Ms. Hawksworth

Revenue Management

The Issue of Tactical and Strategic Revenue Management

By Cheryl Hawksworth, Regional Sales Manager, IDeaS, a SAS Company

The global hospitality market is in the period of slow recovery after the recession of 2008/2009, but the status of room pricing recovery is uneven across regions. Despite rebounding occupancies, the U.S and Mexico are not yet seeing improved average daily rates (ADR), while hotels in Asia are leading the world in ADR recovery. Hotels in Europe and the Middle East, despite showing no early signs of recovery, are now seeing slowly improving ADR. It is becoming apparent that, in most geographical regions, recovery is hindered by the tactics hotels employed to deal with the soft demand created by the recession; namely, the tactic of rate discounting in an attempt to raise occupancy, and the subsequent loss of rate integrity. Room prices were driven even lower by the outbreak of regional price wars, the unfortunate result of an intense cycle of pushing for rate parity with competitors that are pricing lower, and lower, in an effort to win market share. The recent recession was particularly deep, and it is important to consider that in the past it has taken the industry between 5 to 6 years for room prices to fully recover from previous downturns. This lends rise to the question - is the tactic of lowering room rates actually complimentary to long-term revenue optimization?

The tactic of lowering rates can maximize revenue in the short-term, by either holding or boosting occupancy, stealing market share from competitors and attracting leisure travelers or brand-neutral, price sensitive customers. But the unknown variable is how price elastic the market is, how much more occupancy will be gained at the reduced rate, and whether the effect on RevPAR will be positive or negative.

In effect, tactical discounting, especially when it descends into a price war, often has disastrous long-term consequences. Regional hospitality industries are now finding that attempts to increase prices back to pre-recession levels are being met with strong resistance from customers. What is an even more damaging consequence for hotels is the commoditization effect – when a hotel makes a choice to compete on price, this soon becomes the only thing customers see about the property, especially in the era of long-distance travel and third-party or internet bookings. As a result, it becomes very difficult to differentiate a property from its competitors - ultimately hurting, or completely destroying, any brand that has been built up in association with that property.

Clearly, the tactic of lowering room rates during the recent recession is now posing a challenge to effective revenue optimization in the recovery. The lesson to take for future periods of soft demand, is of the utmost importance of always aligning any tactics employed, whatever the demand conditions, to the larger revenue management strategy of the hotel. Indeed, there is now a near-total acceptance in the industry that in order to truly maximize revenue in a coherent and effective way over the long term, revenue managers, and the discipline of revenue management itself, should fundamentally move beyond traditional, tactical revenue management, to embracing a strategic revenue management focus.

The Evolution of Revenue Management

The major catalyst for the evolution of revenue management can be traced to the collapse of international travel, and the industry recession, triggered by 9/11. It was a period of extremely soft demand and, out of necessity, the discipline emerged from the challenge with an expanded strategic role. No longer was the industry about a tactical approach to room management, focusing on reservations and inventory. Instead, a new strategic role emerged, that utilized the process and analytical tools of revenue management to also encompass marketing, sales and channel strategy.

The shift from the tactical focus, to a strategic focus, has created broader responsibilities for revenue managers. Revenue management must now go beyond purely managing room inventory, to considering total revenue contributions, including ancillary streams such as food and beverage, spa or conference spend. Strategic revenue managers now have to, and are, adopting a customer-centric focus and thinking hard about price and value, rather than taking them as given assumptions.

Foundations for Strategic Revenue Management

Technology

Having clear, accurate and objective data and forecasts are crucial for strategic revenue management and, as an expanded discipline, the complexity and extent of analyzes and decisions required can only really be provided by an automated revenue management system. It provides the hotel’s revenue management team with a view to the true volume and value of demand to come, enabling the revenue manager to book the right business, at the right time and at the right price. The revenue manager can then be more proactive in execution, and revenue manage by exception.

A survey of hospitality industry revenue management professionals conducted at IDeaS Revenue Solutions’ 2010 Client Summit revealed that many were now relying on automated RM systems to perform the tactical applications of the job, leaving them free to focus on the strategic implications of revenue management and make better profit-related decisions for the entire hotel.

The technological advances in revenue management systems are playing a crucial role as the discipline shifts from a tactical, to strategic one. There are a number of systems on the market, that provide a whole host of functionalities, such as multiple channel management and competitor rate-shopping tools, that support the expanded remit of strategic approach to revenue management.

People

The skill set of the revenue management professional must adapt to meet the needs of a profession that is evolving. Revenue management professionals need to have the ability to think strategically, understand customer behaviour and synergize with the sales and marketing team. They must be analytical and detail-orientated, but also have the communication skills to maintain relationships with the hotel’s other departments, and be able to articulate decisions and information further up the line.

Hotels are rightly recognizing the importance of investing in dedicated revenue managers, hiring purposefully - or as many international chains are doing - setting up internal training schemes to develop the necessary skills in their existing staff. It is important to consider, for those hotels who are struggling to develop and implement the sustainable revenue management processes, structures and best practices to remain competitive, that there is the option of investing in an external consulting service to provide short or long-term revenue management support.

The evolving nature of revenue management also raises issues of organizational structure since revenue managers will be maximizing revenue across departments yet, ideally, will have their own dedicated department. Placing the revenue management team within an existing department might limit the ‘big picture’ perspective needed for strategic thinking. Ultimately successful revenue management is about breeding a culture within the hotel, where individuals from all departments collaborate their thoughts and ideas, and focus on all aspects of revenue to ensure that a complete picture of the hotel is drawn up in order to make good and effective strategic decisions.

Conclusion

To provide maximum value in through this period of recovery, and eventually in future peaks of the hospitality cycle, revenue management needs to grow into an even more strategic discipline. With strategic revenue management principles in mind, good revenue managers will be able to handle any challenges offered by a dynamic marketplace and will successfully drive better revenue, no matter the demand conditions.

The future focus of revenue management will be about understanding the elasticity of demand of different customer segments, and the value you are creating for them. The key difference when the next period of soft demand arrives, is that revenue managers will be thinking strategically. They will have the forecasts, tools and insight to ensure that if price reductions do occur, they will be implemented strategically, with long-term objectives in mind.

Cheryl Hawksworth has written this article in her role as a founding member of the Hospitality Revenue Management Community of BAHA (British Association of Hospitality Accountants www.baha-uk.org). She is also Regional Sales Manager for IDeaS - the premier provider of Pricing, Forecasting and Optimization solutions and services for the Hospitality, Travel & Transportation Industries. Ms. Hawksworth has a wealth of regional industry knowledge and leadership experience and she joined IDeaS following a successful tenure as the Head of Revenue for Grosvenor House, London. Ms. Hawksworth can be contacted at +44(0) 7887 486181 or Cheryl.Hawksworth@ideas.com Extended Bio...

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