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Revenue Management is Dead. Long Live Revenue Management

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October 29, 2018
Revenue Management
Paul Murray

Revenue management, as we know it, is dead. To stay at the forefront of the industry, hospitality companies need to embrace the changing nature of the revenue management concepts and technologies to reimagine the delivery of total revenue optimization.

These fresh concepts give hospitality companies the opportunity to pursue total revenue optimization by permeating revenue management capabilities throughout the entire organization, and those that fumble or hesitate will see their competitors eat their lunch. 
It’s not as if hospitality revenue management professionals are unaware of the power behind the latest tech advancements. In fact, research from Cornell professor Sheryl Kimes, a highly regarded thought leader in revenue management, revealed that hospitality industry leaders predicted in 2010 that revenue management would be applied to all revenue streams in their industry within five years. The catch? Those same predictions were made in 2016, and we haven’t attained this goal at either point in time. 
What’s holding the hospitality industry back from embracing the potential to optimize revenue and maximize profit? The answer is rooted in the following changes taking place in hospitality revenue management.

In its infancy, revenue management was designed around the concept of yield, which is an inventory-centric approach to filling planes and hotels. Moving forward, revenue management should be thought of as dynamic. The cruise industry is leading the charge and is a prime example of how revenue management is multi-dimensional. Revenue Analytics Senior Consultant Operations Research Pratik Mital said, “When building a revenue management system for one of the largest cruise lines, we considered value adds, onboard spend, commission, and taxes. As a result, we created both the optimal mix of customers and ideal price point to maximize revenue generation.” Likewise, hospitality decision makers must consider all costs, and optimize all revenue streams along their value chains, creating total revenue optimization.
In the past, revenue management viewed the customer merely as a transaction for the benefit of the organization – in other words, one transaction was considered just as good as another. Today, industry executives are moving toward a broader view of guests. Matt Busch, a former director at IHG said, “Leaders in travel and hospitality are integrating customer centric insights into their revenue management strategies to drive customized ancillary offers and priority access to constrained inventory.” To ensure total revenue optimization, hospitality decision makers must take a broader view of customers as relationships with the potential for integrated lifetime experiences.
Previously, pricing alternatives in the hospitality industry were opaque and difficult for guests to consider. Rates were not highly visible across channels, there were no online travel agencies (OTAs), and there was a limited expectation that a guest would shop around for the best rates. However, in today’s information age, pricing alternatives have become transparent. Consumers look through OTAs for promotions, star ratings and more. Therefore, as the industry transitions toward total revenue optimization, hospitality companies must take these factors into consideration when measuring price response and evaluating the impact on search results to maximize market share and profitability.
Years ago, revenue management professionals used to look at guests as transient, fleeting revenue-generators. Now, total revenue optimization calls for executives to pay attention to all guests, as well as all their touch-points, to maximize their customer lifetime value (CLV). CLV is essential to the growth of any organization, and analytics are core to accomplishing this. Proven analytical approaches have driven enormous value to the transient segment for hospitality companies, and should also be leveraged to optimize groups and corporate contracts. 

In the past, revenue management operated in a world where fax machines, green screens, dot matrix printers and mainframe computers dominated the tech landscape. Today’s reality has jumped light years ahead of that world with nearly limitless technology and information. In fact, we will create more data in 2017 than in the past 5,000 years of human history combined.2 Steven Moy, SME Partner, Data Engineering Revenue Analytics, said, “Looking ahead to the future of technology in revenue management, there are exciting developments in the world of quantum computing. Certain optimization models traditionally have been impossible to perfectly solve in a reasonable amount of time, and require heuristics to produce an approximate solution (i.e. making a tradeoff between time vs. money). Quantum computing has the potential to revolutionize these models, by drastically reducing the amount of time to solve a problem, which translates into creating optimal solutions.” Moving forward, hospitality organizations need to exploit these innovative and future technology capabilities to fully achieve total revenue optimization.

Until now, revenue management has been viewed as a centralized function that services hotels, casinos, resorts, cruise ships and all other manner of organizations. In the future, revenue management will require a flexible and decentralized decision support system and analytical capabilities that are imbedded in every part of an organization, a key concept to ensuring the success of total revenue optimization.

Total Revenue Optimization is the Future for Revenue Management
By understanding these significant changes to revenue management, it’s time to explore what the path of the hospitality industry looks like. Today, revenue management is built on core systems, such as reservations systems, sales systems, inventory systems and distribution partners. 
Companies then wrap these core technologies with a nuanced pricing and inventory strategy as well as an internal culture to support the practice. These strategies drive capabilities that generally focus on the transient guest to forecast demand, recommend inventory controls, predict overbooking, and produce price recommendations. 
Revenue management has the capacity to expand into guest-level pricing to manage the full lifetime value of top guests (think casinos), to merchandize offerings and accommodations through voice and website channels (think airlines), and to price rooms with much more flexibility and detail (think cruise ships).

Naturally, revenue management capabilities should also expand into several support areas, including sales (group forecasting, group pricing), marketing (generating demand through effective promotions), distribution (total organization negotiations and profitability), branding (mix of brands and franchisees), and finance and operations (outlet selection and staffing optimization). Incorporating advanced analytics and modern revenue management practices into these vital company functions will result in a truly transcendent and state-of-the-art organization.
All of this means that the data microcosms that support current revenue management system silos will provide limited value in achieving these new total revenue optimization goals. It’s clear that a fresh environment is required to bring more holistic data elements together. Combining the traditional revenue management data sources with loyalty, customer value, finance, point of sale (POS), web traffic and more will allow companies to take full advantage of the limitless technology of the 21st century.

No More Excuses
What has stopped companies from already achieving these goals? The answers fall into the following areas: vendors, technology, people, investment and C-suite executives. Many companies claim to be committed to their vendor’s “vision” of revenue management, which ultimately halts progress. To achieve success, it’s time to choose vendors that will truly partner with your organization to develop fresh capabilities that will drive revenue generation across your organization.
Companies also strive to achieve a centralized vision of organizational technology. But this often results in rigidity and limits progress. A more creative and flexible vision will be necessary to deliver true total revenue optimization, including rethinking historical technology stacks and adopting dynamic capabilities, like cloud computing.
Other excuses surface around the people that are relied upon to deploy enterprise technology. However, when end user experts are not included in the design and acceptance process (which is often the case), the process is fundamentally flawed. Many organizations have limited funds devoted to advancement – so work your way up to a full solution – or convince your organization that you can provide a true ROI. 
No matter how hard it may be to get to and convince senior leadership, don’t give up, especially if it’s going to save your company money in the future and set the organization up for success.
Don’t let excuses determine the path of your company. Excuses are failure with a capital F. Do something to fix it.

Taking Action: The First Step Toward Total Revenue Optimization
How can companies move along the total revenue optimization continuum – and how do they know when they’ve achieved success?

First, start with the basic revenue management principles. For later success, it’s paramount to have the right foundation of systems providing the data you need, effective strategies to manage transient pricing and inventory controls, the technology needed to optimize these recommendations, and a culture in place to empower people to act on this information. 
Next, companies must build innovative data capabilities that take advantage of today’s technology and eliminate silos. Don’t settle for making decisions without the data you need at the time you need it. 
Once data capabilities are in place, it’s time to embed analytics throughout your organization. Revenue management is a great starting place, but these core competencies should permeate your company. This will allow the same revenue management analytical approaches to be employed within each part of your company.
Now it’s time to deliver technology and capabilities that leverages data intelligence, building effective ways to deliver information to all the different personas that consume the data.
Finally, you’re ready to use the fresh capabilities to drive users to actions that require human sensibilities.
Revenue management as we know it today is a thing of past. Hospitality companies need to accept the changing revenue management concepts and technologies that allow your organization to strive for total revenue optimization. So, drop the common excuses, adopt a plan to move forward to eliminate the unknowns within your business and ensure you beat your competitors to the punch. Long live revenue management!

©2018 Hospitality Upgrade 
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