Mr. Kohlmayr

Revenue Management

Revenue Management Impacts: How do you measure them?

By Klaus Kohlmayr, Senior Director - IDeaS Consulting, IDeaS Revenue Solutions

While revenue management professionals devote significant effort towards advancing strategies and tactics to optimize revenue, many revenue managers still lag when it comes to establishing and measuring agreed success criteria. This often leaves revenue management professionals to defend their actions to a skeptical audience with insufficient means.

Crucially, many revenue management professionals struggle when it comes to measuring and articulating the impact of their initiatives to senior management. Industry professionals should spend time considering the methods they use to measure the impact revenue management is having on their hotel so that steps can be undertaken to provide a compelling value proposition to their key stakeholders. In order to be truly effective in the job, revenue managers need to understand that devising, implementing and agreeing on “what success looks like”, in many cases, is as important as the activities themselves, and will ultimately go a long way towards supporting their success story.

There are however, key challenges that all revenue managers face when looking to measure their success. These challenges include information overload, over analyzing data and unclear or conflicting objectives.

Gone are the days when a business manager had to scramble to get their hands on data. The reality today is that data is often too easy to obtain and the difficulty lies in trying to see through the deluge of data, to be able to translate it into information, then transform that information into measurable strategies. With the ever increasing amount of data available, a revenue manager can easily become overwhelmed and unfocused when looking at what to measure and – more importantly – what not to measure.

With huge amounts of information easily available – and with revenue managers being naturally inclined to love charts and tables – too many revenue managers attempt to understand, analyze and measure every bit of data available and, in the process, lose focus on the critical success factors for the business. “Analysis Paralysis” often results, with a revenue manager rattling off an overwhelming amount of data, tables and charts to a non-data driven and potentially tuned out audience.

While many sophisticated hoteliers set clear objectives and critical success criteria, a surprisingly large number of businesses measure success based on criteria which are unclear, or, in the worst case, conflicting across different business lines. A typical example is the desire by a hotel to drive performance as measured in RevPAR or profitability; while at the same time setting corporate sales objectives, which are purely focused on volume and do not take into account profitability and displacement. Often a big (room night) volume account is considered a “good” account, even though it might not be the optimal business to ultimately support the overall goals of the hotel.

To help offset the challenges that revenue manager face when looking to measure their impact across the hotel business it is important that agreed-upon goals are in place, as this makes it easy to define and measure what constitutes success and failure for everyone involved. Of course, there are always reasons for over performance and excuses for under performance against a particular performance goal. However, sound measurement criteria – agreed upon by everyone at the outset– make it easier to identify any potential shortcomings early enough in the cycle so that they can be rectified before it is too late.

In a hotel environment, there are a number of key performance indicators which are critical in measuring and evaluating the impact of revenue management. At the minimum and highest level, every hotel should at least look at RevPAR Index Performance, which in many cases is still the best indication of how a hotel is performing against its competitive set. Although widely used in the industry, many revenue management professionals fall short by not drilling deep enough to fully understand what good (100 and more) or bad (below 100) signifies. Some of the questions sophisticated revenue managers should ask are: what are the trends (by day of week and segment); what are the reasons (Rate or Occupancy driven); what is the change vs. my competitive set over time in index or rank - even if the index is above 100, if everyone improves their RGI and our hotel doesn’t, we should still be worried.

Looking at the RevPAR Index is always a good starting point before delving down deeper to get a more detailed picture about where opportunities for improvement might lie.

To perform a more sophisticated and micro view of the business, efficiency indicators are often very useful to measure how well individual parts of the business are performing. Each indicator provides a point of comparison for performance to be assessed against either an actual or optimal benchmark. The most commonly used are rate, room type, sell out, and channel efficiency.

• Rate Efficiency: Indication of ADR achieved against a benchmark (i.e. Transient ADR vs. BAR ADR) which can be either measured against specific segments or an aggregate of segments depending on the needs of the business.

• Room Type Efficiency: Indication of specific Room Type ADR vs. either Total Room ADR or vs. an “optimal” benchmark set by the revenue team.

• Sell Out Efficiency: An indicator of how many times the hotel was sold out in periods over 95%. This indicates if the business is managed correctly in high demand periods (i.e. through management of overbooking, no-shows, guaranteed reservations, etc.).

• Channel Efficiency: Indication of the relation between the rates achieved from our distribution channels vs. the overall average rate. Again, this can be measured either by channel vs. overall distribution rates or against a broader spectrum of rates.

A robust and reliable forecasting process lies at the heart of every successful hotel revenue management operation. Regardless of the economic climate, certain portions of hotel demand will always be more volatile than others, and the forecasting process needs to anticipate and account for this volatility. While measuring the accuracy of a forecast is valuable, it is purely a retrospective measure. Forecast Accuracy is only one measure among many that can be employed in order to determine how well the forecast performed in respect to the overall role it plays in the forecasting and revenue management process. In order to drive better revenue and improve the process of forecasting, hotels have the potential to benefit from shifting the focus from forecast accuracy to forecast performance.

Forecast performance brings together a number of different measures which are made against the inputs and outputs in order to reveal how well the forecasting process is working as a whole. This approach also considers the conditions under which the hotel forecast process is operating. A variety of measures that are taken individually, and then combined, will allow the revenue manager to achieve a more holistic and ongoing evaluation of the overall performance of the hotel.

Given that many hotels have too much information located in many different places, a key challenge around measuring impact for revenue managers centers on how to best bring critical information together. To synthesize important information into one place and build a performance measurement culture, at the least, every hotel should have an over-arching “Business Scorecard” – a visual indication of the key success criteria that are important for the business on a single page or slide. In its simplest format, the scorecard can be a simple 4-box model, with each box representing one business indicator that is considered the most relevant for the business. Within each box, absolute numbers for each KPI (i.e. for the month or YTD) and trend (improvement, decline vs. previous period, performance vs. budget) should be clearly indicated. For revenue management related areas, KPIs might include:

• Revenue Generation Index (RGI), rank or change of rank vs. previous periods (i.e. last year or month)
• RevPAR, change vs. previous period or vs. goal
• Distribution Channel Performance vs. previous periods and/or goals
• Profitability (as % margin, per available room or similar)
• Or simply any other area that is deemed to be of critical importance for the business at that time

The scorecard should be freely shared with everyone in the organization to provide a cohesive, summarized view of business performance. While simple in design, this will go a long way towards establishing the necessary alignment, focus, and transparency across the various stakeholders who are responsible for managing and improving performance.

As hotels increasingly embrace total hotel revenue management and revenue managers expand into more profitability-related areas, it is crucial that new success criteria, like Gross Operating Profit per Available Room GOPPAR, are developed and implemented so that they become main stream. No matter how many measurements of success a hotel has, it is important to remember that the value of any success criteria does not come from the absolute number alone, but from the underlying factors and longtime trends which are impacting upon the final number (index, score). By understanding what drives the end result, short and long term trends, how to positively impact the KPIs and clearly communicate results to key stakeholders, revenue managers will be well on track to increase their value to the business, whilst simultaneously generating higher levels of support and buy in from the business.

Klaus Kohlmayr currently holds the position of Senior Director - IDeaS Consulting for IDeaS Revenue Solutions, the global leader in Hospitality Revenue Optimization. (www.ideas.com) He is responsible for leading and growing the revenue management consulting and advisory division assisting clients in the Hospitality and Travel sector worldwide to develop, implement and enhance best practice revenue optimization, pricing and forecasting strategies and tactics. Mr. Kohlmayr can be contacted at 612-840-3301 or Klaus.Kohlmayr@ideas.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.