Five Revenue Lessons Hotels Can Learn From Wall Street
By Jean Francois Mourier Founder & CEO, RevPar Guru Inc. | March 27, 2011
The hotel business, on the surface, seems full of ambiguities. Its central product, the guest experience, is something that is notoriously hard to quantify. The hotel room night is one of the most perishable items in the world as it is absolutely irredeemable if gone unsold. The largest hotels and resorts- like small cities in their complexity- are rife with variables, while the smaller and more streamlined properties are at the mercy of a myriad of external influences. In any given hotel, different departments have varying aims and objectives, which require multiple plans of action to achieve. And every aspect of a hotel's operations ultimately depends on a consumer's decision to stay there (or not).
There is another industry that routinely confronts uncertainty through the course of normal operations: the financial industry. The variables associated with the stock market, equity and commodity trading, and financial risk management are arguably greater than those associated with the provision of a night's lodging, and yet the financial industry's ascension has been marked by ever-increasing, ever-sophisticated scientific and mathematical processes to predict and govern these variables.
Hotels, on the other hand, have traditionally employed ad-hoc strategies to deal with the ambiguity of their business. Yield management in hotels wasn't even a widespread concept until the late 1980s, whereas it had been a mainstay of financial economic theory since time immemorial.
This disparity exists (or existed) despite the similarities shared by core aspects of the financial industry and the hotel industry. Determining, predicting and influencing the behaviors of rational actors in an equities or commodities market-sellers and investors-is not so different from anticipating and persuading a guest to book a room. Likewise, the appropriate management of perishable inventory- and the mathematical models and formulas that govern the management, insurance and distribution of that inventory is the same whether the inventory consists of hotel rooms, preferred stock, or pork bellies.
This is not to imply that all hotels have systematically ignored or avoided sophisticated methodology designed to optimize the practice of revenue management. Many hotels, most notably the large chains, have devoted significant resources to systems and personnel charged with increasing yield and achieving the most profitable balance between occupancy and average daily rate. But the application of stock market principles to hotel revenue management is uncommon at best. In general, hotels have not embraced the complex algorithms and models that produce tangible results on a daily basis for the financial sector.
Of course, there are many lessons that hoteliers and revenue managers can learn from the stock market and the technology that powers it. We have outlined the top five lessons that every property must incorporate into their revenue management strategies today to ensure that their property is able to withstand the unpredictable future that we, as an industry, are currently faced with.