Mr. Kotrba

Revenue Management

Revenue Measurement Is Not Revenue Management

By Bill Kotrba, VP of Industry Strategy, Leisure, Travel and Hospitality, JDA Software

In pricing and revenue management, hedging your bets with a tried-and-true process may actually be riskier than taking a chance on something different. It sounds counterintuitive, but the fact is that the conservative route to pricing practices is costing big hospitality firms millions in revenue, risking their future viability.

Over the past few decades most hotel chains have adopted some form of automated revenue management (RM) system. But there are still some medium and large chains that have not. Worse yet, as some of these chains churned through acquisitions and ownership changes, their RM systems were abandoned or shut down. During the last decade’s brand consolidations, industry realignment and ownership changes, business intelligence (BI) tools were growing in maturity and sophistication.

Fifteen years ago, when I was a brand new analyst learning pricing at a major airline company, business intelligence tools were more humbly known as “reports.” Woe to the analyst assigned to produce reports — it was an arduous and time-consuming task.

he old paper BI reports gathering dust in binders on an executive’s shelf. Where there used to be a data warehouse, best-in-class companies now have a data “convenience store” that enables all manner of fancy, web-based, interactive, real-time dashboards showing every profit coming in the door, every cost, every price, every trend, every year.

In fact, the ability to track, measure and review revenue trends has become so timely and sophisticated that revenue managers have been wowed into thinking that pricing and revenue management systems aren't necessary. Today, we find many medium and even large hotel chains have sophisticated BI tools and legacy revenue management systems that fall into two categories — disuse and misuse. The result is that revenue management departments lack RM systems, and instead maintain a robust set of BI reports and tools. At first glance, these reports resemble many of the screens one would find in real revenue management software. With scarce capital to invest in software systems the last few years, some users of slick, interactive reporting tools are talking themselves into believing these are just as good as automated RM — or at least “good enough.” But at the end of the day, reports are reports, and while a sharper, crisper rear-view mirror might make the drive more pleasant, it’s not much help in navigating what lies ahead.

Using BI tools as a primary means of revenue management, managers and analysts pore over dashboards and reports for hours, adjusting pricing or inventory based on recent trends and gut reactions to the measurements they see. If they are dedicated and work hard, they can certainly improve results, but the fact is that mental brute force is not a good way to position a multimillion — or billion — dollar enterprise for future success and growth. No matter what kind of rock stars are doing the heavy lifting, this approach to revenue management is not sustainable — and should not be confused with the true science of pricing and revenue management.

The Pitfalls of the “Measure and React” Approach

Every year, some of the best and brightest — team members who know each region inside and out, make critical decisions about top-line revenue, and are instrumental to maximizing profit margin — will leave the department. Some will move on to other disciplines or move up in the organization. Some will join competitors. The message here is that relying solely on people can be a risky move.

A leader of pricing and revenue management at a major travel brand told me recently, “We are very proud of our manual RM process. We have honed our reports and dashboards to a razor fine edge. When we a see a change in pricing or booking trends, we jump on it. We measure and react. I’ve built a team of smart, decisive people who know their regions inside and out and never miss an opportunity.”

He went on to say that a few years ago they shut off their automated demand forecasting and optimization software because it was a “black box” that had withered over the years from lack of use and no longer produced reasonable output.

That’s too bad, because the reality is that a room full of even the smartest people with the best BI tools simply can't capture all of the revenue upside that a revenue management system provides.

Maximizing Profitability Through Automation

The point is not to argue that measuring trends and reacting quickly is necessarily bad. In fact, talented, disciplined revenue managers should do just that.

True pricing and revenue management goes beyond revenue measurement, especially with demand forecasting and optimization at the heart of the solution. Pricing and revenue management is about intelligently placing a bet on what will happen in the future — predicting and optimizing — which unlocks revenue upside far beyond simply measuring and reacting.

Further, there is a huge difference between building a capable team that can watch the store day and night, and structurally improving revenue-generating potential in a way that is sustainable and actually increases the value of an enterprise. Armed with a quantitatively disciplined view of future demand, a revenue manager (or automated system) can choose prices and set inventory controls to capture upside much sooner than by waiting and reacting without the right data intelligence.

The “measure and react” revenue managers insist they do more than that, that indeed they bring a view of the future that is more nuanced. Some would say their demand is very inconsistent and lumpy and that computers are only good at forecasting demand that is consistent. Actually the opposite is true—people are only good at forecasting things that are consistent. The latest algorithms are far more accurate at forecasting uneven demand than people are.

Additionally, even though human analysts can draw on experience to make decisions, they're also fallible. Humans are biased and are extremely inaccurate when they lack food or sleep, unlike computers, which hum fairly consistently day and night. A recent price optimization pilot study at rural hotels in the U.S. found they were chronically underpriced compared with what their customers were willing to pay, largely due to the biases of hotel general managers who were unwilling to deviate from their view of appropriate prices for their market.

The travel industry’s best-in-class companies embrace automated pricing and revenue management systems and are pushing the limits of science and innovation. The data storage, processing power and advanced algorithms available to the latest generation of RM systems can solve problems of stunning complexity. Revenue management systems can allocate rates and inventory to thousands of future length-of-stay permutations (i.e., a combination of hotel or airline hub origin/destination) quickly and accurately to balance supply and demand and maximize revenue. The latest area of innovation is price optimization — where the hotel industry in particular has begun systematically untangling the terrible pricing pressure resulting from today’s web-enabled instant price transparency and severe price competition. Measuring price elasticity and quantifying customers’ willingness to pay, using real-time competitor price data, is a reality in today’s RM systems.

The sophisticated approach embodies powerful algorithms to unlock revenue potential, which cannot be duplicated by people reacting to recent trends. Today, companies must look beyond people and sophisticated BI tools. To capture the highest revenue potential for their business, best-in-class companies need to adopt the latest innovations in pricing and revenue management, which brings powerful and accurate demand forecasting and price optimization capabilities to analyze, predict and accurately price to demand in any market condition.

Bill Kotrba is Vice President of Industry Strategy for the Leisure, Travel and Hospitality practice at JDA Software. In this role he has the opportunity to consult with hotel managers and executives frequently on the subject of pricing and revenue management best practices, systems and techniques. As leader of one of the top RM software providers in the Hospitality space he has constant exposure to industry best practices and the most technologically advanced approaches that are available. He studied pricing and revenue management at the Cornell University School of Hotel Administration while earning an MBA degree at Cornell. Mr. Kotrba can be contacted at 480-308-3000 or bill.kotrba@jda.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.