Bigger Data and Tighter Focus
By Michael Sturman, Ph.D. Professor, Human Resource Mgmt, Rutgers School of Management & Labor Relations | October 05, 2014
While it still retains its price-setting function, hotel revenue management has become more integrated with other hotel operations, including function space and restaurants. Additionally, revenue managers must take into account the industries diverse distribution channels, particularly those provided by online travel agents, which themselves offer different pricing and distribution strategies. Two other frontiers for revenue management are making use of the increasing flow of customer information from big data and managing the effects on price and demand that result from customers' postings on social media.
Revenue management continues to evolve in the age of big data and ever changing technology, as hotel brands seek to maintain their revenue stream by maintaining pricing strategies that meet their guests' needs. In terms of that evolution, it may be that the word that best describes current trends in revenue management is "integration," since revenue management has become increasingly central to hotel operations. Although hotels have applied revenue management tactics and strategies to the rooms division for over two decades, hotel operators continue to work on integrating revenue management for other departments, notably, combining strategies for function spaces and restaurants with the rooms department. An even larger integration task looms as hotel brands gain increasing access to data regarding customer buying behavior, in the form of so called big data. The available of such data has also led to a greater focus on distribution as part of the revenue management function. Finally, revenue managers are becoming more integrated at the regional or even central level, as revenue management becomes a chain-wide function for all but the most complex hotel properties. In this column, we examine these trends and review their implications.
Although revenue managers have long thought that revenue management would (and should) be extended beyond the rooms division into such areas as function space and food service, this trend has moved slowly for two reasons. First, and most important, the profit potential of the rooms division is substantially greater than that of other revenue streams, such as restaurant or function space. As a consequence, managers have invested their efforts into exploring additional revenue opportunities in the rooms division. Additionally, managers are increasingly looking beyond revenue considerations to focus on the profit implications of their rate decisions. Second, although the basic principles of revenue management do apply to restaurants and function space (as well as golf courses and spas), the application of these principles works differently in these areas, if only because there are fewer units per day to sell (that is, generally fewer time slots or spaces). Function space sales particularly have a distinctive and intertwined relationship to room sales, even though a substantial amount of meeting space is not directly connected with the rooms division. This is one of the reasons that some hotels have worked to integrate function space revenue management with that of the rooms system. Others have hired dedicated managers to oversee the RM for function space, since the strategies and tactics involved in optimizing both areas can be complicated. To make this approach work, the hotel must record the performance of each meeting room and then match availabilities to the most appropriate market segment, based on booking patterns and revenue contributions.
The revenue management approach to restaurants starts with determining the highest demand periods, which offer the greatest opportunity to maximize revenue. A key strategy is to manage the meal duration, so that tables can turn faster in busy times. Again, however, rooms division occupancy can drive some of the restaurant demand, depending on the restaurant's relationship with the local market. This again means the integration of room division strategy with restaurant strategy.
As we mentioned above, distribution is rapidly rising as a major focus of revenue management. One elephant in the room for revenue managers and hotel marketers generally is the effect of online travel agencies and social media on hotel pricing and distribution. OTAs are remarkably effective distribution channels which can help a hotel clear the market for its rooms inventory. The cost of using this channel, however, involves the room rates charged by the OTAs. One of the more intriguing pricing models is found on the so-called opaque sites, which require customers to give up their ability to get full information about a potential hotel in exchange for a lower price. The opaque method has the additional benefit of protecting a brand's positioning, since this approach creates a new "product" through the opaque sale and helps to avoid setting an artificially low reference price for the brand in question. Similar approaches using rate fences also allow guests to purchase rooms at a lower rate, but the rate fence rules likewise change the nature of the product. This idea of creating a different "product" by manipulating the timing of the purchase or use of the service remains a fundamental strategy of revenue management.
The effect of social media on hotel pricing and distribution cannot be understated. Several studies have examined the effects of customer ratings on various websites. While this may not sound like a revenue management issue, it turns out that ratings do have an effect on demand and pricing. As an example, a study by Cornell Professor Chris Anderson found that coming in second on the recommendation list at Travelocity reduces the likelihood that a hotel would be chosen by the person doing the search by a bit over 11 percent, compared to being first (other things being equal). The review scores likewise influence the likelihood that a hotel will be selected, with a 1-point increase in ratings driving a 14-percent increase in the hotel's selection chances. Not surprisingly, Anderson's study also found that hotels gain pricing power when they have high customer ratings. Revenue managers then must determine how to factor in that information as they perform their assessment of likely demand.