Top Ten Questions You Should be Asking Your Revenue Managers
By Klaus Kohlmayr, Senior Director - IDeaS Consulting, IDeaS Revenue Solutions
In today’s extremely competitive hotel market, hoteliers are recognizing the benefits of taking a targeted approach in identifying and reaching guests who will bring the most value to their hotel. Here are the top ten questions that hoteliers should be asking revenue managers to ensure they are making the most of upcoming demand and attracting the right kind of business.
1) Do we have the right data?
Any hotelier with a basic understanding of revenue management principals should know that utilizing data and analytics is the best way to determine marketing and pricing strategies for the future. What hoteliers need to be asking their revenue manager, though, is whether they have detailed data that is both historical and forward looking. Historically, the data should include (at least) the number of occupied rooms, coupled with revenue by market segment by day. Also ensure that number of rooms and revenue on the books by day (and by market segment) for at least the next 90 days is included. If data is collected every day it will allow the hotel to establish simple booking pace forecasts by segment and day of week, from which they will be able to compare to historical data. If this is done consistently, it will allow mid-level hoteliers to quickly pick up any changes when demand increases and enable them to tweak their strategies accordingly.
2) Is our forecast realistic?
Accurate forecasting is the essence of a successful revenue management strategy, but often hoteliers fall into the trap of being overly optimistic about what can be achieved. A simple way to test if a forecast is realistic is to check if daily pick up of rooms assumed in the forecast compares favorably to the actual average daily pick up the hotel has achieved over time.
It is important to view forecasts with a critical eye and constantly reassess them over time because they are the basis of forming your revenue management strategy. If your forecasts are completely unrealistic, you are likely to put the wrong strategies in place and your hotel’s bottom line is likely to suffer as a result.
3) Which segments are up and which are down?
Forecasting demand from your different segments is a good way to develop effective pricing approaches to maximize revenue across a number of markets.
By understanding which hotel services each customer from any given market segment is likely to use, hoteliers can begin to make better decisions about which customer should receive that last available room, and who should be offered free or discount breakfast options, complimentary spa treatments, etc. for a limited time to drive demand in low periods.
Some segments are more price sensitive than others, so when price is lower, it is likely to have a positive impact on demand. These customers are also likely to respond better to price promotions, such as discounts. While other customers may be less sensitive to changes in price and are more likely to be swayed by room upgrades and complimentary services, such as spa treatments and exclusive gifts, etc.
4) Will discounts make a difference?
Panic sets in when a hotel is forecasted to miss its targets. Promotions are put in place, rates are slashed, and management waits and hopes the reduced rates will drive sufficient demand to make up for the gap. This rarely happens. Research has proven time and time again that reducing rates will almost never drive increased revenue per available room.
In fact, often the worst thing a hotel can do in times of weaker bookings is offer a short term discount to gain an edge over a competitor and then reduce services (to help accommodate for the price reduction) that differentiate its property from the competitors. In order to fight commoditization brought about by excessive focus on price, hotels must maintain service levels and brand focus. Every customer that comes through the door needs to understand what makes your property different and special, and what makes your brand unique, whether they are a loyal customer or came in because of a discount.
Instead of a rushed and panicked reaction, a measured and strategic approach is instead needed. Being aware of the price sensitivity of demand is critical to understanding what happens when prices are changed. Additionally, not many hoteliers think about what happens if they make a price change and the competitor makes a price change too – everyone will be at the same place as before, however, everyone will have lost out on revenue.
5) Are we opening our doors to the right business?
Not all business is good business. If lower rated business is filling up a hotel too early, higher rated business cannot book. Essentially this is costing the hotel money, as higher paying customers take their business elsewhere. To ensure hotels are optimizing higher rate business, it’s important that there is alignment with sales and an understanding across management about what good and bad business means and what strategies need to be in place to ensure the right business is taken at the right time.
To help guarantee a hotel is attracting and retaining high value guests, it is vital that a holistic view of their guests’ lifetime value is obtained, not just their room rate spend. Data from all transaction systems needs to be integrated to provide a true picture of a guest’s preferred activities and their overall value considering all ancillary spend, from the time they make an online reservation to the time they check-out. This should include everything from food service to the day spa usage, guest rooms to gift shop purchases, and more.
6) What is the risk of displacement of other business?
Taking business from one segment will almost always impact another. As we discussed above, not all business is good business. While many hoteliers choose to operate under a “busy hotel is a successful hotel”, mantra when faced with softer booking conditions it is important to note that any ‘race to the bottom’ short term pricing strategy has the potential to displace higher value guests and deliver potential negative long term impacts. Just because business looks great on paper, for example high volume or repeat business, does not automatically mean it is good for a hotel, because it could be displacing business from higher value guests. Hotels need to be smarter about how they price themselves and what incentives they are using / giving away to attract business. Overuse of incentives to attract guests can actually reduce the revenue coming into a particular venue and turn away higher paying customers who are attracted to a hotel for their reputation or prestige.
7) Are we using the right competitor set?
Ask different stakeholders in a hotel who they are competing with, and it’s likely you will get very different answers from each. This is not necessarily wrong. Competitor sets will vary depending on the market segment or customer group and it can be that an owner, a management company and an asset manager use different competitors to evaluate performance. The key point is that from an operational and revenue management perspective, the right competitor set is chosen based on the criteria to be evaluated. Competitors differ by price range, segment, and depending on other consumer criteria – even by channel. It is important to agree on the right competitor set to understand how performance stacks up against the competition for the strategies you are trying to evaluate and measure.
8) How is our strategy going to impact our profitability?
While the focus for revenue management is on driving top line performance, profitability questions must be put forward as well to achieve bottom line results. Not just revenue, but also the costs of the associated strategy must be taken into account. For example, if a hotel is considering offering guests free breakfasts, then the cost of these meals should also be taken into account to decide if the subsequent increase in revenue is worthwhile. If not, they might want to consider other less costly promotions to drive demand; for example: free Wi-Fi in rooms, a complimentary turn down service, etc. As discussed earlier, different segments will respond differently to different promotions. For example, one customer’s demand may result in high revenues but low profits, whereas another customer could provide lower revenues but much greater profits. This must also be considered.
9) Is what we are doing paying off?
When talking about revenue management, many hoteliers believe adopting the right system or software will deliver comprehensive market analysis and demand forecasts to solve all of their problems. It is true these systems are critical to a thorough revenue management approach; however, good analysis is only the first step - it is also important to measure the success of all strategic decisions made by a hotel.
Hoteliers need to make sure they have methods in place for measuring ROI and the effectiveness of pricing or promotional strategies. A hotel must establish real and firm success criteria before a price is changed or a promotion implemented. Many hotels are in the habit of doing the “true and tested” even when more detailed analysis would show that these actions have often been detrimental to the business. Sound analysis needs to be followed by sound strategies.
10) Have we learned from past mistakes?
Having methods in place to measure the effectiveness of a promotional strategy is crucial; however, using these results to make better decisions going forward is crucial for future performance. Great revenue managers understand that the system needs to be continuously adapted and changed, to do more of what has worked, revise what hasn’t, as well as adapt to the ever-changing business environment and customer demands and requirements.
It is vital that hoteliers ensure the fundamentals of good revenue management are in place – including: accurate forecasting by segment, targeting the right business with the right kinds of pricing strategies, and having strong analysis in place so the same mistakes aren’t made over and over. Any hotelier that has embraced revenue management and is taking a strategic approach to their pricing is helping to ensure that their property is operating as profitably as possible.
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...
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