Establishing the Synergy between Finance & Marketing in Lodging Operations

Table of Contents

Tables of Figures

Abstract

Introduction

Establishing the Synergy between Finance & Marketing
Customer Profitability Analysis
Activity-Based Costing

The Payback of CPA & ABC Implementation

Conclusion

Bibliography

Table of Figures

Figure 1: Customer loyalty segmentation

Figure 2: Comparison between traditional costing and ABC

Figure 3: Two-dimensional ABC model

Figure 4: Customer profitability example

Abstract

This essay aims to emphasize the synergy between the functions of finance and marketing created by the concept of Customer Profitability Analysis (CPA) and its potential benefits within lodging operations. Traditional accounting means as USALI are incompatible with the assessment of product and customer profitability performance, and hence do not assist the formulation of marketing strategies. CPA closes this gap between finance and marketing as it allows the distribution of revenue and costs on a segment or individual customer basis. Whereas the revenue per customer or segment may be sourced from property management systems and other means, costs are calculated in the context of CPA by the method of Activity-Based Costing (ABC), whose implementation is a complex and cost- intensive step. The first key benefit of implementing CPA and ABC is two-folded as the combined methods enable the assessment of an individual customer’s profit structure as well as information on the vulnerability of a property’s cash flow. The second key benefit is the facilitating role of CPA in determining a customer lifetime value, which therefore enables customer-centric pricing. The essay concludes with four recommendations for hotel managers:

(1) CPA does not replace USALI but is a complementary accounting method.
(2) The necessity of implementing ABC depends on the property’s market complexity but it does provide other benefits outside the regular CPA framework.
(3) CPA only provides numeric data on customer profitability and therefore additional factors have to be considered in marketing decisions.
(4) The value of CPA in long-term strategy has to be considered.

Keywords

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Introduction

“[...] [Y]ield management is the process of allocating the right type of capacity to the right kind of customer at the right price as to maximize revenue or yield.” (Kimes, 1989: 15)

Even though this early statement by Kimes (1989) greatly simplifies the concept of yield/revenue management in the lodging industry, it raises two fundamental issues: Who is the right customer and what should he/she pay for the room? Since Reinartz and Kumar (2002) argue that the link between customer loyalty and profitability is relatively weak, these issues become even more prominent as guests that hotel managers perceive as loyal and hence devote time as well as money to may not be worth the investment or the discount given (Noone et al., 2003). This is supported by Noone and Griffin (1999), who argue that the level of service and support differs from customer to customer and so does therefore their profitability. However, Reinartz and Kumar (2002) further state that the weak connection between loyalty and profitability is due to the crudeness of the methods used in order to assess the loyalty of a customer. In their place, the authors suggest a framework segmenting the customer base into four different categories separated by the two interrelating variables of forecasted length of relationship and profitability (Figure 1). Whereas the former may be determined by statistical calculations or market research (Reinartz and Kumar, 2002; Noone et al., 2003), the latter does demand especially in lodging operations more effort interconnecting the expertise and resources of the finance function with the customer-centric activities in the area of marketing.

This paper will focus the critical analysis of the linking practice commonly referred to as Customer Profitability Analysis (CPA) on its key implications for the marketing function in hotel operations. Hence, before the concept of CPA along with the supporting model of Activity-Based Costing (ABC) will be reviewed, its advantage over conventional accounting means in the context of marketing will be emphasized. The examination of the potential benefits of the conclusive information established by CPA and ABC procedures will precede the conclusion of this paper where four key recommendations directly related to the hotel industry will be discussed additionally.

Figure 1: Customer loyalty segmentation

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Source: Adapted from: Reinartz, W. and Kumar, V. (2002), ‘The mismanagement of customer loyalty’. Harvard Business Review. Vol. 80, No. 7, pp. 86-94.

Establishing the Synergy between Finance & Marketing The ‘Uniformed System of Accounts for the Lodging Industry’ (USALI) developed originally in 1926 has greatly contributed to the comparability of financial data across this industry as this standardized accounting system is applied by most internationally operating hotel groups (Chin et al., 1995; Harris and Brown, 1998). USALI homogenizes amongst others the composition of the income statement by presenting three sections covering revenue centres, cost centres and definite expenses (e.g. management fees and income taxes) respectively to determine the net operating income (Pavlatos and Paggios, 2009). Still, its actual main objective is the implementation of the generally accepted accounting principles resulting in a limitation of available financial information (Karadag and Kim, 2006). Whereas Huefner and Largay III (2008) argue that financial reports are able to guide managers to improved decision-making, Selnes (1992) describes the figures provided by conventional accounting means as incompatible with the assessment of product and customer profitability performance, and with the formulation of marketing strategies. Karadag and Kim (2006: 156) support the latter notion by claiming that “[...] the current accounting systems fall short of enlightening marketing managers about how to devise marketing policies that will maximize profitability of selected customer groups.” Kaplan and Narayanan (2001) attribute this issue to the fact that financial reports do not require the assignment of operating expenses to customers. Therefore, another methodology has to be applied as Downie (1997: 311) argues:

“The key to the integration of accounting information with marketing strategy would seem to focus on improving the information available to managers concerning the profit implications of their decision making, applying activity based costing techniques, and more information concerning individual market segments, which forms the basis of marketing planning.”