Revenue Managers versus Sales - The Price War in Your Own Office
By Bill Kotrba VP of Industry Strategy, Leisure, Travel & Hospitality, JDA Software | February 26, 2012
Much has been written about price wars recently, considering the economic roller coaster, occupancy crash and recovery that has taken place since 2008. The downturn hit the hotel industry with terrible timing, right at the intersection of Internet price transparency and the mobile shopping revolution. It was a perfect storm - a wave of economic weakness hitting an industry poised at the tipping point of price volatility and vulnerability.
When people think of price wars they think of the industry's B2C retail or transient business segment. With varying intensity, most hotels are in a constant war with local competitors to capture market share and fill otherwise-empty rooms. The price wars we are most familiar with occur when one competitor panics and drops rates dramatically attempting to steal market share or stimulate new business. Images of highway signage advertising "as low as" pricing comes to mind, or online travel agency price comparisons with competitor rates matched dollar for dollar and ending in 99 cents.
There is a different kind of "price war" though, which commonly occurs within the walls of a hotel, or central chain headquarters, between the Revenue Management (RM) department and sales team or sales director. This price war concerns the pricing a hotel offers in B2B distribution channels, such as to groups, corporate contracts, wholesalers, tour operators and the like-and refers to the conflict that occurs between revenue managers who are charged with increasing unit-revenue (RevPAR) or total profits, versus sales staff who may be measured on occupancy or sales volume for particular business segments.
The conflict between RM and Sales is common in hospitality and also exists in adjacent travel industry verticals like airlines, cruise lines, car rental, etc. I believe it arises from the cultural DNA of revenue-generating organizations. Salespeople are deemed to be effective when bookings are being made, whereas RM people are deemed to be effective when bookings are being turned away. As such, revenue managers are prone to leaving money on the table by pushing too hard for higher rates, and salespeople may be biased toward leaving money on the table by pushing for higher occupancy.
What's Wrong With This Picture?
The problem with this conflict between RM and Sales is … nothing! In any hotel, from largest to smallest, there is a constant push-pull between rates and occupancy. As occupancy increases, the opportunity arises to generate more total revenue or profits by increasing rates-more than can be generated by further increases in occupancy alone. This back-and-forth between RM and Sales, constantly pressure-testing the other's assumptions on rates versus occupancy, distribution channel mix, groups versus transient, etc., is a healthy and vital means of ensuring no stone is left unturned. The combination of a skilled sales team and RM team, armed with disciplined analysis, good forecasting and optimization technology, can efficiently propel a business to grab every possible dollar of revenue and profit.