From Managing Demand to Generating Demand

By Jon Higbie Chief Science Officer, Revenue Analytics, Inc. | October 27, 2013

Co-authored by Dax Cross, President, Revenue Analytics

Over the past 25 years, Revenue Management (RM) has grown from a new idea in hospitality into a core competency that is essential to any hotel's success. In recent years, the internet has made pricing transparent and social media has empowered consumers. These dynamics have resulted in Revenue Management rapidly evolving from a function of managing demand to playing a critical role in generating demand. At the corporate level, hotel chains are investing heavily in new Revenue Management analytics to inform pricing, promotions and marketing. At the hotel level, Revenue Managers are pricing more dynamically across multiple market segments to drive demand and maximize revenue. It is an era of big data, and new Revenue Management capabilities are turning data into dollars.

In the late 1980s, hoteliers began to recognize an opportunity from applying the yield management techniques that airlines had used to drive revenue gains following airline deregulation. The airlines had focused on using data and analytics to forecast demand for different fare products, then optimizing inventory availability. They developed yield management systems that maximized revenue by precisely determining how many seats on each flight to protect for late-booking, high-fare travelers, and how many seats to offer at discounted fares to more price sensitive leisure travelers with more flexible travel plans. Following a chance discussion between Robert Crandall, then CEO of American Airlines, and J.W. "Bill" Marriott, Marriott International became an early pioneer of yield management in hospitality. These early efforts resulted in revenue gains of $150 million to $200 million for Marriott.

As a result of this success and similar success with other hotel chains, Revenue Management became a core discipline in hospitality. Similar to the airline practices from which it had been adapted, Revenue Management focused on managing inventory availability to maximize revenue based on expected demand. Revenue Management systems, some of the earliest "big data" analytics, crunched data for every reservation for the last two years to produce demand forecasts for every night for the next year, across various room types, seasons and days-of-week. For a hotel chain with 3,000 hotels, that means the Revenue Management system produces over 40 million new forecasts each night! These forecasts feed an optimization program that generates inventory controls for each hotel to manage the availability of different rates across various lengths-of-stay and to set overbooking levels.

When demand is strong, using analytics to yield manage demand to "cherry-pick" the highest value bookings is extremely effective. However, over the past 10 years, as pricing became more transparent and consumers were empowered by the wealth of information available to them through the internet, the fundamental Revenue Management problem for hospitality began to change. These changing dynamics also highlighted key differences between hotels and airlines that drove hospitality Revenue Management to evolve. First, hotels sell to a variety of market segments that can have different demand patterns and pricing models. Second, hotels have far more differentiated products than airlines. They can offer luxury, full-service, limited service or economy products, each with various room types and amenities. They are differentiated from competitors by brand, quality, and, most importantly, location. Based on these different market segments and differentiated products, hotels fundamentally have more pricing power than airlines, whose products are often viewed as commodities.

Limitations of Traditional Revenue Management

Choose a Social Network!

The social network you are looking for is not available.

Close

Hotel Newswire Headlines Feed  

Scott Hale
Chris Green
Gio Palatucci
Chris Charbonnet
Bernadette Scott
Janelle Schwartz
Dianna Vaughan
Nicholas Pardon
Robert M. O'Halloran
Coming up in June 2019...

Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.