Do you know why you’re doing this assignment?
This is a case study designed as a means of stressing the importance of process when attempting to implement somewhat controversial revenue management strategies. It utilizes an example of price management and its possible effect on an operation’s menu mix as well as capacity (inventory) management to do so.
CASE STUDY
“So you want Sam to lower his prices during his busiest serving period to increase his revenues?” asked Sofia Davidson, the GM at the Barcena Resort.
“That’s right,” replied Damario, the resort’s revenue manager, “but I’m convinced it will increase his profits as well.”
Sam was the Barcena Resort’s F&B director. He reported directly to Sofia. In his position, Sam was responsible for several food outlets inside the resort, including the poolside restaurant/snack bar that was so popular with the resort’s guests during the lunch period and early afternoon. It was that facility’s pricing structure that was the topic of Damario and Sofia’s meeting.
“Damario, I have to tell you that when I agreed you could take a look at our F&B department’s pricing, I was really hoping that with your revenue management background, you could help us find areas where prices could be increased, not decreased,” said Sofia.
“Sofia,” replied Damario, “what we all want is to maximize revenue and profits. Listen, right now, the pizzas at Sam’s pool-side operation are the most popular item.”
“Right” replied Sofia, “he does a great job with them. That’s why they sell so well.”
“And that’s the problem,” said Damario. “The pizzas take 20 minutes to bake. They can’t be made ahead because the toppings vary. That means guests ordering pizzas are occupying the restaurant’s tables, but no food is being served for at least 20 minutes. In fact, the average sit-down, order, wait for the order to be prepared, eat, and leave time for a family buying pizzas is nearly one hour.”
“So?” replied Sofia.
“So”, said Damario, “the number of table turns we can make during the peak lunch period is minimal. When people see the long lines of guests waiting to be seated during the busy times, they decide to skip lunch or go outside the resort to eat.”
“So because the pizza is popular you want to lower the price of hot dogs?” asked Sofia.
“That’s right. I’d like to offer a package special of hot dogs and soft drinks only. And only during our busiest times. I want to price the package right. . . . and promote it well. Our hot dogs are preprepared so they can be served almost immediately. I’ve checked and the average total table time for hot dog buyers is less than 30 minutes,” said Damario.
“Well if you want to reduce pizza sales, why not just raise pizza prices. That would slow their sales and increase their profitability,” said Sofia.
“Our lunch time revenue issues at the pool are not price based,” said Damario. “They are item selection and capacity based. I want to bundle hotdogs with drinks, offer them at a great price, and move a reasonable number of buyers away from pizza and to the special. Under my plan, we can do that without raising prices or making our menu prices appear even higher. And we will be providing even more value to budget-conscious families. Simply raising our pizza prices doesn’t do that. ”
“O.K. I understand your plan. And when you informally discussed this idea with Sam, what was his reaction?” asked Sofia.
“He said reducing prices on the hot dogs would decrease his margins and hurt his profits. . .especially if the new package became a good seller. I think he will be hesitant to try the idea. And that’s why I wanted this meeting with you before the entire Strategic Pricing and Revenue Management committee meets and I present the idea to them,” said Damario.
For Your Consideration, please answer the following questions relating to what you learned in this chapter (1 point per question):
1. In this scenario, Damario presents a potentially controversial proposal to his boss prior to introducing it to the entire Strategic Pricing and Revenue Management committee. Why do you think Damario chose to do this? How important would Sofia’s support likely be to Damario’s success in gaining support for his proposal? As an RM, how important do you think administrative support will be to your own success as you seek to implement change?
2. Pricing decisions are often viewed in internal operational terms. Ultimately, however, external guests’ reactions to pricing and revenue optimization strategies are of most importance. How would the resort’s guests respond to Damario’s plan? Do you believe the plan is consistent with the development of a customer-centric revenue optimization strategy?
3. Damario appears to believe that food and beverage revenue optimization is based primarily on menu mix and capacity maximization. Sam’s position appears to be that profit optimization is a matter of maintaining proper product-cost ratios (and thus the hesitancy to reduce prices on the hot dogs). Whose position most closely resembles your own view? Explain in detail why you would agree with Damario or with Sam.
4. Assume you were Sofia and that you supported trying out Damario’s idea. What would you say to Sam? What specific measure(s) or operating statistics would you want to see after the plan’s implementation that would help convince you (and Sam) of its effectiveness?