Ordinarily, running a spa business is similar to operating a hotel business. It is, therefore, possible for a spa business to use the revenue management approach for the benefit of the customer and the operator (Kurtz 2010, p. 345). Globally, the spa industry generates close to the US $40 billion per year. In 2005, the total revenue from spa business in Canada and the U.S. averaged the $11 billion (Kimes and Singh 2009).
Due to the low revenue per available treatment hour (RevPATH) and total sales realized by Beleza Spa, the Board of Directors needs a strategy to maximize the overall revenue stream. The purpose of this financial report is, therefore, to establish the root cause of the low RevPATH at Beleza Spa, and devise an improvement strategy. The report provides an in-depth analysis of the issues faced by Beleza Spa and proposes a recovery plan. Apparently, most spa owners are aware of the income they generate and whether that translates to a profit or loss for their business. Unfortunately, they often experience difficulty when it comes to understanding the cost factors involved and the volume of treatment and product sales needed to realize profits (D’Angelo 2009, p. 59).
The report will also provide a means to increase the rate at which treatment rooms and therapists are used and a way to change the current method of discounting so as to increase the overall revenue. For even better results, a dynamic pricing strategy will be proposed. According to Shin (2005, p. 238), demand pricing is defined as a pricing strategy where prices change over time, based on buyer demographics.
Generally, the goal of maximizing revenue in the hospitality industry is quite complicated and requires the use of well-coordinated processes if desired results have to be realized (Bates 2008, p. 210). In most cases, revenue management techniques are used during periods of low as well as high demand (Dopson & Hayes 2008). For Beleza to maximize its revenues, a number of critical things must be done. These include serious marketing, product improvement, designing an effective pricing strategy, improving the quality of service delivery, and monitoring outcomes. As far as the product is concerned, Beleza Spa must do everything possible to understand what its guests need and make concrete plans to provide the same. This may be accomplished by providing a means of capturing guest requirements as well as feedback after services have been offered. Among other things, this will enable Spa to lock in its customers, attract more customers, and compete successfully (Odden 2012, p. 6). Regarding pricing, Beleza Spa should ensure that customers receive competitive prices without compromising service quality. Generally, when customers are happy, they become very good markets and the company benefits without incurring further expenses (O’Fallon & Rutherford 2010, p. 298). Besides, this may result in better incomes for service providers and eventually, greater profits for the establishment.
Although some people believe that revenue management strategy does not offer a concrete solution to the financial challenges faced by most spas, Beleza Spa, similar to other businesses in the hospitality industry has continued to rely on this approach to improve business performance and increase sales and consequently, overall profits. While in principle, the benefits from a revenue management system should match the assessed revenue opportunity, this is never so in practice (Talluri & Ryzin 2005). For many, however, this is not a surprise in any way. From time to time, business conditions keep changing and this leads to recessions, economic wars, and currency changes. To a large extent, these have a bigger impact than the effects of a revenue management system (Bodeker & Cohen, p. 301). In implementing the revenue management strategy, these companies modify product and service prices based on the existing demand. By predicting the level of demand at different times, and grouping guests depending on how much each is supposed to pay, there are high chances for Beleza Spa to better its performance and increase total revenue.
Analysis and Justification
The need for this report has been necessitated by the current situation at Beleza Spa, which has not been operating productively. It is, therefore, necessary to establish the cause of the decline and subsequently, devise and implement a rescue strategy that will put Beleza Spa on the road to recovery. Practically, revenue management implies determining prices based on the existing market demand. This is done in order to allow customers the freedom to choose when to do their purchases depending on how much they are ready to spend (Kimes and Singh 2009).
To start with, it will be essential for Beleza Spa to determine the ratio of Revenue per Available Treatment Hour (RevPATH) to Average Treatment Rate (ATR). Similar to hotels’ focus on revenue per available room (RevPAR) to monitor performance, a spa may use RevPATH as a metric of performance (Enz 2010, p. 572). RevPATH makes use of data about the average amount spent by guests as well as the rate at which treatment rooms are occupied in order to provide a guide for monitoring the effectiveness of spa facilities. According to Kimes and Singh (2009, p. 12), RevPATH is a time-based measure that integrates the price as well as the total treatment time as critical factors when calculating spa revenue. Seemingly, not many spas take into consideration important characteristics of spa operations which include offering discounts to customers and tightly controlling treatment duration. For reliable results, it is imperative to make sure that these characteristics become indispensable in revenue management plans. ATR on the other hand is similar to Average Daily Rate (ADR) which is used by hotel managers to find out how much income is generated by the room when occupied. It is, important to note that the ATR metric usually gets affected by a number of factors such as the type of service requested by a guest, pricing, and the duration of the service offered (D’Angelo 2009, p. 60).
To a large degree, RevPATH, as a means of measuring the success of spa businesses, greatly affects how a spa is managed. As noted in a number of studies, many managers use all sorts of approaches to guarantee the success of their spa businesses. Whilst the methods used to shed some light on the operation of spa businesses, they certainly do not provide a strong foundation for understanding the profitability of spa businesses (Kimes & Singh 2009). Turning to the use of RevPATH is, therefore, a helpful solution for dealing with this challenge.
According to Enz (2010, p. 559), RevPATH calculation can be used at different levels of analysis and for different purposes. At the individual spa level, managers may choose to develop hourly RevPATH figures to help come up with a revenue management strategy best suited to their spa. RevPATH can also be used to evaluate the effectiveness of managers. Here is how that might work. Say the manager of a hypothetical twenty-room day spa wants to understand his or her hourly RevPATH for a given month, say September. Obtaining data from the spa’s booking or Point of Sale system, the manager finds that the highest RevPATH periods are on Saturdays from 4 p.m. and Sundays from 1 p.m. to 3 p.m. and that the lowest periods are on weekdays before 11 a.m. as shown in table 1. The manager can use this information to develop revenue management tactics to fit high and low RevPATH periods (Enz 2010, p. 559). For example, during busy periods, the manager may want to consider requiring a credit card guarantee for reservations, reducing the amount of time between treatments, or offering premium services. During the slow periods, the manager may consider offering specially priced treatments for customers who are available on weekdays such as young mothers or retired people, in an effort to build demand.
Table 1: Sample Hourly Revenue per Available Treatment Hour (RevPATH) for September
|11 a.m.||12 p.m.||1 p.m.||2 p.m.||3 p.m.|
The line chart below shows how revenue per available treatment hour changes as the day get older.
As noted by Kimes and Singh (2009, p.15), the Revenue per Available Treatment Hour (RevPATH) is calculated by multiplying the treatment room occupancy by the average treatment cost per person. It may also be found by taking the revenue for a given time span and dividing it by the number of the available treatment hours for the interval in question. In this report, the revenue per available treatment hour will be determined as follows:
Calculating Revenue per Available Treatment Hour
RevPATH = Total Service Revenue / Total Available Treatment Hours
The calculations are done based on the fact that Beleza Spa is open 5 days a week from Monday to Friday with services offered from 4 p.m. to 8 p.m. for a total of 4 hours a day. Beleza Spa has 4 treatment rooms and apart from room Wood which remains closed on Fridays, all the other rooms are open from Monday to Friday. Considering the period between tenth September and eighth October 2012, there are a total of 4 weeks plus one more day and given that the total amount of service revenue during the said period is 8,232.82 CHF, the ratio of RevPATH to ATR will be determined as follows:
Total Available Treatment Hours = (4 hours x 4 treatment rooms x 5 days) + (4 hours x 4 rooms) = 96 hours
Therefore, RevPATH = Total Service Revenue / Total Available Treatment Hours = 8,232.82 / 96 = 85.76
Calculating Average Treatment Rate
The Average Treatment Rate (ATR) is given by the formula below:
ATR = Total Service Revenue/ Total Number of Treatments Booked
With a total of 45 treatments booked between tenth September and eighth October 2012, the value of ATR will be calculated as shown below:
ATR = 8,232.82 / 45 = 182.95
From the above calculations, the ratio of RevPATH to ATR equals to ((85.76 / 182.95) * 100). When evaluated, this gives the ratio of RevPATH to ATR as 46.88%. According to Kimes and Singh (2009, p.15), the ideal ratio of RevPATH to ATR for spas should be within the range of 60% to 70%. It is, therefore, quite clear that the ratio of RevPATH to ATR for Beleza spa is below the recommended standard.
In order to improve returns, it is advisable for Beleza Spa managers to analyze the company’s ATR by integrating it with the rate of utilizing the available treatment rooms on a weekly basis. This will eventually allow Beleza Spa to maximize its revenues by offering guests lower rates during periods of low demand and higher rates when the demand goes up. The treatment room utilization will be calculated and analyzed in the following section.
Utilization of Treatment Room
Considering room Wood as an example, the total number of treatment hours booked is 38.14. When this is divided by the total number of available treatment hours which is 96, the percentage of utilization for room Wood is 39.72%. Applying a similar operation to the other three treatment rooms gives the results as shown in table 2.
Table 2: Percentage Room Utilization Rate
As is evident from the table, room Wood has the highest rate of utilization in comparison to the rest of the rooms while room Metal has the lowest utilization rate. On average, the rate of utilization is 24.64%. The above results are illustrated by chart 1.
From chart 1, room Wood has the highest rate of 39.72% followed by room fire with 28.81%. Room Metal comes in last with the smallest treatment room utilization percentage of 13.35%.
As far as the utilization of treatment rooms is concerned, it is imperative for managers to factor in the rate of occupancy. Generally, any slight alteration of the utilization rate can greatly affect the total revenue received by a large spa business (Sturman et al. 2011, p. 257). According to research, the percentage utilization rate of treatment rooms is a very important indicator in revenue management. It helps in evaluating needs against the maximum available stocks and is critical when measuring revenue from every treatment on a daily basis. For spas offering a huge number of services, it is advisable to carry out the measurement exercise on an hourly basis. However, since Beleza Spa operates on a small scale, it is possible to perform less vigorous revenue management calculations.
For most spa businesses, the percentage rate of treatment room utilization lies between 35 and 40 percent. From the results in table 1, it is obvious that the utilization rate of room Metal and room Earth are far below the acceptable standard and Beleza Spa must look for ways to improve the rate of utilization for these rooms. On the other hand, the utilization rate of room Wood is within the acceptable range.
In its operations, Beleza Spa makes use of qualified therapists who offer the different services shown in table 3. From the table, there are four specialized providers at Beleza Spa. Christian is in charge of giving medical massage in room Fire, Coralie offers facial treatment in room metal, massage in two rooms, Fire and Earth, nail services in room Wood, Magna is a hair designer and does her work in room Wood. Finally, Regina is in charge of nail treatment which is done in room Wood.
Table 3: Therapists, Services Offered, and Treatment Rooms
|Therapist||Services Offered||Treatment Room|
|Coralie||Facial, Massage, Nail,||Earth, Metal, Fire, Wood|
|Regina||Nail of hand and feet||Wood|
Looking at the table, it is obvious that the high utilization rate attributed to room Wood springs from the fact that it has two workstations, one used for hair design and the other for nail treatment. There is, therefore, a possibility that the productivity level of room Wood may not be as high as depicted by the data in table 2. Apparently, there are two possible causes for this. First of all, there is the challenge of pricing. Based on Beleza Spa’s menu, all facial spa services are priced at 85 CHF after allowing a discount of 42.5 CHF or 125 CHF after giving a discount of 62.5 CHF. Since most guests who come to Beleza Spa are students who often have little to spend, and are hence sensitive to pricing, these prices are generally high. Secondly, there are two different providers who can provide facial treatments unlike in the case of massage treatment and nail design services. Despite having two providers to offer the same service, it is not economical in the existing setup since only one provider is needed to do a facial service at any particular time. There is a possibility that an available treatment hour may go unutilized when one of the therapists in-room Wood engaged. To deal with this challenge, it is maybe helpful for Beleza Spa to train Magna and Regina to provide facial treatment in room Metal. In a way, this will make it possible for Beleza Spa to maintain the shift schedule as it is presently, increase the utilization of room Metal, and consequently, generate more revenue. The present shift schedule appears as shown in table 4.
Table 4: Shift Schedule
Dynamic Pricing Strategy
The use of dynamic pricing is based on the assumption that some people will pay more for a product or service than others will (Ng 2008, p. 35). At first glance, this type of pricing seems discriminatory and unethical, but upon closer consideration, it makes sense (Mill 2007, p. 305). It is generally easy for people to understand senior discounts and student discounts, which are a part of dynamic pricing. However, not all pricing strategies are allowable. Collusion by competitors in order to fix prices is illegal, as is using age and gender to target people for different prices or other discriminatory treatment (Weber 2008, p. 53). Nevertheless, dynamic pricing is a tool that, when used effectively, can ensure that a transaction is profitable and benefits both the customer and the vendor. Spa managers who understand perfectly why and how people buy can provide retail options for their guests that can significantly increase the revenue generated by a spa business (Mill 2007, p. 305).
Beleza Spa can continue to offer competitive prices for its clients who comprise students and teaching staff. At the moment, all guests are entitled to a fifty percent discount for all treatments except hairdressing. Although Beleza spa is able to carry on with its operations, it will be necessary to devise a strategy that will help to reduce heavy losses due to discounting. Between tenth September and eighth October 2012, Beleza Spa reported a loss of 820 CHF as a result of giving discounts to its guests.
This is calculated by taking a therapist’s total service hours performed divided by the therapist’s total available hours. The analysis of therapist productivity indicates that between tenth September and eighth October 2012, Christian’s productivity was 84.18%, Regina’s 89.52%, Coralie’s 56.17% and Magna’s was 59.83%. This is shown in table 1 and further illustrated by chart 1.
Table 1: Provider Utilization Rate
Generally, it is beneficial for spa managers to make use of revenue management in their spa businesses. It is, therefore, advisable for the management at Beleza Spa to implement the revenue management strategy presented in this report, to realize better results. To do this, however, it is absolutely essential for Beleza Spa to change the way it regards its sales. According to Kimes and Singh (2009, 12), it is advisable for Beleza Spa to focus more on keeping a record of the time spent offering services rather than spending too much time tracking customer appointments and needs.
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