Revenue Management and CRM: A Conflict of Strategies?

By Stowe Shoemaker Associate Dean of Research, Conrad Hilton College of Hotel and Restaurant Management | October 28, 2008

Hospitality managers have paid much attention to the practice of both revenue management and customer loyalty over the last few years. Unfortunately, these managers often come from different departments; and as a result, they often have different goals and different financial targets. For instance, those in marketing are measured by increases in repeat purchase, word of mouth, and satisfaction, while those in revenue management are measured by REVPAR index and yield index. While in an ideal world these goals would be complimentary, this is often not the case. Rather than being a zero sum game, it is a winners take all game, where the win is the incentives that come from reaching specified targets. For example, in one of my executive education classes a sales manager of a large international hotel company told me the following story:

We had very large meeting client that accounted for about $250,000 a year in revenue and visited three to four times a year. At one meeting we had booked a music awards ceremony in the room next door. Unfortunately the sound proofing was not the best and the meeting for our big client was ruined. When the meeting planner asked for a $35,000 refund I was told by both the executive chef and the general manager to say no. The chef was worried about his food cost, the figure that his bonus was based upon. The general manager was concerned about quarterly profitability, as his bonus based was upon that figure. The meeting client was not happy and never booked again.

This story is an example of why I call revenue management and customer loyalty a potential conflict of strategies. Focusing on revenue management without regard to the customer often destroys loyalty. In the same way, focusing totally on customer loyalty without knowledge of the customer's worth can often have a major impact on revenue.

This and future articles will argue that revenue management and customer should and can go hand in hand. The thesis is that the old definition of revenue management - "tell me when you want to arrive and I will tell you what to pay" or "tell me what you want to pay and I will tell you when to arrive" should now be "let me identify who you are, and then you tell me when you want to come and I'll tell you what to pay." The difference - let me identify who you are - is the key that ties marketing and revenue management together. For it is the person's behavior (known in the airline business as personal name record or PNR), that determines the price the customer will pay.

In the casino industry, the behavior is measured by "theoretical win," which is the amount of money the casino will win from the customer. For one large casino company the actual room rate the customer will pay is determined by subtracting the theoretical win from the room rate determined by the revenue management system. Therefore, customers with high theoretical win will pay less for the room than those who have a lower theoretical win. For instance, if the revenue management system says that the room should sell for $400 and the theoretical win of the customer is $200, then the room cost to the customer is $200. For the customer who stays at the casino and is not a gambler (a theoretical win of $0) the room will be $400. The system used for this one casino company also estimates how many rooms should be held for the top players.

Non gaming properties, such as hotels do not have theoretical win as a financial measurement, but they do have frequent guest programs that can be used to determine a customer's worth, visit frequency, and the like. In addition, if the reservation comes through a central reservation line management can also help identify the potential long-term value customers. Those who are coming to attend a wedding in the area have much different long term potential than those who are salespeople visiting a local client. The customers are different and should be treated as such. This may be considered hearsay by some, but it is the foundation of customer loyalty. All customers are treated well, but those loyal customers are treated better.

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