News for the Hospitality Executive
David K. Hayes Ph.D., Allisha A. Miller, and Joshua D. Hayes, MA, Peggy
November 13, 2011
Hoteliers have spent the past decade improving their skills in revenue management. Subsequently the stature of the revenue manager has grown. This is simply because companies increasingly recognize the impact on profits achieved by talented revenue managers.
Today revenue managers are involved in all key sales and marketing decisions. But that’s true in only two out of the three major revenue producing areas in most full-service hotels. There remains only one significant revenue generating department in which a widespread “revenue managers keep out: this means you” mindset clearly persists.
Front Office Managers (FOM) were among the first hoteliers to recognize the importance of pricing, reservation, inventory and channel management to RevPAR optimization. From the earliest days of “Yield Management” application to todays’ sophisticated customer-centric revenue optimization strategies, the impact revenue managers make on room sales is unmistakable. As a result, skilled revenue managers are always welcome at an FOM’s or rooms manager’s departmental planning meetings. In fact, their absence at such meetings, rather than their presence, would be notable.
Directors of Sales and Marketing (DOSM) were the second group of department heads to welcome the contributions of well-trained revenue managers. Today few DOSMs would try to make the case to a hotel’s GM that revenue management principles do not apply to the sale of group rooms and meeting space. In the current competitive environment a hotel lacking a talented revenue manager who is directly involved in the property’s sales and marketing department would actually seem quaint (and quite unacceptable).
Only F&B Directors, Chefs, and most free standing restaurant managers persist in keeping their meeting doors closed to revenue managers. Price, inventory, and capacity management in the F&B department is the last major income producing area within a full-service hotel that operates without a customer-centric revenue management focus. But that’s not actually their fault. It’s due to the fact that nearly 100% of today’s food service professionals possess a cheeseburger mentality.
The cheeseburger mentality is so widespread because it is elegant in its simplicity. It can be summarized by the following guiding principle:
Cheeseburgers sell for more than hamburgers because they include cheese.The use of this principle can be seen on the menu prices of almost every full-service hotel food outlet as well as free standing restaurants ranging from fine dining to quick service.
Inherent in the cheeseburger mentality is this simple belief:
The cost of producing a product dictates its worth.It might be nice if that were true. It is not. Don’t misunderstand. Cost control is essential to a manager’s operational success. That, however, does not translate into cost control becoming the only factor, or even a very relevant factor in determining product price. In fact, consumers are famously indifferent to a producer’s costs when assessing a product’s value to them. Actually, many may even find increased satisfaction when acquiring products at a price they believe to be below the seller’s investment. They are not looking out for a seller’s interests; they are looking out for their own. Consumers are seeking value, and value is as much a perception as it is a reality. Perception is affected by many extenuating circumstances.
For instance, according to the “cheeseburger mentality” a retailer selling hot chocolate would calculate product costs, labor cost, etc. and determine the appropriate price per cup. Fair price equals good sales. Right? Not necessarily. If that purveyor attempted to sell the hot chocolate on a scorching summer day at the beach, price wouldn’t matter. Hot chocolate would be of no value to the target market. It is safe to assume that demand would probably be nonexistent at any price. No sales equal no profits. But if the same hot chocolate was sold on a cold day by an outdoor park’s ice-skating rink, demand would most likely be substantial. The perceived value in that instance might even justify a higher price point than that calculated by cost alone.
Sir Rocco Forte, Chairman Rocco Forte (hotel) Collection put it nicely; “A lot of hotel companies tend to be run by accountants these days, who spend their time looking at costs. You need to make a profit these days. If you don’t have a top line, you can control costs all you want, but you won’t make a profit.[i].
The truth is that only after selling prices accurately reflect consumer perceptions of value can a business determine the costs it can incur while still generating needed profits.
Experienced revenue managers know that fact well. They routinely match the products and services offered and the prices charged for them with their customers’ desires. To do this they must first know their customers and more importantly be exceptional at providing satisfaction to them. It is not simple. Customer demands may vary greatly based on any number of variables. Time of day, day of the week, weather, celebrations, social events, holidays, networking, desire for fun, relaxation, indulgence, status, convenience, savings, and more. It takes expertise to consider all the influences in individual environments, determine the nuances in customer expectations, and then fulfill their demands.
This does not mean however that base prices fluctuate. Quite the opposite. Price inconsistency decreases value perception. But there’s a contradiction here, right? Revenue Management means utilizing knowledge of a multitude of variables to coordinate a multitude of responses, including marketing, packaging, discounts, product variety, presentation changes, imaging, and communication. It really is about establishing a value for the product and then finding the best way to convince customers of it’s worth to them, while simultaneously making them believe they are getting a good deal. It’s not easy.
The diamond industry has this concept perfected. People believe diamonds are valuable because they perceive them to be so. Many factors play into this, such as romance, status, setting, and image. Diamonds have no function. Diamonds are incredibly expensive. Unless one is highly skilled, they cannot even be easily distinguished from their cubic zirconium imitations. Yet, a diamond is the one product that people from across the economic spectrum will long for, strive for, scrimp and save for. From a revenue management perspective the value and price of diamonds make great sense. They provide everything the customer is looking for; and the price is worth paying.
Because the value and price of diamonds are not directly related to the cost of producing them, their pricing makes no sense to those with a cheeseburger mentality. Those with a cheeseburger mentality would maintain the misconception that diamonds are valuable because they are rare and difficult to mine. They are. But that is not why they can sell at their current price level. A diamond’s price is entirely based on customer perceptions existing in the market place, not their cost.
The Five Guys Burgers and Fries restaurant chain is one that does not have the cheeseburger mentality. They apply customer-centric revenue management principles well. Their product is simple and of high quality. The burger is sold at a fixed price. The emphasis is not on being the lowest priced burger. It is on value delivered. The customer orders the burger and chooses whatever toppings they want added; …at no extra charge. The result in the customers’ mind is, “Free cheese …and anything else I want! What a great deal”. Five Guys gets it. The value delivered is primary; product cost is secondary.
It’s time the third revenue producing area in full service hotels discovers the importance and impact that customer-centric revenue management can have on food and beverage sales. Customer-centric revenue management is here to stay. It’s not a fantasy, it’s not a phase,…it’s reality. It’s essential to success. When revenue managers are allowed in hotel F&B meetings perhaps they’ll be given a chance explain why.
[i] “Hotels” magazine, August 2008, page 22.
About this Article: This article is based on information in Revenue Management for the Hospitality Industry by David K. Hayes and Allisha A. Miller. © 2011 John Wiley & Sons, Inc. All rights reserved. To purchase this book or obtain information about bulk sales, please contact [email protected]
About the Authors: Dr. David K. Hayes and Allisha A. Miller operate Panda Professionals Hospitality Management and Training (www.pandapros.com) where they create and deliver innovative and practical educational materials and pricing-related seminars exclusively for those in the hospitality industry. Joshua D. Hayes, (MA Stanford, 2011) is currently enrolled in a doctoral program at the University of California Davis and is a Panda Professionals consulting author. Peggy Hayes is co-owner of Panda Pros and Director of Editorial Services.
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