The Analytic Hospitality Executive

CHAPTER 8Analytics for Revenue Management

The goal is to sell the right product, to the right customer, at the right time, for the right price.

—Bob Crandall, former CEO of American Airlines

Revenue management, or yield management, was first applied in the airline industry after deregulation in the 1980s. After witnessing the successful implementation by the airline programs, hotels adopted revenue management beginning in the early 1990s. Revenue management is a specialized pricing discipline applied to industries that have the following characteristics (Kimes 1989):

• Relatively fixed capacity. For example, there are only 350 rooms in the hotel.

• Time-perishable inventory. If a room is not sold for this evening, you lose the opportunity to sell it.

• Time-variable demand. There are peak periods and off-peak periods, like for a business hotel that is busy during the week and slow on the weekends.

• Low cost of sale as compared to fixed costs. It costs relatively little to sell one more room as compared to the operating costs of the hotel.

Revenue management is important to capacity-constrained firms, like hotels and casinos, because they need be smart about how they sell their inventory. During busy times, they want to sell the inventory only to customers who are willing to pay the most, but during off-peak periods, because it doesn’t cost that much more to sell one more unit, they are willing to discount to drive revenue through volume, or occupancy. The first revenue management applications ...