Acknowledgement

First and foremost, I would like to express my deepest gratitude and sincere appreciation to Dr. Do Ba Khang, research advisor and chairman of the research committee, who patiently gave his continuos guidance, construction suggestion and enthusiastic help during the research period. His concern, consideration and understanding deserve a special note of thanks and appreciation. I am also indebted to Prof. John. C. S. Tang and Dr. Hans Stoessel for serving as committee members. Their comments and suggestions have substantially improved this work. Moreover, special and unlimited gratitude is also expressed to the Government of Switzerland who provide the author scholarship to do MBA at the SAV program and AIT Special thanks to Mr. Nguyen Duy Bot who is kindly enthusiastic about writing an introduction letter to help me more easily to access to Huunghi Hotel. I also would like to express my thanks to those who provided data for the completion of this study such as Mr. Mai Xuan Thang, Manager of Huunghi hotel, Mr. Dung - Manager of Dienluc hotel, who spend their precious times for lengthy interview sessions and company visit. No words could possible to express deepest gratitude to my beloved parents, brother for their inspirational and moral support. Last but not least, sincere thanks to all the faculty members at AIT and SAV and friends for their help and boundless inspiration.

Abstract
While Vietnamese hotel companies are looking for solutions for the current stagnation, managing revenue is one area that has been paid less attention. The purpose of this study is to explore possibility of appropriately using Yield Management technique to help a domestic hotel increase revenue. Huu nghi hotel, the best hotel in Haiphong has been chosen as a case for the study. First, through a review of literature on the Yield Management and its practical implementation, benefits, conditions and limitations when the techniques are applied in the hotel industry are highlighted. Second, through a problem solving approach involving: (1) understanding the context in which the hotel is operated, goals and constraints (2) investigating of practices relevant to managing and improving revenue in the hotel (3) analyzing the hotels demand, difficulties in the operating process are pointed out. Finally, a more appropriate segmentation scheme and a pricing proposal are given to help the hotel overcome the difficulties in boosting its revenue.

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Table of Contents
Chapter Title Acknowledgement Abstract Table of contents List of tables List of figures i ii iii v vi

1 Introduction ..........................................................................................................................................................1 1.1 Background.....................................................................................................................................................1 1.3 Objectives of the study....................................................................................................................................1 1.4 Research framework.......................................................................................................................................3 1.5 Research methodology....................................................................................................................................4 Data collection..................................................................................................................................................4 Method of analysis............................................................................................................................................4 1.6 Scope and limitations of the research.............................................................................................................5 1.8 Organisation of the study................................................................................................................................5 2 Hotel Yield Management .....................................................................................................................................6 2.2 General issues in managing revenue in hotel ................................................................................................6 Main operating activities directly affect revenue management........................................................................6 The nature of problems in managing revenue in hotel.....................................................................................7 2.4 Basic concepts of yield management ..............................................................................................................9 Concepts of Yield management........................................................................................................................9 Appropriate situation for effective yield management application................................................................10 Main Components of yield management system............................................................................................10 Hotel industry applications.............................................................................................................................11 Managerial implications of yield management systems.................................................................................13 2.6 Yield management solutions for hotel problems...........................................................................................14 The overbooking problems.............................................................................................................................15 The pricing problems......................................................................................................................................16 Capacity allocation problems.........................................................................................................................16 Segmentation problems..................................................................................................................................17 Conclusion......................................................................................................................................................17 3 Overview of the Huu Nghi hotel ........................................................................................................................18 3.2 Overview of hotel industry in HaiPhong city................................................................................................18 HaiPhong City................................................................................................................................................18 The hotel industry...........................................................................................................................................18 3.4 The HuuNghi hotel:.......................................................................................................................................19 General description.........................................................................................................................................19 Analysis of revenue performance:..................................................................................................................29 Evaluation of current operating practices.......................................................................................................29 Identification of areas for improvement........................................................................................................31 4 Demand analysis for the hotel ...........................................................................................................................32

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4.1 Customer profile............................................................................................................................................32 Segmentation .................................................................................................................................................32 Average rate and contribution of each segment.............................................................................................33 Guest Characteristics......................................................................................................................................33 4.2 Effects of the current segmentation practice on operational decisions........................................................35 4.3 A modified segmentation scheme..................................................................................................................35 4.4 Demand pattern.............................................................................................................................................36 Seasonal pattern..............................................................................................................................................36 Daily pattern ..................................................................................................................................................39 4.5 Conclusion.....................................................................................................................................................40 5 Proposed yield management applications for hotel ........................................................................................41 5.1 Assess conditions for applying Yield management.......................................................................................41 Favourable conditions:....................................................................................................................................41 Constraints:.....................................................................................................................................................41 How should yield management be applied in the hotel?................................................................................42 5.2 A pricing policy proposal..............................................................................................................................42 General issues.................................................................................................................................................42 Pricing policies:..............................................................................................................................................43 5.3 Managerial implications...............................................................................................................................44 Group room sales............................................................................................................................................45 Transient room sales:......................................................................................................................................45 6 Conclusions and Recommendations .................................................................................................................46

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List of Tables
Table 3-1: List of international standard hotels in Haiphong Table 3-2: Comparison of forecasting and real demand (number of room sold) Table 3-3: Current rack rate of the hotel Table 3-4: Performance results in the last three years Table 4-1: Average room rate and contribution by segments (1998) 33 Table 4-2: Demand by segments 20 25 26 29

List of Figures
Figure 1-1: Research framework Figure 3-1: Organizational chart Figure 4-1: Monthly room sold over three years. Figure 4-2: Monthly revenue over three years Figure 4-3: Demand pattern of vacation travelers vs. business travelers Figure 4-4: Daily aggregate demand Figure 4-5: Daily demand of group tours, transient vacationers and business segments 3 23 38 38 39 39 40

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Chapter 1

1 Introduction
1.1 Background

Through a long time in the war and over one-decade thereafter under the policy of central planning, the tourism industry in Vietnam was almost completely stagnant. Tourism as well as hotel industry was marginalized in the national economy because it was considered by the government as no-producing material for the society. Moreover, Vietnamese people were too poor to think of travelling for leisure. At the same time foreign tourists hesitated to visit the war-torn Vietnam. As the result, demand for tourism and hotel was very low. The economic reform launched in 1986 initiated fast and radical changes in the countrys business environment. The changes have in turn created great opportunities for hotel industry when many foreign companies came to look for business opportunities. Development of tourism industry several years later also attracts more foreign visitors. Demand for hotel services, especially for hotels of international standard, significantly increased, leading to a shortage in both quantity and quality of hotel rooms. In response to the demand surplus situation as well as optimistic prospect of tourism industry, investors rushed to enter the hotel industry. In a short time many new hotels were built with various kinds from very big and luxury hotels with hundreds of rooms, to mini hotels with a small number of room tens of rooms. In an attempt to meet the demand as soon as possible, investors mostly emphasized on physical aspect of the service, they try to build nice building with comfortable rooms that meet international standard. After 1995, the number of hotel rooms still strongly increased while the growth in tourist arrivals has significantly slowed down. Surplus in hotel supply has started, and competition becomes more and more fierce. Operational inefficiency and service quality problems at the majority of hotel, especially domestic ones, just aggravate the struggle for survival and development. Occupancy rates at most hotels keep on decreasing, despite the effort by the hotels to reduce, often indiscriminately and without a clear strategy, the room rate to attract guests. The revenue of these hotels decreased drastically, putting the payback on investments and survival of the hotels at risk. At the same time, a quick look out side of the country of reveals a new approach to improve hotel productivity and increase revenue, has been adopted rather successfully by large international hotel chains. This approach commonly called Yield Management or Revenue management consists of a range of several techniques and strategies, from single to intuitive one to sophisticated mathematical models to an integrative computer-assisted revenue management system. It is therefore desirable to explore possibility of applying such approach to the hotel industry in Vietnam to help improving its competitiveness, at least through operational efficiency.

1.2 1.3 Objectives of the study

The main objective is to find an operational solution to increase revenue for the hotel. To achieve the main objective, the following objectives will be reached:

To review the various concepts and techniques for improving hotel revenues commonly known as yield management techniques. Benefits, conditions and limitations are highlighted when the techniques are implemented in the hotel industry. To explore possibilities of appropriately using yield management techniques in setting pricing policies to help an actual domestic hotel in Vietnam to overcome its difficulties in boosting its revenue in increasingly competitive market.

The first objective will be achieved through a thorough review of literature on the yield management and its practical implementation. However, sophisticated mathematical modeling will not be covered. Instead, the general issues and approaches, as the actual problems and difficulties will be presented. The second objective is achieved through a problem solving approach involving several stages: Understanding the hotels operating practice, goals and constraints. Analysis of the demand for the hotels room Developing and analyzing alternative solutions.

1.4

Research framework
OBJECTIVES

LITERATURE REVIEW

CURRENT PRACTICE

MARKET SEGMENTATION

INFORMATION SYSTEM

PRICING POLICY

BOOKING POLICY

DEMAND FORECASTING

DEMAND ANALYSIS

EVALUATION OF THE CURRENT PRACTICE

YM APPLICATION FOR THE HOTEL

CONCLUTION

Figure 1-1: Research framework

1.5

Research methodology

With problem solving approach, the aim of the study is to identify problems in Yield management practice at actual hotels under study and suggest a way to solve them. The analysis will be both qualitative and quantitative.

Data collection Getting required data for the research is very difficult because of two reasons: (1) hoteliers are not willing to provide information on their demand and daily operating, which may be used by their competitors for competition. (2) Hotels did not keep necessary information for yield management system. Therefore, hotels are chosen that selecting criteria are available and valuable of historical data. Six hotels were approached; they are allocated in Hanoi, Hochiminh City, Vungtau, and Haiphong. Of which two are joint-ventured hotels, the others are state-owned. Hanoi hotel, Amara hotel and Rex hotel refused to provide information because of disclosure information. Kimlien hotel and Dienluc hotel has not done any thing remotely related to yield management. Finally, thanks to the authors relationship with the hotel, Huunghi hotel agrees to cooperate. Therefore, this research will concentrate only on investigating the problems and possible solutions at Huunghi hotel. In depth interviews are conducted with the general manager, front office manager and receptionists to get information and understand policies of the hotel, system and procedures. Difficulties in managing revenue are determined here. The management have no ideas specifically to improvement of revenue management activities. Hence, instead of asking focusly on yield management practice, the questions are expanded to include some other managing issues such as marketing, accounting. Personal observation is carried out to get more understanding of procedures and policies of the hotel. It helps to define and confirm the real problems. By observation, information of guests: characteristics and behaviors can be obtained. Historical data are collected from several sources: receptionists notebook, accounting book and daily reports. The data helps to determine demand pattern of the hotel, characteristic of groups of customers and their behavior. The data also helps to confirm the determined problems and new problems may be found. Solutions can be derives and tested on the data. Secondary data were collected through Vietnamese tourist magazines, annual report of Haiphong Tourist Company, Internet. Method of analysis The research starts by reviewing of literatures on issues related to revenue managing in hotel, concepts of yield management, frequent problems of hotels, and yield management solutions. Search will be made to provide a base for approaching the hotel, to expose problems, and find direction for possible solutions. The current yield management practices are qualitatively investigated based on information from the interviews and observation. The market and demand pattern was analyzed by quantitative and qualitative methods. The analysis bases mostly on historical data.

1.6

Scope and limitations of the research

Scopes: The research focuses only on room function of the hotel. Other activities such as restaurant, bar, laundry, etc, will be ignored. Only problems related to managing revenue are considered. Others such as problems in accounting department or marketing department will not be discussed in this paper. Limitations: The research mostly bases on qualitative analysis, sophisticated mathematical modeling and computer system development are not focused. Hence, the recommendations for the hotel lack specific; they serve as guidelines only. However, it is hoped that the results obtained can provides some insights to help hotel management to adjust the practice to compete better in the market.

1.7 1.8 Organisation of the study

This study will be organized as follows: Chapter 1 is the introduction including the rational of the research, background and identification of the problem, objectives, and scope and limitation of the study. Chapter 2: a literature survey pertaining to the topic being considered by the research proponents. There are three parts as follows: Part I deals with the literature review on issues of revenue management in hotels, main operating activities that affect revenue management with problems often arise. Part II deals with the literature review of Yield Management. Concepts of yield management, conditions for implementing yield management, components of yield management, hotel applications, and managerial implications of yield management. Part III is overview of solutions for hotel problems

Chapter 3 is an investigation of revenue management practice in the hotel. An over view of the hotel industry, company profile will be mentioned in order to state the context in which the hotel was run. Analysis of yield management practice will focus on pricing, booking practice; segmenting, demand forecasting and information system. Chapter 4 will analyze the demand pattern of the hotel, how demand pattern and other operating policies may bring difficulties and how they affect revenue. Chapter 5 bases on literature on necessary conditions for applying yield management, and it considers the current condition on components of Yield management system, an assess of those conditions will be carried out. This chapter also answers for the question how should YM be applied in the hotel. A pricing proposal will be suggested with managerial implication. Chapter 6 will be conclusions.

Chapter 2

2 Hotel Yield Management

This chapter discusses about issues in managing revenue of hotel and approaches to increase revenue based on literature.

2.1 2.2 General issues in managing revenue in hotel

Main operating activities directly affect revenue management

2.2.1.1 Rate setting

Hotel practitioners have been making room-rate pricing decision for years. As all pricing decision, rate setting decisions for hotels are based on the economic principles of supply and demand. More specifically, demand relative to available supply on any given day determines the price in the market place. The essential elements of price theory include demand, competition and cost. These parameters offer a framework from which hotel room-rate decision can be made. Demand determines the highest rate that can be charged. Rate will vary tremendously depending on the market; thus the particular target market of a hotel needs to be clearly defined when making a pricing decision for it. Competition is a key element in putting a cap on the relevant range of prices. At peak demand periods, when competition is low, the relevant rang is higher and conversely at off peak periods. Cost structure is a base for setting different price levels in different demand situations. As customers become more sophisticated in manipulate the current pricing system, hotels eventually are forced to modify their pricing structure. Denny G.Rutherford (1995) listed three possible pricing strategies as follows: A single rate: offer a single rate for all transient inventories. That rate can change according to the season or the day of the week. This approach is easy to explain to customers and easy to administer, however, it fails to respond to customers willingness to pay. Rates by room type: This approach is currently used by many hotels. It is also easy to explain to customers because there maybe a perceptible different in the rooms offered at different rates. It improves on the one-rate approach by allowing the hotel to offer different rates on the same day, thereby realizing more revenue. But this approach certainly wouldnt work for a hotel that comprises just one type of room. Even if it had different kinds of rooms, a hotel would be limited by its actual physical inventory in the number of high-price rooms it could sell, so that potential revenue is limited by product levels and not demand levels. This approach to segmentation will not work in markets where customers are unwilling to pay for upgraded rooms, and it is operationally difficult for the front desk clerks and reservations sales agents to manage. Rates with fence discounts: Customers can segment themselves into appropriate rate categories based on their needs, behavior or willingness to pay. Such fences include advance reservations and non-refundable advance purchases. Those policies allow pricesensitive customers to gain a lower rate in exchange for reduced flexibility. On the other hand, traditional full-rate customers can have a room whenever they please. The important

aspect of fences is that they allow a hotel to sell discount rooms to one segment of customers without allowing higher-rate customers to trade down. Rates with fences are easy to explain to customers and every rate has a rationale. The downside of rate fences is that they are more difficult to manage than other approaches. Rate fences require sophisticated reservation and revenue management systems, moreover, a hotel must have regular rates that are correctly positioned for the marketplace. Fences must be combined with inventory control procedures to maximize revenues. That requirement goes beyond the yield management currently practice by many hotels.

2.2.1.2 Reservation policies:

Reservations are the lifeblood of any hotel operation, their value is clear both to guests and to hoteliers. Customers are benefited from assurance of room available and hoteliers lure by active scheduling rooms. The policies have strong influences on occupancy rate. Reservation policies includes three basic areas (Denney G. Rutherford): Reservation acceptance: conditions to accept a reservation Collections and recourse: ways to deal with guests who fails to honor a reservation. Overbooked houses: policies regarding nonaccommodation guests. The nature of problems in managing revenue in hotel Hotel managers have traditionally accepted the notion that a full house is a gamble. Even the language of the front desk reflects the uncertainty of the reservation system, using such terms as expected arrivals and expected departures. When rooms are scare, reservation managers gamble on these expectations, using history and instinct to make a rough estimate of how many reservations will be no-shows, how many expected departures will stay beyond their checkout date, and how many unexpected guests, or walk-ins, will arrive seeking accommodation. Hotel managers also have to answer for questions of how to price rooms. The more guests be satisfied the more revenue hotels can get from existing demand, therefore, pricing policy must satisfy as many guest as possible. The following subsections will list problems often faced in hotel management.

2.2.1.3 Fixed capacity

Fluctuating in demand results in under utilization capacity sometimes and over capacity sometimes. Its difficult to face with fluctuating demand while rooms can not be inventoried. How to control demand? How to increase occupancy rate when demand off peak? When to minimize loss due to not satisfy all customers on peak demand periods?

2.2.1.4 No-show and late cancellation

Problem of not utilized capacity while refuses other customers. If customers fail to honor their reservations, the reserved rooms will be waste. A hotel may refuse reservations on that day because all rooms were booked, but at the end of the day nobody come to occupied the rooms, hotel can not fill the rooms by other customers.

2.2.1.5 Overbooking

To protect themselves from the problem related to no-shows and late cancellation, hotel accepts over-booking. However, this may lead to bumping problem, hotel may dishonor the reserved customers and will lost customers good will if number of overbooked rooms is greater than number of no-shows.

2.2.1.6 Sooner leaving and stay extension:

Sooner leaving may lead to situation similar to no-show or late cancellation, customers who leave sooner then initial intention create unoccupied rooms; stay extension makes difficulties in reservation process, especially in demand peak days because may be the room already be schedule for an other guest. How to deal with the situation if all rooms were booked? Of course hotel can not refuse the extension to build customer good will.

2.2.1.7 Willingness to pay

Different groups of customers have distinct willingness to pay for the same room. If hotels offer one price they will lose the opportunity to charge high price for customers who can pay higher than the price offered. Some guests will be paying less than they are willing to pay, while some others will find the rate too high and go else-where, possibility leaving the hotel with rooms it could have filled by using another strategy.

2.2.1.8 Discount price classes

Offer different prices for different groups of customers is one way to increase revenue. The number of discount price classes refers to the number of distinct groups of customers who are willing to buy rooms at discount prices, which also equals the number of discount price levels that can be offered. However, how many price levels is enough?

2.2.1.9 Reservation demand

Each distinct class of discount or full-price customers may have demand that is deterministic, or random and correlated with other classes. How to determine demand of these distinct classes?

2.2.1.10

Diversion

Distinct classes are not completely separate from each other, customers who are willing to pay full price would also take a discount room if it were available. Difficulty is how to allocate room inventory, how many discount rooms are enough?

2.2.1.11

Group reservation

Group reservations are highly variable probability of cancellation, group often negotiate significant discounts off the regular price. The trade-off between group business and transient business is often one of occupancy versus rate. How to treat group reservations in consideration with other customers?

2.2.1.12

Multiple-night stays

If demand levels for each day are different, and therefore room rate also different, how to treat with customers who have multiple-night stays?

2.2.1.13

Asset control mechanism

Whether a hotel can ever turn down a request for a high price room if discount rooms are available? Of course they never want to let this happen. However, if segments are separated with a distinct inventory and the limit is reached for high price segment before the limit is reached for discount-price segment, it will happen. Is distinct or nested inventory?

2.3 2.4 Basic concepts of yield management

Concepts of Yield management Yield management, a method for managing capacity profitably, has gained widespread acceptance in the airline and hotel industries. Yield management is a method, which can help a firm sell the right inventory unit to the right type of customer, at the right time, and for the right price with the purpose of maximizing revenue to the firm. Yield management guides the decision of how to allocate undifferentiated units of capacity to available demand in such a way as to maximize profit or revenue. The problem then becomes one of determining how much to sell at what price and to which market segment. (SHERYL E.KIMES 1989) The concept of yield management originated in the airline industry. Most travelers know that passengers on the same flight often pay different fares. Super-saver discounts, three-day advance-purchase plans, stay-over-Saturday-night packages, and so fourth have become the norm for airline pricing. What is not as widely known is the potential application of yield management to other service industries. Yield management has proven successful in the lodging, car rental, cruise line, railroad, and touring industries basically, in situation where reservations are taken for a perishable commodity. Yield management is based on supply and demand. The key to successful implementation appears to be an ability to monitor reservations and to develop reliable forecasts. Proper pricing adjustments, which take existing demand into account and can even influence it, appear to be the key to profitability. Extending the airline definition of yield to hotel industry, yield for a hotel would be measured as revenue per available room. Yield is a straightforward measure of the effectiveness of practices and policies applied to generating revenue from room sales. This tactics can be expressed as follows: Yield = Revenue realized --------------------------Revenue potential

Revenue potential is the income that could be secured if 100 percent of available rooms are sold at their full rack rates. Revenue realized is the actual sales receipt. The Yield is closely related to the industry standbys of occupancy rate and average rate. The occupancy percentage, of course, is actually a ratio of the number of rooms sold to the room available for sale. Average rate can be expressed as a simple dollar figure or as a ratio of actual rate to potential rate. So, the yield is closely related to the combination of occupancy and average rate. The only difference is that average rate is converted into a ratio. But the yield is more flexible and consistent way to judge a hotels performance. Yield thus, combines two factors: rooms inventory and pricing policies

Appropriate situation for effective yield management application Sheryl E.Kimes (1989) analyzed situations in which yield management is practiced and showed characteristics are necessary conditions for the proper adoption of yield management. Relatively fixed capacity: The focus of yield management is efficient allocation of shared fixed capacity, it is only appropriate for firms which can not quickly adapt available capacity to available demand Ability to segment markets: Yield management aims at sell products for right price, that means the price fit with customers value perception. To be effective, the firm must segment its market into different groups, which have similar perception of value. Basically, the business must know which customers are most likely to use variously-priced classes of service, and must develop different marketing strategies for each market segment. Perishable inventory: The product or service can not be stored, unsold products represent spoiled or wasted inventory. If a firm can minimize its inventory spoilage, it will operate much more efficiently. Product sold in advance: One of the capacity management tools that service business use is a reservation system in which units of inventory are sold in advance of actual use. This characteristic of product makes firms easier to meet demand with constraint of fixed capacity. It also creates opportunities for higher revenue: manager has time to wait for higher paying customers, of course with uncertainty. Fluctuating demand: Yield management can be used to help temper some of the demand fluctuations by increasing utilization during slow demand times (by decreasing price), and by increasing revenue during times of high demand (by increasing price) Low marginal sales costs/ high marginal capacity change costs: If cost of selling an additional unit of inventory is high and cost of providing additional capacity is not very expensive proposition, yield management may not very useful. Main Components of yield management system In order to achieve the goal maximize yield, two key questions must be answered are: How many units should be made available initially at various price levels ( or, what are the optimal pricing levels?) When should certain price levels be closed out or opened up?

According to SE KIMES (1989), to answer the above two questions, yield management must address following elements:

2.4.1.1 Demand patterns

Information on demand patterns for each rate class gives better understanding of the behavior of different customers. Demands for different rate classes help determine the

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possibility of correlation among rate classes. By knowing the interaction between rate classes, a firm can better understand how many inventory units, which could have been sold at a high price, may be cannibalized by selling to many units at a lower price. To know about demand patterns, information on historical demand patterns for various classes must be available.

2.4.1.2 Demand elasticity

Making pricing decisions almost always have to take into account the reactions of competitors. To fully use the potential of a yield management system, management must know the elasticity of demand for various rate classes and be able to make corresponding changes.

2.4.1.3 Overbooking policy

Overbooking policies must be assessed and include information on historical no-show rates and current policies on overbooking. The overbooking policies must be integrated with the yield management program or sales will be limited to an arbitrary low level.

2.4.1.4 Information system

Availability and accuracy of historical data is critical, without a good information system, the yield management system will be doomed to failure. Its not necessary that good information system must enclose with computerize system, the most important things is value of information (usefulness, accuracy, availability). Hotel industry applications

2.4.1.5 Conditions for infrastructure

A hotels effectiveness in improving yield is based on its infrastructure in the following four areas (Denny G.Rutherford, 1995 ) Forecasting: Good forecasts of daily rooms demand with a system for continuos updating. The most effective yield-management tactics have a daily, rather than seasonal, orientation. For example, decisions regarding the availability of packages designed for rate-sensitive markets should be made for individual future days, and not as a single policy for all days in a seasons. Forecasting must provide estimates of future demand on a daily basis for it to be helpful in optimizing yield. Forecast must consider both transient and group demand. In evaluating whether to book a group two years in advance at a marginal rate, the sales managers must determine the likelihood of displacing other groups, as yet unknown to the hotel, that might be willing to pay higher rates. Computer-assisted forecasting methods can facilitate the necessary data handling and analyses. Systems and procedures Daily demand forecasting, regardless of accuracy, is not sufficient to enhance yield. Policies, procedures, and personnel trained for yield maximization must be in place to take advantage of the forecasts and act in ways that enhance the propertys revenues. Its important that every one in hotel understand what yield management is and process of implementing yield

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management. Procedure in operating activities must support to make easier for managing yield by providing information like price-value relationship, demand pattern and so on. To be assured of systems and procedures that encourage yield maximization, that purpose must be designed specifically into the system. Strategic and tactical plans Appropriate planning is integral to yield management. Planning for maximum yield determines goals by asking questions like What would be our mix of market segments if we were to maximize yield? Many critical decisions are made by a casual continuation of past practices, rather than an analysis of and choice for the future. Example of such inertia include commitments to base accounts, levels of participation in citywide conventions, discounted rates for local organizations that have the potential to produce a certain volume of business, and a desired ratio of transient to group room-nights. A clear strategic will head and co-operate efforts of all departments for the final goal. A proper tactical plan has all of its decision making oriented toward the same goal of yield maximization Departments work in concert supported by actions and decision rules appropriate for current and forecast market conditions. As a result, all departments coordinate-and contribute to optimization yield. Feedback system Systematic feedback is needed to assess the effectiveness of forecasts, the impact of tactics, and the performance of individuals and departments in their effort to raise the hotels yield. Regular and likely feedback provides encouragement, set priorities, and enables the use of yield management techniques that otherwise would be impossible.

2.4.1.6 Applications
All hotel companies have a common problem: they produce a mix inventory of perishable products that can not be stored if unsold by a specific time. The commodity that hotels sell is time in a given space. If a room goes unsold on a given night, there is no way to recover the time lost and therefore the revenue lost. Therefore, these products are typically sold for varying prices that depend on the timing of the transaction and the proposed of date delivery. In the hotel industry, yield management is composed of a set of demand-forecasting techniques used to determine whether room rates should be raised or lowered, and whether a reservation request should be accepted or rejected in order to maximise revenue. Yield management seeks to maximise revenue by controlling forecast information in three ways: capacity management, discount allocation, and duration control. Capacity management Capacity management involves various methods of controlling and limiting room supply. Capacity management balances the risk of overselling guestrooms against the potential of loss of revenue arising from room spoilage. Other forms of capacity management include determining how many walk-ins to accept on the day of arrival, given projected cancellation, no-showns, and early departures. Capacity management strategies usually vary by room type. That is, it might be economically advantageous to overbook more rooms in lower-priced categories, because upgrading to higher-priced rooms is an acceptable solution to an oversell problem. Discounting allocation

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Discounting involves restricting the time period and rooms available at educed or discounted rates. The primary objective of discount allocation is to protect enough remaining rooms at a higher rate to satisfy the projected demand for rooms at that rate, while at the same time filling rooms that would otherwise have remained unsold. Implementing such a scheme requires a reliable mechanism for demand forecasting. A second objective of limiting discounts by room type is to encourage up-selling. In an upselling situation a hotel attempts to place a guest in a higher rated room. This technique requires a reliable estimate of price elasticity and/or the probability of upgrading. Duration control Duration control places time constrains on accepting reservations in order to protect sufficient space for multi-day requests. This means that, under yield management, a reservation for one-night stay may be rejected, even though space is available for that night. Managerial implications of yield management systems Very little has been written on the managerial implications associated with yield management. Yield management can give a firm a competitive edge, but it could also result in (1) a loss of competitive focus, (2) customer alienation, (3) severe employee morale problems, (4) a change in reward systems, and (5) a need for intensive employee training. As with any new approach to business, (6) proper organization and (7) a firm commitment from top management are essential. (SHERYL E. KIMES, 1989)

2.4.1.7 Loss of competitive focus

Since most yield management systems focus on maximizing revenue or yield, firms using such a system may develop an undue focus on short-term profits and ignore long-term profits which could result from managerial attention to producing and delivering good service. As Hayers and Abernathy (1980) point out, although financial success is imperative to any firm, an over emphasis on short-term financial gains may leads to disastrous results. Many service firms are successful because they offer very high quality services, which are in high demand. The focus on efficient resource use that yield management may take managerial attention away from customer service, and fundamentally change the service concept. The net result may well be a loss of customers at considerable financial cost.

2.4.1.8 Customer alienation

Consumers seem to be resigned to the fact that airlines charge different prices depending on how far ahead a ticket was bought, and on what restrictions were met, but will customers of other types of services do the same? In industries with a large number of competitors like the hotel industry, customers often do not willing to pay different prices for the same room, they may decide to patronize the competition. Likewise, customers may find it unfair to be paying a higher price for a service than someone who reserved it a few weeks earlier. Firms adopting yield management programs may face consumer education problems.

2.4.1.9 Employee morale problems

Yield management systems take much of the guesswork out of how many items of inventory to sell at what price, but they also take some of the judgement out of the jobs of reservationists. Unless properly structured to allow for some judgement, yield management systems could be met with resentment from people having to use them.

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2.4.1.10

Incentive and reward systems

Yield management systems could also cause a problem for group sales departments. Typically, sale-people in such departments are rewarded by the amount of sales they make. With a yield management system, it might not be beneficial for the business to accept a group sale at a low rate when that block of inventory could be sold at a higher rate. Unless incentive system is changed, group sales workers might find that yield management works against them. In a similar vein, managers are often rewarded on the basis of capacity utilization or average rate. With a yield management system, the manager needs to be concerned with both of these factors. Unless incentive system is changed to reflect this, managers may resent using yield management.

2.4.1.11

Employee training

As with any new systems, a yield management system will require extensive training of all employees. The employees must clearly understand the purpose of yield management system, essentially how it works, and how it affects their jobs. Top management can not assume that yield management will just happen: it requires careful planing and training.

2.4.1.12

Organization of yield management function

One of the major problems confronting most firms adopting yield management system is degree of centralization of reservation systems. This problem can be overcome by developing a strong information system which integrates both central and branch reservations systems.

2.4.1.13

Top management commitment

Without commitment from top management, yield management systems may be doomed to failure. Unless all employees know that the yield management system is considered essential to the success of the success of the firm, they may be inclined to treat it less seriously than top management may prefer.

2.5 2.6 Yield management solutions for hotel problems

Yield management has been applied in hospitality industry, it helps many hotels achieve the goal of consistently maintain the highest possible revenue. Yield management techniques has been used to solve hotel problems: determine policies for overbooking and allocating hotel capacity to customers of different revenue-generating potential through discriminatory pricing. The overbooking policy deals with likelihood of cancellations and no-shows and the consequent loss revenue. Balancing the expected lost revenue due to unoccupied rooms against the loss of goodwill caused by not honoring overbooked reservations is the essential consideration in determining an over booking policy. The pricing problem can be identified in two forms, the cases of revealed-price and hidden price. Reveal-price is the case in which a customer calling in a reservation is assumed to be able to identify his/her customer class, thereby receiving a certain rate. The booking policy that must be determined is usually expressed in the form of booking limits for each customer

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class. Since this problem deals with demand from different market segments with a different price charged to each segment, one can view determining a room allocation to each segment as a pricing decision. Hidden price is the case in which the hotels reservation system doesnt have ability to identify the market segment to which a customer belongs when the customer made a reservation. In such situation, it is impossible to set booking limits for different customer classes explicitly. The overbooking problems Up to now many researches has been done on overbooking problem. The overbooking problem has been extensively researched in isolation from the pricing problem. Rothstein (1971), (1974), (1985) shows the overbooking problem as a stochastic decision process. This means that the decision of how many reservations to take is updated as the rental date draws nearer and actual demand as opposed to forecast demand manifests itself. His focus is upon how to adjust booking limits at various decision points that lead up to a target date. Request for reservations, cancellations, and show rates are all sources of uncertainty. In his model, Rothstein assume that only one discount price class. The model seems so sophisticated that may not be justified by the profitability it creates. Williams (1977) demonstrates the necessity of applying optimization methods to the overbooking and pricing problems as opposed to using simple, approximate decision rules. He models a particular date that represents a peak in demand. He assume that demand for rooms on this date comes from three sources, listed in decreasing order of priority: stay-overs ( guests occupying rooms on the day preceding the critical date); reservations (guests arriving on the critical date with reservations); and walk-ins (guests arriving without reservations). He further assumes that the occupancy of the day before the critical one is known with certainty, and calculate the expected costs of forgone revenues and overbooking that are associated with various numbers of reservations. Although Williams suggests method of designing decision aids, his model is concerned more with estimating the cost of specific policies than with optimization. Ladany (1976) derives models for the overbooking decision process in combination with the reveal-price decision (also referred as the inventory allocation problem). This latter aspect of the yield management problem reflects the issue of setting aside a certain amount of hotel capacity for each of reservation customer classes such as travel groups, single-room customers, double-room customers, etc. Each customer class is given a different room rate. Lieberman and Yechialli (1978) introduce a discount to a standard room price as a cost of acquiring a reservation. However, their models do not allow for uncertainty in the response of the market to the discount. Hence, the realistic price elasticity of demand is not incorporated in any of the afore-mentioned papers. Rex S. Toh (1985) introduce an overbooking model whose operations and applications can be understood and subsequently implemented by hotel managers, whether or not they have access to sophisticated computerize reservation systems. The model allows hotels to determine optimum booking level with consideration of uncertainty in no-shows and cancellation. Limitation of the model is assumption of one price for all customer classes. The model excludes room rate side, only focus on avoiding not honor reservations. SE Bodily and PE.Perfeifer (1992) approach overbooking problem as the inverse of newsvendor, adjust the distribution of demand (survivals) in order to match a fixed inventory. The decision rule maximizes expected payoff, which includes the cost of both spoilage and oversales. Again, this model assumes there is only one price and all customers are treated as the same.

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Other models, such as Belobabas, allow discount price classes. Alatrup et al.(1986) treats the overbooking decision as a Markov decision process and is solved as a two dimensional stochastic dynamic program. However, these models do not allow diversion. The pricing problems The pricing policy requires updating in the face of uncertain demand. It is generally more profitable to change price over time in order to sell some of the hotel capacity at higher price and to capture a large number of higher-yield customers. Orkin (1988), Relihan (1989) describe the nature of this problem in general terms and critique various proposed approaches to solving it. Belobaba (1989), for the case of reveal-pricing policies, and Pfeifer (1990) for the case of hidden pricing policies, give sub-optimal methods for solving these problems by using a concept called marginal revenue(MR). The essence of the MR methods is that the marginal value of allocating one unit of capacity to a higher-yield customer can be based on the difference in threshold prices between customer classes and the probability that the unit of capacity will be demanded by the customer class with the higher threshold price. The MR approach has been applied by Brumelle et.al. (1990) in the case of airline booking when demand is correlated across fare class. Curry (1990) extends the MR approach to the airline booking problem of incorporating the itineraries as well as the fare class of customers in setting booking limits. Both of these papers assume the reveal-price pricing policies along with rather restrictive assumption about the demand process. A more accurate model is derived by Badinelli (1990). The performance of this model in comparison to the MR methods is encouraging in terms of yield as well as computing time. The model and its results apply to hidden-price pricing policies with consideration of many related factors, such as cancellation, overlapping day stay, and so on. The work is made with assumptions of deterministic demands - a set of market segments are defined based on willingness to pay; a single, critical booking date, only one types of room. Model simulation requires demand data, its really difficult to capture the data. In 1996, Ralph published an article in this field. His research mentioned especially the field of hidden price. The work covers many basic assumptions of yield management, such as overlapping demand of different segments customers (diversion), uncertainty of no-show, cancellation, and so on. Especially, the model considers profit that would be generated from guests as a packaging, not merely as quoted price. The model works on the idea of mixing of overbooking and pricing policy. Only one assumption that simplifies the model is one type of room. Capacity allocation problems The generic allocation problem was first solved for the airlines by Littlewood and then Belobaba and others. Bodily and Weatherford developed a generic problem that can be used by other industries. The assumption is deterministic full-price demand and one discount price level. Brumelle et al. (1990) provides a solution with consideration of stochastic dependence between demands in the two customer classes. However, the level choice for booking limit of discount rooms is assumed to have no effect on full-price demand. This model ignores diversion issue. Perfeifer (1989) provides a decision rule that tells when to stop offering discount rooms. The rule is defined in terms of two probabilities: probability that the next customer is discount-price customers and the probability that there are enough room for all full-price customers. Pfeifers model makes an assumption that there are two groups of customers: discount-price

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customers and full-price customers, but the observable distinction is blurry (full-price customers will buy at discount price but are willing to pay for full-price if no discount rooms are available. One major draw back of this approach is the estimation of the two probabilities. SE Bodily and LR Weatherford (1994) introduce another approach to allocation problem with consideration of diversion matter. The model does not assume independent demands for the price classes. This model can be applied for multiple price classes, and also it treats the joint overbooking/discount optimal allocation decision. Segmentation problems Although researchers have written many papers on problems related to yield management, works on the field of how to optimally segment market is very few. SP Ladany (1995) approaches the problem by mathematical programming. His model finds out way to determine the optimal number of different market segments strategy that a hotel should follow. This strategy will be derived simultaneously with the optimal number of rooms to be assigned to each segment and the price that should prevail in each one of them, under the deterministic demand curve assumption. This model is unrealistic because of the assumed demand curve. Subhash C.Mehta and Ariel Vera (1990) approached the problem in another way: marketing approach. The work provides a way for segmenting base on survey of customers behavior, historical data is also needed. This is quality approach, no assumption needed but the reliability of the result depends on quality of the survey and many subjective adjustments. Conclusion Of all approaches to solve problems in managing revenue in hotels, the gaps between theoretical models and practical application is considerably wide. Application of these solutions requires revising models to fit with operating practice in hotels. Many solutions seem very difficult to apply for real problem due to a lot of strict assumptions. This research study tries to apply appropriate models to solve real problems of a specific hotel, to see how can theoretical model be utilized in practice.

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Chapter 3

3 Overview of the Huu Nghi hotel

3.1 3.2 Overview of hotel industry in HaiPhong city

HaiPhong City HaiPhong City is on the coast of BacBo Gulf, about 103 km away form Hanoi. It was built in late 19th century on the bank of CamPha River covering an area of 1,503 square kilometers with the population of 1,583,500. It is the third largest city of Vietnam after Hanoi and Ho Chi Minh City. HaiPhong City has a port on the Cam River, 20 km from the sea. It plays an important role in international trade relations. For all this, so far HaiPhong has been a major port and the gate to outside world for northern provinces. HaiPhong is an industrial city with traditional industries such as cement, engineering, ship, building, glass manufacturing, maritime products processing and fine arts and handicraft. The city of HaiPhong has the potential to develop maritime industry including frozen see food, vegetables, and marble. HaiPhong also possesses many tourist spots and landscapes. Do Son beach is a gift of Nature to HaiPhong. Do Son is a small peninsular formed by the stretch of Rong Mount to the sea only 20 km away from the city. From Do Son tourists can go boating to Cat Ba Island, to Ha Long bay, to Den Bien, Long Chau and Hon Dat" islands. The hotel industry In Vietnam, while almost all large cities and tourism centers such as Hanoi, Hochiminh City, Nhatrang, Vungtau have experienced a hotel boom that is historically unprecedented, it is interesting to note that Haiphong is out of the main stream. Being the area of strategic economic development in the North of Vietnam and one of big trade center, Haiphong has strong potential for luring international travelers as well as local travelers. However, the number of visitors arrived in Haiphong annually is much lower than other big cities. Because of poor infrastructure, and inadequate tourist promotion programs, Haiphong is considered as an ill-favored market for hospitality business. That is why number of hotel room in the city is so small. Right now, there are just over 1000 hotel rooms in the market (compared with more than 60000 rooms across country), of which about 450 rooms meet international standard, rating from one to three stars. Table3-1 lists hotels of international standard in the city. In the years from 1990 to 1995, along with the economic development of the country, number of visitors arriving in Haiphong, especially international business travelers, significantly increased. Growth in visitor arrivals and tourist receipts had never been higher than in 1996. During the last two years, Vietnam has experienced a decrease in tourism receipts and foreign investment. Haiphong has been, inevitably, affected by the situation. Nevertheless, because of progresses in relationship between governments of China and Vietnam, the simplification of procedure for Chinese to visit some areas in Vietnam, a new market for Chinese tourists has emerged.

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In 1997, there were nearly 20 000 Chinese tourists visiting Haiphong, in 1998 the number is 35000. The new market has filled up the gap left by the decrease in demand from the old markets. In the years 1997 and 1998, demand for hotel in Haiphong market is maintained, even increases slightly. Table 3-1: List of international standard hotels in Haiphong Hotel name HUU NGHI HOLIDAY MANSON QUANG MINH HANG HAI DUYEN HAI DIEN BIEN TRADE BACH DANG HOABINH Type *** ** ** ** * * * * Number of room 126 64 30 38 27 30 40 24

* 90 (Source: Haiphong Tourist)

Due to the above reasons, hotel industry in Haiphong is a little bit different from overall situation of the industry in Vietnam. Hai Phong market also faces surplus in supply but over supply is not so serious. While most hotels across the country are facing a fierce competition environment and very low occupancy rate (average is 30%), in Haiphong average occupancy rate is around 45%, which can be as high as 55% on larger hotels. Regarding development potential of the market in Haiphong, recently a number of jointventure hotels have started construction process. In the next two years, there will be four new luxurious hotels that will enter the marketplace, including Haiquan hotel, Habour view hotel, Tray hotel, and Sun Flower village. Estimate number of added rooms is 500, which meet international standard (at least three stars). In the near future, visitors arriving in Haiphong will not increase much and the participation of new players in the market will lead to a situation of conflict between demand and supply. Doing business in the hotel market will become very hard, said Mr Mai Xuan Thang, general manager of Huu Nghi hotel.

3.3 3.4 The HuuNghi hotel:

General description

3.4.1.1 History:
Huunghi hotel is state-owned company; it belongs to Haiphong Tourist Company. It is a hotel designed, constructed and managed by Vietnamese people. The hotel construction began in1990. The construction process did last for five years. On 1st,Oct 1995 the hotel started

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operating with 30 rooms. The remaining parts were completed at the end of 1995. From 1996 the hotel started operating with full capacity of 126 guestrooms. Huunghi hotel is classified as a three-stared hotel by Vietnam Tourism. It is the best, biggest hotel in HaiPhong. All the guest rooms are fully equipped with modern facilities such as high quality king size beds, TV, VCR system and IDD telephone, separate shower and bath tub, room safe and twenty four hours service. It is a full-service hotel, with a wide range of conveniences for guest. These service include: swimming pool, tennis court, fitness center, karaoke and sauna, massage, souvernir shop, business center, baby-sitting service, and so on. The hotel was located in the center of the city, near trade center, five minutes drive to Hai Phong port by car, fifteen minutes drive to Cat Bi airport, half an hour drive to DoSon casino and an hour to Halong bay by boat. With the height of eleven floors, the hotel offers very nice view of the harbor and a whole picture of the city.

3.4.1.2 Organization:
Huu Nghi hotel has a simple organization structure. The hotel is divided along functional lines into seven separate administrative departments: Accounting, Front office, Marketing, Housekeeper, Food and beverage, Maintenance, and Security. The seven department heads report to general manager every day. Figure3-1 is organization chart Right now, the hotel employs 156 employees, of which 25% has bachelor degree, more than half can speak English. The hotel significantly focuses on improving skill for their employees to ensure quality service. General manager is in charge of organizing training courses. Very often the hotel sends their employees, who directly contact with guests, to other hotels to improve working skill. General manager provides leadership to meet organizational goals of profitability and service. He holds a major responsibility in developing and executing plans developed by the corporate owner (Hai Phong Tourism Company). Because of simple organization structure, the General manager in this hotel also plays the role of operation manager; he supervises all daily operating activities. Maintenance team has 17 staff, they are responsible for equipment maintenance and environmental control. The team includes electricians, plumbers, air-conditioning contractors and general repair people. As required, maintenance staff have to help housekeeping attendants and assist with safety and security of personal comfort to the guest. Housekeeper is responsible for guestrooms and public areas, maintaining and controlling an endless inventory, which includes linens, soap, guest amenities, live and artificial plants. In-house laundry service also belongs to housekeeper department. The department has 55 staff. Marketing and sales department has only 4 members and their duty is quite heavy: seeking for new market, forecasting demand, maintaining relationship with guest, working with community, encouraging new guests. These works are also shared by general manager and front office department. Front office directly deals with guest, is the place guests make reservation, register and check out. The department has 20 staff. Food and beverage department, which consists of 29 staff, provides food and drink to hotels guests. Accounting department takes care of recording financial transactions, providing management with timely reports of operating results. The department and front office cashier keeps track of

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all charges to guest accounts. Responsibilities of the department also include payroll preparation. There are 8 staff in accounting department. Security department consists of 22 employees and it is responsible for guest safety

3.4.1.3 Front office department:

The front office department is central to hotels various functional and supportive components. Front office and its staff are the central focus of the hotels interactions with its guests. Currently the department has 18 staff and 1 manager, 1 assistant manager. The staff includes three positions: receptionist, cashier, bellmen. (Figure 3-1) Receptionist has responsibilities of verifying guest reservations, registering guests, assigning rooms, distributing keys, answering telephones, communicating with housekeeping staff. The duties of cashier include processing guest check out and providing change for guests. Bellmen are people who open the front door, lift and carry the baggage, familiarize guests with their new surroundings.

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Hai Phong Tourism Company

General Manager

Maintenance

Accounting

Front office

Marketing

House keeper

Food-beverage

Security

Receptionist Figure 3-2: Organizational chart

Cashier

Bellmen

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Yield management related practices:

3.4.1.4 Segmenting:
The hotel understands that profit increase can be achieved by market segmentation, where the different market segments are separated and in each market segment a different price per room prevails. Huunghi hotel currently segments its market based on price sensitivity and propensity to spend. Business travelers are distinguished from vacation travelers, groups are differentiated from transients, regular guests with new guests. The hotel focuses on segments of business travelers, includes corporate guests, long stay guests, regular guests and other business travelers. Detail analysis on segmenting issues will be carried out in next chapter.

3.4.1.5 Forecasting
Demand forecasting is considered as an important step in the hotels operating process. The forecast is a main base for scheduling labor and major maintenance activities, planing for use of facilities. In some cases, when estimate of over capacity situation, demand forecasting may be used for making decisions to accept or not a reservation, however, in general the forecast was not be used to establish suitable policies with maximum revenue purpose. At the end of year, marketing department will make forecast for the next year: how many guests will arrive next year, what is the demand in each month. The forecast is made based on five factors Historical data: This source of information provides very good base for forecasting demand, if every thing was unchanged, demand in the next year will be the same as in the current year. Normally, the data is a starting point of the forecasting process, forecasted demand will be adjusted number through qualitative assess of other related only number of visitor in the previous years. Trends in demand: tourism trend over the world, fad in living style and so on, which has effect on travel stream. Improvement in living standard of south Chinese people and their desire of travelling has created an emerged market for Vietnam tourism. The depreciation of Thai baht may be one reason of decrease in tourist receipts in the other Asian countries. The hotel also forecasts trends in demand by using statistics released by tourism department. Macro economic predictions: such as economic development strategies, import and export policies that affect number of visitor arrivals. For example, the policy making easier for Chinese to visit some areas of Vietnam has created a new market for hotel industry in Haiphong. Economic growth and investment environment also has strong influences. Investment situation: Haiphong is an industrial and commercial center, the development of industrial zones, number of investment projects in the city, the progress of those projects is important to estimate number of guest arrivals. Base on relationship with government officers, the hotel estimates changes in demand of corporate guests. Events will take place in Hai Phong in the year: sport competition, conference, seminar often provides large group guests. The forecast is made both intuitively and quantitatively. It is intuitive because assessment of the factors is based heavily on experience. It is quantitative because the forecasting process adjusts the previous year figures on each market segment based on the assessment of the above last four factors. For example, number of rooms sold for corporate guests in 1998 is 3212 rooms, and the hotel estimates that in 1999 the demand will be decreased 5% because

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of delays in progress of some projects while there will be no new one. The forecast demand for this segment will thus be 3050 rooms. The estimate of 5% reduction is quite intuitive. Nevertheless, the method used can provide forecasted number on demand of each segment. However, the hotel stops at monthly basic only. The forecasted data is relatively exact; table 3-2 is a comparison of forecasted and real demand through last three years. Table 3-2: Comparison of forecasting and real demand (number of room sold) Year Month January February March April May June July August September October November December 1996 Forecast 1400 1350 1500 1500 1500 1400 2000 2000 2000 2000 2500 2200 Real 1,199 1,060 1,783 1,863 1,788 1,472 1,934 2,185 2,342 2,699 3,130 2,635 1997 Forecast 2358 2123 2720 2750 2572 2218 2250 2300 2133 2415 2902 2447 Real 2,451 2,005 2,816 2,410 2,462 2,183 2,127 2,243 2,026 2,575 2,853 2,274 1998 Forecast 2025 2094 2376 2519 2483 2000 1988 1912 1936 2487 3028 2569 Real 1,968 2,111 2,589 2,420 2,429 2,096 1,942 1,737 1,824 2,540 2,913 2,476

(Source: the hotels marketing department)

3.4.1.6 Pricing:
Pricing policy: Huunghi hotel pricing policy is arbitrary and intuition-based without a clear and well-enforced policy. Management looks at other hotels in the market and sees what they are charging for comparable guestroom. Hotel can charge only what the market will accept, said the general manager. Targeting at maximizing occupancy rate, the mentality of we cannot lose a room at any cost has taken hold leading to arbitrary reduction in price without a clear and long-term perspective. Therefore, it is quite often that the hotel charges the same price in the market for a better room or sometimes even accepts very low price. This may lead to unutilized of competitive advantage, however, in some case it can make revenue increase. Huu Nghi hotel offers five room rate categories corresponding to five types of rooms that are comparable in area and furnishings. Differences are based on criteria such as room size, location, view, furnishings and amenities. The below table gives rack rate:

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Table 3-3: Currently rack rates of the hotel Room type Super Suite Deluxe suite Dejux Superior Standard Quantity 2 15 24 32 53 Single US$300 US$155 US$85 US$75 US$50 Double US$300 US$155 US$95 US$85 US$60

Special room rate is not specifically quoted, however the hotel gives discounts for following guests: Group guests: Special discount for groups because of big sale volume. Group guests include group tours, guests on special events and corporate guests: Chinese tourists: discount up to 55% from quoted rack rate Other group tour: discount up to 40% from quoted rack rate Corporate: discount up to 40% from quoted rack rate Government: discount up to 50% from quoted rack rate Long stay guest: discount up to 50% from quoted rack rate Regular guest: discount up to 40% from quoted rack rate Advanced book tourist traveler: discount up to 20% from implicit rack rate Advanced book business traveler: discount up to 10% from implicit rack rate

Long-term guests:

Advance booked guests:

Special guest: guests in affiliated organization such as, group leaders, meeting planners, important industry leaders, tour operators, government officers. These people may provide business for the hotel in future. The hotel offers them heavy discounts or even free rooms. Only manager has authority to decide who are considered as special guests and what are policies for them. Walk-ins (tourist and business traveler): no discount from implicit rack rate Pricing policies are set up by general manager and other department heads. The policies are only reference for manager and front office staff when negotiating room rate. Many guests of the hotel have contracts with the hotel, in which room rates are predetermined. Tour operators and companies that have frequent business with the hotel often make contracts for long time and these contracts are also signed by general manager. The hotel implements hidden pricing policy. There are many rate classes available for various guests, the policies for each guest is kept secrete. The basis for charging different prices is not clear, even for front office staff. Other cases, receptionist or reservation staff can make decision for an authorized interval of room rate, out of that they have to get permission from general manager. To ordinary guests (include advanced book and walk-ins), thanks to the implicit rack rate, the rates are very

26

flexible. Implicit rack rate is reviewed quite often, it may be daily, weekly or monthly depending on variation of demand. Manager is the person in charge of this duty. He makes those decisions based on common sense. Official rack rate is reviewed at the end of year. Pricing practice: Travel agencies provide the largest source of demand for the hotel. However they often force the hotel to accept low rates. They can pay for room or for person. Travel agencies are pricesensitive and so they pay only for standard room regardless whichever room type they occupy. Hence the agreed rate is a specific amount of money for all room types. The rate is kept unchanged for long time regardless high or low demand season. To companies that have frequent business with the hotel and other transient guests, bargained rate is often percentage discount, may be same or different for room types. Long stay guests are often encouraged to stay in dejux or superior room with rate a little bit higher than what they have to pay for standard room. This is one way to give special discount. The policy is giving discounts for advanced bookers. However, the hotel does not care how long reservation was made before the date of arrival. Officially, the hotel does not adjust room rate for whole year. If a reservation is made one or two months in advance, future rate will be the same as current. When the arrival date coming nearer, demand on that day can be more exactly estimated, the hotel will adjust offered rate depending on situation of room inventory. Therefore, late bookers may be offered lower rate. Finally, for all kinds of guest, one important factor that determines the rate pay is guests ability to negotiate. According to the policy, walk-ins are charged highest rate, but if they make a well deal they can have lowest price. Again, advance bookers if they badly bargain they may pay higher than implicit rack rate. It seems that discount price is for every guest and how much discount is depends on themselves. Upgrading: In tight days, because number of room sold at standard room rate is often larger than standard room available, the hotel has to upgrade for many guests. It is funny, but it is true for any hotel that targets on maximizing occupancy rate. Moreover, late booking of groups also causes over-sale of standard room since groups always ask for standard room regardless the availability of this type of room. The priority for upgrading is as follows: high paid guest, corporate guest, regular guest, transient business traveler, and group tour.

3.4.1.7 Booking policies

Guests can make reservation via phone, fax or mail without any advance deposits for guarantee. Huunghi hotel has experienced that most of guests make reservation (95%) but almost all reservations are made close to the date of arrival. Corporate and long stay guests often reserve for one month in advance; some regular guests book just for a few days in advance. Travel agencies often make reservation one week before arriving, however they also may book for only one days in advance it often happens in travel season (from October to December). The hotel does not have policies to encourage guests to reserve room far in advance. No-shows are not considerable (about 2%). According to Mr. Tuan, the head of marketing and sales department, cancellation rate is around 5%, mostly due to group tours. Tourist operators often overbook a certain number of rooms, as they are not sure of the exact number of people in their tour.

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Knowing that, on days the hotel serves group tours, overbooking is used. Huunghi hotel has a flexible overbooking policy. It only accepts overbook when it has group tours guest. The number of overbooked rooms depends on the hotels experience about the tourist operator. When realizes an over-sale, the hotel will first set priority for serving. Unlike the traditional first come first serve method, the hotel set the serving priority as follows: Regular guest, corporate guest, business traveler, and tourists. Duration of stay and rate paid are also criteria for consideration, long-time advance booking is not important criteria. The hotel has experienced the over capacity status but it is quite infrequent (17 days in 1998). The situation occurs when the hotel accepts large size group tours. The hotel usually foresees the situation and carefully prepares for it. In addition number of no-shows and cancellations is small, so the overbooking issue is not so complicated. All other over-sold guests arriving before 12 p.m. are customarily entitled to compensation. The hotel will give displaced guests transportation to another hotel and provides accommodation in a comparable room at the original hotels expense. Letter of apology will be sent to the important over-sold guest those have potential long-term business with the hotel. In fact, the hotel also faces unintentional over-sale. When a travel agency books for a number of rooms that is larger than number of rooms still available, the hotel may have to displace some other guests. The decisions are made based on balancing between profit from the group and lost of unoccupied rooms plus compensation for over-sold guests as well as lost of goodwill.

3.4.1.8 Information system

As requests for reservations are accepted, the guest information will be noted manually on reservation book: full name, nationality, date of arrival, date of departure, room type, number of room, number of guest, special requests, room rate. Although the hotel has computers, reservation process works manually. Guest information is entered on a reservation card by receptionists and room inventory for the booked days will be updated. The completed reservation cards are held until the date of arrivals, after that it is thrown away unless guest asks for delaying the arrival date. With reservation via fax, the final fax will be held as reference and replaces for reservation card. With regular guests, reservation card may be not necessary; receptionist just adjust room inventory. When the guests arrive, their information will be retrieved from reservation card and entered in computer. The hotel has computer system with local network link, however the computer network is used only for supervising purpose (link among departments of the hotel). Every day, through computer network manager and department heads can access updated information on number of guests, rate charged, number of occupied rooms, type of occupied rooms, revenue of the day. Other information is recorded in receptionists notebook. With group guest, only name of group leader, tour operator, size of group, duration of stay, occupied room and rate charge are recorded (no guest profile). The hotel has never used information on guest profile for any purpose; only information on number of room sold, and revenue is used.

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Analysis of revenue performance: Huunghi hotel started its operation at the end of 1995, at the time hotel industry in Vietnam was getting a boost. The opening was meeting the demand for international hotel in Haiphong market at that time. In the first operating year (1996) the hotel served 26382 guests of which 87.92% are international guests. In the year 1997, in spite of reduction in demand from old sources, the hotel serves 34057 guest, 30% higher than 1996. It resulted from actively seeking for new market. The hotel was rated as one of the top ten hotels of the year. Nevertheless, the hotels revenue in 1998 has fallen even lower than 1996. The following table shows the performance results in last three years. Table 3-4: Performance results in last three years. Criteria Number of guest Occupancy rate Room revenue (US$) 1996 26,382 52.4% 842,894 1997 34,057 61.8% 970,371 34 Change 29% 9.4% 15% -3% 1998 37,345 58.2 % 731,787 27 Change 9.7% -3.6% -24.6% -20.6%

Average room rate 35 (US$) (Source: the hotels annual report)

Huunghi hotel had the highest performance in the year 1997. Though average room rate slightly reduced, occupancy rate increased 9.4%, and hence revenue increased by15%. The situation was bad in 1998 with revenue reduced by 24.6% despite the radically falling down of room rate. The displeasing performance in 1998 is due to not only difficulties in the market but also unsuitable pricing policies. In the years 1996 and 1997, the hotel targeted on business travelers and the rates offered was distinct with other hotels in the market. In 1998, the hotel recognized the growth of Chinese tourist market and moved focus to this segment. To compete in the market the hotel has changed its competitive strategy from differentiation to rate base. Instead of charging high rate for high quality room, and focusing on business travelers, the hotel has tried to increase occupancy rate by attracting Chinese tourist. And, therefore reduced the room rates. The unexpected result is a significant reduction in room rate of all segments and total room revenue in 1998. Evaluation of current operating practices Huunghi hotel is considered as one of typical hotels, which have relatively high performance on the hard period of the hotel industry. Moreover, it is one of very small number of stateowned hotels, which have paid much attention on improvement of operating activities. The hotels operating policies and practices have following strong points: Strengths: Demand forecasting is based on its own historical data, hence value of its services and behavior of the hotels guests are taken into account. The monthly demand forecast is relatively exact, demand is forecasted for each segment. The flexibility of pricing policy: Unlike many other state owned hotels, Huunghi hotel has authority to adjust the room rates responding to changes in the market. This facilitates for

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achieving the purpose of increase revenue by attracting various types of guest. (However, the flexibility also embodies constraints, which will be mentioned later) The hotel has successfully implemented overbooking policies to offset late cancellations of travel agencies.

Although the hotel has carried out segmenting, forecasting, overbooking and differential pricing, these measures are not quite effective for the following reasons: Weaknesses: Segmentation: The hotel wants to separate guests in order to implement price discrimination. However, the segmentation was based only on subjective assessments (price sensitivity and propensity to spend of guest) regardless of distinct characteristics. Hence, they cannot find sensible reasons to differentiate among the segments. Demand forecasting: Demand forecasts have not been used to establish the suitable policies with maximum revenue purpose. Although the demand forecasting is relatively exact, it is done on monthly basis only. Lacking of daily forecasts causes following problems in operating: (1) Problems in inventory allocation (2) Unexpected over-sale The inventory allocation problems often occur in peak season, when the hotel receiving a late booking for large group of guests. It is often that the sale for standard room will be over the room available, hence the hotel has to upgrade for many guests. Upgrading may cause loss. Unexpected over-sale often happens in full capacity days when the hotel receives a reservation for a number of room more than the remaining capacity. For example, the hotel receives a reservation for 40 rooms while only 30 room available. The hotel has to decide whether the reservation should be accepted or rejected by balancing between cost of 30 unsold rooms and cost of displacement of 10 transient guests. Pricing policies: One weak point of the pricing policies is unclear. The hotel has experienced failings in keeping secret of hidden policies. When a client, especially travel agency, knows about the existence of lower rate, they often force the hotel to reduce rate. Therefore room rates gradually reduce. The hidden policy also causes many distrusts and confusions. The second weak point is lacking of reliable reason for price discrimination. The rates offered are flexible, but the basis for differentiation is not reliable (why lower discount for vacation travelers than business travelers with the same conditions). The rates depend much on how well the guest makes a deal. Unintentionally, the hotel gives the guests ability to control the rate he willing to pay. The policies also lack of focus on target market and the hotel is forced by middlemen. Middlemen introduce guests to the hotel, represent for guest to negotiate with the hotel and benefit from the gap between the real rate paid by guest and the rate charged by the hotel. Middlemen usually get very low price. Because of mistrust on front office staff, almost all pricing decisions are made by general manager. It causes inconveniences for guest and front office staff especially when the hotel implements such hidden policies.

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Information system is not effectively operated so that retrieving past data is difficult. Data on bookings, upgrading are not recorded.

Identification of areas for improvement Being the unique three-star hotel in the market, Huu Nghi hotel has very powerful advantage in competing. However, the hotel has poorly positioned itself by following the strategy of maximizing occupancy rate and therefore, has not made use of the advantage. Analysis of the severe falling of revenue in 1998 shows that inappropriate pricing policy is a reason of the severe reduction in room revenue. Chinese tourist is a niche that the hotel should not ignore however, suitable policies should be issued to prevent bad effects on other segments. To increase revenue, the hotel has to balance between objectives of occupancy rate and room rate. The current pricing policy and pricing practice of the hotel embody many weaknesses. Unclear pricing policy creates difficulties for front office staff and limits the ability of exploiting lucrative market segments. Manager usually makes pricing decisions without any explanation, so front office staff becomes very inactive, they do not understand the policy and dare not to make decision. Pricing policy is the first priority for improvement. The second priority should be enhancements on segmenting and forecasting so that the hotel can create linkages among operating activities. The linkage also support for more appropriate pricing policies. Information system also needs to be improved. Information on booking pattern of groups is critical for increasing effectiveness of demand forecasting, overbooking policies and room allocation.

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Chapter 4

4 Demand analysis for the hotel

This chapter looks at guest profile; evaluates the current segmenting practice with the goal of arriving at a more appropriate segmentation scheme for the hotel. The analysis of demand pattern of the hotel is also implemented in order to get deeper understanding of the hotels situation.

4.1

Customer profile

Being the biggest, the most luxurious hotel in Haiphong, Huunghi hotel has attracted nearly all-international guests in the market; visitor arrivals include 89% foreigner. The below part describes profile of guest types: Segmentation As mentioned, the hotel segments its market by dividing guests into two large categories: individual and group. Each of these two large segments is further refined into sub-segments. The group segment is divided into the following four sub-groups: corporate, Chinese tourists, the other group tours and government meetings. The transient segment is broken down as follows: long stay, regular guests, advance booked vacation travelers, advance booked business travelers, walking-ins. Chinese tourists: Almost all-Chinese tourists are from south provinces of Mainland China, near the border between Vietnam and China. They usually go in large groups, on tourpackages offered by travel agencies. Corporate guests: The hotels corporate guests are those booked by companies with which the hotel has a contract for specific below-rack rates and credit terms. Corporate guests are mostly from foreign companies or represent offices located in Haiphong. Almost all of them are foreigners. Corporate guests may go in small groups, individual or big group (corporate meetings). However, all corporate guests are considered as group segment because they are in a big group booked by one company. Other group tours: The other group tours refer to vacation travelers other than Chinese. Most of them are European: French, English. They arrive in Haiphong to visit historical remnant. The reason for distinguishing these guests with Chinese tourist is difference in willingness to pay. Government meetings: This group includes attendants of meetings, conferences of government organizations or industries. Guests of sport competitions also belong to this segment. Guests are Vietnamese and/or foreigner. Long stay guests: Guests stay for more than thirty days are considered as long stay guests. They are businessmen who often have important positions in foreign companies. Regular guests: these group guests have stayed in the hotel more than two times per month. Almost all regular guests are business travelers. This segment excludes corporate guests. Advance booked tourist travelers: transient vacation travelers with advance reservation. Advance booked business traveler: transient business traveler with short stay.

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Walk-ins (tourist and business traveler): transient guests who arriving in the hotel without advanced booking. Average rate and contribution of each segment Chinese tourist is the largest segment with 32% occupied rooms. The next two large segments are long stay guests and regular guest. Walk-ins, transient tourists and guests of conferences each segment accounts for small percentage. Advanced book business travellers are the most lucrative for the hotel. Chinese tourist has lowest rate. Its interesting that tourists with advance booking pay lower than long stay guests, walk-in has average rate nearly equal long stay guests. Although Chinese tourist segment has lowest rate, it generates great revenue (26%). It is essential to maintain the hotels volume. Corporate guests and regular guests contribute the greatest portion for hotels revenue (31.2%) in spite of only 27% occupancy. (See table 4-1) Table 4-2: Average room rate and contribution by segments (1998) Segments Chinese tourist Other group tourists Corporate guests Government Long stay guests Regular guests Adv.bk.Bus.travellers Adv.bk.tourists Walk-in Occupancy percentage 32% 8% 12% 2% 16% 15% 10% 3% 2% Average room rate (US$) 22 25 31.3 26 26.6 31.2 35.1 25.9 26.8 27 Revenue contribution 26% 7.4% 13.9% 1.9% 15.6% 17.3% 13% 2.9% 2% 100%

TOTAL 100% (Source: the hotels annual report 1998) Guest Characteristics

Chinese tourists arrive in Haiphong in large groups; they are convenient tourists. Most of them have no visa and passport; they are permitted to visit only some provinces such as Haiphong, Quangninh, Langson. They often buy packaged tour offered by tourism companies; the tours last from four days to one week. Usually, Chinese tourists visit Haiphong in the last three months of year; they stay from one to two nights in hotel. Chinese tourists are price sensitive, they do not require high quality service and regularly share double room to save money. Recently, Chinese tourist is an attractive market niche because of its size. Tourist companies compete on price; the first item to cut cost is hotel rentals. Consequently, accepted rate of tourist companies for these guests is quite low and they always book for standard room.

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Although tourists from Europe and some other Asian countries are also price-oriented customers, they require higher quality service and pay higher for the tour than Chinese tourists do. Tourism companies accept higher rate for these guests because of quality service reason. In fact, these guests often go in smaller group but more profitable. They prefer standard room, too. Anyway, tour operator is the key person who decides which type of room will be rent, how much they will pay. Tour operators usually pay one rate for all room categories that their customers occupied. They usually do not pay for any room rather than standard room unless it is guests request. They do not make reservation far prior arrival date, one week or even only a few days. Corporate guests are value-oriented customers; they do not pay for hotel rentals for themselves. Normally, these guests do not decide which type of room they will rent, how much they will pay. Corporate guests often have longer stay than tourists do; they arrive in the hotel for many times. Corporate guest may has long stay, however they are still considered as corporate guest. Corporate guests will accept higher-rate rooms if standard room is not available. Companies usually make reservation long time advance the arrival date. Government meetings and conferences involve guests from different companies who are usually in the same industry or line of work. Again guests do not make decision; meeting organizers are decision-makers. Reservation for meetings or conferences is often made quite far in advance, normally 3 months. These guests often stay in standard rooms. Long stay guests, regular guests, and other business travelers have some similar characteristics. They are not aggressive in seeking low rate. They will easily accept better rooms if discount rooms are not available. They make reservation not as far from arrival date as corporate guests. Long stay guests may choose hotel for themselves or their companies do it. Long stay guests often chose standard room; they are not completely price oriented, however they chose the hotel first then chose the lowest rate. Long stay guests mostly are Taiwanese and Japanese. Regular guests arrive in the hotel quite often, they are not price sensitive but they know right price in the market. Some of them choose standard room, some choose superior room, delux room. It depends on their financial ability as well as the people who really pay. Regular guests are Chinese, Japanese, Taiwanese, Hongkong and Vietnamese. Many of regular guests do not make reservation prior arriving, the others book only a few days in advance. The other business travelers: One difference between these guests with regular guests is that they may not know right price in the market. These people usually make late reservation. Willingness to pay of these guests is quite varied. Some of them easily get agreement in negotiating rate; these guests usually choose good room. Some others, in contrast, are very aggressive and often prefer standard room. Transient vacation travelers often have late booking. This group is also diverse. Usually this type of guest goes with small groups and stay in double room. Transient vacation travelers are often businessmen who work in Hanoi or just arrive in Hanoi and take a chance to visit Haiphong. They usually visit Haiphong on weekend. They have strong financial ability but they usually do not directly deal with the hotel. Middlemen introduce these guests to the hotel and gain sale commission. However, middlemen also directly negotiate on room rate with the hotel and force the hotel to reduce price. On the other hand, the hotel has considered this kind of guest as high potential one for future business hence they often provide premium services.

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Walk-ins arrive in the hotel without any pre-intention. They are often rate seekers and willing to go for another hotel if the negotiation is not accepted. Although lacking of information on booking pattern of types of guest, the analysis of customers behavior provides some valuable conclusions on booking patterns. In general guests do not make reservation far prior arrival. Corporate guests, long stay and some business travelers usually reserve for rooms far in advance. Regular guests and transient vacationers do not care much on booking, they often make a book only several days in advance to confirm the availability of room. Normally, travel agencies need to book far in advance because they reserve for big volume, however, when they can not control the flow of guests how can they plan for hotel? When possible travel agencies will make reservation soon, however, very often, they make reservation only two or three days in advance. Late booking of group tours segment has created many difficulties for the hotel on inventory allocation and unintentional oversold. The fact is guests do not pay attention on booking, it may be resulted from two reasons: (1) the hotel does not have policies that encourage guest to make room reservation, (2) the situation of over-supply in the market.

4.2

Effects of the current segmentation practice on operational decisions

The hotel segments its market into various segments in order to apply price discrimination. Did the hotel reach its objective? The above analysis of customers characteristics and contributions of each segment help to answer the question. It is easy to recognize that the hotel was unsuccessful in applying price discrimination for different segments. Average rate of each segment shows unreasonable differences among the rate charged on various segments such as walk-ins pay much lower than advanced booked business traveler and corporate guests do. In fact, the hotel wants to separate guests in order to make use of the difference in willingness to pay of various guests. However they just try to assign guests to groups that they think their ability to pay is the same and regardless conditions to distinguish them. This leads to unfair in discounting policies. For example, the hotel separates business travelers with vacation travelers just because their willingness to pay is different; they know that vacation travelers seek for price while the others seek for convenience but they do not know what can they can base on to treat them differently. It seems the segmentation is meaningless when the rate charged to guests in one segment is too distinct; why two advance booking business travelers, one pay 27 US$ and one pay for 50US$ for the same room? It is necessary to find out different characteristics of these guests and separate them into different segments. Guests in one segment do not have necessary similar characteristics while guests with many similar points are assigned into different segments. This creates difficulties in setting conditions to restrict discounted customers. For example in the advance booking business travelers there may be different financial abilities, different booking patterns and different characteristics while there is no difference between this group and advance booked travelers.

4.3

A modified segmentation scheme

Based on the above analysis we go to the following conclusions:

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Distinguish Chinese tourists with other group tours is not necessary because they are not direct customers but travel agencies who represent for them deal directly with the hotel. One distinct characteristic that the hotel can use to separate among group tours is size of group. Chinese tourists often have larger group size than the other. This segment is distinguished with other segments by time sensitivity, size of group and annual volume of business. Guest of meetings, conferences or sport events can be separated with other segments by size of group. Business travelers and transient vacationers should be in one group because they do not have distinct characteristics. Vacationers are more aggressive in negotiating price, however it is not a base for distinction. Vacationers often arrive in the hotel on weekend but many business travelers also stay over weekend. In addition, it is not easy for receptionists to distinguish business travelers and vacationers when they make reservation.

Therefore the segmentation scheme should be modified as follows: The market should be divided in to three large segments: group, corporate guest, and transients. The group segment and transient segment will be refined into sub-segments. The Group segment is divided into: Tourists from travel agencies Meetings, conferences or sport events Long stay guests Regular guest Advance booked guests: all transient guest with reservation, excluding long stay and regular guests. Walk-ins

The transients segment is divided into:

According to the new segmentation scheme, the group tours segment is the largest segment; it accounts for 40% occupied rooms with 33.4% revenue. The advance booked segment is the most attractive segment. It accounts for only 13% occupied room but generates 15.9% revenue. The next attractive segment is regular guests with 15% occupied room and 17.3% revenue. Corporate and long stay guests are also important segments. The new segmentation scheme can support the hotel to apply discrimination pricing based on distinct characteristics.

4.4

Demand pattern

Demand pattern for various rate classes, information on the booking pattern for each rate class, demands for different rate classes are necessary for the hotel in order to deeply understand behavior of the different guests and make decision on inventory allocation. Seasonal pattern Over three-year operation, due to movement on the hotel market, demand of each segment has changed. Chinese tourist segment radically increases from 5% of total occupied room in

36

1996 to 32% in 1998. Corporate guests, long stay guests and regular guests slightly reduce. In general, number of business travelers reduces from 71% to 55% of total hotels guest, in contrast with the increase of number of vacation travelers (see table 4-2). Nevertheless, aggregate demand pattern of the hotel through three-year operation is relatively stable (see figure 4-1). In January and February the demand is low; it increases in March and keeps stable until May. In the summer beginning from June to September demand reduces to lowest level. In October and November demand significantly increases and it reaches the highest point. In December demand reduces. The demand pattern in 1996 is slightly different with the other two years because of the starting period when the hotel was new to customers. The first two months of year are usually the time of lunar New Year. At that time number of business travelers as well as Chinese tourists declines. On the next three months the demand stable at high level; guests are mainly business travelers. In summer, demand severely declines because almost all vacation travelers and some business travelers go for DoSon beach and stay in hotels there. In the last three months of year, demand rises significantly because of travel season. Reductions in demand in the second half of December are due to New Year holiday of international business travelers. Figure 4-1 shows monthly room sold through last three years. Segments Chinese tourists Other group tours Corporate guests Government Long stay guests Regular guests Ad.bk.business travelers Ad.bk.vacation travelers Walk-ins Table 4-2: Demand by segments (Source: marketing departments report) The number of guest arrivals in each month is not much varied. In tightest month of the year 1998 occupancy rate is 74.6% and the occupancy rate is lowest in August, 44.5%. Monthly average room rate is smooth, too. From January to June rate is high, on the other month rate slightly reduces. Figure 4-2 shows monthly average room rate. Demand patterns of the various segments are quite different in comparison with each other and with total demand pattern of the hotel. Number of Chinese tourists has significantly increased over the three years. In January and February, due to Chinese New Year, Chinese do not go for traveling in Haiphong. In March, demand of these guests slightly increases then reduces in June and sharply increases in October. High demand lasts until end of December or the first half of January. Vacation travelers from Asian and European countries have reduced, however their demand pattern is uneven. Occupied room 1996 5% 18% 18% 2% 20% 18% 13% 5% 1% 1997 17% 12% 17% 2% 18% 16% 13% 3% 2% 1998 32% 8% 12% 2% 16% 15% 10% 3% 2%

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In general, demand of business travelers is quite stable in the whole year, only slightly reducing at the year-end and a slightly increasing in several months after traditional (lunar) New Year. This is true for all business segments. Figure 4-3 shows demand pattern of vacation traveler and business traveler in the years 1997 and 1998.
Monthly Room sold

1
96

2
97

3
98

6
Month

10

11

12

Figure 4-3: Monthly room sold over three years. (source: the hotel annuals reports)
Monthly Revenue

1 96

2 97

3 98

7 Month

10

11

12

Figure 4-4: Monthly revenue over three years (source: the hotel annuals reports)

dem and pattern of vacationers

demand pattern of business guests

4 1997

10 1998

11

12

4 1997

10

11

12

1998

Figure 4-5: Demand pattern of vacation travelers vs. business travelers (Source: the hotel annuals reports)

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Daily pattern The daily aggregate demand is quite randomly. The main reason is the uneven in demand pattern of the groups of tourist. Though the hotel can forecast monthly demand of this segment, they can not forecast its daily demand. There is no way to control the fluctuation in demand of these groups. How can we know when travel agencies do not know, said the head of marketing department. Demand of business travelers reduces on weekend; transient vacationers often arrive in the hotel on weekend. To illustrate the daily demand pattern, we take one month daily demand as a sample. Figure 4-4 shows daily pattern of aggregate demand and figure 4-5 shows daily pattern of three groups: business travelers, transient vacationers and group tours.

Daily parttent of aggregate demand

150 room sold 100 50 0 19 31 10 13 16 22 25 28 1 4 7

day
Figure 4-4: Daily aggregate demand (the sample of August, 1988) (Source: Huunghi hotels monthly report)

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Daily demand pattern by segments

100 80

Room

60 40 20 0
Sa t M on W ed Sa t M on W ed Tu e Fr i Tu e Th u Su n Su n Th u Fr i Su n

Tourists

Businessmen

Vacationers

Figure 4-5: Daily demand of group tours, transient vacationers and business segments (the sample of November,1998) (Source: Huunghi hotels monthly report)

4.5

Conclusion

In spite of the changes in demand of each group of customers recently, aggregate demand for the hotels room is relatively stable over the last three years. The keeping on of stability at medium level in average occupancy rate (approximately 60%) along with the smooth in seasonal demand pattern have created certain eases for operation decisions. Uneven in demand pattern of group tours is one difficulty for the hotel to forecast daily demand. Moreover, these groups also often make late reservation (only one to two days in advance), hence making decisions on accepting a reservation and estimating conscious rate for a future day is complicated. The hotel may accept many transients booking for standard rooms on a certain day before receiving a reservation of a travel agency for that day. Consequently, they have to upgrade for many guests including people who may willing to pay for higher rate room if standard rooms are not available. It is not difficult to make daily forecast for business travelers when the hotel has relatively exact monthly demand forecast thanks to the even in demand pattern of these guests. However, the fluctuation of daily demand of group tours is one constraint that hinders effectiveness of the prevailing forecast method.

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Chapter 5

5 Proposed yield management applications for hotel

This chapter will assess conditions for applying Yield management in the hotel. Based on the conditions mentioned in chapter 2, facilitating and inhibiting factors for yield management application in the hotel will be determined. With consideration to external factors, an answer for the question How should yield management be applied in the hotel? will be given. And finally, a pricing proposal for the hotel will be suggested with managerial implications involved.

5.1

Assess conditions for applying Yield management

Though the hotel emphasizes on increasing occupancy rate, its the most important objective is boosting the bottom line as high as possible. The hotel has carried out segmentation, forecasting, over-booking, and discriminating price to support for reaching the objective. Because of unsystematic approach, the achieved results have been limited. As mentioned in chapter 2, there are conditions for successfully applying Yield management. Through analysis of current operating practices in the hotel, following favorable conditions and constraints in applying Yield management are pointed out: Favourable conditions: Although the past data is not effectively recorded, the hotel has data that may be a good base for starting yield management system such as: daily demand of each segment, guest types with related information on rates charged, type of occupied rooms. The flexibility of pricing system that permit room rates change up and down frequently is a facility for applying yield management.

Constraints: Forecasting: lack of forecasts of daily room demand. Computer-assisted forecasting methods are not used. Systems and procedures: - Human factor: management and staff do not clearly understand what yield management is and processes of implementing yield management. - Procedures in operating activities do not support to make easier for managing yield. Lack of information on booking pattern, no-shown, cancellation and soon departure. Segmenting and forecasting do not provide basis for optimizing revenue. - Lack of professional in information system. Even though the computerized system has been installed, many of the guests information are kept in books (such as type of guest, reservation information). Information, which is recorded in computer, is so disorganized which is very difficult for retrieving past data. - All decisions regarding pricing and discounting must be given by the managers in case of excess amount. It is a constraint to the flexibility of pricing practice in Huunghi Hotel.

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- The purpose of yield maximization is not designed specifically into the operating system. Strategic and tactical plans: - The mix of market segments for maximizing yield is not determined. - Lack of a clear strategy to co-operate efforts of all departments for the final goal. Feedback system: the hotel has no system to assess the effectiveness of forecasts, the impact of tactics and performance of individuals and departments.

How should yield management be applied in the hotel? The above analysis proves that the hotel cannot apply all components of yield management system. The analysis of internal factors in chapter three as well as external factors in chapter four, also supports that it is not necessary for the hotel to completely apply yield management. Although the uneven in daily demand pattern creates bad effects revenue enhancement, forecasting should not be focused now. Because of the low occupancy rate situation, those effects can be considered not as serious as pricing issues. Of the five embodied components of yield management system (pricing, overbooking, segmenting, forecasting and information system) the hotel, right now, should focus on two only: pricing and information system. Information system should be set the first priority because it is foundation for the other components and for completely implementing yield management in the future. It does not mean that the hotel needs complicated software for the system. Only recording information in right way and be organized in storing data may be enough. However, the hotel also should keep an eye on segmenting and forecasting which have significant influences on effectiveness of pricing policies. Segmentation and demand forecasts should fit with pricing purpose.

5.2

A pricing policy proposal

General issues In marketing perspective, right positioning is one of critical steps for successful of pricing policies. So, the hotel should reconsider the current room rate categories because they are not affiliated with the image of the most luxurious hotel. Room rates here do not mean rack rates but the real rate charged. Discount should not be considered as the effective way to stimulate customers and maximize revenue in the low demand season without taking into account the price sensitive behavior of customers. The discount policies should be based on the behavior of each segment to utilize the resource effectively. Beside, conditions for getting discount should be clearly set up to: 1. Limit of giving discounts to certain guests 2. Be ensured fairness to all customers: every customer who meets required condition will be given discount. Though the hotel segments the market into different segments, in fact it let the customer freely choose which segment they will belong to. 3. Explain to customers why the hotel has different prices for different customers with the same room.

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Pricing policies: The pricing proposed here is based on the modified segmentation scheme. Recommendations are given based on qualitative analysis of the hotels demand in order to improve weaknesses in the current pricing policies and therefore help the hotel increase the revenue. Recommendations however will not be specific such as how much the hotel should set the rates, how many percent of discounts the hotel should offer for segments. Prevent other segments from joining the special policies for group tours segment: Group tours are essential guests of the hotel because they account for 40% in total rooms sold and contribute 26% of total room revenue. However, to increase revenue the hotel should exploit profitability of other segments at the same time attracting group tours. The fact is that when moving its target to group tours segment the hotel has lost ability to control the rate charged. Rates charged for all segments have significantly reduced (average rate reduced from US$34/room in1997 to US$27/room in 1998. Despite the reduction on average room rate, demand of business segments decreased (according to the marketing department head, in 1998 the hotels market share on business guests market did not increase). Therefore, it is necessary that the hotel should affirm special policies for group tours segment based on its distinct characteristics such as size of group, volume of annual business of clients. By clearly setting criteria for joining the policies the hotel can prevent other segments to claim on discrimination of rates charged. Travel agencies, corporate guests, regular guests and long stay guests are very familiar with the market rate, the hotel should implement revealed price system. It means that guests are assumed to be able to identify his/her customer class, thereby receiving a certain rate. Affiliate with revealed price is a system of clear criteria to help the guests identify their customer class. Criteria should be typical and distinct characteristics of various group guests such as size of group, volume of business, duration of stay, frequency of arriving, leading time of reservation. For walk-ins and business travelers who not often stay in the hotel, the hotel should implement hidden price policy because of the variety of guest types in these segments. Usually, it is difficult for the hotels receptionists to identify the difference in willingness to pay of these guests. In this case the hotel should base on threshold price to screening guest by quoting a price above the price that these guests are willing to pay1. However, in the condition that the hotel did not build its threshold price curves, the rate can be determined by the demand on that day. It is done by experience. In long-term, the hotel should carefully record bookings and draw threshold curves so that the hidden price policy can be scientifically implemented. Because the lack of daily demand forecasts for segments plus the scarcity of full capacity days, it is not necessary to set booking limits for segments. However, on high demand season, when the demand of group tours segment is high (October, November, and December) the hotel should limit the availability of standard rooms for business segments. On these three months almost all standard rooms are occupied by group tours (see appendix) Guests introduced by middlemen are small numbers, about 1% in total hotels guests. The hotel should pay only sale commission to middlemen; policy for this type of guests should not be differentiated because of power of middlemen. Also for some aggressive walk-ins, the hotel should not accept too low rates. This type of guests are not important to the
Bodily S.E. & Weatherford L.R.(1995)

43

hotel, further more the consequence of accepting too low rate may be distrust from other guests. The hotel should encourage guests to make reservation far in advance by policies such as give more discounts for one month in advance booking than for one weak ones.

Giving discounts for segments: how the modified segmentation scheme works? According to historical data on average room rate of each segment, group tours have lowest average room rate. Because these guests are very price sensitive, to compete for this segment the hotel has to offer competitive price. The most salient characteristic of this segment is size of group and frequent business of travel agencies. Group tours will be the segment that receives highest discount because of the unique characteristic. The hotel should offer different levels of discount for groups with different size even if for the same client. Larger group size will get more discounts. One point that the hotel should give heed is the ability to serve large groups. It is real competitive advantage of the hotel because no player in the market place has that capacity. Travel agencies often dislike separating their group into different hotels. Therefore, the hotel can reduce discount for too large size groups. It is fair because when accept large groups the hotel has to upgrade other guests to higher rate rooms, or even has to compensate for over-sale guests. Discounting policies based on volume of business help the hotel to differentiate clients in the group segment. Frequency of business should be determined by total volume sale on the clients annually, quarterly or seasonally. Meetings, conferences or sport competition may be very large size groups, however they can not get as big discount as travel agencies. Similarly, corporate guests may get more discounts than guests on sport competitions do. Determine cutting points is the most important things here. Cutting points are defined as the limit that makes a difference among groups of guests. The hotel should review past data to see frequency of size of groups. If the hotel wants to prevent corporate guests from getting discount for group tours, the cutting point should be set higher than normal size of corporate groups. How many is too large size? It will be determined by looking at capacity of others hotel in the market. Similar to transient segment, long stay guests and regular guests have right to receive higher discount level than the other. Advance booked guests should be offered different discounts based on how far their reservations were made. Again, the hotel can differentiate business travelers with vacation travelers if necessary because business travelers often make reservation closer arrival date. Walk-ins have to pay highest price.

5.3

Managerial implications

The fact that flexible room rate affect number of guests and associated revenue transaction helps demonstrate the potential complexities of Yield management. Yield management becomes even more complex when room rate discounting is granted on selective rather than general basis. The hotel will offer various discounts to different categories of guests; the hotel must also decide whether to accept or refuse a group at a discounted room rate. This section discusses various situations that can arise when the hotel implementing yield management.

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Group room sales Groups have formed the nucleus of the hotels room revenue. They are powerful customers, especially travel agencies. The hotel may face customers education problems. Travel agencies may not accept the policies of the hotel because it is too complex. They may not like to pay differently for vary groups because of the difference in number of guest in each group and therefore go to another hotel. Problems of displacement of transients: Displacement occurs when the hotel accepts a group at the expense of transient guests. Since transient guests often pay higher room rate than group members, this situation requires careful inspection. Several factors help determine whether a group reservation should be accepted. The hotel should first look at revenue factors. A group should probably be accepted only if the expected revenue gain offset the transient guests who cannot be accommodated. However, the hotel should also keep an eye on type of displaced guests: are they important guests? This issue deserves careful consideration because it is difficult to have right evaluation of loss of good win. Transient room sales: As with groups, management must monitor the booking pace and lead time of transients in order to understand how current reservation compare with historical and anticipated rate. The complexity of transient room rate discounting with implicit rack rate facilitates for maximizing yield, however business ethics is one issue with many debate. If a guestroom is classified as standard, there is usually a very good reason for it. Therefore, it would appear unethical to sell the room at a rate higher than its rack rate just because someone may be willing to pay the higher rate. The rack rate mentioned here is, of course, not the quoted rack rate. Today every guest understands that the quoted rack rate is just window price but the so call implicit rack rate is also a black box, the right rate must be the normal rate in the market. Even though demand may provide the opportunity for a higher rate, charging the rate just because some guests accept it at the time is not good business practice. Apply hidden price for walk-ins and business travelers those not often stay in the hotel require high skill of reservation staff. In addition, the hotel also needs to empower front office staff in negotiating process, gives them wider range of authority to make decisions. However, the hotel recently faces problems in honesty of its staff that is why the manager limits authority of front office staff. The direct consequence of having far in advance reservations is the increase in rate of noshowns and cancellation. This also causes similar difficulties on booking and room allocation.

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Chapter 6

6 Conclusions and Recommendations

This research investigates the yield management practice in Huunghi Hotel and derived a solution that can help the hotel increase its revenue. After analyzing the environment in which the hotel operates and components of the hotels related Yield management practice, following conclusions was made: Market competition The hotel market in Haiphong is in the situation of over-supply, however the competition is not so fierce, especially for international standard hotels. Huunghi hotel has very strong competitive advantage: it is the leader in the market. Yield management practice Segmentation: the hotel has divided customers into groups based on willingness to pay, duration of stay, frequency of arriving, purpose of visit, booking procedure. The characteristics that the hotel based on for segmenting are not distinct enough to differentiate among some groups. Hence, the segmentation does not support for effectively managing revenue. Forecasting: the hotel uses expert opinion and experience method in forecasting; base on the assessment of related factors, the hotel estimates changes in number of guests for each segment. Although lacking of daily forecast, the monthly forecast is relatively exact. Pricing: the hotel prices its guestroom based on market price. Different rate categories are based on criteria such as room size, location, view, furnishings and amenities. The hotel offers discounts for certain guests but discounting policies are not clearly quoted. Pricing policy is very flexible; guests can make a deal on room rate and how much a guest has to pay, to some extent, depend on how well the deal was made. Because the guests have been given too much influence on rate paid, the hotel was in situation of inability of controlling room rate. The hotel has a flexible overbooking policy; because the experiences of low no-shown and cancellation rate, overbooking will be used only when there is group tours reservation. The number of overbooked rooms depends on experience about the rate of real used room and reserved room that tourist operators often make. Information system: information on daily operating has not been effectively recorded. Information is also kept manually. The hotel has missed useful information such as guests booking pattern, no-shown and cancellation. Guest information was not effectively used. Pricing practice and pricing policy. Information system: Record information on booking pattern (improve reservation procedure), data on no-show, cancellation and so on. Segmentation and forecasting: Segmentation and forecasting must contribute for setting appropriate price policies; there must be a linkage among these three.

The hotel needs to improve following areas -

Analysis of demand shows that

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Aggregate demand is relatively stable in the period of three years while demand of different segments has continuously changed. Demand for hotels rooms is not too seasonally fluctuate, only slightly reduces in low season. Demand of group tours is daily and seasonally fluctuates while demand of business travelers is quite smooth. Chinese tourist is the largest segment and contributes the largest part to the hotels revenue. However, it is also the least profitable segment. Generally, vacation travelers are less profitable than business travelers are. Advance booked traveler is the most lucrative group.

Based on the results of demand analysis as well as the examination on conditions for applying yield management in the hotel, the research goes to following conclusions: (1) the hotel cannot completely apply all components of yield management system. (2) Of the five embodied components of yield management system, the hotel right now should focus on improvement of pricing policy, segmenting and information system. Finally, a pricing policy is suggested Pricing policies should be clear for all guests. Apply reveal price approach for group guests, long stay, corporate guests and regular guests. Apply hidden price for other transients In the current situation, hotels should not focus on increasing occupancy rate only. That may lead to destroy of revenue because of the mentality we cannot lose a room at any cost Even in the situation of over-supply, yield management can be one valuable tool for improving revenue. Hotels should pay more attention on information system, by no means of complex computerized system with expensive software. Manual system with well organize can contribute much for managing revenue process. Good segmentation and pricing policy is appropriate solution for hotels in Vietnam.

The research has provided some valuable lessons for Huunghi hotel and similar hotels

Limitations The proposed solution also has limitations. The suggestions for renew pricing policy are difficult for implementing in the current situation of the hotel. While employees of hotels are still strange with these techniques, it is difficult for the system to effectively work. In addition, the centralization in organization of almost hotels that only manager has right to make decisions is a big constrain for applying the solution. Due to the lack of necessary data, the recommendations are just general, without specific measures. This begs two questions: (1) Are they feasible for the hotel? (2) Whether Huunghi hotel can improve its revenue by doing that? To the first question, the recommendations are based on analysis of current situation in the hotel and ability of the hotel. The hotel can implement with efforts to increase revenue. The problem is on market side; the study did not

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take into account competitors reacts. To the second question, the recommendations are to help the hotel improve weaknesses in operating practices, especially for the faith in pricing policies that let to severe reduction in revenue of the year 1998. In reality, the reduction may result from some reasons; there is no way to test except trying to apply. Therefore, the recommendations serve merely as guidelines for the hotel.

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