Thinking Through Revenue Management to Achieve Value
By Robert O'Halloran
Revenue management has a bad reputation in some ways because it focuses on room rates.
A new hotel to some is just another place some travelers cannot afford to stay.
That is said tongue and cheek but in the current hotel landscape, the efforts by lodging decision makers have been on room rates. There is continuing discussion of revenue management by experts, newcomers and working hoteliers. Lodging operators need to ask themselves the main goal of revenue management for their hotels. Once the goals have been established, operators should consider the tools and education needed to utilize and optimize revenue management methods and techniques to provide value for guests and profitability.
Hotels continue to look for ways to drive efficiency, boost profitability and adapt to the challenges ahead. The focus is on variable demand tied to market crises, short term booking windows, which are focused on guest spend and dynamic optimization embracing rate flexibility. To keep up with competition in the industry, hotel operators need to always search for ways to grow hotel revenue while also offering competitive hotel room rates.
It is noted that competitive and reasonable rates and limited fees are often what guests are looking for in a hotel. In addition to room rates, the fees that now accompany rising room rates have also made some guests consider other hotel options. For example, on a driving trip this past summer we stayed at a major brand hotel in the greater Boston area. I will note we had stayed there before and enjoyed our experience. This time we booked the room online, checking the brand rates as well and were satisfied we found a reasonable rate with the expectation of a high-quality experience.
Unfortunately, when checking in we found that there was also a parking fee (not previously known). . I will also note that this was a new fee compared with our previous experience at this property. There was no new parking structure or parking protocol, just a new daily fee. Checking in was long and difficult due to limited staff. Getting in the room, we found it "fairly clean" versus clean and that we did not have any internet connection. The room was dark and dingy, and, in this guest's, opinion needed to be updated. Calls to the front desk to follow up did nothing to help. The front desk noted, "our internet is down." This was problematic for us as we needed to do some business while on the road. There was never any notice of restoring the internet and or mention of what would be done to make up for it.
Overall, a very disappointing stay at a hotel that we had selected based on previous experience. Where was the value for the price paid? I appreciate it is a tough time and the recovery post COVID-19 takes time, but prices continue to increase while service and value may not keep pace. Lodging operators need to focus revenue management system on the total hotel experience inclusive of rate, operations, and marketing. Maybe if there was an incentive offered driving us to book directly, we might return.
Also, room types & descriptions are important; for example, there is little point in "including" a key driver (breakfast, business lounge etc.) if you do not tell your customers until they are 95% of the way through the booking process. In the hospitality business sector, there are three factors that make revenue management significantly relevant:
- Limited inventory: a fixed number of rooms for sale.
- Perishable resources: unsold rooms perish every single night.
- Customer demand: guests who are willing to pay different prices.
These are basic tenants of the lodging industry and critical factors in the effort to have effective and efficient revenue management. The implementation of revenue techniques has created specific positions in hotels, i.e., revenue managers. This has been good news but now these efforts need to be more inclusive of the entire hotel team.
For example, data transparency and co-operation efforts will help the entire hotel operation. Chris Crowley of Duetto notes that real-time sharing of data means that operations teams can better schedule staff and order perishables, while revenue, sales, and marketing can work together to fill any gaps in demand through tailored packages and personalized pricing. Additionally, the focus on personalized pricing, which is assigning personalized pricing and packages based on upsell demand or loyalty profile directly from the inventory through revenue management.
Revenue Management Trends
Revenue management continues to progress and evolve in planning and practice. The focus today is on the utilization of big data in real-time. Big data is the phrase used to describe the extremely large sets of data that come into a business daily. The data can be extremely varied and may come from a wide range of diverse sources. Within hospitality management, these data sets are most commonly associated with customer behavior and interactions. Hotels should utilize demand intelligence data, which is how upcoming events (sports, concerts, conventions and more) may boost demand, and on the other side, be aware of how other external factors, such as severe weather, may change the demand curve. The adage if you measure it, you can manage it, is true.
The following discussion highlights a sampling of revenue management trends that include the entirety of a hotel. There are numerous lists and discussions available on this topic and this article offers sample discussions and recommendations for keeping revenue management current.
Revenue Management Culture
For lodging decision makers, start by asking if a hotel has a Revenue Management Culture ? Additionally, has there been education and training for all members of the hotel team and as previously noted in this article, the focus is on "Value." The hotel and its revenue management efforts need to be consistent across the hotel and all segments of the hotel need to document and focus on accurate data. The old theme ABCD, Always Be Collecting Data, is relevant for the revenue management processes to identify and analyze guest habits, booking patterns, mobile technology use, discount sensitivity, and more.
Another key for revenue management decision-making is to know your hotel better than anyone else. This seems an easy task but one that is often overlooked. Hotel decision-makers need to define and agree on why guests and potential guests book with them and what will make them return. For example, when operators look at their hotel and want to define their competitive set, what are the criteria they use or should use? Factors like geographic proximity, number of rooms, meeting space, facilities and amenities etc. are all typical. The questions may dictate that hotels be more specific about competitive sets, i.e., are the hotels in a "comp set" competitive across all segments of demand? The inference here is to drill down on the data you have and use to make decisions with. For example, what are the key features and benefits that your hotel has and how does your hotel compare to the competition?
Forecasting & Competing
More than a working knowledge of competitive set, demand growth and forecast, and competitiveness in a market is needed to coordinate a revenue management system. to illustrate, an academic exercise example, (sorry I can't help it), is provided below. The goal of this exercise is to be a catalyst for discussion and analysis of your hotel and the market in which it competes. Lodging managers can examine market segments individually and match those segments to the demand factors that decision-makers believe make your hotel competitive and qualitatively assess your hotel versus the competition.
The example below notes one market segment, tourist, and is set up to compare one hotel with its competitors on a variety of factors. The noted weights reflect the importance of that factor for a hotel competing with its comp set. For the exercise, weights can be decided and assigned for all factors and then the rating points are assigned. The rating is the grade a manager would give his/her hotel compared to the competition. It is stressed that this is a training and education exercise focused on providing value and assessing competitiveness in a market. A key will be the discussion and justification of these decisions.
An exercise like this one may be a good learning tool for employees in a hotel new to revenue management. In the illustration below, the total rating for the hotel indicates that the hotel should be expected to outperform the competition in the tourism market segment on these factors. As previously noted, modern revenue management systems can crunch the numbers, but as noted, human decision-making factors need to be included.
Forecasting demand is a pivotal task for successful revenue management. Assess your plan for forecasting by asking self-assessment questions. How does your hotel forecast demand? What is the data used to estimate demand going forward? Good guest demographics and booking data are critical. Good forecasting is vital and while it may be a challenge, operators will want to know the market segments and factors influencing demand so they can estimate demand for room nights based on solid facts.
In addition to guest data, what is the data for the location, region, city, or town? These data can include traffic counts, special events, airport access etc. Also be knowledgeable of the business areas that might benefit a hotel such as higher education, sports, healthcare facilities, military, technology, big pharma and more. Consider identifying contemporary trends for economic indicators in these markets. Is the population of the region increasing? Based on a hotel's targeted market segments, which of these data groups, e.g. census, occupancy taxes, traffic counts etc. are important to hotel demand? There are software packages that can calculate the forecast numbers for a hotel, but there remains a need for human decision-makers to make sound choices and set the direction for the hotel. For example, in the illustration above, from an educational perspective, discuss the weight of each data factor for specific groups etc. as they pertain to room night demand.
Define your target segments as business travelers, group and meeting attendees, or tourists and leisure travelers. You can also define your segments uniquely depending on the strengths of your hotel. For example, a previous project this author participated in, in a rural destination, created target segments that included bird watchers, hunters, anglers, kayak/canoe paddlers, and leisure travelers focused on families. The identification of your target segments can be specific to your hotel. Decide who your segments are and make them your own.
Pricing Analysis
Hotel decision-makers need to constantly review the data for pricing purposes. What segments are being served, are there any discounts offered and or available, what are the rack rates, what room types are available, are their specialty rooms, etc.? These are all factors to be considered. Additionally, managers need a knowledge of their reservation information to manage pricing. These data points include the percentage of room nights at rack, the percentage of room nights at discount, how much discount, if any is being offered in each segment, and more.
In the example below, a simple rate analysis is illustrated. This is an educational exercise that could be used in a training session. Review of data notes, the commercial segment with 69,202 annual room nights forecasted, and the hotel with room choices of single, double and suites. Obviously, this type of analysis and discussion is a learning tool; it can be as simple or complex as needed. The distribution of room sales, the distinction of rack versus discount room rates and sales is made, and the calculation of expected revenues and ADR by room type and for the entire section is noted.
To reiterate, revenue management systems can provide digital alternatives and analysis. The emphasis here is the decision-making factors for pricing, noting again the discussion and justification for the multiple decision points in the exercise.
A case in point is offered here. This author, years ago, had the opportunity to have a sabbatical for a semester. During that semester I was fortunate enough to work with the United States Forest Service (USFS) in their Recreation division. In this experience working with USFA professionals, we created a national training program for recreation sites across the country. These sites had destination attractions, typically a limited number of rooms, and campgrounds. This was a long time ago before campground networks typically offered reservations. The destination managers presented their plans for the destination to move to a more revenue-generating model.
Historically, I will note, funding for recreation destinations across the country had been cut and was the catalyst for a more business model operation of the destination. A simple example exercise used included the map of a large campground with approximately fifty sites. The campground was adjacent to a lake with some beautiful vistas. There were also showers, a trash area and ample parking. However, there were no hookups for recreational vehicles. The discussion focused on pricing for the sites. I was told by the group that all the sites would be sold for the same amount, $9.00 (a long time ago). The discussion continued as we altered the exercise to say that the destination managers would make all pricing decisions. As one would guess, lake front sites were suddenly selling for $30-40.
Other factors connecting value and pricing that emerged from the discussion included the use of reservations, shower availability, ranger tours, ranger talks (amenities) etc. These site managers were smart people that, given the opportunity, would use the data they had (supply and demand) to embark on a new pricing methodology that included rack rates, discounts, market segments, group rates, length of stay and more. In today's markets, pricing discussions can include providing a static percentage off your Best Available Rate (BAR). Therefore, you can set more flexible discounts and using a predictive analytics platform.
The conceptual framework of this discussion makes the point to all hotel wide revenue management team. In addition to discussions, education and training exercises could include simulation packages and other software. The goal is to get everyone involved and on board in the revenue management culture of the hotel.
Food and Beverage Offerings
Food and beverage can be a key area to examine for revenue management purposes. For example, a group books a meeting and rooms at a hotel and then a follow-up question is, how many meals will be taken in the hotel? Per previous Hotel Executive articles, menus need to be current, up-to-date and flexible. New food and beverage trends focus on local products, sustainability, and uniqueness plus environment and decor and more.
An example of modernizing food and beverage offerings occurs to me concerning a small full-service historic hotel that is currently being renovated "to bring it back to its former glory." This author participated in a project with the hotel that is located on an old rail line in a rural tourist area. Historically (from the 1880's), booking a room at the hotel included all meals (breakfast lunch and dinner). Additionally, menu choices may need more diverse options than those restricted to the favorites of a bygone era such as chicken and dumplings, baked ham, fried chicken, trout, etc. I love many of the standards, but guests are looking for diversity of choices and unique food and beverage experiences.
In discussing the concept with the leadership team, the topic of modernizing the menu was discussed. One point made in the discussion was that tying guests to all meals at the hotel for their full stay may not be optimal. The model of all meals included is still in place at remote destinations and some other geographic choices, but in this area, it may be a difficult sell to potential guests.
Additionally, the observation was made that there are many walkable and short drive eating and drinking places in proximity to the hotel. It was also noted that given the hotel's location, they will attract area visitors but also could build a local clientele. Therefore, a broader food and beverage choice and more diverse menus were and are recommended.
Revenue Management Technology Choices
The investment in technology has become a crucial priority for the lodging sector to keep up with modern customer demands, deliver exceptional experiences, and retain top talent. Selection of the right software for your hotel depends on dozens of variables many of which can be quantified based on the characteristics of a hotel property but many of which also come down to personal preference. Is your hotel a small property with a limited budget? Or is your property a luxury resort with lots of outlets and high ADR? Consider your goals for revenue management technology. Do they include forecasting, operational efficiencies, improving Revenues Per Available Room (RevPAR_, improving New Revenues Per Available Room (Net RevPAR) / Gross Operating Profit Per Available Room (GOPPAR), and Revenue Per Available Room Index (RevPAR Index), which provide support for driving revenues and forecasting demand?
These are all factors to consider in a revenue management system. Technology companies will also provide detailed information about their systems. Additionally, other digital tools are available and could be helpful in multiple areas and provide significant data. These can include customer relationship management systems, operations platforms, guest experience platforms, HR Management tools, sales platforms and more.
Additionally, it is noted that the 2024 edition of "The Hotel Yearbook (HYB) Technology, " curated by EHL's Ian Millar, is another resource to consider.
Going Forward
Revenue management has evolved into a standard topic in the curriculums of higher education for hospitality business. Students at these programs across the country and across the globe are graduating with a familiarization and application experience of revenue management techniques. Industry professionals can and do participate in revenue management training sessions and use revenue management software. Revenue management is a vast topic that includes operational metrics to big data and touches on operations, marketing, effectiveness and efficiency, guest service and staffing and profitability.
Revenue management was the earliest adopter of data analytics in hospitality, and the field has benefited by leveraging the power of predictive analytics for forecasting, but that is not the only application of big data in hotels. Hotel marketing strategies, for example, have also been revolutionized through data and artificial intelligence by leveraging ad tech apps like automated metasearch bidding platforms.
Hotel chains that understand data analysis and automation are at a massive competitive advantage when it comes to decision-making because the proper use of data eliminates many innate biases. Hotels can leverage data analytics to uncover valuable competitive insights that can inform their strategic decisions and drive their success in the market.
In this author's opinion, a focus on providing value and embracing a total hotel revenue management system is vital. Hotel operators need to provide continuous training opportunities and set standards for revenue management knowledge, comprehension, application and perhaps synthesis for all hotel employees connected with hotel revenues and profitability.
