A Future Vision for Revenue Management

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June 16, 2006
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Caryl Helsel - caryl@inspireresources.com
KathleenCullen

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© 2006 Hospitality Upgrade. No reproduction without written permission.

In today’s environment revenue management is most often recognized as the central place for the practices and processes of hotel operations. It is such an integral part of a hotel, that in many cases it dictates the processes, procedures, interactions and responsibilities that support the maximization of hotel revenues.

 


Most hotel companies today have one or more resources dedicated to the management of hotel revenues. These resources often include regional and corporate revenue directors and/or an assistant to the revenue director on the local level.

Today’s practice of revenue management is commonly focused on day-to-day responsibilities which include the fundamentals of revenue management – forecasting, unconstrained demand assessment, inventory management, displacement analysis and distribution strategies such as channel management. Hotels commonly take a narrow view of revenue management that includes one point in time and focuses mainly on room revenue.

In the past, customer relationship management (CRM) and revenue management were not considered to be a good mix. That perspective is beginning to change as hoteliers now understand the benefits of looking at all the revenue earned throughout the guest’s entire stay and including all outlets; not just room revenue.

Many of the traditional pricing models are no longer relevant in the marketplace. Many of those models were based on setting an artificial "ceiling" on how high the rate could go.

Today, distribution and revenue management must incorporate strategies and elements of each into the other. However, it is often the case that revenue directors do not know all costs associated with distribution or how to calculate these costs. Worse yet, the focus is often on the cost of the channel (such as GDS cost) and gives no consideration to the yields through each channel, such as guest spend on ancillary service offerings that flow through that channel.

Furthermore, hotels do not always have a plan for how they will maximize their desired segmentation via selling in the appropriate distribution channels. Hoteliers are recognizing that market segments as they are currently defined are becoming less and less meaningful due to the blurring lines of segmentation. Perhaps the time has come for the industry to redefine the rules of segmentation to allow for better classification of guests?

One thought is to segment by booking conditions. For example, someone booking through an opaque channel may be traveling for business or for leisure. But their willingness to accept the strict booking terms makes them a unique group of guests compared to other guests who do not want to make any prepayment and want a last minute change-and-cancellation option.

Moving forward revenue management is well positioned to expand and make innovative contributions in several areas.

One area that is gaining popularity is the concept of one-to-one revenue management. A future vision of revenue management is to attempt to identify the guest or client that would bring in the most revenue.

Hoteliers have been collecting information on customers for years in hopes of improving customer relationship management. A better understanding of our customers will allow us to better segment our customers. Customer segmentation will contribute to getting us closer to the ability to do one-on-one marketing and revenue management. This information allows input into consumer choice models, which will in turn allow prices to be set based on estimates of demand elasticity and buying propensity by customer segment.

For the resort, gaming and ultra-luxury market, the focus on the total revenue a guest can contribute has been the desired measurement for many years. In those environments, often the focus is not on room revenue but rather on other sources of revenue such as casino, spa, food and beverage, golf and other services the hotel offers.

The future of revenue management will include a focus on the revenue per available guest (RevPAG) and CRM. Perhaps the next generation of revenue management systems will create an offer based on the value of each individual customer. This is in contrast with today’s singular focus on the room-only biased measure of RevPAR.

Function room yielding is another area that will see more focus in the future. Today, most of the processes to analyze the best group fit and catering opportunities are considered antiquated. A majority of hotels are still using a "big function book" or some variation of an automated function book, to look up the space availability and are maximizing the space, based on the manual rules within the department. The future will ideally offer a sophisticated revenue management system that maximizes the group fit and catering opportunities in much more detail and with a higher level of sophistication.

Displacement has been a very challenging exercise for function room analysis. It is challenging to determine what to negotiate when considering booking a group with a significant lead time, because when compression does hit, it is possible that more money could have been made by waiting and taking the last-minute groups that are willing to pay higher prices. But that requires hotels taking significant risks and gambles.

Because there are fewer statistical data points, it is more difficult to revenue manage function space. Thus the science is more challenging to replicate in a system. Much development is currently being focused in this area by both large hotel companies and revenue management system vendors. It is expected that much improvement will be seen during the next five years.

Analysis of channel cost is yet another area that will become more of a focus. Due to the differing costs for each distribution channel and the difference in buying behaviors of their customers, different revenue streams do not net the same profit. The process will soon shift from revenue management to a more advanced concept of optimizing profits and managing higher yield demand. Furthermore, the cost of acquisition, including sales overhead, will be included more often in the cost of a booking.

Some hotel companies are tracking profit per available room (ProfPAR) for their hotels and others are willing to sacrifice average daily rate (ADR) share (as defined by Smith Travel Research) if the group opportunity generates additional profit through ancillary spend. Therefore, the future of market share reports will need to include ProfPAR measures in order to determine if a property is effective in generating their share of profit.

Additionally, it is predicted that employee reward models will be changed. It is important that the manner in which hotels reward employees be based on the right measurements and that employees be rewarded appropriately. Anyone who has an impact on revenues should be rewarded based on profit optimization. More incentive should be given for need times versus non-need days.

There is room in the future of revenue management for more sophisticated revenue management capabilities as mentioned. However, the industry needs to recognize that there is a gap between the advancement of these opportunities and the technology that exists to support them. The wider the gap, the slower the adoption rate.

As the demands in this area continue to grow and evolve, it becomes more apparent that it is not feasible to handle revenue management via human assessment alone. At some point, a computer system needs to be part of the equation. But revenue management will always be both an art and a science – requiring both expert human resource and advanced technological systems to maximize profit.

This article includes excerpts from the HSMAI Special Report "Defining Revenue Management: Topline to Bottomline" to be released in June 2006. Authors of this special report are Kathleen Cullen and Caryl Helsel, partners at Inspire Resources a hospitality consulting firm. Cullen can be reached at Kathleen@inspireresources.com and Helsel at Caryl@inspireresources.com.

 

"A future vision for revenue management speaks of a day when each guest is a market segment of one and the availability of rates for a requested stay would depend on a guest's past history or forcasted future with the hotel or brand."

- Eric B. Orkin



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