Step Aside Revenue, the Dawn of Enterprise Optimization Is Here

By Bernard Ellis President & Founder, Lodgital Insights LLC | October 11, 2015

Classical and even more current revenue optimization practices and technologies have focused too narrowly on maximizing room revenue, and more recently, to minimizing the distribution and marketing costs associated with that revenue. Expanding the same practice to other revenue streams has been a natural next step for some revenue managers and systems, but the higher that revenues go, the more profit margin that seems to leak out of the balance sheet. A new practice called Hospitality Enterprise Optimization, using the proven analytical abilities of revenue managers and the systems at their disposal, will go a long way to finding that lost profit.

So we've been hearing for a while now that, in the United States anyway, the hotel industry has fully recovered from the downturn, and we're now exceeding pre-recession levels. The pipeline of supply is historically low versus demand, the elusive group segment has come back to the table in spades, and revenue management systems have been running at full throttle to be sure their human operators aren't leaving money on the table. One way to know that revenue managers and their systems are on the job is to just ask any business traveler you know if they felt like they paid too much for their last hotel stay, and the one before that, and the one before that, and you're bound to get a "yes" to most of them. They didn't like the price, but lacking attractive alternatives, they paid it anyway. So, now that the revenue managers have chipped away at the guests' value perception of their properties, at least hotel owners should still be happy, right? Meeting with them should be nothing but an exercise in gratitude and delight. But, this isn't how those meetings are going. Instead, in this high fixed cost/low variable cost business they invested in, they are wondering what happened to that "almost pure profit" business that they were supposed to now be enjoying, in return for toughing it out through those lean years.

They say extreme times call for extreme measures – pick your battles, focus, and everything else will follow. At the depth of the downturn it was all about cutting costs, and at such low business levels, it was pretty easy to discover where the line was where you couldn't cut any further, where you might as well shut off the lights and lock the doors. And in boom times like these, it's all about maximizing rate. RevPAR levels are at historic highs, and most operators are similarly discovering how high they can price before either demand falls off a cliff, or the guests that do pay it are so disappointed with the value, that the hotel pays an even higher price with their social media reputation. So, if hotels are getting historically high rates, why are they not incurring historically high profits, while delivering flawless service? Where did that profit go?

There are a variety of possible causes. One is that many operators may have simply forgotten how to be so busy, or in the case of millennials, may have never been this busy ever before in their careers. Another one is that, in choosing to focus on the rate battle, all of their revenue optimization expertise, attention, and measurement is being applied too narrowly to that effort.

Well, just as pricing decisions during the downturn were relatively straightforward-basically open up all your discounts and get what you can--one could argue that they are almost as straightforward now. If you know your high water mark on price, and you know what days demand will way exceed your capacity, it doesn't take a lot of analysis to conclude that only your highest rates should be available. Yes, you can keep testing if your highest rate is really high enough, or on the softer demand days, keep testing if your band of lower price points is set correctly, or consider if you should have pre-set price points at all, since you may be leaving $5 or $10 on the table here or there. But those actions aren't going to move the needle much.

You can examine your channel mix, and see if perhaps you are getting your business at an unnecessarily high cost of distribution, a practice now commonly referred to as revenue strategy. If you're in the rare situation of really being able to tell your guests what channel they have to book through if they want to stay with you, or not have them think you are sold out when you are simply not available on the first booking channel of their choice (or quite often, their employer's choice!), then that will move the needle more. But what if you go to that next meeting with your owner or asset manager, and it's still not enough? What now? Well, if revenue optimization was achieved by applying observation, science, and technology to the problem, then it only stands to reason that doing so throughout the enterprise should yield similar results: The time has come when Revenue Optimization must give way to a broader practice of Enterprise Optimization.

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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.