Revenue Management for Owners... From the Outside, Looking In
By Kristie Dickinson Senior Vice President, Business Development & Marketing, CHMWarnick | March 27, 2011
In the lodging industry, no topic is more relevant or timely given continued anticipated RevPAR recovery, than revenue management. In all of its complexity, this multi-faceted discipline, tasked with delivering the right business, at the right price, at the right quantities and at the right time, can make or break a hotel's bottom line. The last time I was officially "inside" hotel operations, revenue management consisted of a white board with color-coded magnets hung in the reservations office. Adjusting the rate strategy was about as dynamic as the manual scoreboard at Fenway Park... updated by hand, run by run, one inning at a time.
Fortunately, that was a while ago and the sophistication of modern day revenue management has evolved into a discipline in and of itself. With the birth of new booking channels, new technology and new customers within the confines of a highly dynamic marketplace, the world of revenue management and the ability to impact hotel performance continues to expand every day. Even the most seasoned hospitality professionals can be challenged to meet all of the skills required in today's operating environment which transcends many areas of expertise including technology, relationship management, forecasting, financial analysis and marketing, to name just a few. With this evolution, however, comes great opportunity, made possible through advanced training and industry organizations, providing analytical tools and information technology solely dedicated to revenue management. This, coupled with an industry-wide paradigm shift that suggests revenue management is being applied not only to rooms, but throughout all operating departments, bodes extremely well for the future of hotel operations and industry profitability.
Lodging experts have written numerous articles aimed at addressing specific tactical issues on pricing, distribution and measuring results for those "inside" the operation. By contrast, this article is intended for the "outsider" – namely individuals who are closely vested in hotel performance, but not directly involved in daily operations…hotel Owners. The importance of revenue management, coupled with the complexity surrounding the discipline, can often leave hotel owners scratching their heads, trying to gain some semblance of order and perspective on the strategy being employed and the resulting performance of their hotels. Fortunately, most hotel owners employ qualified management companies who have the expertise necessary to manage the day-to-day operation (and if not, this is a good place to start). Further, an increasing number of owners today are relying on hotel asset management companies to represent their interests, act as an extension of ownership and actively engage with the operating team to enhance performance. The art and science of revenue management should ultimately continue to lie in the hands of these experts. However, there are some key considerations which may be helpful to hotel owners in evaluating at a 30,000-foot level, the role of revenue management, and understanding the influence that it can have on hotel performance and overall asset value.
Revenue Management... a term used widely across many industries, but what does it mean for hotel owners? Is it a job description? A philosophy? Well, effectively implemented, it's both. Technically, revenue management is the "art and science of predicting real-time customer demand at the micro market level and optimizing the price and availability of products to match that demand," a definition provided in HSMAI's publication, The Evolving Dynamics of Revenue Management. Perhaps a more simplified definition for hotel owners might be the strategic, simultaneous optimization of top line revenue and bottom line profitability through effective pricing and distribution of guest rooms, meeting space, restaurant seats, spa treatments and anything else you could possibly sell at a hotel. Revenue managers are responsible for recommending and executing sales strategies that will significantly impact the overall revenue and profitability of the hotel. Owners know better than anyone that enhanced profitability translates into enhanced asset value. Therefore, it is fair to say that revenue management can directly influence hotel value and deserves a high degree of attention.
Organizationally speaking, owners can learn a lot about a hotel's culture and emphasis on revenue management by examining the organizational chart. At minimum, owners should expect that the position of Director of Revenue Management (DORM) exist, which is commonplace at properties managed by national brands and by most third-party management companies. Assuming there is a DORM on property, look to see where they are positioned within the management structure. Experience suggests a correlation between where the DORM is positioned within the organization and the degree to which revenue management is engrained in the overall operating culture. There are many structures in place today and what works for one property may not work for another, but close examination of the existing structure can provide keen insight on the DORM's sphere of influence. Industry best practices suggest that revenue management-centric hotels have elevated the DORM position in recent years to the executive committee level, working side by side the likes of the Director of Sales and Marketing and Director of Operations with a direct reporting line to the General Manager. This structure allows for close coordination between the key leaders, while also promoting a culture by which revenue management practices can be disseminated throughout the property. Similarly, this structure fosters regular group discussion, acts as a catalyst for strategic thinking and a platform for making critical business decisions. Owners should understand how revenue management is treated within their hotels, including on-property resources and centralized support that may exist to ensure the operation is focused on maximizing revenues and profitability.
Ownership approval rights over the selection and hiring of key senior executive personnel, such as the General Manager, Director of Sales and Marketing, Director of Food and Beverage, among others, is typically standard language in most Hotel Operating Agreements (HOAs). What may not be typical, depending on when the HOA was negotiated, is the inclusion of the DORM as a position for which ownership maintains approval rights. The ever evolving job description and skill set required of revenue management professionals can make truly qualified candidates difficult to come by and appropriate incentives must be in place to attract and retain the right talent. Given the importance of this role, owners might consider pursing a modification to the HOA to explicitly include the right to interview and approve proposed revenue management candidates. Additionally, provisions for temporary replacement of revenue management personnel might also be a point of negotiation with the management company to minimize disruption in the event of a position vacancy.