NB: This is an article by Ahmed Mahmoud founder of revenueyourhotel.com
Revenue management focuses especially on short and long term profit maximization and is an essential tool for hotels to make profit. On the contrary, customer relationships management (CRM) focuses on a long term relationship with the customer in order to increase the profit no matter how much revenue is going to be generated.
The purpose of revenue management is “to maximize revenue and ultimately profit through improving sales” and the revenue manager has to set the right prices in order to sell the maximum number of rooms at the highest price the customer is willing to pay. This is done by “increasing the operating efficiency and effective management of three main areas: pricing, inventory control and costumer mix or market segment. Capacity constrained service industries are faced with the problem of allocating their perishable inventories to demand from different market segments with the goal of maximizing their revenue.
The least understood aspect of revenue management (RevM) appears to be the need to devise business policies and procedures as a precursor to gathering the information needed for accurate forecasting, and then the continued enforcement of them as necessary ingredients of the constant refinement of inputs needed for successful RevM. In addition, the sheer volume of data that needs to be processed and the difference in the optimization algorithms from company to company requires the extensive use of computers and specific mathematical skills. As such, few hospitality companies have the internal resources to develop effective revenue management programs on their own.
Customer Relationship Management
CRM is a relatively new business strategy that has its roots in sales force automation and has been enabled largely by advances in and the decreasing cost of information technology. Given the relative newness of CRM, citing a traditional definition is difficult. Customer Relationship Management (CRM) is a strategy used to manage the hotel’s interaction with customers. Its goal is to find, attract, win customers and retain a good relationship with them.
According to CRM Guru.com, “CRM is a customer-centric business strategy which dictates re-designing of functional activities, drives re-engineering of work processes, and which requires CRM technology to implement.” In essence, CRM is about enabling customers to have what they want, when they want it and how they want it – it is about identifying, retaining and growing a company’s most valuable customers.
While the concept of CRM may be simple, the implementation of a comprehensive CRM strategy is not. To begin, effective CRM requires a complete change in most companies’ strategic orientation from a product to customer focus. This usually requires not only substantial investments in technology to enable the identification and tracking of customers, but also a re-engineering of business processes to enable the delivery of products and services tailored to the needs of specific customers.
The adoption of CRM in the hospitality industry has been impeded by a number of factors. These include the persistently fragmented nature of the industry, the disparate, proprietary and relatively immature nature of IT systems, and the additional complexity associated with managing a perishable product that is sold through a variety of distribution channels. However, more rapid progress is being made due in part to the continued consolidation between hospitality companies and hospitality IT vendors.
Much research is being done in the marketing field on customer relationships management that shows CRM has a strong focus on the management and development of profitable customer relationships. The implementation of CRM activities generates better firm performances when managers focus on examining the value of customer.
Maintaining a good relationship with a good customer is another way to maximize profit for hotels, because they provide services and have a strong incentive to satisfy their customers. This is why it is difficult to imagine how could a hotel making profit without considering CRM.
Every bit of feedback hotels get from customers is valuable, whether it’s positive or negative and whether they agree with it or not. Hoteliers have to take the good and the bad and realise the value of both.
Both revenue management and customer relationship management have an influence on profit maximization, but work in different ways with different objectives. Revenue management allows hotels to maximize their revenue, but little research has been done on its effects on the customer relationship. In fact, revenue management implies customer conflicts. It can be viewed as unfair by customers. For instance they may ask, “Why do people who stay at identical hotel room sizes end up paying different prices?” If the hotel does not set loyalty program guidelines, it may happen that loyal customers discover that others pay less because they booked earlier or later and they may never book a room in that hotel again. Using revenue management, hotels maximize their profit and increase their revenue in the short term, but might lose some clients and not perform in the long term if they under-evaluate the customer relationships management.
Studying hotel revenue management and making a link with customer relationship management is important in order to find solutions to overcome the potential managerial conflict that can arise between them. Hotels utilizing revenue management strategy have to consider how it will impact customer reference prices and transactions and ensure that customer perceptions of fairness are not adversely affected.
There are a variety of scenarios in which revenue is not maximized due to either short-term revenue enhancement at the expense of customer-specific data or vice versa. And yet, for the most part, this is the state of the industry. There are both business and technical issues to be overcome. Nonetheless, as RevM and CRM become more widely accepted and less expensive, traditional RevM concepts will be merged with those of CRM, one-to-one marketing and business intelligence to create even greater revenue maximization. The benefits associated with doing this should outweigh the costs – especially if the blending of the two strategies is undertaken at the outset.