Total Revenue Optimization - Still a long way to go

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March 01, 2015
Revenue Management
Afrodita Dobreva
Jean-Pierrevan der Rest
StanJosephi

Do all people working together really work together, in the very same direction? Is a common workplace a sufficient precondition to assume a common goal? Is the successful accomplishment of individual targets a guaranty for success of the entire organization? Logically, the answer to all these questions must be “yes.” However, reality is often very different.


Let’s start off simply by saying that each company is a form of an organization. And as the definition states, an organization is a “social unit of people, structured and managed to meet collective goals” (BusinessDictionary.com, 2014). These collective goals are believed to be of the best interest for the entire organization. Serving such a wide scope, however, they are rather broadly formulated, and therefore, need to be broken down into targets on a departmental level and even on an individual basis. It goes without saying that there is a very strong correlation between the alignment of goals on the different levels and the overall organizational performance. As the figure shows, if the goals are not in the same direction, an organization will accomplish less. As total revenue management is about managing and optimizing the revenue potential at every guest touch point during the stay, it is evident that goal congruence is of huge importance when it comes to optimizing the organization’s total revenue and must be addressed with a great deal of attention.

Before pointing out relevant interdepartmental goal conflicts, let us mention the possible reasons for having them in the first place. It might be purely a matter of motivation. Often individual goals are imposed on an employee without them having a say in the process of goal formulation. Certain theories, such as the goal-setting theory by Dr. Edwin Locke and Dr. Gary Latham, explain the negative impact this has on employee motivation. In return, a lack of motivation can lead to lack of satisfaction, which influences employee and thus company performance. And this is only one possible scenario. Apart from motivational issues, the reasons for goal incongruence might be ascribed to the personal interest of the employee. Considering the individual bonuses often attached to targets in the hotel industry, this explanation seems legit. When incentives are tied to the target accomplishment, some employees engage in behaviors that are dysfunctional to their organizations. For example, managers have been known to play budgeting games in an attempt to misrepresent and manipulate financial information, but still receive their bonuses. This is how the monetary element adds additional complexity to the already elaborate goal congruence equation.

Whatever the reasons behind it, goal incongruence is a fact in the hotel industry. Judging by the preliminary findings from interviews with revenue directors from large hotel chains, two major sources of internally conflicting targets can be identified: (1) sales vs. revenue; and (2) finance vs. revenue. But, we knew that already, right?

The first struggle is related to the volume-price debate. Generally, the performance of any hotel’s sales team is assessed on production, meaning units sold (the occupancy figures). However, if revenue managers aim at higher rates during periods of high demand, this can potentially sacrifice occupancy. The different focus of both departments (sales recommends being more volume and client driven, whereas revenue management is traditionally more price and revenue driven) creates a precondition for internal conflicts and is conducive to goal incongruence.

Another conflict can be found in the following example: Suppose one of the revenue departmental targets is a certain booking balance, calculated as the ratio between direct and indirect bookings (number of reservations through its own channels divided by those made through OTAs). At a certain point in time, the required balance is achieved. However, if at this very same point in time there are still rooms available for sale, then the questions remains: Is it better to have the balance kept and the target achieved, or is it better to sacrifice the target but sell more rooms and eventually generate greater revenue? The answer will depend on who gets asked, and whose bonus is affected.
 
We have briefly highlighted a challenge faced by the international hotel industry. The way to successful goal congruence is surely not paved yet, but improvements have been made. Some hotels have replaced the occupancy targets of their sales teams with RevPAR goals and others have even introduced TRevPAR as a target, pushing the entire hotel to unite forces towards one common total revenue goal.

In the fast-paced reality of today’s business world, there is only one constant: change. Agility, innovativeness and interactivity have transformed from being recommendations to being requirements.  To stay alive and be competitive, one must continuously look around, adapt, evolve and evaluate. And knowing that, we cannot help but ask ourselves when will the hotel industry let go of its old-fashioned habits? Isn’t it time to re-engineer the outdated targets and reinvent performance management? From the moment that this happens, the hurdle called goal incongruence will disappear from our way toward total revenue optimization.

Afrodita Dobreva is a final-year student at Hotelschool The Hague. Jean-Pierre van der Rest is the chair in Strategic Pricing and Revenue Management at Hotelschool The Hague. Stan Josephi is a senior lecturer and researcher in the field of revenue management at the Academy of Hotel Management, NHTV Breda University of Applied Sciences.

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Omni Brand Continues to Grow Market Share
RevPAR Index Growth:  Six Consecutive Years and Counting

The Omni Hotels & Resorts brand continues its impressive growth, essentially doubling the number of hotels under its management from 30 hotels to 60 hotels in just the last six years.
 
During this same period, the Dallas-based international luxury hotel group posted consecutive year-over-year RevPAR Index growth, consistently outperformed its competitors, and grew market share.
“Our revenue management system is one of the factors that has been behind our multiyear run of successes,” said Jamie Pena, vice president, revenue strategy and global distribution for Omni Hotels & Resorts. “There are other contributory factors, certainly, but the system clearly helps us support and execute on our strategies.”

Omni’s revenue management system is known as GuestREV®, a revenue optimization solution by The Rainmaker Group proven to increase RevPAR and total revenues.

“Protecting longer lengths of stay, we believe, is what drives RevPAR for us,” said Pena. “What we really like is the system’s precision pricing.”

Omni’s Corporate Director, Revenue Management Brenda Gordon said, “As time has passed, our portfolio of hotels has changed. We’re now looking at using GuestREV for total spend and managing customers’ ancillary spend behavior, rather than just relying on it for room revenue behavior.”

It’s an Omni initiative to perfect the proprietary approach, known as Total Guest Value. This technique is credited with boosting revenues from 5 percent to 15 percent over the past 14 years at numerous casino-hotel properties.

Another solution also implemented by Omni Hotels & Resorts is GroupREV®. This system allows group sales and revenue management to very quickly respond to leads and RFPs with intelligent prices that drive conversion rates and increase group revenues.



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