managementservices.hilton.com/en/support-services/revenue-management/. Landmann, P. (2019). The future is all about total revenue management. Insights. eHoteliers. https:// insights.ehotelier.com/insights/2019/07/15/the-future-is-all-about-total-revenue-management/. Noone, B. M., Enz, C. A., & Glassmire, J. (2017). Total hotel revenue management: A strategic profit perspective. Cornell Hospitality Report, 17(8), 3–15. Meffert, H., et  al. (2018). Marketing: Grundlagen marktorientierter Unternehmensführung Konzepte – Instrumente -Praxisbeispiele. Wiesbaden: Springer Gabler. Wikipedia. (2020). Hilton hotel group. Retrieved 3 Jan 2020. https://en.wikipedia.org/wiki/ Hilton_Worldwide.

2

Pricing Elements and Price Elasticity

Logic will get you from A to B. Imagination will take you everywhere. Albert Einstein (1879–1955)

2.1

Elements Affecting Pricing Strategies

The optimal pricing strategy of a company’s product or service range is a complex process and must be part of its (total) revenue management. Pricing can be defined in this context as the way of finding an optimum price for products and services offered. This strategic process is combined with the other revenue, pricing, distribution channel, economic pattern (supply and demand), competition, market demand and product or service characteristics. Pricing strategies help enterprise to determine prices that maximize revenues, profits and shareholder value while considering consumer and market demand. Pricing strategies have to be established in an analytical, systematic and optimal way to meet the customers’ expectations. All pricing concepts suggest to add value to any product or service. Value is something for which the customers are willing to pay for. In contrast to services, products are tangible and visible, so that the customers have a good understanding of what they can buy. Services are intangible and variable, so that certain elements must be incorporated when defining the appropriate pricing strategy. Kayapehlivan recommends certain elements to be considered in the hospitality field (Kayapehlivan 2015): • In order to match prices with demand and supply, differentiate product offer. • Products are a combination of price and value: develop different products to target different types of clients with different needs.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 M. Helmold, Total Revenue Management (TRM), Management for Professionals, https://doi.org/10.1007/978-3-030-46985-6_2

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2  Pricing Elements and Price Elasticity

• Guests should clearly see the difference between room features: differentiate them in your inventory; create products with different benefits and characteristics. • Sell products in a different way. • Create physical rate fences. • Have enough rates and product variations available to reach all submarket segments and consumers. • Evaluate the needs and wants of your guests. • Ensure clear differentiation through your room type descriptions in your distribution systems, brochures and website.

2.2

Demand and Supply Theory

2.2.1 Demand and Supply Curves The demand and supply pricing theory is the pricing concept used in economics. The concept of market is usually defined as a number of buyers and sellers of a given good or service that are willing to negotiate in order to exchange those goods (see Fig. 2.1). Demand (D) is the global market value that expresses the purchasing intentions of customers. The demand curve shows the quantity of a specific product that individuals or society are willing to buy according to its price and their income. This curve shows an inverse relationship between price and quantity demanded giving it a downward slope. The reason why this happens is known as the law of demand—ceteris paribus—and considering ordinary goods, the higher the price, the lower the quantity demanded and vice versa. On the other side (S), supply is the set of offers made in the market for the sale of goods and services. The supply curve records the location of the points corresponding to the amount offered for a particular good or service at the different prices. This curve shows a direct relationship between price and quantity supplied, giving it an upward slope. The reason why this Fig. 2.1  Demand and supply. (Source: Author’s source)

Price

Supply (S)

Equilibrium

Price (P1)

Demand (D)

Quanty (Q1)

Quanty (Demand)

2.2  Demand and Supply Theory

15

happens is known as the law of supply—ceteris paribus—and considering ordinary goods, the higher the price, the higher the quantity supplied and vice versa.

2.2.2 Equilibrium and Market Clearing The demand and supply curves define the market clearing, that is, where the demand of the products meets its supply. At this point, we have what is known as an equilibrium point, with its corresponding price and quantity of equilibrium. It is possible for disequilibrium to occur when the amount demanded does not equal the amount supplied. There are a series of scenarios in which this can happen. In situations in which the quantity demanded is higher than the quantity supplied, the market is suffering from an excess demand. When the opposite occurs, we will be talking about an excess supply. Prices will have to gradually adjust through different market mechanisms until the equilibrium price is met. Figure 2.1 shows the supply (S), the demand (D) and the equilibrium price and quantity. A movement refers to a change in either the demand or supply curve, which occurs when a change in the quantity is caused by a change in price and vice versa. An increase in the price of a good or service would cause a movement along its demand curve, decreasing the amount demanded. In the case of supply curves, as we previously saw, an increase in price would also increase quantity. It’s important to understand that movement along the curves does never actually change the equilibrium point, as movements along the curves do not affect it. In the adjacent figure, we can see a price increase (let’s say, because an increase of VAT), which causes a movement along the demand curve. Sometimes the market suffers from changes due to a displacement (shift) of the demand and/or the supply curve. This shift in curves will always result in a new market equilibrium. When a shift occurs, the curve moves, meaning that for each price there will be a new different quantity being demanded or offered. This curve shifts can occur in two directions, upwards Fig. 2.2  Shifts in supply. (Source: Author’s source)

Price

Supply (S2) Supply (S1)

Price (P2)

Price (P1)

Demand (D)

Quanty (Q2)

Quanty (Q1)

Quanty (Demand)

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2  Pricing Elements and Price Elasticity

and downwards or, if preferred, rightwards and leftwards. Depending in what curve we are considering, one is equal to another one. Demand curves may shift for multiple reasons, for example, an increase in the consumers’ level of income would increase the aggregate demand of a normal good for each price and hence shift the demand curve to the right (left figure). Other examples would include changes in the price of competitors (substitute goods), changes in complementary goods, tastes, expectations, number of buyers, seasonality, etc. Supply curve shifts may be also motivated by a variety of different reasons, such as input prices: an increase on the price of paper would shift the supply curve to the left, since the same quantity would be sold at a higher price (right figure). Other variables that can shift the supply curve include technological progress, expectations, number of sellers, etc. Figure  2.2 shows a change of the supply from the supply curve S1 to S2.

2.3

Cost, Competition and Customers: 3Cs Pricing Model

The 3Cs model is a strategic pricing model, which is used in industry and service sectors to establish the right pricing strategy by looking at determinants and at the factors needed for success. It was developed by Japanese organizational theorist Kenichi Ohmae (Helmold and Samara 2016). The 3Cs model points out that a strategist should focus on three key factors for success. In the construction of a business strategy, three main elements must be taken into account: • The customers • The competition • The cost or company’s cost Only by integrating these three elements a sustained and long-term competitive advantage can be developed. Ohmae refers to these key factors as the three Cs 3-C Model

Customers Competors

Costs

3-C Pricing Model3 Nature of the Market and The actual amount of fixed

Percepon of Value of the Product or Service are the key success. No demand above this Price.

Industry.

Competors´ Strategies and Prices are important Elements for establishing the right Price.

Fig. 2.3  3Cs model. (Source: Author’s source)

and variable cost to create the product or service.

No Profits below this Price.

2.4  Marketing Mix (7Ps) to Set Up a Price

17

(Meffert et al. 2018). Customers have wants and needs. The company recognizes these and offers a basic product. To cater to their expectations and also to differentiate from competitors, companies try to offer differentiated products. Similarly, competitors attempt to offer differentiated products to generate profits and growth. Figure 2.3 outlines the 3Cs model and its determinants. The customer dimension refers to the attributes of the offered product or services and the value for customers. It is associated with the customers’ perceptions and the possibilities to convince the customers to purchase the products or services. The second category is the competition and the nature of the industry. Competitors’ pricing strategies will also decide on how a company can and will price its products and services. The last category is the costs of the products and services. Costs include the procurement side of raw materials: the production, operations, marketing and distribution. Costs are defined into fixed and variable costs.

2.4

Marketing Mix (7Ps) to Set Up a Price

The marketing mix or 7Ps model is a framework to define the appropriate marketing strategy and to set the right pricing (Kotler and Amstrong 2018). The model is an ideal tool to analyse and select a strategy, which is based on seven elements (Dathe and Helmold, 2018; Kuerble et al., 2016). The elements are shown in Fig. 2.4 and can be described as place, promotion, price, product, process, physical Marketing Mix (7Ps) Price

Product

Place

Traditional Marketing Mix (4Ps) Physical evidence

Promoon

Process

People

Fig. 2.4  The marketing mix (7Ps model). (Source: Author’s own figure)

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2  Pricing Elements and Price Elasticity

evidence and people. It is visible that the marketing mix already integrates pricing elements in one of the categories. The 7Ps model was originally devised by J. McCarthy and published in his book Basic Marketing: A Managerial Approach (McCarthy, 1968). Originally the marketing mix consisted of four elements: product, promotion, price and place. The focus of the traditional four Ps was on physical products to market and to sell, rather than services. As a consequence, Booms and Pitner added three categories with the emphasis on services. The three added categories are process, physical evidence and people (Kotler and Amstrong 2018). The 7Ps helps companies to review and define key issues that affect the marketing of its products and services and is often now referred to as the 7Ps framework for the digital marketing mix.

2.4.1 Product The product should fit the task consumers want it for, and it should work and it should be what the consumers are expecting to get.

2.4.2 Promotion Advertising, PR, sales promotion, personal selling and, in more recent times, social media are all key communication tools for an organization.

2.4.3 Price The product should always be seen as representing good value for money. This does not necessarily mean it should be the cheapest available; one of the main tenets of the marketing concept is that customers are usually happy to pay a little more for something that works really well for them.

2.4.4 Place The product should be available from where your target consumer finds it easiest to shop. This may be high street, mail order or the more current option e-commerce or an online shop.

2.4.5 Process The delivery of your service is usually done with the customer present, so how the service is delivered is once again part of what the consumer is paying for.

2.5  Pricing Elasticity

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2.4.6 Physical Evidence Almost all services include some physical elements even if the bulk of what the consumer is paying for is intangible. For example, a hair salon would provide their client with a completed hairdo, and an insurance company would give their customers some form of printed material. Even if the material is not physically printed (in the case of PDFs), they are still receiving a “physical product” by this definition.

2.4.7 People All companies are reliant on the people who run them from front line sales staff to the managing director. Having the right people is essential because they are as much a part of your business offering as the products/services you are offering.

2.5

Pricing Elasticity

Price elasticity of customer demand is a metric used in companies and businesses to show the responsiveness, or elasticity, of the quantity demanded of a good or service to increase in its price when the price changes. More precisely, it gives the percentage change in quantity demanded in response to a 1 percent change in price. Price elasticity is almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand may have a positive price elasticity. Generally speaking, one can say that

Pricing in hospitality

Quanty (million units)

Elascity Changes in Quanty as a Result of price changes?

1.6 1.4 1.2 1.0

E

0.8

Price Elascity (E) = % Change in Volume % Change in Price

0.6 0.4 0.2 0.0 20

40

60

80 100 120 140 160

Fig. 2.5  Price elasticity. (Source: Author’s source)

Price

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2  Pricing Elements and Price Elasticity

Fig. 2.6  Price elasticities. (Source: Author’s source)

the demand for a good is inelastic (or relatively inelastic) when the price elasticity of demand is less than 1 (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its price elasticity of demand is greater than 1. Figure 2.5 shows the elasticity concept. Revenues can be optimized when price is set so that the price elasticity is exactly 1. The elasticity of a good can also be used to predict the incidence (or “burden”) of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Price elasticity of demand was further divided into perfectly elastic demand (∞), perfectly inelastic demand (0), relatively elastic demand (>1), relatively inelastic demand (