Room Capitalization to Customer Capitalization

Research Paper (undergraduate), 2007

48 Pages, Grade: A

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1.1 Introduction
1.2 Issue Identification
1.3 Statement of Aim and Objectives
1.4 Scope of Research
1.5 Limitations

2.1 Introduction
2.2 Performance Measurement
2.3 Non Financial Measurement
2.4 Financial Measurement
2.5 Market and Market Segmentation
2.6 Customer and Customer Potential
2.7 Customer Equity and Customer Perceived Value
2.8 Revenue Per Available Customer (REVPAC)
2.9 Conclusion

3.1 Introduction
3.2 Purpose of Research Topic
3.3 Research Process
3.4 Hypothesis
3.5 Research Tool
3.6 Rationale Behind Data Collection
3.7 Population and Population Attributes
3.8 Sample Size and Sampling Technique
3.9 Data Analysis
3.10 Conclusion

4.1 Introduction
4.2 Interpretation of Data
4.3 Conclusion

5.1 Conclusion
5.2 Recommendations and Scope for Further Research



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The information contains herein is no way to be construed as recommendations by the “Institute of Hotel Management, Aurangabad” of any kind to be adapted by or binding upon any member of the hospitality industry.


We would like to thank Mr. Satish Jayaram for giving us an opportunity to do a project on “Revenue per available customer”: Room capitalization to Customer capitalization”

We are thankful to our guide; Mr. Anand Iyeangar and our mentor; Mr. Graham Miranda for giving us valuable inputs and guiding us through every stage of our project.

Mr. Kush Kapoor the Front office manager of the Taj Mahal New Delhi for giving us a helpful start in our research.

We are extremely grateful to Mr. Ashok Vasudevan the General Manager of Taj Residency Aurangabad for providing us with the necessary inputs and the hotel’s financial data.

We would also like to extend are gratitude towards the entire library staff and IT staff for their constant support in the library and IT labs


Customers today are in a fast advancing world and are nowadays considered to be hotel’s biggest asset. As without a demand there is no sense in running a hotel. Customers play a huge role in today’s hotel industry, as hotels earn revenue from customers, hence they should be the focus to provide consistency with regards to business, and making them assets to the hotel. But by just making them assets to the hotel, it is not good enough for this ever changing industry and with the advent of technology the value of customers increase as it would also be easier to establish their current worth and plan for the future. Hence hotels would have to look beyond their customer’s money, with a view of customers as a measure of their overall performance apart from their physical assets. This performance indicator namely REVPAC (Revenue per available customer) could be used to analyze the hotels revenue per customer with regards to its status in a market share and customer capitalization.

The focus and importance of customers is therefore becoming a glaring significance in the hotel industry. Hotels with efficient customer relationship management systems are able to breach all sorts of customer related problems. With the ever increasing demand for rooms in India, the need to satisfy the customers with what is available in the hotel is an extremely tough job, which is what customer relationship management techniques are aiming at by stressing on the importance of customers. This in turn would help hotels understand as to why they need to use customers as a base in a performance indicator to measure their overall performance.

The researchers have studied the works of prominent researchers to compile a literature review. The researchers have used the works of prominent researchers to support the argument. The literature review was followed by a primary research. To make the study more relevant, the primary research revolves around Aurangabad, an Indian city which serves as a perfect example, a city with a good mix of tourist cum business clients. The study revolves around Taj Residency Aurangabad which was chosen, as it is a five star hotel and is a part of the Taj Group of Hotels.

A trend analysis has been made between the basic turnover of the hotel and the REVPAC of the hotel. Thus showing that, REVPAC is similar to the hotel’s turnover and can be used as an “overall” performance indicator in hotels.

This also further proves the hypothesis and supports the compiled literature review. The method of research is the hypothetico-deductive method.



Hotels today, operate in a highly competitive market with great emphasis on benchmarking and competition analysis. The industry today analyses and compares its performance in terms of room revenue only. Whereas on the other hand looses out on the accuracy of its performance analysis by neglecting the revenue which is generated through the ancillary facilities present at the hotel.

At the same time hotels also differentiate themselves with the type and style of services provided to their selected market segment, hence customers being the center of focus in the hospitality industry and of very high importance, more and more attention is given towards them. This leads to greater customer satisfaction and increases customer equity and loyalty.

Where customer equity is a function of the revenue generated through the rooms as well as from the ancillary facilities. The evaluation of the consolidated revenue in terms of a performance indicator will help hotels analyze its overall and competition analysis. (Source: Kotler .P and Keller .K.L., 2006, Marketing Management.)

For performance evaluation, a keen eye must be kept on the business drivers,the most important being a customer, therefore to derive any measure for overall performance a customer component must be involved


Performance indicators which are used in hotels are individualistic to departments, particularly REVPAR, which takes into consideration room revenue but excludes the additional revenue generated from the guest staying in the room, at the same time it is used to compare overall performance. This however leads to the question of the need of an indicator, which considers the room revenue of the hotel and the additional revenue generated from the guest during his stay at the hotel, which in turn indicates the hotel’s performance as a multi service provider and efficiency in its sales mix, considering the guest needs.

"REVPAR” has high validity as so many people use it and its accessible data. But we have long recognized that it is limited and represents only part of the picture - albeit an important one. A wider perspective is needed, which also recognizes operating profits and costs. It will become more sophisticated, but we have to move at the industry's pace."-(David Bailey, Director, Tri Consultancy)

REVPAR, at present is the preferred performance indicator used in hotels. which strikes the balance between average rate and occupancy levels and produces the best combined results; it still is a yield for physical assets of the hotel. However due to the hotel industry’s shift to customer focus and their potential with emphasis on market segmentation, there is no empirical value to validate the customer element as a base on a daily basis in the market performance of the hotels overall performance.

“It should be REVPAC - revenue per available customer, because we are interested in understanding all the incremental income streams per customer, not just the room’s revenue.”- (Michael Wale, senior VP, director of operations, NW Europe, Starwood Hotels & Resorts).



To study the significant difference between REVPAR (Revenue per available room) and REVPAC (Revenue per available customer).


To study the performance indicators a hotel uses to measure its performance with an emphasis on REVPAR.

To bring out the drawbacks in using REVPAR as a performance indicator.

To study a performance indicator which considers rooms as well as the additional revenue generated through the guest.

To measure a hotels revenue through REVPAC.


The scope of the research is to study the various researchers’ work which encompasses the functioning of performance indicators. Giving an emphasis on REVPAR, a highly credited performance indicator and its drawbacks which are prevalent in this highly competitive world. Also to get an insight about consolidated performance indicators which take into consideration revenue generated from rooms as well as from other points of sale.


The research is restricted to only one hotel in Aurangabad.

The market share for the primary data is considered to be as fair share.



India, which recently celebrated its 60th Independence Day, is firmly cementing its position as one of the leading stars in the hotel industry. With a 13% growth in the number of international visitors last year, and a rapidly expanding domestic market, India is looking good on both fronts.

(Source: )

Tourism can be divided into two fronts: domestic and international. Hotels therefore cater to both types of clients, who in turn have different needs and preferences, therefore with regards to hotel revenue maximization prevalent today, hotels look at room revenue in terms of occupancy, market share, competitive pricing but exclude the additional spend of the above clients which is a determinant of spending habits, potential, segmentation and guest profiles’ history which shows customer importance and yield.

For customers, hotels therefore standardize to create a homogenous sense of service and amenities for different clientele along with personalization of services which can be defined as “realizing customer uniqueness”. Hence if a hotel understands the concept of customer uniqueness with relation to consumer purchasing power and needs, along with service delivery to those customers in the market which it segments and caters to, hotels would therefore have to look at room revenue and the additional spend by the customers together, to measure its performance on a customer basis.

(Source: Choudhary, Alok. Scalable Customer Relationship Management. Kellogg School of Management, Northwestern University. )

This poses the uniqueness with relation to hotels and their assets which are primarily physical, whereas their production is through services to customers. Hence showing the inputs from customers, and leading to understanding of customer value in relation to the revenue generated by them as well as the experience they enjoy at the hotel. Understanding customer value adds a certain layer of complexity because of the service components involved in hotels, specifically the intangible nature of various services mean that it is difficult objectively to define and measure the level of service outputs being provided. Therefore to overcome such a problem hotels prepare a competition set based on three broad criterias - service levels, product type, and location. Monetary evaluation of the services provided can be defined to a certain extent, through the turnover of the hotel which includes rooms and ancillary departmental revenue. Therefore any measure for productivity should involve a customer component to cover the value they generate. As a customer is a constant variable with changing needs and wants, it is important to view the customers who check in and spends on rooms, which is their primary need but also look at their spending on the ancillary services.


With the uniqueness of service components in hotels, its’ operations too are different from a manufacturing unit with relation to revenue generation which relates to not only rooms but also additional services provided with core operational concerns such as:

- Linking operations performance to business drivers.
- Performance measurement and operations improvement.
- Guarantees, complaints and service recovery - tools for improvement. People management.
- Service design.
- Service technology.
- Design of internal networks. Service encounter.
- Managing service capacity.

( “ Service operations management: return to roots ” by Robert Johnston. International Journal of Operations & Production Management, Vol. 25 No. 12, 2005, pp. 1298- 1308.)

The following literature will help in establishing how hotels measure operational performances primarily through turnover and business drivers being customers, along with aspects of revenue management by revenue generation through customers.

The evaluation of operational performance has always been a major concern for the hotel industry. Operational performance serves as a basis for organizational improvement and criteria for detecting problems in enterprises. Top management of hotels conduct their own measurement or diagnosis of their property at regular intervals, this is done to ensure that management would gain a better understanding of how effectively they have used their resources to earn revenue. The diagnosis or measurement of these operations however can be done in two different ways:

- Non financial performance indicators
- Financial performance indicators

Performance however, is a function of different business drivers which serves as variables to form performance measures. Figure-1 shows the various variables that affects a hotel’s performance both as financial measures and non-financial measures. A few examples are as follows:

Units of human resources = Employee to guest ratio Number of customers

(This indicator shows the number of employees engaged per customer.)

Total Revenue = Average spend of the customer

Number of customers

(This indicates the average spending power of the guest.)

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(Robert Johnston, Service operations management: from the roots up, International Journal of Operations & Production Management Vol. 25 No. 12, 2005 pp. 1298-1308)

Measure of productivity and efficiency can be a combination of any of these variables which can be considered as they each would help interpret a piece of information with relation to a hotel’s performance and its operation. The result of this performance evaluation could serve as reference for them in their future allocation of resources for the enterprise. Though evaluating operational performance acts as a stepping stone, the measurement of operating activities on a large scale are generally not accurate because they are averages or an arithmetic mean, which is a single number that gives the central location of a set of data. The mean is the value obtained, when one divides the sum of all values in the data set by the number of items in the set. A problem with the arithmetic mean is its tendency to be distorted by extreme values at either end of a distribution. This can therefore mislead hoteliers while analyzing data.

(Source: Cathy A. Enz, Linda Canina and Kate Walsh, Hotel-industry Averages: An Inaccurate Tool for Measuring Performance, Cornell Hotel and Restaurant Administration Quarterly 2001; 42; 22.)

But inspite of them being inaccurate hotels still need to set standards for themselves, so that the staff personnel can work towards achieving them. These standards can be benchmarks which hotels can try and achieve.

For performance measurement, hotels must keep in mind, the cost and benefits of product, customers and time. Customers input in a hotel, however are in terms of time, effort of service made by hotels and financial costs for an experience at the hotel. Hence hotels establish processes keeping in mind materials, equipment, customer, staff, technology and facilities for guests to reap the benefits of brand loyalty, revenue, guest satisfaction and revenue earned. Productivity of the hotel is therefore a combined effect of process and experience of customers. Figures-2, explains the operational inputs and outputs, Figure-3, explains the customer inputs and outcomes and Figure-4, explains the operational process.


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Apart from financial performance, companies and hotels also evaluate the non financial performances of the hotel such as guest satisfaction, employee satisfaction, and employee turnover etc. This is done because financial measurement does not take this aspect into consideration because they deal with revenue only. It would be doing injustice to neglect something which does not have any monetary value but affects the performance of the hotel indirectly.


Financial measurement is an important aspect in operational performance measurement not only to the hotel but also to its stake holders, hence it is mandatory for hotels to prepare reports of financial statements such as the income statement or profit and loss statement, balance sheets, cash flow statement, funds flow statement along with schedules which deals with the overall performance of the hotel at intervals of time i.e. quarterly, half yearly and yearly. Along with these prime financial statements, hotels also evaluate themselves on a daily basis through departmental and daily business reports for operational efficiency.

Evaluation of financial performance serves as a basis for organizational improvement and criteria for detecting problems in utilization of resources. Along with a better understanding of how effectively the resources are being used, that is to say utilization of resources is establishing the potential the hotel has in terms of the design capacity which is rooms and additional points of sale which involves the use of both physical assets and services provided to ascertain potential. They budget to a certain level of efficiency and plan for its maximum use, for actual revenue earned as suppose to the efficiency which is the effective use of resources from the potential against actual revenue earned. Figure-5 explains the difference between how the evaluation of recourses utilization and efficiency in use of resources is carried out.

The result of this performance evaluation serves as reference for their future allocation of resources and bench marking operational activities and financial returns.

This is because daily financial measurement deals with revenue generated against potential, budgets, and actual figures, hence gives an opportunity for financial planning by evaluating costs and incomes, revenue management by looking for business opportunities, and control activities by strategic and decision making.

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Revenue being one of the variables in financial measurement is addressed by hotels through revenue management systems which is based on modern economic theory of advanced and subtle demand-management decisions such as non linear pricing, bundling, segmentation, and optimizing in the presence of asymmetric information between buyers and sellers. With relation to hotels’ the demand management is maximized through inventory allocation of rooms which poses three basic concepts with relation to demand.

- Structural decisions- Which selling format to use(such as posted prices, negotiations or auctions); which segmentation or differentiation mechanisms to use(if any);which terms of trade to offer(including volume discounts and cancellation or refund option); how to bundle products; and so on.
- Price decisions- How to set posted prices, individual-offer prices, and reserve prices (in auctions); how to price across product categories; how to price over time; how to markdown (discount) over the product lifetime; and so on.
- Quantity decisions- Whether to accept or reject a offer to buy; how to allocate output or capacity to different segments, products or channels; when to withhold a product from the market and sale at later points in time; and so on.

Hence as hotels view demand, they also face a complex selling decision, with regards to how can it segment its buyers by providing different conditions and terms of trade that profitably exploit their different buying behaviors or willingness to pay. Revenue management optimizes a firm’s demand with relation to the (1) Different products it sells primarily rooms for hotels. (2) The types of customers it serves (business, leisure, conference etc.), their preference for products, that is type of rooms and by providing additional services hotels provide and cater to their individual needs, and their purchasing behaviors, and (3) Time.

Financial measurement and analysis can be done on a daily basis through performance indicators. Hotel operators and investors use a number of industry statistics or performance indicators as benchmarks, to assess current operations and to make forecasts and plans. Three commonly used statistics are Occupancy and percentage, Average Daily Rate (ADR), and Revenue Per Available Room (REVPAR).

- ADR- It is the average daily rate per rented room, or the mean price charged for all hotel rooms sold in a given period.
- REVPAR- This can be calculated in one of two ways (both give the same result): (a) divide the room’s revenue by the number of rooms available or (b) multiply the occupancy percentage by the average daily room rate (ADR).
- Occupancy- This can be calculated by dividing the number of rooms sold by the number of rooms available and multiplying by 100.

(Source: Netessine and Shumsky, Introduction to the Theory and Practice of Yield Management.).

These performance indicators are summarized as means (averages), and have become common benchmarks by which the lodging industry makes performance comparisons. By analyzing and interpreting these key industry averages of ADR, REVPAR, and occupancy, it is possible to understand the nature of these averages. Which may be insufficient to determine what the “typical” hotel’s overall performance is really like? REVPAR reflects the industry's fundamental structure and value proposition based on physical assets (hotel rooms) as the driver of wealth. REVPAR is a good indicator for room’s inventory management.

While somewhat inconsistent because of different sizes of rooms, it is comparing room’s revenue only against number of rooms and cannot be used to analyze the overall performance of a hotel because it does not take into consideration the revenue generated from ancillary facilities of the hotel nor does it take into consideration the costs incurred. Therefore to overcome these problems of total revenue and costs, performance indicators like TREVPAR (Total revenue per available room) and GOPPAR (Gross operating profit per available room) can be taken into consideration.

- TREVPAR is the total revenue divided by the number of rooms and helps analyze the yield per room. This therefore unlike REVPAR takes ancillary revenue into consideration. (Source:

- GOPPAR on the other hand takes into consideration total revenue less the operating costs and dividing it by the number of rooms, hence taking into consideration total revenue as well as bring in light on the cost per room. (Source:

However, the above mentioned performance indicators, might not be suitable when it comes to benchmarking one hotel against another because they measure non room revenue against the number of rooms in the denominator in the case of both the performance indicators. A problem arises as we are taking rooms into consideration for non room income, hence an inconsistent measurement because their revenue generating capacity is different which is dependent on size of the hotel. It is time the industry starts benchmarking in a more consistent way, by using a more consolidated performance indicator which takes into account the revenue generated from the rooms as well as from the ancillary facilities provided at the hotel and dynamic conditions of the market. Firstly to solve the problem a base of customers should be used because the account for both room and ancillary revenue and to meet the market dynamics takes into consideration a market share together. Such a performance indicator valuates, the overall performance because it takes into consideration the entire revenue earned and capitalized market. Hence fulfilling all aspects which are lacking in the present day performance indicator with analysis of turnover and market dynamics used by the industry. A performance indicator called REVPAC must be considered which takes the entire revenue earned by resident and non resident guest, dividing it by the number of guest to give the revenues per customer and then multiplying it by market share to get the capitalized revenue in a market place.

Having seen the requirement of focus on the customer for the future for overall performance, it is therefore important to know how and to what extent a customer affects the business and shows the importance of customers. This can be seen as follows:

- Market and market segmentation.
- Customer and customer potential.
- Customer equity and customer perceived value.


“It’s Not the Big That Eats the Small; it’s the Fast That Eats the Slow.”

- (Jason Jennings and Laurence Haughton)

In other words, we need to respond to customer needs in a timely manner if we have to survive in this highly competitive market. It is therefore essential to know who our customers are. In the cases of hotels it is the customers who are “in-house.” or resident guests, who come into the hotel to avail the lodging facilities and the ancillary services provided by the hotel. On the other hand we also have non resident guests who come into the hotel to use only the ancillary facilities provided by the hotel.

We also have the traditional definition of a customer - an end user; this is someone who writes a check to acquire our products or services.

Both types of customers are important, the most profitable hotel organizations of the future will be those that capture an increasing share of the customer's purchasing power - while they are in the hotel. For it must be kept in mind that if both these types of guests are not satisfied and their needs are not met they would find someone else to provide them a product or service.

The phrase, "the customer is always right," is an age old adage. When we are working with others all day, that concept can be a bit frustrating. Customers come with a number of concerns, questions, and expectations. They often also come with bad attitudes, frustrations and complaints, which the customer service personnel gets to work out.

It is this time when the customer service representative who is responsible for diffusing problems and answering questions with a smile to act in a calm and appropriate manner to break the ice. Because the customer service representative is the only, or one of the few contacts that an individual may have with a company, it is important that that person has a positive experience. A positive experience will keep them happy and coming back. The general recognition of the marketing principle is that, keeping customers is more profitable than attracting new customers this also serves as the basis for customer relation ship management.

Only recently, companies realized that in order to develop such relationships a differentiated approach is needed, instead of treating all customers equally, managers have come to understand that it is more effective to develop customer-specific strategies.

By using customer information contained in databases, companies can invest in customers that are potentially valuable for the company, and minimize their investments in non-valuable customers. This therefore requires the understanding of the market and its segments.

In economics a market is where buyers and sellers meet for trade therefore and governed by the forces of demand and supply. The size of the market hinges on the number of buyers who might exist for a particular offer. But there are many productive ways in breaking down the market:

- Potential Market: It is the set of consumers who profess a sufficient level of interest in the market offer. However, consumer interest is not enough to define a market. Potential consumers must have enough income and must have access to the product offer. For example in the case of hotels the potential is the total guests it can accommodate on a daily bases.

- Available Market: This market is a set of consumers who have interest, income, and access to a particular offer. For some market offers the company may restrict sales to certain groups for example in hotels a particular category of a room may be denied to another guest due to the reservation of another guest.

- Target Market: This is the part of the qualified available market the company decides to pursue. The company might decide to concentrate its marketing and distribution efforts on the targeted market or market segments. Penetrated Market or Market Share: In this the set of consumers who are buying the company’s product is determined, which is a representation of the market share.

- It is not possible to cater to a mass customer base but to cater to consumers who are segmented therefore market segmentation is required.

Market Segmentation

There are two ways of segmenting markets. Some researchers try to form segments by looking at descriptive characteristics such as:

Geographic - Geographic segmentation is based on dividing the market into different geographical units such as notion, states, regions, cities and neighborhoods.

Demographic - Demographic segmentation is based on variables such as age, family size, family life cycle, gender, income, occupation, education, religion, race, generation, nationality, and social class. This is important to distinguish customer groups in relation to customer needs, wants, and usage rates and product and brand preference as they all are determinant of these variables.

Psychographic- Psychographic segmentation involves dividing customers into groups on the basis of personality traits, lifestyle or values.

Other researchers try to segment markets by looking at behavioral considerations such as customer responses to benefits, use association, or brands. Which method employed it is important to see that hotels pay a great deal of importance to market segmentation to increase profitability and examine the customer needs. (Source: Kotler .P and Keller .K.L., 2006, Marketing Management.)

With a view of segmenting markets customer segmentation comes into focus if customers are used as a base for overall performance.


The potential value of a customer refers to the profitability of a customer if that customer buys all the products or services from the supplier. Hence, customer value depends heavily on the number of purchases in the product or service category made by an individual customer .The potential value is computed as the total profit margin on all purchases. To obtain information on the potential value of a customer, analysts need data on customer’s purchasing behavior at their own company, as well as at other companies in the market. Usually companies only have data on customers' purchasing behavior at their own company in their customer information file.

The total turnover of each customer or customer profitability is often used as segmentation variables to distinguish between valuable and non-valuable customers. In this way database analysts construct customer pyramids. These customer pyramids are often used as a segmentation method. Using these pyramids, strategies mainly focus on moving promising customers to the top of the pyramid and optimizing revenues from less promising customers, for example, increasing prices or reducing costs.

We can segregate our customers into 4 basic segments:

Segment I: Segment I can be regarded as unattractive. It has low potential value and low current value. Therefore, it is expected that future profitability is low. In order to maximize the profitability from this segment, strategies should focus on cost reductions and possibly on price increases (i.e. less promotions) instead of trying to increase the purchase level.

Segment II: Segment II has high potential value, but the company has not succeeded in taking a large share of this segment. Therefore, companies should aim to get a larger part of the customer potential in this segment. Customers in this segment have many opportunities for up selling activities. Of course, some customers might be more sensitive to such activities than others.

Segment III: Segment III has low potential value and high current value. Hotels are concerned here, with relatively loyal customers with low up-selling possibilities. As loyal customers are important for companies, companies should strive to keep these customers. However, up-selling efforts are not likely to be successful.

Segment IV: This segment is the most valuable segment. These customers are loyal and have a large potential value. Losing this group of customers would really harm the company. Management should strive to keep this group of customers using all kinds of relational efforts. This group might, for example, get priority in the service delivery process.

(Source: Peter C. Verhoef and Bas Donkers, Predicting customer potential value: An application in the insurance industry.)


Customer equity - It is defined as the degree to which an industry has fully developed relationships with its customers, providing them with more products and services to meet exiting and emerging needs. Customer equity is also the total of the discounted lifetime value of all the firms’ customers. (Kotler). According to Rust, Zeithmal and lemon that value equity is the biggest contribution in customer equity. Value equity is the objective assessment of the utility of an offering based perception of its benefits over relative costs. The drivers for value are quality and service, price, and convenience. Value equity makes the biggest contribution to customer equity and can be measured financially. Traditionally an assessment value equity was REVPAR but as it does not take into consideration all point of sales or entire turnover of the hotel it is weak as an “overall” performance measure to compare hotels only on room revenue. But entire value earned by the customer.

Customer Perceived Value: Customers are more educated and informed than ever, and they have the tools to verify companies’ claims and seek out superior alternatives. How they ultimately make choices? Customers tend to be value-maximizes, within the bounds of search costs and limited knowledge, mobility, and income. Customers estimate which offer will deliver the most perceived value and act on it. Whether or not the offer lives up to the expectation effects customer satisfaction and the probability that he or she will purchase the product again. Customer perceived value is the difference between the prospective customers’ evaluation of all the benefits and all the costs of an offering and the perceived alternatives. The customer value is the perceived monetary value of the bundle of economic, functional, and psychological benefits customer expects from a given market offering. (Source: Kotler .P and Keller .K.L., 2006, Marketing Management.). Total customer cost is the bundle of cost customers expect to incur in evaluating, obtaining, using and disposing off the given market offering, including monetary, time, energy and psychic costs. Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for the different possible choices. Hotels use this for pricing and marketing by combining products and increase sales.

In the light of having understood how customers affect a business, the revenue generated by them is of great importance. Hence providing an insight into revenue per available customer which should be viewed as an aspect of performance indication and operation.


The hospitality industry is continually changing and the hotel executives are expected to keep pace. The industry's current focus will shift from that of the physical asset (hotel) to that of the market (customer).Through a series of preferred vendor relationships, hotels will emerge as a conduit for the delivery of products and services to an already captive audience.

(Source: ).

Therefore, the customer, rather than the physical asset will be the most important focus of hospitality organizations. REVPAR (revenue per available room), a formula which focuses on the physical assets of a hotel, will be replaced (will not be viewed with as much importance as it at present, due to a shift in focus to customers) by REVPAC (revenue per available customer). (Source: Global industry survey conducted by Arthur Andersen and New York University's Center for Hospitality, Tourism and Travel Administration).

REVPAC is a concept which focuses on increasing the yield from the guest. Executives will be expected to continually reassess their organizational structures, as they must evaluate the importance of focusing on the customer in the future. The value of the customer will be evident in all aspects of the hotel organization's marketing and product concerns. The hotels of the future will increase profits by focusing on new services and products sold to guests, rather than on traditional room sales. (Source: Roger Cline, Arthur Andersen's director of worldwide hospitality consulting).

A poll overwhelmingly ranked customers over physical assets as the most critical aspect for the future success. The defining trends for the next few years, according to the study conducted by (Arthur Andersen and New York University's Center for Hospitality, Tourism and Travel Administration).

As hoteliers move towards profitability based idea on customer spending habits, the platform will be the link to track those habits. This platform would provide a linkage that profiles the customer. This is made possible thanks to the technology prevalent today with revenue managements systems, hotel database management software’s etc, which would break down the physical barriers of collection and analysis of such data.

(Source: Maximizing Customer Potential, Global Hospitality Forum 2005 Master Card)

In a contemporary world, hotel organizations are no longer constrained by physical location in serving customers. New media and systems technologies offer extraordinary efficiencies in delivering services with greater speed, lower cost and improved flexibility. Furthermore, technology offers unprecedented opportunities for innovation in this industry's changing menu of products and services. (Source: http://www.hotel What does this mean for the industry? It means that we are witnessing a period of major change as the fundamental value proposition of our industry requires an overturned paradigm view. “Customers” and no longer physical assets - drive wealth in all industries, and the hospitality industry is certainly no exception. Technology provides tangible benefits to REVPAC as a concept because it offers opportunities to increase business value and create new opportunities for growth in the industry.

REVPAC also casts a spotlight on a number of key questions for the industry on the eve of the 21st century. How can hotel organizations "talk" to customers in a way they have never been spoken to before by the industry? What must companies do to "hear" their customers in new ways, learning how to better represent them and their needs in the market? How can hospitality organizations maximize revenues by making the most of their relationships with customers? REVPAC does exactly that. It evaluates the spend by all the customers that enter into the hotel to make use of the physical and ancillary services and evaluate the customer perceived value of the property as well as if compared with competition, help hotels realize faster and better their competition in terms with the business they attract and the efficiency in product delivery based on the entire business or hotel capacity. (Source: Proceedings of the Fourth International Conference on e-Business, November 19-20, 2005, Bangkok, Thailand)

This can be accounted because guests are hence not lust customers who seek room and board, and perhaps a fax machine in the room. They represent a consumer with an array of needs, whose time is limited and who, in many cases, will respond to diverse products, improved service and convenience. Technology and analyses deployed for enterprise-wide platforms makes it possible to get closer to customers. As on a global analysis information systems, generate customer profiles based on tracking consumption patterns and in the process define a diverse range of wants and needs.

REVPAC can help in determining customers spending habits. This can further easily be done by determining the REVPAC of a hotel as REVPAC = (average spend per guest multiplied by the market share performance). Looking at average spend of the guests as a variable in accordance with the formula, REVPAC looks at bringing about better average spends of customers in hotels. This helps in improving customer relations and also helps in bringing about repeat customers which should enhance service delivery and brand loyalty.

“Put a logo on everything. If they forget the name of the hotel, you have lost a customer”. ). (Source: Maximizing Customer Potential, Global Hospitality Forum 2005 Master Card.). This line shows how REVPAC can help hotels from a non financial point of view, as it stresses upon how hotels need to emphasize on trying to get repeat customers or the most potential customer into the hotel.

This is possible by using better service standards which in turn increases business growth, and analyze that with an increase with REVPAC; both competitions as well as individual.

The understanding of Service standards, customer satisfaction along with market and market share, increasing revenue per customer in the market, sets benchmarks for effective end result. REVPAC remains incomplete without market share performance as without it, it is just an average spend per customer. With regards to market share performance it is defined as a hotel’s occupancy performance in relation to other hotel’s within predetermined competitive set. Market share performance shows how a hotel should have done and how much of business it took from its competitors. This is deducted by determining which hotel falls into the competitive set. This is based upon the product type, location and service level. The next step is to determine the hotel’s individual market potential. It is followed by finding the hotel’s rightful market share followed by the hotel’s actual market share through its actual occupancy percentage and then its total inventory potential. Then the actual market potential is compared with the rightful market share. This is done to determine how an individual hotel did in relation to its potential. From this we can see that if there is an increase in market share performance then it means that their will be an increase in REVPAC and vice versa making REVPAC directly proportional to market share. Market share performance is used in REVPAC because by multiplying revenue figures of customers into the market share we would be able to consider the fact that on the basis of customer revenue where do we stand in the market. And not just on the basis of rooms sold or occupied.

Hence in one line look at the level of customer capitalization in the market and not only room capitalization.


The research conducted by the researchers, emphasizes the need on performance, hotel operation, revenue, customers, markets and the need to analyze these through performance indicators.

The standards used to measure a hotel's overall performance, REVPAR (Revenue per available room), TREVPAR (total revenue per available room) and GOPPAR (gross operating profit per available room) are ratios which use rooms which are variable units of measurement, as a denominator which does not account for the ancillary revenue earned by the hotel. As long as the unit of measurement remains different in a way where the denominator is consistent with hotels, the results of such benchmarking are only partially valid. The researchers through their research which was supported by primary data have concluded that until a more consolidated performance indicator is put into place such as REVPAC the hotel does not get the exact picture about its performance because it takes into consideration room and ancillary revenue.

The concept for the use of “REVPAC” as a performance indicator is new and does ask the top management team to change its focus. Are hotels an asset play - or a customer access play? The real values of the industry have always rested with the customers that stay in the hotels, but opportunities to serve them are vastly increased by technology. REVPAC is a performance measure that matches the capabilities of the Information Age, and underscores the strategic directions hotel organizations must consider in the years ahead to return shareholder value. It asks of the top management to change its thinking all together with regards to rooms as it stresses on customers and their importance to the hospitality industry. REVPAC is something what you can call a new dawning or a new vision which hoteliers of today and tomorrow should sense and see. In the years ahead, managers need to change the way they’d think about the hospitality industry.

Indeed, they would need to transform themselves with the new vision of serving customers, or the customers will do it for them.

(Source: html)



Based on the conclusions reached in the previous chapter, the literature review, the authors in this chapter will outline the research methodology used for the valuation of the research undertaken. The authors will define the purpose for selecting the research topic and will also elucidate the readers about the underlying principles and the methods used to collect data and analyze the collected data to arrive at a logical solution.


The purpose of undertaking this research is to get acquainted with a prevailing concern of hotels; them traditionally focusing on rooms as a performance indicator instead of customers as an indicator for the hotel. With the advent of technology customer capitalization could very well become a critical issue which the hotels would face in the not so far off future. Dealing with customers efficiently is important as it affects the hotel operations in various ways- it implies costs, affects the hotel policies and would shows the instability of the organization. The researchers were keen to study the need for hotels to look at customers with not just a view of making money, but also measuring their performance on a customer basis with regards to the amount of revenue generated per customer and then comparing it in the market. Researchers have restricted their study to the city of Aurangabad as the city holds a mix of tourists and business travellers. By means of this research, the researchers attempt to bring about an awareness to hotels, that by using rooms to measure a hotels overall performance is not justified, as nowadays the other departments also contribute a major chunk to the hotels income, and hence suggesting the usage of a more consolidated performance indictor like REVPAC which is customer driven and includes the hotels total income unlike REVPAR which takes into consideration only room income.


The researchers have used the hypothetico-deductive method for conducting this research, where the hypothesis has been logically derived from the secondary research, and will be subsequently tested through a primary research.

The method thus provides a foundation to understand and analyze a hotel in an effective manner and make deductive statements that formed the base of the field research.

Thus, the research design as developed by the researchers consists of the following steps:

- Deciding the research topic

- Assembling of secondary data

- Formulation of research methodology and research tools

- Primary data collection

- Data analysis

- Conclusion


According to Sekaran (1992), Hypothesis is proportion stated in a testable form, which predicts a particular relationship between two or more variables. Hypothesis is a deductive method of carrying out a research. The process of induction is that data are obtained, some creative insights occur and based on these hypothesis is generated.

The hypothesis derived at the end of this research work has been formulated as:-

H0- REVPAR does not take into consideration other departmental revenue or ancillary revenue.

H1-REVPAC, as performance indicator for the measurement of overall performance of hotels.


The nature of the research question calls for the use of two types of research tools: an interview and financial data from the related hotel. The researchers interviewed the General Manager of Taj Residency Aurangabad, Mr. Ashok Vasudevan and got the hotel’s financial data for the year 2005-2006 for the analysis. The objective of the interview was to understand the perspective of the General Manager about the current revenue turnover, growth of the hotel and his views on REVPAC as measure for hotels overall performance instead of REVPAR and its impact on the hotel operations. By means of the interview, the researchers extracted a good idea of how the hotel is fairing in the market with regards to its competition. The interview did not entail a lot of detail and time on the part of the interviewers and the subject, due to lack of time and constraints of the General Manager, whereas the financial data which was acquired from the hotel for the analysis of the hotel’s intra performance was off high relevance. As the entire secondary review was dependant upon the primary field research. The financial data which was analyzed consisted of the flash reports of the critical months with regards to the different seasons; hotels go through namely peak and off peak season.


In the above research the use of questionnaires would not have been applicable as the research requires financial data, as hard data facts need to be compared between the two different financial years of the hotel, so as to see how the analysis of the data would help the hotel and thus be implemented in the near future. The financial data collected just complimented the secondary research conducted thus further proving its point by choosing financial data over questionnaires. The interview which was taken also helped in providing a further understanding in interpreting the data accurately.


For the purpose of this study, the researchers selected one 5 star property of the Taj group of Hotels namely The Taj Residency Aurangabad as this hotel was well suited for the research conducted. The choice of city was due to the fact that it was a good mix of tourist and business travelers.

The data collected from the hotel comprises of flash reports of important months in the hotel. The reports given are not complete in nature due to confidentiality of the reports. The reports given provide an insight of the hotels work for the financial years of 2004-2005 and 2005-2006 thus enlarging our population of data. The population of data comprises of figures of the hotels room income and food and beverage income with regards to the hotel.


According to Manheim (1977, pg270), a sample is a part of the population, which is studied in order to make inferences about the whole population. A sample represents the entire population. The sample should be judiciously selected as all conclusions drawn about the sample being studied are generalized to the entire population.

The sampling for the research is based upon 5 different months over a period of two financial years. The researchers intended on getting data from only one hotel in Aurangabad. The researchers also anticipated on getting month end reports for five different months over a period of two financial years. The sample size is sufficient as it shows how the hotel progressed with regards to its earnings from customers during the various hotel seasons Studying the sample rather than the entire population is likely to lead to more reliable results mostly because there will be less fatigue and fewer chances of errors in data collection and interpretation especially in case of 5-star hotels as the financial data of the different hotels would be vast in nature and would cause mental fatigue and stress.

The sampling technique used by researchers was purposive sampling or otherwise known as judgmental sampling which was a tedious affair, as it involved efficient selection of financial data from the hotel. The different months; financial data used for the analysis was selected after a long thought, as the selection of the months was done in consideration with the seasonal changes hotels face every year. Thus the use of this sampling technique is justifiable as there is an efficient break up between months and a good flow in a trend analysis is prevalent, thus no discrepancies can be seen thanks to efficient sampling. This sample technique is suitable for our research as the population can be very large and moreover, use of stratified sampling or cluster sampling is inappropriate as collecting and assembling financial data into clusters or stratas can become very complicated and time consuming, especially in the hotel industry.


Data Analysis is essential because when data is in the raw form, it is very difficult to interpret and understand as information can stay hidden and the true picture at times may not be portrayed. Data analysis can be qualitative or quantitative.

The interview with the General Manager though highly informal in nature, yielded qualitative data, as a lot of information was inculcated during that period of time, whereas the financial data protracted from the hotel was highly empirical in nature, which was analyzed through graphical representation. The information and interpretation obtained was compared to verify the hypothesis derived from the secondary research work.


The research process adopted was designed to achieve the objectives of the research being carried out. A structured approach was followed for arriving at the hypothesis. The study strictly relates to Taj Residency Aurangabad in the city of Aurangabad. Through the research strategy applied, data goes through a systematic flow of processes, making it available as verifiable information, useful for further scope of research.



The objective of this chapter is to interpret the interview of the General Manager and graphically represent the data gathered through various reports and analyze the same to see if the hypothesis that was generated has been supported.


The researchers, collected data on the basis of room revenue, food and beverage revenue which included The Garden Café (coffee shop), Room service, Banquets, Garden Bar, The Residency Restaurant and the other Food and beverage income which included renting of the Royal Palm Lawns or the Banquet halls and other miscellaneous income which included shop, telephone, guest laundry, health club, business centre, internet income and miscellaneous income (courier facilities, bouquets etc.), Along with the non residential covers in hotels and number of in-house guests. The following data was obtained from the hotel by analyzing their different reports such as Daily Business Reports (DBR), Flash Reports, and the profit and loss statements (P&L statements).

From the data collected the researchers computed the following from the data.

Abbildung in dieser Leseprobe nicht enthalten

- Where the following are as follows.
- Room income includes the revenue from all market segments
- Food and beverage income includes revenue from - The Garden Café (coffee shop), Room service, Banquets, Garden Bar, The Residency Restaurant
- Other miscellaneous income include services such as Telephone income, Guest laundry income, Health Club income, Beauty Parlour income, Business Centre income, Florist, Internet income and other Miscellaneous income such as couriers etc
- Total number of customer is the sum of in-house guests and non - resident covers.

Using the computed data the researchers carried out the following analysis.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4.1

The REVPAR analysis through the months across the years 2004-2005 and 2005- 2006 suggests the performance of rooms across the months taken into consideration are as follows:

APRIL - The REVPAR for April in 2004-2005 is higher than 2005-2006 because the room inventory in the year 2004-2005 was lower than 2005-2006. The performance of 2004-2005 in relation to occupancy and average daily rate to generate room revenue keeping in mind the total inventory, season and market share was higher than 2005- 2006.

JUNE - The REVPAR for June in 2004-2005 is higher than 2005-2006 because the room inventory in the year 2004-2005 was lower than 2005-2006 and the performance of 2004-2005 in relation to occupancy and average daily rate to generate room revenue keeping in mind the total inventory, season and market share was higher than 2005-2006

SEPTEMBER - The REVPAR for September in 2004-2005 is lower than 2005-2006 because the room inventory in the year 2004-2005 was lower than 2005-2006 and the performance of 2004-2005 in relation to occupancy and average daily rate to generate room revenue keeping in mind the total inventory, season and market share was lower than 2005-2006

DECEMBER - The REVPAR for December in 2004-2005 is lower than 2005-2006 because the room inventory in the year 2004-2005 was lower than 2005-2006 and the performance of 2004-2005 in relation to occupancy and average daily rate to generate room revenue keeping in mind the total inventory, season and market share was lower than 2005-2006.

MARCH - The REVPAR for March in 2004-2005 is lower than 2005-2006 because the room inventory in the year 2004-2005 was lower than 2005-2006 and the performance of 2004-2005 in relation to occupancy and average daily rate to generate room revenue keeping in mind the total inventory, season and market share was lower than 2005-2006.

The analysis of REVPAR does not bring about the picture of the overall performance, as to the ancillary revenue earned from the in-house as well as from the nonresidential guests, which is a function of the total capacity of rooms and ancillary services. Firstly because while calculating REVPAR, only room income is taken into consideration which does not bring about the paradox overall performance that is, if room revenue is less and ancillary revenue is more and vice versa, the performance may still be better than competition or the previous year. Hence proving the hypothesis that REVPAR does not take into consideration ancillary revenue. This can be further proved by the interpretation of the graphs below.


Abbildung in dieser Leseprobe nicht enthalten

Figure 4.2

Abbildung in dieser Leseprobe nicht enthalten

Figure 4.3

In the above Figure 4.2, the graph, explains how hotels divide their total turnover into room revenue and ancillary revenue for the year 2004-2005. The breakup of the revenue is done in terms of percentages and over a period of 5 different months. From the graph it can be seen that the ancillary revenue for the months of April and December is actually higher than that of room income in terms of percentage. Though the ancillary revenue for the remaining months is lower than that of the room income it is still very much comparable to the room income. The percentage breakup for the hotel for those months on the whole with regards to the ancillary income would be 45 to 50% and room income would be 50 to 55%.

In the above figure 4.3, the graph, explains how hotels divide their total turnover into room revenue and ancillary revenue for the year 2005-2006. The breakup of the revenue is done in terms of percentages and over a period of 5 different months. From the graph it can be seen that the ancillary revenue percentage for the 5 months is less than that of the room income. But even then the percentages are comparable as overall for the year 2005-2006 the ancillary revenue is around the 40 to 45 % whereas the room income is around the 55 % mark

From the above two graphs, it can be safely concluded that though the hotel’s room income is a bit higher in terms of percentages than the ancillary income, the hotel cannot just measure their overall performance by only looking at the room income after all the ancillary income does claim a fair share with regards to the hotel’s turnover breakup. Thus it can be seen that a hotel can’t justify its overall performance indicator by just looking at its rooms and hence needs to look at ancillary revenue as well. And this can be made possible by looking at REVPAC (Revenue per available customer) which looks at total turnover of the hotel which is then divided by the total number of customers. Hence proving the hypothesis that “REVPAR does not take into consideration ancillary revenue” and “REVPAC, as performance indicator for the measurement of overall performance of hotels”.


Abbildung in dieser Leseprobe nicht enthalten

Figure 4.4

The Turnover and REVPAC analysis, through both the years suggests that the performance of rooms in 2004-2005 and 2005-2006, the turnover from the rooms and ancillary revenue over 2005-2006 has increased from the year 2004-2005 indicating that the overall performance is better over the last year. The analysis of the REVPAC showed a similar trend with the revenue from each customer has over 2005-2006 has increased from the year 2004-2005 indicating that the overall performance is better over the last year and also showing that the revenue from rooms and ancillary revenue has increased. This is because while calculating REVPAC, the rooms along with the ancillary revenue is taken into consideration as a performance indicator for overall performance as both the factors are essential in computing and interpreting for the year or against competition would reflect the overall.

Therefore proving the hypothesis that revenue per available customer is a performance indicator for hotels overall performance.


On analyzing the collected data, the researchers came across some interesting facts which supported the proposed hypothesizes. A fact like REVPAR does not take into consideration other departmental revenue. Also it came to the notice that REVPAC takes into consideration the entire turnover and indicates overall performance of the hotel.



The researchers in the document showed how hotels need to change their current views on hotels and adapt them in accordance with the current changing scenario. This is possible by adopting and incorporating new ideas proposed by analysts and researchers. The researchers in this document focused on upcoming problems of the hotel industry. One of most important being, hotels not looking at customers with utmost importance. After all customers are the main sources of income to hotels. This gives a hotel the right to actually view their overall turnover performance on the basis of customers, with the researchers suggesting REVPAC (Revenue per available customer) as a measure of the hotel’s overall performance.

The above suggestion given by the researchers is based upon the literature review and the field research conducted in Aurangabad. The literature review comprised of the importance of customers and how hotels should go about looking at them. The researchers in the review also said how hotels should not and why not look at physical assets only to measure a hotels overall performance. It also stated as to how hotels should look at the qualitative aspect of their hotel with regards to customer satisfaction.

The primary research conducted in Aurangabad revolved around Taj Residency Aurangabad. With the data which was collected from the hotel, the researchers were able to prove their hypothesis by doing a trend analysis between the two financial years namely 2004-2005 and 2005-2006. The trend analysis comprised of the growth of REVPAC in the hotel over the selected months in conjunction with the hotel’s turnovers. The other trend analysis consisted of the hotel room’s income being compared to the hotel’s ancillary revenue. Thus further proving the hypothesis which stated “REVPAR does not take into consideration other departmental revenue or ancillary revenue” and “REVPAC, as a performance indicator for the measurement of overall performance of hotels”.


- Effects of market share on REVPAC could be looked into with greater detail as it plays a huge role in calculation of REVPAC of a hotel and its overall evaluation.

- Contribution margin of revenue from different hotel departments while calculating hotel turnover could be looked into with greater detail for future analysis.

- Calculating number of guests in hotel can be further researched upon as to get a more accurate figure.

- Suggested Hypothesis H1 could be put into use for the measurement of a hotel’s overall performance.



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Room Capitalization to Customer Capitalization
University of Huddersfield
Revenue Management
Catalog Number
ISBN (Book)
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654 KB
Room Capitalization to Customer Capitalization - a more robust performance indicator for the Hotel Industry
Revenue Management, Hotels, Forecast, Performance Measurement
Quote paper
Apurv Batra (Author), 2007, Room Capitalization to Customer Capitalization, Munich, GRIN Verlag,


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