A Futuristic View of Optimal Profitability - Total Revenue Management in the Year 2020

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June 01, 2013
Demand | Management
Bonnie Buckheister

Everything evolves. Eventually processes, procedures, practices move to that next level–to that next cycle of innovation. Sometimes this movement boggles the mind–like the biobot, a tiny, hydrogel robot produced by a 3-D printer that is small enough to crawl through the body wired with living neurons that detect toxins and then treat disease. What? Are you kidding me?  Actually, no I’m not. This technology is on the horizon.


What may you ask, does this have to do with total revenue management? Well, it might seem out of this world to think about biobots crawling through your body today, but it may well be common medical practice in the year 2020. And it may seem unlikely that the hospitality industry could pinpoint the absolute most profitable business mix of guests on any given day of the year, but that is coming. Maybe not tomorrow or next week or next year, but it’s coming. 

The concept of total revenue management is simply about managing every revenue source at every guest touch point to it’s maximum profitability for the entire hotel or resort asset. Certainly, as an industry we’ve always tried to choose the best pieces of business, but the difference today is the desire by hoteliers to sophisticate that process; to have the empirical data to identify that ideal business mix, and the investigative talent and strategic vision to deploy optimal selling guidelines at every time horizon – long, medium and short-term.

There are glimpses of these phenomena, but not widespread, universally accepted practices across our industry sectors. Few would argue that American Express can send out an email blast about a great golf package strictly on the basis of targeting members who recently purchased a new set of golf clubs on their American Express card. Most would agree that a casino hotel knows exactly who its high value guests are, or that a cruise line knows exactly how much per-passenger spending takes place on board a 7-day cruise. Certainly those resorts that issue guests a single card to use for all transactions, know their guests’ spending habits. And speaking again of casinos, I recently learned of the use of heat maps by casinos to provide insights into machine and table performance.

But if I ask senior hospitality professionals, what is your most profitable market segment, or what is your most profitable mix of business, I’ve yet to have anyone tell me they really know.  At some point we must identify which processes, procedures and practices to which we aspire. 

What will total revenue management look like in the year 2020?
First of all, the industry’s Uniform System of Accounts will be permanently restructured and updated. The traditional rooms division profitability ratio will be fully disaggregated, identifying expense factors by market segment, by distribution channel, by room type and even by length of stay. Budgeting templates will incorporate formulas whereby changes in market mix automatically reveal changes in profitability all the way through the P&L, including the food & beverage division and all ancillary revenues.
 
Organizational structures will evolve to fully align marketing, sales, business intelligence and demand/profit management.  Likewise, incentive structures will be completely revamped for all departments eliminating cross-functional conflicts. No longer will sales managers be incentivized on top-line revenues associated with targeted market segments. The financial performance piece of incentive programs will focus entirely on profit, virtually eliminating silo-based, territorial business decisions.

Data will be input only once. Systems now termed as property management, sales/catering, customer relationship, central reservations, revenue management, global distribution, back office, point of sale, business intelligence, etc., will be supported by a singular, cohesive data base. Users will have access to accurate, meaningful data sets across a spectrum of touch points. Gathering data will take much less effort, leaving more time for data interpretation and the opportunity to identify exceptions and trends and act upon this information in a proactive manner.

Revenue managers will be demand/profit managers and will move away from a rooms-centric revenue management effort.  Their focus and necessary skill sets will further evolve from report generation and data interpretation to development and implementation of short, medium and long-term strategies. Today, the traditional revenue manager is often asked to create demand, when in fact their job is to manage demand. If a hotel is relying on the revenue manager to create demand, the assumption is that the “game plan” to garner room nights from every other market segment (group, tour, corporate negotiated, packages, etc.) has failed to produce enough business, then the revenue manager’s arsenal of weapons is in reality pretty limited – price and channel. In a total revenue management environment, decisions and strategies will all be based on profitability, and average room rate (perhaps surprisingly) will take a backseat to its current position of importance. This is not to suggest that average room rate becomes irrelevant, but that the industry will be paying more attention to the true net of any given rate.

New metrics will emerge, joining (if not replacing) RevPAR (revenue per available room) and CPOR (cost per occupied room). Metrics such as profit per occupied room, profit per available room, catering revenue and profit per occupied group room, revenue and profit by room type, profit per square foot of function space, revenue per available seat hour, profit per square foot of spa or retail space will become mainstay industry metrics. 

Online metrics will also become front and center in the total revenue management world. Demand/profit optimization managers will be fully conversant with Web analytics, social media metrics and digital marketing performance measurements.  Whether it’s page views, bounce rates or click-through ratios –these metrics will just be the tip of the iceberg for the demand management professional.  And benchmark reports will evolve to include much broader sets of comparative data–both to the market place and from consumer reviews.

The new generation of demand managers will act somewhat like a general contractor–managing all the trades or in this case all the subject matter experts under one roof–the business intelligence specialist, the online optimization expert, and the digital marketing professional.  Business mix and channel mix will be fully connected to “other spend” factors using ratios from historical spending habits/trends to calculate ancillary revenues and profits. Dynamic pricing will replace static pricing in outlet and catering menus. Not unlike the way in which a menu item is subject to market pricing today (like lobster), food and beverage managers will adjust prices not just by time of day, but also by day of week, time of year and location demand influencers.

Unconstrained demand forecasting will be universally applied, not only to rooms division, but also to food and beverage outlets, catering, spa and golf operations, activities, etc. All sell strategies will be based on accurate demand forecasting, enabling the hotel to identify well in advance exactly what their most profitable mix of business is on any given day of the year. The demand manager will then manage the demand according to these parameters. Forecasting will also become far more accurate–not just by month, but by day, market segment and channel. The industry will finally agree upon the best definitions of market segment and channel, based strictly on consumer buying behavior.

And finally everything will be accessible on a mobile device, both from the consumers’ perspective and for the hotel manager. By now is you are probably saying, not by the year 2020. The hospitality industry just doesn’t move that fast. Well, you may well be right, but for those hotels that are already a long way down the path to total revenue management, they will enjoy a competitive advantage for some time to come. And to that special class of hotels I say, good for you!  Go for it!

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