Mr. Isenberg

Revenue Management

Respecting the Revenue Management Quartet

Identifying the Impact of Fragmented Revenue Management

By Gary Isenberg, President, LWHA Asset & Property Management Services

Consider the potential quartet of revenue managers holding a stake in a single hotel: OTA market managers working for Expedia and Booking.com; brands employing their own revenue managers for their flagged hotels; third-party management/revenue management companies overseeing the day-to-day property operations; and an asset manager serving as ownership's fiscal watchdog. And in some cases there may be other revenue management influencers who take an active role.

Ideally, all of these parties strive for the same end game of enhancing a property's revenue and profits. Occasionally they can work in tandem toward that goal. Yet each also vies fiercely to protect its own revenue fee streams. Unfortunately, these turf battles sometimes come at the expense of the other revenue managers, and, quite possibly, the hotel's profits and ROI.

There is nothing inherently wrong about the different revenue managers safeguarding their respective financial interests. They're simply doing their job. Ultimately, however, all must work together to ensure revenues push profits to the highest possible level at the hotel.

OTA Influence

OTA market managers works closely with the onsite revenue managers and/or reservations manager in order to ensure a hotel is maximizing all the OTA has to offer. Such contributions are designed to increase room night production and yield management for that specific family of OTAs. In today's consolidated OTA environment fewer players control several booking sites. Expedia, for example, owns over 15 different brands of travel companies and booking sites. Therefore, without the guidance of an Expedia market manager, the hotel revenue manager may not be aware of all the sites and how to utilize them. This guidance sometimes creates a false sense of security, and is quite costly in terms of commissions paid to the OTAs by the hotel. The goal and objective of an OTA market manager is to increase the volume of bookings through its sites, period. This goal can only be obtained if hotels continue to dedicate room inventory to the OTAs.

Market managers grab as many available hotels room nights as they can in a particular market. If the territory is a 24/7 urban market, for example, a market manager may aggregate 20 rooms at a Sheraton, another 50 at a Hilton, 50 more at a Marriott, in addition to any rooms they can gather from a well-known independent property. The OTA's sole goal is to amass as much inventory as it can and then sell that inventory through the OTA's channel. If the market manager stockpiles a 1,000 rooms for a Tuesday night, he or she wants to bump that number to 1,500 so the OTA earns more revenue. Essentially, market managers revenue manage hundreds, and in many case thousands of available hotel room nights, spanning a variety of lodging products.

Brand Influence

The typical brand hotel company books approximately 13% of its rooms via OTA platforms like Expedia or Booking.com, with commissions on average of 10% to 20%, according to Skift research. Ever since the first online room aggregator arrived on the scene, the OTAs have been in a heated skirmish for control of the guest. And the struggle may never end as the brands feverishly push consumers to book through their websites and bypass the OTAs. Major hotel brands have even tried to band together and form their own OTA, which led to the disappointing RoomKey.com experiment. Nevertheless, the brands and OTAs occasionally declare a cease fire. Depending on demand and market conditions at a single point in time, the brands may decide to hand over more (or less) of their inventory to the OTAs. However, generally speaking, the brands and OTAs are frenemies at best.

Occasionally, the ongoing battle between brands and the OTAs over control and commission levels has erupted publicly, as it did recently when Hyatt announced it would terminate its contract with Expedia if the two parties were unable to reach an agreement by the end of July. Hyatt reportedly wants to point more booking traffic to its own channels as well promote its revamped loyalty program.

At the same time, revenue managers for the brands focus their efforts on maximizing the programs and systems sponsored by the flag, with the intention of directing as much traffic as possible toward direct and brand booking channels, thereby avoiding or limiting OTA bookings. Obviously, their objectives conflict with that of the OTA market manager. An astute onsite revenue manager needs to balance the objectives of both in order to maximize revenue and profits for the hotel. Exclusively following the lead of either the OTA market manager or the brand revenue manager may leave revenues and/or profits on the table.

Third Party Management Company Influence

A third-party revenue manager's objective is to direct sell room nights in an attempt to net the highest revenue. The third party manager controls inventory through monitoring and shifting between securing room night bookings via brand channels or the OTAs -- whichever platform maximizes revenue yield.

Asset Manager's Influence

The asset manager guards the owner's interest, which means maximizing return on investment (ROI) or profits of a transaction. To reach peak ROI, the asset manager lasers in on profits. Of course, he or she loves healthy revenues, but simply raking in dollars on a nightly basis may not lead a hotel to profitability, the cost associated with acquiring that customer must be considered. Many asset management organizations employee their own independent revenue management person or entity. The asset manager revenue team regularly shops all sites - the OTA, brand, hotel direct, etc. - hunting for discrepancies and comparing costs associated with each booking channel. It therefore falls to the asset manager to understand all the competing revenue management roles and ensure the hotel's peak profit level - not just revenues - is realized. An owner's representative ensures all these various factions in revenue management align to maximize ROI for the ownership.

Owners and Third-Party Managers - A Balancing Act

Conflicts between the different revenue managers operating a hotel naturally arise. Again, each role is neither good nor bad - they're doing what's best for their brand, OTA, management company, or owner. Sometimes, competing revenue managers can (and should) work together. Yet each must also understand they have conflicting goals. They're not always going to be in lockstep.

As mentioned previously, the third-party revenue manager oversees the room inventory. But it's also worth noting the management company receives a fee of between 2% to 5% of the property's gross revenues. Given that target, the third-party revenue manager aims to squeeze as much revenue out of the room inventory as he or she can on a nightly basis.

The third-party management company also may reap an incentive fee. Such incentive fees are typically based on a predetermined net operating profit marker. For a hotel making $1 million in revenues, the profit target may be set at 30%, or $300,000. If the hotel exceeds $300,000 and hits $400,000, the management company cashes in 10% of that additional $100,000 of NOI as an incentive fee.

A management company faces a tougher path to hit the profit incentive, whereas the manager always receiving a fee for every dollar of revenue. There is no hurdle to reach the revenue fee. As a result, the management company's incentive to drive revenue can, at times, override the profit motive.

Since the manager is in total control of the inventory, he or she could theoretically accept a group piece of business that maximizes revenue at a high acquisition cost, while displacing other demand generators with lower acquisition costs. Hence this increases the management fee and reducing hotel profitability.

This puts the third-party manager in direct conflict with ownership's goal of profits and ROI. It's then up to the asset manager to monitor the expenses associated with a hotel's different revenue streams and square those costs against potential profits.

Brands and Third-Party Managers - The Redemption Clause

Like the OTAs and brands, brand revenue managers and third-party revenue managers can spar at times. Two dynamics in particular cause this discord: brand reward redemptions and the hotel's use of OTAs.

Nearly every major hotel chain rewards frequent guests with free room nights. Consumers love reward programs, but these enticements pose a somewhat thorny issue for the third-party revenue manager. The tension rears up when those frequent travelers redeem their reward points and stay at the third-party manager's hotel free of charge. This isn't a problem when the brand owns the hotel, but most of the time, the hotel isn't owned by the brand.

The brand reimburses the hotel management company a nominal fee that can range between $45 and $50 per night to cover the property's costs of putting up that guest for free. But that nominal fee bumps up when the hotel hits a certain occupancy threshold, typically 95%. If the hotel's occupancy bounces above 95%, then the brand must pay the hotel's RevPAR for that day. When a hotel's ADR runs $200 and the occupancy rises over 95%, RevPAR equals $180. In that instance, the brand pays the hotel manager $180 for a redeemed guest night.

Obviously, to receive the higher reimbursement, the management company's revenue manager wants to push reservations to a hotel where those bookings vault the property above the 95% occupancy level. Now, imagine this scenario when the management company operates three hotels in the same city owned by three different owners, but all flagged by the same brand.

Hotel A has already booked 95% occupancy and is scheduled to accommodate 50 redemptions. At that hotel, the management company knows it will secure the full RevPAR reimbursement. The management company's other hotel, Hotel B, has an occupancy rate of 90% with 100 guests cashing in their free nights. Hotel C, the third hotel under the management company's wing, also stands at 90% occupancy but will only get 50 redeemed stays.

What does the revenue manager for the third-party management company - the person who controls the inventory - do? Push the overflow inventory to Hotel B where the revenue manager knows it can surpass 95% occupancy (and grab the RevPAR fee for the reward nights) sooner than in Hotel C. That puts the third-party revenue manager in direct conflict the brand for two reasons: The brand has to pay the higher reimbursement at two hotels, while another hotel is deprived of a higher occupancy. The third-party management company isn't wrong to do this; it is merely pursuing its goals to obtain as much revenue as possible and capturing a higher reimbursement fee.

The owner, meanwhile, may be heartened by the near capacity occupancy, but was it good for profits to host so many free room nights? An asset manager needs to be cognizant of the cost (and possible lost profits) linked with that higher occupancy.

The relationship between the third-party revenue managers and the OTAs is just as conflicted. On some nights, the OTAs delivers the best revenue to a hotel (albeit to the detriment of the brand). Other nights, the brand presents the higher revenue potential. The discounted rates offered by the OTA and the brand cause these shifting alliances.

For instance, on the same night, the brand may offer 10% off the bar rate of $200 for booking direct, which, in essence, gives away $20 of the hotel's revenue. Then, the hotel pays 5% in points for the brand's reward program - another $9 slashed from the rate. Adding up all those discounts reduces the bar rate down to $171.

Simultaneously, the OTA peddles the same room for $190, but the commission the brand pays to the OTA ranges from 10% to 20%, depending on the brand's negotiated agreement with the OTA. Consequently, on that particular day and depending upon the commission, the hotel reaps extra revenues by pulling in more bookings from the OTA than the brand. On another day, the third-party management company takes the opposite tact and reduces its inventory on an OTA, preferring to sell the rooms through the brand because it receives higher revenues from the brand's booking channel.

Sometimes, the third-party revenue manager and the OTA's market manager can work together on special promotions. But it will never be a long-lasting or binding partnership because each is incentivized differently. Their goals misalign in many instances.

Doing What's Right for the Hotel

The current fragmented nature of revenue management naturally leads to territorial scuffles, and probably always will due to the opposing goals of each party. The ultimate winner in that battle must be the hotel. Profits and ROI for the ownership outweigh the narrow ambitions of all parties.

Today's revenue management resembles a puzzle in which all the constantly shifting pieces fit together to secure the hotel's highest profit margin on a nightly basis. The hotel's profits - not the OTA's, the brand's, or third-party management company's goal - stand as the top priority in any revenue management decision.

Gary Isenberg is President of LWHA® Asset & Property Management Services. Mr. Isenberg’s expertise includes third party asset management, serving as an owner’s rep, due diligence for real estate investors, and development services to negotiate management or franchise agreements. His asset management specialties include capital budgeting, PIP costing, and internal control and accounting. A graduate of Fairleigh Dickinson University with a Bachelor of Science in Business Management and minors in Corporate Finance and Information Systems, Mr. Isenberg started his career with ITT Sheraton as a Corporate Trainee. He was rapidly promoted over a series of increasingly responsible positions, mergers and acquisitions, at both the corporate and property level. Mr. Isenberg can be contacted at 212-300-6684 x108 or gary.isenberg@lwhadvisors.com Please visit http://www.lwhadvisors.com for more information. Extended Bio...

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