Best Practices for Total Revenue Management
By Lily Mockerman
Total Revenue Management is growing in popularity for discussion, but there remains some ambiguity as to what this really means. Some discuss the application of revenue management principles to ancillary departments like F&B, or a narrower application of simply enhancing room sales to include additional ancillary revenue. Others focus on things like cost containment or various fees. For the purposes of this article, we will define Total Revenue Management as the concept of monetizing every area of the operation in various ways to capture the highest profits given the time-perishable aspect of a hotel's various types of inventory.
The applications of Total Revenue Management can be exhibited in many ways, but some of the primary focus areas for rolling out a new program involve applying the concepts of revenue management to your ancillary revenue streams beyond rooms, such as F&B, Spa, Function Space, Golf, and more depending on the offerings of your particular property. The end goal of any serious Total Revenue Management program is to enhance bottom line profits by maximizing both top-line revenues and the costs associated with each area. This is referred to often in the industry as Profit Optimization.
For those reading this article that may still be new to the concept of time-perishable inventory, this refers to the idea that a given product or service cannot be resold once it “expires”. This is generally applied in the hospitality industry to room nights, as a hotel room night cannot be sold for a past date, say May 21st, if it was left unoccupied on that date and it is now June 1st. The same concept can be applied broadly across many areas of the hotel industry, including seat hours (F&B), treatment room hours (spa), RevPAS (Revenue per available square foot - banquet space), and many others.
Many hotels feel that because they're already doing well with their ancillary revenues, or because of the time and effort it would require pursuing this type of a program in these outlets, that it's not worth pursuing. To give a real-life illustration of the importance, however, imagine a grocery store that only adjusts pricing for its meat products. Vegetables and fruits, however, are always the same price, because they sell enough of them that they don't really need to pursue a program for adjusting the pricing. If they want to sell more apples, they simply publish a package deal in their circular that you can get a 5% discount on steak when you buy it with a pound of apples.
This is much like what you see in hotels now, when the primary revenue effort for ancillary spend is limited to packaging with rooms, giving F&B credits, etc. Certainly, these efforts are not without merit, and engaging revenue management in the outlets is not a replacement for these tactics, but a true total revenue program should far exceed these basics.
It doesn't always take a significant amount of effort to begin to pursue the concepts of Total Hotel Revenue Management. As a first step, it's important to make an effort to creatively determine what areas of the operation can be maximized through the program. There are some obvious areas, such as the restaurant, spa, golf course, banquet space, etc. A full-service or resort property, for example, has the advantage of cross-selling between departments, with restaurant staff learning about guests through polite introductory conversation, and responding with an offer to book a spa treatment or round of golf for the guest after they've finished dining.
However, even limited service properties can harness areas such as parking spaces, monetizing guest rooms, or new applications of occupancy like selling rooms in day use blocks either directly or through some of the new technology partners. For example, when a special event is taking place near a property, offer special use of guest rooms based on the type of attendees at the event. If the event appeals to families, offer the use of a room for 3-4 hour in the afternoon so older kids can swim and little ones can nap. The room can then be made up and ready for a late check in guest, adding revenue to the room hours which otherwise would have been idle.
Additionally, any size property can identify smaller, undefined hotel areas which may be used as meeting spaces for interviews, or simply as a retreat for someone who needs a quiet place to work mid-day or rest between business meetings. The most important focus when determining areas of application is to use creativity, unshackling your thinking from a space's traditional use. New concepts like Airbnb and Uber were successful by addressing a need or desire in a niche market that didn't yet have a really great solution; that same type of thinking should be applied in total revenue management to maximize some of the less thought of areas.
When we're first approached by a hotel about how to roll out a program of this scale, we focus on three primary areas: 1) Baseline Data, 2) Back to Basics best practices, and 3) Creative Applications. A simple baseline measurement of the current performance of each area, using the following metrics, is one of the most important things a hotel can do to start rolling out a new revenue program. This is essential to the beginning of the program, as without an initial benchmark for strategies and tactics which will be implemented, success is impossible to measure.
Let's look at a few of the metrics that are important to the various ancillary areas of your operation:
- RevPASH - Revenue Per Available Seat Hour. This concept takes the full revenue for the day within a given F&B outlet, divided by the total available seats, first multiplied by the open hours of the restaurants. This metric, similar to RevPAR for rooms, equalizes the concept of filling the restaurant, vs. the importance of increasing the average check (total restaurant revenue divided by total checks).
- RevPATH - Revenue Per Available Treatment Hour. This concept takes the full treatment revenue for the day from the spa operation, divided by the total available treatment rooms, first multiplied by the open hours of those rooms. This metric, again similar to RevPAR, equalizes the concept of fully booking the spa with appointments, vs. the importance of increasing the average treatment rate (total treatment revenue divided by total guests).
- RevPaR - Revenue Per Available Round. Not to be confused with the normal RevPAR, this metric is intended for golf courses and is widely used in markets like Phoenix and California, in conjunction with a newer benchmarking tool called the ORCA report. This concept takes the full golf round revenue for the day, divided by the total available rounds. This metric, again similar to RevPAR for rooms, equalizes the concept of fully booking the golf course with tee times, vs. the importance of increasing the average rate per round, or ARPR.
- RevPAS - Revenue Per Available Space (also known as RevPASF/M, or Revenue Per Available Square Foot/Meter). This concept takes the full revenue for the day from all events, divided by the total area of available space. This is much like the ADR metric for space.
- RevPASF/ProPAST - Revenue/Profit Per Available Space/Time. This concept takes the full revenue for the day from all events, divided by the total area of available space, first multiplied by the available hours of that space. This metric, again similar to RevPAR, equalizes the concept of fully booking the space with events, vs. the importance of increasing the RevPAS or generally, the revenue from each event.
- ARG - Average Revenue per Guest. As a hotel measures the above ancillary revenue, the end goal of a cohesive total revenue program should be to increase the average revenue per guest across all areas, also the goal of the popular packaging and credit tactics mentioned earlier.
There are almost no bounds to the number of ways each of these areas can be measured, and additional metrics abound, but those defined above are typically considered the standard for accurate measurement, without falling into the ever prevalent “analysis paralysis” from trying to measure too many data points!
One of the most common objections we hear to rolling out a program of this nature is that there aren't systems yet to accurately measure these data points, and maybe when the technology exists, a total revenue program can then be implemented. However, today's revenue management systems did not exist before we started practicing revenue management! Technology is always a response to the need to enhance a process that already exists. Hoteliers should not shy away from some of the basic tools we've used in the past, even software programs like Excel, to begin tracking where they can. As we often try to drive home with our clients, it's not as important that the program is rolled out to perfection as it is that the first steps are taken. Even a crude application of these metrics and strategies will enhance revenues to some degree, and additional polish can always be added once the basics are in place.
But perhaps your operation doesn't feature all of these ancillary revenues. What, then, is a savvy mid-scale or limited service hotelier to do to take their revenue management program to the next level? Using some back to basics techniques can still create big wins for many hotels. With the speed at which the industry moves these days, many hotels fall into the trap of just doing the surface evaluations in their daily tasks.
One of the most important but often overlooked areas of revenue management, especially as we turn the corner to profit management, is the concept of using net rates, particularly in displacement or group evaluations. There are several areas that can be pitfalls in this process, including 1) comparing a potential group rate, as a total, to an average rate for Transient vs. looking at which Transient business it will actually displace, 2) netting the group rate, but comparing to a full Transient rate prior to costs, 3) neglecting to figure in realistic ancillary spend or ancillary revenue costs for both Group and Transient in the evaluation.
When evaluating these net rates, teams should look at all booking costs on both sides, including commissions, booking fees for web or OTA's, rebates, and length of stay displacement by pattern. Additionally, calculating the ancillary spend for both Group and Transient (often an average for Transient, ideally by channel or market segment) along with the correlated costs, will give savvy revenue managers an apples-to-apples comparison to work from when evaluating business. This is an important practice to implement as a foundational step for any total revenue management program, and can easily be done today by hotels both large and small.
Looking into future trends for total revenue management, we believe that in the future we may start to see a 24-hour check-in widely used in the industry. This has already been beta-tested by a few brands, but without any major roll-out at this point. The main drawback is simply the technology that is based on room nights instead of hours, but in the future, we may see an industry focused more on RevPARH (Revenue per Available Room Hour) or simply RevPAH as opposed to the standard RevPAR that we're accustomed to today. This type of change, although currently hindered by operational issues tied to systems, could actually create a more efficient operational process in the future. Imagine if you knew the time block in which each guest planned to arrive and depart? Operational schedules would become much more efficiently planned.
Some examples of how to harness the concept today include companies like Day Use or Hotels By Day that are allowing hotels to leverage an extranet that sells day-use rooms in blocks of a few hours for guests who are looking for a place to “park” for the day when they're on the road, similar to the ideas we shared above. Even Hilton has rolled out a program for this on their direct site to compete with what they appear to view as a growing industry. This concept could be particularly lucrative for airport hotels where guests may want to relax in a guest room during a long layover, or those near to all-day attractions where guests may want to rest for a while in the middle of the day, or before driving home in drive markets, as a few examples.
Along the same lines as harnessing day-use in rooms, nearly every hotel has at least some type of space they can use as meeting space if given the opportunity. Depending on the meeting requirements, even guest rooms can be used for interviews, or a Courtyard lobby can become a family gathering or reception area. A new app called “Breather” is being launched in major markets like New York, demonstrating the desire for this type of pop-up meeting space or co-working space.
Another example of applying creativity to available assets is maximizing parking revenue. Even if a hotel isn't in a market that generally supports charging for parking, there are many companies that will help you monetize your extra parking for long-term airport guests, especially when a shuttle service is already in place to transport those guests to the airport. With Uber also expanding its reach in more and more cities, if your hotel is close to major events like Spring Training, Concerts, Football, etc., you could consider a “Park and Uber”. Another possibility is, if you have the resources, a “Park and Shuttle” package that allows guests to cut back on Uber expenses by being parked close by, while still avoiding the crowds and headache of parking directly at the event. Sometimes convenience is more important than price, so if you can design something more convenient, guests will be drawn to your offering.
Think about time as a scarce resource, and then try to look at your operation with new eyes to see how you can grant guests their time back in some way. Some of the most popular services that show rapid growth include TaskRabbit - people who simply want to hire someone else to do odd jobs, or apps that let you connect with “line-fillers” - people who are willing to stand in line for a sale or event on someone's behalf for a fee to give them back that time in their life. These are just a few examples of tasks that people could easily have done themselves, but due to the convenience factor they chose to pay a premium for the service, indicating that price was not their motivating factor.
Additionally, you can look for opportunities to monetize hours which normally expire without revenue. Identify these times in each department, and create as part of your program ways to generate revenue rather than letting the opportunities slip away. One example could be to offer an appetizer buffet or grab and go deli style option with upscale items for that time between the lunch and dinner crowds. This could be in one small area of the dining room, allowing staff to continue setting up for dinner. It could offer appetizers, sandwiches and salads which are easy to make ahead and have ready to eliminate taking the chefs away from preparing the dinner entrees. Using the buffet format eliminates the need for more than a handful of staff to keep things moving.
Another idea could be to monetize a larger lobby area by showcasing retail items, offering a flambe station with a restaurant special tasting, or advertising for specials and services elsewhere in the hotel that grabs a guest's attention when they might not otherwise have thought through the use of those additional ancillary services.
These are just a few examples, but at the end of the day, creativity is the most important aspect of any Total Revenue Management program. Take a step back and try to look at your asset from a new and unique way. What delights your guests that you could expand on to increase interest and revenue? What is available in the vicinity of your property that you could combine with some of your own areas to enhance monetization? How many times have guests requested something that you are not currently offering? How could those be tied to other areas to add value to a guest's experience?
Always ask yourself the question, “What are people looking for that no one is yet providing?” By applying this creativity to your whole operation, you're guaranteed to find new and unique ways to maximize revenues and profits for your owners.
