Spa revenue management.

In principle, spa managers should be able to apply revenue management to spa operations. To do so, however, requires a revision in the way most spas traditionally have viewed sales. Most spa managers track appointments and customer needs, but instead they need to focus specifically on the time element involved in their services. A time-related measure, revenue per available treatment-hour (RevPATH), integrates the price and duration of the treatment as factors in the revenue calculation. Certain elements of current-day spa practice, such as discounting and managing treatment duration, carry the seeds of revenue management, but those are often implemented as tactical measures during particularly slow or busy times. Few spas have established the necessary strategic approach to assemble those tactics into a coherent revenue management strategy. This report establishes a framework for implementing a spa revenue management strategy and sets a practical road map for its execution.

The principles of revenue management that have been extended from the airline industry to hotels and restaurants can also be used by spa operators. To make this work, spa managers must have a measure of time and revenue. Such a measure is revenue per available treatment-hour (RevPATH). This measure integrates a treatment's price and its duration, rather than simply tracking appointments and customer needs. Revenue management for spas must go beyond simply offering discounts to fill slack times. Rather than taking a tactical approach when business is particularly strong or weak, managers need an integrated approach.

Keywords: spa management; revenue management; spa revenue

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Research in revenue management that we and others have conducted has addressed the theoretical and practical problems facing airlines, hotels, and restaurants, among other industries (Hanks, Noland, and Cross 1992). So far, we have seen little consideration given to the possibilities for revenue management in spas (see Boyd and Bilegan 2003; McGill and van Ryzin 1999; Weatherford and Bodily 1992). The spa business is similar enough to hotel and restaurant operations that a spa should be able to apply revenue-management principles to the mutual benefit of customers and the operator. Indeed, many spas use various revenue management-type practices, but the application has so far been mostly tactical. We propose here that a broad theory of revenue management would permit spa operators to gain the benefits of strategic revenue management that they currently lack.

The worldwide spa industry is estimated to generate nearly US$40 billion per year (Haden 2007). In 2005, the spa industry generated $11 billion in revenue in Canada and the United States. The average annual growth rate is 18 percent in North America, while the growth rate in the Asia-Pacific region is nearly 200 percent. Not surprisingly, spas are considered the fastest-growing sector in the tourism industry (Haden 2007). Spa visits in the United States alone reached more than 130 million per year in 2006, with an annual growth rate of 9 percent (International Spa Association [ISPA] 2006).

With the exception of the large chain hotel and resort spas, the spa industry is thought of being in its developmental stages, quickly growing but with a lack of set global standards. The industry has not seen measures of financial performance or a chart of accounts until recently. In 2003, ISPA, in collaboration with the Association for Hospitality Financial and Technology Professionals, released the first edition of Uniform System of Financial Reporting for Spas, and ISPA compiles industry statistics.

A logical way to measure success in the spa industry is a straightforward approach of analyzing the contribution of different revenue streams, managing expenses, tracking the percentage of retail out of treatment revenue, and managing productivity or utilization of treatment areas and therapists. Taking those revenue measurements into account, in this report we propose a framework for how revenue management can be applied to spas. We review the necessary conditions for revenue management; the strategic levers available to spa operators for revenue management; how they have been applied in traditional revenue-management settings; and how they, along with some tactical tools, can be applied to spas.

A Review of Revenue Management

Revenue management is the practice of allocating the right space to the right customer at the right price at the right time so as to maximize revenue or contribution margin (Smith, Leimkuhler, and Darrow 1992). The determination of "right" in that definition entails achieving the most revenue possible for the spa while at the same time delivering the greatest value or utility to the customer. The issue of maximum utility is particularly important for spas because of their direct contact with the guest through the spa experience. Without the balance of revenue and utility, revenue management-type practices will alienate customers who will feel that the spa has taken advantage of them and has not provided them with the expected service in exchange for their patronage.

In practice, revenue management has meant setting prices according to predicted demand levels so that price-sensitive customers who are willing to purchase at off-peak times can do so at favorable prices, and price-insensitive customers who want to purchase at peak times likewise can do so. The application of revenue management has been most effective when it is applied to operations that have relatively fixed capacity, predictable demand, perishable inventory, an appropriate cost structure, varying customer price sensitivity, and time-variable demand (Kimes 1989; Cross 1997). Those attributes are generally found in some form or another in the spa industry.

Relatively fixed capacity. Spa capacity can be measured by the number of treatment rooms and the time that those rooms are available (with the added factor of ensuring appropriate staffing). Most spa operators approach optimizing revenue by filling the treatment rooms, but that effort can be limited by demand patterns and the number of therapists available. In many spas, the therapists are specialized, and even if a room is available, the appropriate therapist may not be. In the United States in particular, or where there are limitations on therapist licensing, it might be challenging to fill a room set up for facials, for example, when only body therapists are available.

Spa capacity is generally fixed over the short term, although spas have some flexibility to offer remote treatments, hire more therapists, increase the number of operating hours, change the length of the appointment, or reduce the amount of time between treatments.

Predictable demand. Spa demand consists of the two distinct market segments. One group is customers living relatively near the spa, and the other segment is visitors to the area. Demand by guest type varies depending on the type of spa. Day spas may approach 100 percent of customers being local residents, while resort or destination spas may see all of their demand from visitors staying at the resort. Unlike many hospitality industry segments, spa appointments are not typically booked far in advance and are mostly made at most a couple of weeks in advance. Many spas make appointments only a day or a few hours in advance, although it is true that resort or destination spas often gain reservations at the time the hotel booking is made. In contrast, spas in urban locations or day spas have a relatively high number of same-day reservations.

One key point about spa demand is that it can be classified by type of user. A leisure day user would typically be available to visit the spa anytime during the day, while corporate users or others on a tight schedule would only be available for set times during the day (e.g., before or after work or for an express treatment during lunch).

That dichotomy creates a revenue-management opportunity. Both forms of demand can be managed, but different strategies are required. Different types of demand constitute an inventory from which managers can select the most profitable mix of customers. To forecast this demand and manage the revenue it generates, a spa operator needs to compile information on the proportions of local and visitor demand and of leisure day and corporate evening or weekend demand. In addition, the revenue manager must record the desired treatment times, how far in advance appointments are booked, and the preferred types and lengths of treatments. Tracking customer-arrival patterns requires an effective reservation system, whether by computer or by hand.

Perishable inventory. One might think of a spa's inventory as its rooms and therapists, but instead, spa inventory should be thought of as time--or, in this case, the time during which the spa's capacity (both rooms and therapists) is available. If the spa is not fully occupied for a period of time, that part of the spa's inventory perishes. This is the key to the strategic revenue management framework, and it is the element we believe has been missing in most approaches to spa revenue management. Instead of measuring costs or revenue for a given month, spa operators should measure revenue or contribution per available treatment-hour (RevPATH). This measure captures the time factor involved in the spa business. Revenue can come from a variety of sources, including regular and upgraded treatment fees and surcharges for particular rooms or therapists.

Many spa companies evaluate operations based on sales volume. This is equivalent to hotels' measuring effectiveness by recording occupancy without paying attention to average rate. While a high volume is desirable, volume alone does not provide the information regarding revenue that RevPATH would give.

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