Lodging industry RMs face hard supply constraints. Most foodservice operators face soft supply constraints. As a result, the revenue management challenges faced by foodservice operators are different from those encountered by hoteliers. The fi rst of these differences Essential RM Term
Room night: The single night’s use of a guest room.
For example, one room sold for three consecutive nights yields three room nights.
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relates to capacity. Consider the fact that limited-service hotels, which make up over 75 percent of the hotels in the United States, essentially sell just one product: guest rooms.
Full-service hotels sell additional products and services, but their guest room night sales are as constrained as are those of their colleagues in the limited-service lodging segment.
On any given night, hoteliers simply cannot increase their number of room nights available for sale at any price. Unlike the supply of hotel rooms foodservice supply is based on two factors, rather than one product. In this context, foodservice supply in a sit-down restaurant can be defi ned with the following formula:
Number of seats available ⫻ Hours of seat availability ⫽ Total available seat supply Thus, for example, a restaurant with 150 seats that is open for 12 hours per day would have a total available seat supply of 1,800 seat hours (150 seats ⫻ 12 hours ⫽ 1,800 total available seat hours). With 1,800 seat hours available, longer dining times reduce the number of customers that can be served in that number of seat hours, while shorter dining times increase the number of guests that can be served.
Excluding, for this illustration, the ability of the foodservice operation to increase supply via the use of carry-out or delivery sales, the manager of this business could also increase the available supply of seat hours by increasing the number of seats in the operation or by extend-ing its operatextend-ing hours. Thus, for example, a restaurant currently closextend-ing its doors at 10:00 P.M. could elect to increase available seat supply by extending its closing time until 11:00 P.M. Doing so would increase its operating costs somewhat but it would also increase the seat hours avail-able and thus its supply capacity. In response to reduced demand, the operator could, of course, elect to reduce operating hours. That’s the good news. The less good news is that demand for dining between 10:00 P.M. and 11:00 P.M. will likely be quite limited.
Recall that a hard or soft supply constraint affects an RM’s decision making primarily when demand exceeds supply. Also, it is important to recognize that despite its importance, restaurateurs do not gain increased revenues merely from increasing seat capacity or supply, but rather from the amount of money spent by those guests occupying each available seat.
Thus, RMs in the foodservice industry should be especially concerned with RevPASH (revenue per available seat hour), a concept that will be explored in detail in Chapter 11.
From a revenue management perspective, it is also interesting to note that hotels and restaurants vary greatly in their knowledge about their customer’s spending. Hoteliers know that a guest occupying a room will pay the room rate agreed upon in advance and con-fi rmed at check-in. In contrast, restaurateurs do not know the income-producing capacity of an occupied seat until the guest has placed his or her order. This, of course, presents an additional challenge for RMs working in the foodservice industry. Even with this setback, foodservice operators benefi t from a positive difference between themselves and those in the lodging industry. Recall that an unsold room night is lost forever. The restaurateur, however, who does not sell an aged Porterhouse steak on a given night will likely have the opportunity to sell that same item the next day. Again, some additional costs may be incurred due to product shrinkage, spoilage, and the like, but the ability to recover at least some of the business’s lost revenue-generating capacity related to products sold is retained.
A fi nal difference between the lodging industry and the foodservice industry is that of daily price variation. RMs working in the lodging industry are accustomed to price changes made on a monthly, weekly, daily, and even hourly basis in response to changes in demand.
Their foodservice counterparts have not adopted this custom and thus do not typically
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adjust their prices in a similar fashion, although some restaurateurs do vary prices between meal periods—for example, a lunch price versus dinner price for the same menu item.
Figure 5.1 summarizes some of the signifi cant differences, similarities, and common practices that distinguish hospitality industry RMs from those in other businesses, such as, in this example, the breakfast cereal industry.
This chapter began with the posing of a reasonable question: “Why is revenue manage-ment in the hospitality industry any different from revenue managemanage-ment in other fi elds?”
Having, we hope, satisfactorily addressed that question, it now remains for you to learn about the societal restraints placed on you as an RM when you utilize techniques and tools to address the hard and soft supply constraints you will encounter when performing your job.
Figure 5.1 Revenue Management Characteristics in the Hospitality Industry
Issue Cereal Maker Hotelier Restaurateur
Supply constraint None Hard Soft
Ability to increase supply Unlimited None Limited Ability to decrease supply Unlimited None Limited Ability to carry over excess
supply to the next day
Yes Service capacity: No
Product: No
Service capacity:
No
Product: Yes Practice price modifi cation
in response to variation in short-term demand
Optional Almost always Almost never
Can benefi t from effective Revenue Management practices
Yes Yes Yes
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Those who understand economics recognize that business and capitalism go hand in hand.
In a pure capitalist system, RMs would be completely free to establish and then manage the prices they felt would best serve the interests of their business’s owners. Such an ap-proach would be in keeping with the observations of Kenneth Minogue, Emeritus Professor of Political Science at the London School of Economics. Minogue stated, “Capitalism is what people do if you leave them alone.”1
Although the certainty of Minogue’s observation may be subject to debate there can be no debate about the fact that there are indeed societal limitations and governmental restrictions placed on the activities of all RMs. RMs are not left alone when it comes to pricing. The restrictions they face take the form of legal and ethical constraints that must be well understood before RMs begin to practice their profession.
RMs must be aware of the laws that affect their actions but the ethical behavior of RMs must be understood as well. Although some laws dictate precisely what RMs can Essential RM Term
Capitalism: An economic and political system in which a country’s trade and industry are controlled by private owners for profi t, rather than by the state.
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and cannot do, ethics regulate what they should and should not do. The inclusion of revenue management-related ethics is in keeping with the view of Thomas Jefferson who wrote,
“I consider ethics, as well as religion, as supplements to law in the government of man.”2 It is to the legal and ethical aspects of revenue management that we now turn our attention.