Ms. McGuire, PhD

Revenue Management

Revenue Management Beyond Hotel Rooms: Five tips to get started

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

Hotel Revenue Management (RM) is maturing, and more and more hotels have implemented RM programs along with advanced RM software to automate pricing. As the discipline matures, the law of diminishing returns begins to apply. More and more effort is required to squeeze our fewer and fewer dollars from hotel rooms. Smart revenue managers are turning to revenue generating assets outside of the hotel room, like function space(1), restaurants(2), golf courses(3) and spas, as the next potentials(1) for revenue gains. In a world where most hoteliers are already doing more with less, how do you even get started? I suggest the following five tips:

1. Understand the theory.
2. Follow a formal process.
3. Involve the operations.
4. Look for low-hanging fruit.
5. Publicize your successes.

These five tips are based on RM research, conversations with managers who are implementing non-traditional RM programs, and my own experiences in this area. They will help managers take full advantage of the opportunities to apply RM beyond hotel rooms, while also working within the constraints of the existing operations. All it will take is a little knowledge, a lot of communication, and a few early successes.

Understand the Theory

There are just a few basic concepts you need to understand that will help you to identify the right area to focus on and the opportunity within that area. First, in order to take advantage of RM, an industry must meet the following characteristics(4):

• Relatively fixed capacity: it is difficult or costly to add more capacity.
• Time Perishable Inventory: the capacity cannot be stored and sold later.
• Time-Variable Demand: peak and off peak periods.
• Segmentable markets: the product or service has different value for different customers at different times.
• High Fixed and Low Variable Costs: it costs relatively little to sell one more unit, so any revenue gains can be used to off-set the fixed costs.

To illustrate how this works, let’s look at golf. There are a limited number of tee times available, and it is difficult to add more without redesigning the course. If the 7:00am, Tuesday tee time is not sold by 7:01am on Tuesday, you can’t sell it later. Most golfers prefer to start in the morning so there is ample time for 18 holes. Weekdays can be slower than weekends. Golfers could be segmented based on their willingness to pay for a desirable tee time, or on their skill level – assuming that more experienced golfers play faster, and therefore one could move more of them through the course in the same amount of time. Finally, compared with the cost of maintaining the course and the clubhouse, the cost of selling one additional tee time is relatively minimal. As you can see, golf is a perfect industry for RM.

If you have multiple revenue generating assets that meet these characteristics, the next step is to understand the strategic impact of each on the business. For most traditional hotels, rooms are the largest and most profitable revenue stream. A logical next step is to select the revenue generating asset that has the highest impact on, or relationship with, sales of hotel rooms. For example, while a hotel’s function space might not be the largest or most profitable revenue source, room sales are highly dependent on function space sales, so that could be a good place to start. In resort hotels, the same might be true for golf courses or spa.

There are two strategic levers for RM, price and duration(5). The goal of any RM program is to move price from fixed to variable and duration from unpredictable to predictable. Continuing with our golf example, golf courses typically charge a set price for a certain number of holes (setting aside discounts), so an opportunity for golf is to move towards variable pricing. Duration in golf is unpredictable. Unlike in hotels, where guests reserve rooms for a set number of nights, golfers reserve a “round” without specifying the time it will take to complete that round. If golf duration were more predictable, managers could schedule tee times with less time in between, potentially increasing the number of available tee-times, and hence revenue.

Follow a formal process

Kimes and her colleagues(6) recommend a five step process for an RM program.

1. Establish the baseline of performance:
   Thorough analysis of the existing operation is essential as a first step. The key metric for RM, Revenue Per Available Time-based inventory unit, is made up of price and utilization (occupancy), so a full investigation of pricing strategies, demand patterns and usage of the inventory is required. This will certainly involve data from the selling system, reservation information, any data about denials and regrets, no-show data, and, for those industries where duration is uncertain, time studies of the service process to understand usage patterns.
2. Understand the drivers of that performance:
   Sit down with the team and analyze the results of the baseline analysis. Look carefully at demand patterns and see if you can segment out customers with different needs. Investigate low and high demand periods and see if you can figure out why those periods are popular or slow. Look at utilization patterns and see if there are any operational issues like staffing levels, job functions or technology issues that might be driving suboptimal performance.
3. Develop a RM strategy:
   Once you understand the drivers of performance, look for opportunities to apply the two levers of RM, price and duration. Are there opportunities to vary prices to stimulate or restrict demand? Would duration management techniques such as increased staffing, service process changes or technology upgrades improve utilization? Do high no-show rates provide an opportunity for overbooking? Are pricing or reservation policies restricting revenue benefit?
4. Apply that strategy:
   Working closely with all key stakeholders will insure success. While some strategies may be simple, buy-in from the staff that will execute these strategies is essential for success. Make sure line-level staff is fully trained on the “whys” of your new policies, and ensure that their incentives are aligned with your desired outcome.
5. Monitor the outcome:
   While this step may seem obvious, it is often overlooked. Continual monitoring of outcomes is essential not only to prove success, but also to identify opportunities for continuous improvement.

Look for low hanging fruit

As you are working through step three of the process outlined above, remember that small changes can have a big impact on revenues. Hotel RM has advanced to the point that automated software with advanced analytics are essential to achieve revenue gains, but in the early days, operational changes made a big difference. Credit card guarantees for advanced bookings can reduce no-shows. Marshalls on the golf course can speed up rounds, resulting in more capacity for tee-times(7). Adjusting the restaurant table mix so that it better matches the customer mix will increase cover counts by filling more seats(8). “Easy” operational changes will result in an early success you can point to as justification to continue.

Involve the operations

Participation from the unit managers and line level staff is essential to the success of any RM program. Not only can these folks provide valuable insight about operations, but they will ultimately be responsible for executing the strategy. I worked on a restaurant RM consulting project with the buffet restaurants in a large casino. We involved revenue managers, food and beverage directors and the unit managers in strategy development meetings. Before the final recommendations were completed the buffet manager pulled me aside and said that on his own he had already replaced some of his four tops with deuces based on our preliminary discussions. He determined that he increased his cover count by about 36 a night with this small change. His small (non-scientific) initial success won over the other unit managers immediately and they were much more responsive to our final recommendations.

Publicize your successes

You can imagine that we used the success of that buffet manager in all of our future conversations with our client. This turned out to be essential to the success of our project. The “real world” win was much more powerful than the mathematical models we used to predict revenue increases. Well-publicized successes will ensure that your efforts can continue. Developing success metrics and communication strategies is as important a component of the RM strategy as the pricing and duration controls. Use regular team meetings to highlight successes (and praise the efforts of team members who assist you along the way). Make sure everyone from the GM to the owners to the managers of other outlets knows about your program. There is nothing like a solid win to inspire the team to continue, and to think bigger.

These five steps should ensure you position yourself for success, no matter which asset you decide to start with. If you would like more information about applying RM to a specific asset, start with the references in this article.

References:
(1) Kimes, S.E. and McGuire, K.A. (2001). Function-Space RM: A Case Study From Singapore, Cornell Hotel and Restaurant Administration Quarterly, December, 33-46.
(2) Kimes, S.E., Chase, R.B., Choi, S., Lee, P.Y. and Ngonzi, E.N. (1998). Restaurant RM: Applying Yield Management to the Restaurant Industry. Cornell Hotel and Restaurant Administration Quarterly, 39(3), 32-39
(3) Kimes, S.E and Lee. W. Schruben (2002) “Golf Course RM: A Study of Tee-times,” Journal of Revenue and Pricing Management, 1(2), 111-120.
(4) Kimes, S.E. (1989). Yield Management: A Tool for Capacity-Constrained Service Firms. Journal of Operations Management, 8 (4), 348-363.
(5) Kimes, S.E. and Chase, R.B. (1998). The Strategic Levers of Yield Management. Journal of Service Research, 1 (2), 156-166.
(6) Kimes et al. 1998 opt. cit.
(7) Kimes and Schruben 2002 opt. cit.
(8) Kimes, S. E. and Thompson, G.M, (2004). Restaurant RM at Chevys: Determining the Best Table Mix. Decision Sciences, 35 (3), 371-392.

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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