The first choice while building RM system is to decide which of RM tools is more important – price or capacity?
There is actually no definite answer, most of the time it depends on the extent to which a firm is able to vary quantity or price in response to changes in market condition. (Talluri, Ryzin, 2004, p.176). Both quantity and price based RM as their goal have reducing sales, but from revenue point of view, favorable option is price-based RM. Quantity-based operates by rationing the quantity sold to different segments of customers, while price-based changes the price. As a consequence both approaches influence sales, but price-based is more profitable, when demand needs to be decreased, because for the same number of rooms the rate charged is higher. The questions is than, why all of the businesses don’t use price-based RM. The main reason lays within marketing and administrative field, most small and medium hotels commit to prices for their different fares in advance of taking bookings (publishing fares in print or other media). Therefore, they cannot react flexibly to rapid change of demand and earn additional profits by increasing the price. However, most of the big hotel chains (especially from budget sector) use price-based RM, but they have to accustom their customers to changing fairs.
- Talluri, K. and Van Ryzin, G. (2004) The theory and practice of revenue management. Boston, Kluwer Academic Publishers.