The New Basics of Revenue Management

By Kelly McGuire Vice President, Advanced Analytics, Wyndham Destination Network | August 31, 2014

Revenue management is a relatively new discipline in the hotel industry. Changing market conditions, the evolution of the analytics and the expanding role of the revenue manager have forced an evolution even in this relatively young practice. In the excitement of all that is new, it is tempting to set aside the practices of the past and write a new playbook for the future. Revenue management is changing, by necessity, with the times, but there are still some core components of this crucial function that must be maintained. In reality, there is no silver bullet answer to the challenges posed in the modern marketplace. Revenue management is, as it always has been, a complex discipline, subjected to the vagaries of the ever changing market, yet built on a solid foundation of proven practices.

Let's take a look at some commonly held beliefs about the "new" revenue management, and expose the truth behind the hype.

It's All About Price Optimization

Price optimization has received a good deal of attention in the revenue management world lately, not without reason. Changes in the market, including price transparency driven by the OTAs, emergence of social media and user generated content, increased competition, and more informed consumers has altered the way that consumers buy. Understanding willingness to pay and consumer buying behavior is the new key to effective revenue generation. Mostly. The truth is that while the transient segment has changed forever, some hotel booking practices remain the same. There are segments of demand – many highly valuable – that are still subject to "traditional" agreements, and need to be accounted for according to "traditional" revenue management practices. Meaning – there are still negotiated rates, groups, wholesalers, qualified demand, last room availability contracts and linked rates. For many hotels, this still represents a significant enough portion of demand that it not only cannot be ignored, but in fact, may represent the backbone of revenue. The value of revenue management has always been in the incremental. If you only solve eighty percent of the problem, you aren't impacting the twenty percent that will drop to the bottom line. The reverse (solve 20% ignore 80%) is worse.

The reality is that most pricing problems in the hospitality industry involve managing a combination of segments with different buying behavior, price sensitivity, and, importantly, agreements with the hotel. The right way to solve the problem is to be able to balance the price-able segments of demand (i.e. transient or unqualified) with the yield-able segments of demand. A little bit of traditional blended with the new. But that's the point. Revenue management in hospitality is evolving from inventory optimization to price optimization, but the problem will never be one hundred percent either approach. If your analytics approach is not accounting for this nuance, you will miss the boat.

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The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.