Question

What is a hurdle rate in revenue management?

Answer 1

Revenue Management is the process of understanding, anticipating and influencing consumer behaviour in order to maximise yield or profits from a fixed and perishable resource. Also called Yield Management, Revenue Management is used by many companies in order to maximise profits by focusing on selling the right product to the right customer for the right price at the right time. 

Initiated by the airline industry, the concept of Revenue Management has spread across the entire travel and hospitality industry today. Almost all major hotels, car rental agencies, cruise lines and passenger railroad firms have developed, or are developing, Revenue Management systems. Other industries that appear ripe for the implementation of Revenue Management concepts are golf courses, freight transportation, healthcare, utilities, television broadcast, spa resorts, advertising, telecommunications, ticketing, restaurants and web conferencing. 

We know that all airline passengers boarding the same flight pay different fares. Once an aircraft takes off, the unsold seats don’t generate any revenue for the airline, thus, can be said to have perished. Therefore, the airlines industry adopts various strategies to overcome the losses incurred by unsold seats. For example, airlines offer discounts on low-demand flights or create Saturday night packages. Some airlines, on the contrary, sell more expensive seats when there is excess demand.

The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price.

If we talk about the hotel industry, all hotels have a common problem—they produce a fixed inventory of perishable products that cannot be stored if unsold by a specific time. For example, if a hotel has not sold a particular room, then that room will not generate revenue. Similarly, if a guest books a room in advance but doesn’t turn up to occupy the room, the booked room will not generate revenue. In both the situations the hotel incurs a loss. Therefore, it is important that the management of the hotel adopts various strategies to overcome its loss incurred due to unsold rooms.