Ms. McGuire, PhD

Revenue Management

Better Pricing Decisions Leveraging Marketing Data and Analytics

By Kelly McGuire, PhD, Director of Hospitality & Travel Global Practice, SAS, Institute

Revenue management is responsible for demand control, including setting rate and availability controls. They own the rooms inventory and hold information about price sensitivity and demand by property, market segment, date and rates. They know when and where demand is expected and needed. Marketing, on the other hand, is responsible for demand generation including campaign strategies, guest relationship management and loyalty programs. They own the guest, and hold information about preferences, purchase behavior and guest value. They know who the guest is and what offers they are most likely to respond to.

So, when you think about it, revenue management and marketing really are two sides of the same coin. Each department holds key pieces of information about demand that, when integrated, result in critical insight about demand patterns, product preferences and purchase behavior. Unfortunately, employees in these two closely related functions do not always work well together. Misaligned goals and poor communication result in situations where marketers, with a goal of generating demand, sends out discount promotions that dilute rates during peak periods. While revenue managers, trying to maximize revenue, close off promotional rates meant to encourage stays from the most loyal guests. These conflicting activities damage revenue performance and guest relationships.

During the recent economic downturn, traditional playbooks were thrown out of the window. Without excess demand to control, all departments in the hotel were forced towards demand generation, working closely to understand where demand could be sourced and building pricing strategies designed to encourage bookings. Weekly demand planning meetings, where marketers and revenue managers sit down to strategize, have become the norm for many firms. Departments that used to be siloed have been reorganized to report through the same Director or VP, resulting in better alignment of responsibilities and goals.

Now that we are out of the downturn and preparing for recovery, lessons learned during the downturn need not be forgotten. As the role of the revenue manager is evolving from tactical inventory management to a more strategic demand management focus, marketing data and analytics become even more critical to maximizing revenue while staying focused on maintaining price position within the market. These departments that often lead the charge to create an analytics culture must continue to share key information and move towards an automated, integrated environment.

Evolving Revenue Management Analytics

Revenue management has traditionally been less concerned about who the individual guest is, but more concerned about demand, in general, for the hotel rooms. Careful analysis of demand patterns by location, date, room type, length of stay, market segment, channel, and rate, as well as competitor price and positioning provides a comprehensive view of demand.

Recently, hotels have begun to consider price optimization, which uses the price sensitivity of demand to calculate the best price, rather than the traditional inventory optimization methods. Many hotels are also beginning to move towards total asset profit optimization, where revenue streams from all ancillary outlets are considered in the revenue management decision. Regardless of the approach, the limited capacity of hotel rooms is carefully managed in order to increase property-wide revenue and profits. The increasing sophistication of revenue management technology and revenue management practice provides continued opportunities for advanced demand analysis.

What has been missing from the revenue management decision is any consideration of the characteristics of the individual guest. When powerful information about the guest (described below) is integrated with demand patterns and price sensitivity analysis from revenue management, proactive demand sourcing becomes a reality. Revenue managers and marketers working together can synchronize promotion and pricing decisions to increase overall revenue and profits.

Marketing Data and Analytics

Marketers collect and manage a robust set of information about individual guests, particularly when they use loyalty programs. This includes stay patterns, booking channels, room types, demographics, on-property activities, travel purpose and geographic preferences, basically any information collected during any guest interaction.

Once this information is collected, it contributes to advanced marketing analytics, including:

• Microsegmentation to identify statistically significant subsets of guests with similar preferences and purchase behavior: e.g. eco-conscious families with children under ten that travel in the summer and prefer to stay in the West or Southwest.
• Market basket analysis to identify “missing” products: e.g. guests who stay with you as a business traveler, but never for leisure.
• Social network analysis to find guests who influence other travelers behavior: e.g. every time a certain corporate guest stays at your property, he or she brings three other guests from the same company.
• Likelihood to respond to determine which offers should be sent to which guests.
• Lifetime Value Calculations to identify the most valuable guests.
• Cross-sell/Up-sell to determine which add-ons or upgrades to offer to which guests.

Integrating Revenue Management and Marketing Decisions

Deep insight about guest behavior combined with strong analysis of demand patterns across the system provides the opportunity to:

• Incorporate total guest value in the revenue management decision: optimize property-wide revenue by considering the total guest spend profile beyond the room rate (or gaming revenue).
• Forecast promotion demand: incorporate expected lift from promotional activities into demand forecasts for an accurate picture of the impact of incentivizing demand.
• Create dynamic packages: Allow the guest to choose the elements of the package, and then price the entire package appropriately based on forecasted demand for all components. Suggest alternate times and dates which would push demand to slower periods, while providing a lower cost option for the guest.
• Next best offer: While guests are exploring your website or speaking with your agents, using the guest profile or searching behavior combined with pricing from the revenue management system, encourage conversion by creating an offer designed just for them. For unknown guest, browsing behavior on the website compared with experience with previous guests can provide the basis for an offer that they are most likely to accept, and revenue management data provides a profit-maximizing price.
• Cross-sell/up-sell: Find opportunities to cross-sell or up-sell products based on guest preferences and the optimal price for those products based on demand.

Consider this scenario: Revenue management alerts marketing that demand is soft during weekends in February for leisure travelers for suites at the city center hotel in Philadelphia. The system has determined that up to a 20% discount off of the weekend rate would still maximize revenue for those weekends. Marketing reacts by developing a promotion that targets guests who are likely to book at that price during that time period, and stimulates just enough demand to fill the empty rooms. Promotional details are sent back to the revenue management system which automatically incorporates the expected lift into the revenue management forecast.

Without accurate intelligence from each department, this scenario is not possible. Working together, marketing and revenue management can transform the organization from reactive to proactive, forming deep and lasting relationships with guests while maximizing property-wide profits.

Establishing a common technology framework, where each department has access to the other’s data and analytics in the solutions they use every day, can enable this evolution. However, deeper cultural and organizational changes will be required. The analytics culture grows as data-driven learning is encouraged. Departmental goals and incentives need to be aligned. Business processes need to be defined across departmental silos, and reporting structures adjusted to reduce conflict. While the process may be complicated, the reward is better pricing decisions, ultimately leading to increased revenue and profits.

Kelly McGuire leads the Hospitality and Travel Global Practice for SAS, Institute. In this role, she is responsible for driving the offering set and setting strategic direction for the practice. Before taking on this role, she was the industry marketing manager for Hospitality and Gaming at SAS. Ms. McGuire works with product management, sales and R&D to ensure that SAS solutions meet the needs of the market. She is responsible for the outbound messaging regarding SAS’s Hospitality and Travel capabilities, particularly in the areas of revenue management and price optimization. Ms. McGuire works closely with IDeaS Revenue Solutions, a SAS company, helping to integrate IDeaS revenue management solution with SAS’s marketing solutions. Ms. McGuire, PhD can be contacted at 607-216-5800 or Kelly.McGuire@sas.com Extended Bio...

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