Managing the long-term profit yield from market segments in a hotel environment: a case study on the implementation of customer profitability analysis

Abstract

Customer profitability analysis (CPA) is a technique which assesses the profit yield from market segments, primarily to provide management with information that will enhance long-term yield decisions. This paper documents the findings of a study which was carried out in order to test the feasibility of implementing a customer profitability system in a hotel environment. The test site chosen for the implementation of the system was a three star, 90-bedroomed hotel property located in the centre of Dublin city. The time taken to conduct the study at the site was 13 months. In order to implement the customer profitability system a 10-step systems development cycle was designed as reported by Noone and Griffin (1998). The paper reports on the key implementation issues at each stage of the development cycle, focusing primarily on the application of activity based costing to assign costs to customer groups, including activity analysis, driver identification and software chosen. The results of the analysis both in terms of the customer profitability figures outputted by the system and also management's evaluation of the system are presented. Among the findings of the analysis was that 38% of the revenue base at the site was generating a profit equivalent to 137% of total profits, with 30% of the revenue base generating a negative profit contribution equivalent to 62% of total profits. This finding is consistent with those reported by Cokins et al. (1993) illustrating that a small proportion of the customer base is generating more than 100% of the profits. Additionally, it was found that management at the site were unaware of the scale of the profit/loss generated by respective groups.