Customer-Centric Revenue Management

Table of Contents

Index of Figures & Tables

Introduction

Requirements of Customer-Centric Revenue Management
Revealing Customer Profitability

Implementing Loyalty and Profitability into Revenue Management

Application: A Case Study of the Harrah’s Cherokee Casino & Hotel
Analysis of the Cherokee ’ s Approach to Customer-Centric Revenue Management

Concluding Thoughts on Customer-Centric Revenue Management

References

Index of Figures & Tables

Figure 1: Comparison between conventional costing and ABC

Figure 2: Customer loyalty categories and strategies by Reinartz and Kumar

Figure 3: Segment-based RM strategies

Table 1: Harrah’s Cherokee Casino & Hotel segmentation summary

Introduction

“Selling the right seats to the right customers at the right prices” (Smith et al., 1992: 8) has been the bottom line of airline yield management (YM) since its first implementation in the early 1970s (Cross et al., 2009). Kimes (1989) states that an operation should have the following characteristics to apply effectively YM:

(1) ability to segment markets
(2) perishable inventory
(3) product sold in advanced
(4) low marginal sales cost
(5) high marginal production cost
(6) fluctuating demand

Whereas Lieberman (1993) and Schwartz (1998) contradict with Kimes (1989) by arguing that perishable inventory is the only necessary condition for YM, this single as well as all other factors are still applicable to lodging operations. Consequently, YM entered the hospitality industry in the mid-1980s (Cross et al., 2009). In contrast to airline YM hotel revenue management (RM) uses variable room rates and length of stay to manage inventory and to balance capacity and forecasted demand based on historical data and current booking pickup (Noone et al., 2003). Jauncey et al. (1995: 25) define RM as “an integrated, continuous and systematic approach to maximizing room revenue through the manipulation of room rates in response to forecasted patterns of demand.” Therefore, its focus is not the maximization of yield but of revenue as indicated by the name change of yield to revenue management (Cross, 1997).

However, the strategic levers of room rates and length of stay only maximize the revenue generated from a single transaction and do not address optimal long-term profit, as they do not consider the varying lifetime value of a customer while managing demand (Noone et al., 2003). The incorrect usage of RM may have a negative impact on customer’s perception of the service company and could therefore diminish customer loyalty (Shoemaker, 2003). Hoang (2007) shows this issue at the example of overpricing, which may produce higher revenue in the short-term but ignore the long-term value of possible repeat customers. However, the author also argues that discounting to encourage short-term demand may hurt long-term profitability, as customers’ willingness to pay full could be reduced. In addition, research by Shoemaker and Bowen (2003) shows that RM negatively affects loyal customers as these are less likely to spread positive word-of-mouth but even more likely to check rates at other properties if yielded traditionally. To balance the short-term revenue opportunities to the long-term yield of a customer is one of the major issues RM is currently facing (Cross et al., 2009). Orkin defines this vision as follows:

A future vision for RM speaks of a day when each guest is a market segment of one and the availability of rates for a requested stay would depend on a guest’s past history or forecasted future with the hotel (as cited in Helsel and Cullen, 2006: 158).

Therefore, RM needs to develop into an approach considering a customer’s lifetime value based on his/her retention and loyalty. Cross and Dixit (2005) name this concept customercentric revenue management (CCRM).

The purpose of this paper is to initiate a discussion on the feasibility of CCRM in the hotel industry. Therefore, the requirements of this practice will be analysed to define subsequently implementation strategies, which are based on a framework of customer loyalty and profitability. Further, these implementation strategies will be used to analyse the execution of CCRM in a casino resort hotel. The paper will conclude with a discussion on the feasibility of CCRM by summarizing implementation challenges and by assessing its potential effect on customers’ perception of fairness in RM.

Loyalty programs have become a commodity in hospitality businesses to track detailed purchase patterns (Cross et al., 2009). Moreover, advanced property management systems store customers’ demographics, booking sources and sales data in customer relationship management (CRM) databases. However, Noone et al. (2003) state that these data sources are rarely used in RM decision making albeit this data may allow examining lifetime value and profitability on an individual customer basis, and consequently provide the necessary support for CCRM.

Reinartz and Kumar (2002) argue that the relationship between customer loyalty and profitability is relatively weak considering the popular notion of loyal customers being less expensive to serve, being less price-sensitive and generating new business leads. Consequently, customers seeming to be loyal may not have the highest customer lifetime value. The authors further conclude that this weak relationship is due to “the crudeness of the methods most companies currently use to decide whether or not to maintain their customer relationships” (Reinartz and Kumar, 2002: 90).

The widespread method of RFM (recency, frequency, and monetary value) considers the revenue generated by a customer, the frequency of purchases and the last purchase made (Reinartz and Kumar, 2002). However, Reinartz and Kumar (2002) see major drawbacks in this approach, as it does not take the profitability of the customer and the probability of his/her purchases into account. Whereas the latter is a statistical calculation based on the values of first purchase, last purchase, number of purchases in between and - depending on the model used - other variables (Reinartz and Kumar, 2002), or is assessed by market research (Noone et al., 2003), the calculation of a customer’s profitability requires especially in a hospitality environment a more complex approach.