What Business Leaders Need to Know about Revenue Management

What Business Leaders Need to Know about Revenue Management
November 22, 2014 Revenue Matters

As a business leader in the hospitality industry, have you ever noticed that expectations for your role have increased exponentially in recent years? General Managers in particular often find themselves needing to become well versed in such diverse topics as union relations, the rake of newly ordered banquet chairs, social media engagement, pool PH levels, cash handling procedures, wine varietals, sheet thread counts, distribution strategies, parking contracts, seasonal marketing programs and much more. Here are some things you should know about revenue management along with some things to avoid:

What is Revenue Management and When Does it Apply?

A lot of people (including those of us in the revenue management profession) have struggled with developing a comprehensive definition that adequately addresses the multi-faceted nature of the discipline. In fact, it is probably a bit easier to define what it is not vs. what it is given that the practice has evolved dramatically in the past two-plus decades. My preference is to think of revenue management as a business process designed to optimize the financial performance of your operation through all market conditions. Notice that nowhere did I state that demand has to exceed supply in order for revenue management principles to apply. In fact, only four conditions need to exist for revenue management principles to have a positive impact on a business:

    1. A fixed amount of inventory (or resource) is available for sale at any given time.
    2. Inventory (or resource) is perishable.
    3. Different customer types are willing to pay different prices.
    4. There is some level of ability to forecast future demand.

With the above premise, it is easy to understand how revenue management techniques can be applied, not only to airlines, car rentals or hotels, but a whole host of other businesses such as parking lot management, smart phone application marketing, apartment complex management, advertising and product distribution.

What Are the Components of Revenue Management?

When we speak of revenue management, many interpret this to mean pricing. Revenue management and pricing are not synonymous and it is a mistake to think that they are. Remember, revenue management is a business process and pricing is just one element of that process.

Other components include Tracking, Forecasting, Inventory Management, Distribution and Internal Communication. Leveraging each of these in a specific sequence as outlined below will yield the best results. A spiral staircase is a good visual model to describe how these components contribute to overall financial performance – each step leading to the next, ultimately leading from one level to another and then another in a continuous cycle.

The First Step: Tracking

Tracking relates to understanding historical actuals. The secret is to determine in advance what data elements you wish to track, who will be responsible for doing the tracking, in what format and with what frequency.

For some odd reason, point-in-time data within the hospitality industry is very difficult to come by. Property technologies have, generally speaking, not evolved to enable a user to easily understand some very fundamental things such as what was on the books this time last year for a future period of time and compare that against what is on the books for the same time this year. Therefore it is essential that point-in-time data be collected reliably and consistently. Pace comparisons by segment, sub segment and channel are all good examples of where point-in-time data can be helpful.

Examples of other useful pieces of information include such things as rate plan production, key account production, reservation call conversion, stay overs, unexpected departures, no-shows, same-day cancellations, walk-ins, same day reservations, weather events, ancillary spend by segment, source of business, social media sentiment (both of your property and that of your competitors), convention and special events etc.

Knowing what data is readily available to you through property and/or brand systems, what needs to be tracked manually and what data meaningfully contributes to actionable decision-making should also be considered. Too much data can be just as detrimental as not enough. I suggest that you develop and document a tracking strategy if you haven’t already done so.

The Second Step: Forecasting

Once historical and point-in-time data elements have been analyzed, developing demand projections that are reasonably accurate based on emerging trends becomes much easier.

Expectations for the accuracy of short-term operational forecasts should be high since other departments within the operation depend on this information for labor and resource management. It is important to review operational forecast accuracies regularly to determine if any trends need to be factored into future forecasts.

Long-term forecasts should be compared against historical pace information where available to determine their viability. Additional “stretch” targets should be reasonable given current circumstances. The risk of owner cash calls and reasonableness of investor guidance should serve to drive more conservative forecasts; however, many of us drawn to work within the service industry tend towards being optimistic. Taking stock of your personal biases and how others on your team respond to these could prove to be valuable.

Communicating bad news early and developing specific action plans to mitigate downside potential is always a good practice. Discouraging upside revenue potential by tying incentives to long-term forecast accuracy is never a good idea.

The Third Step: Pricing

Price by itself may attract consumer attention; however, perceived value in the eyes of the guest is what causes a booking to take place. Commoditization is a threat to all of us who depend on the financial health of the industry, so competitive price positioning, which is often central to the discussion at many revenue strategy meetings, should be thought of in a broader context. Consumer perception of value is truly what drives conversion.

Pricing is a highly complex and involved topic; however, there are some things you can do to validate that your pricing strategies are working and there are a few techniques you can deploy to support average daily rate (ADR) growth objectives.

AB testing is one method whereby you take two periods of time that are expected to share similar demand characteristics and test two different pricing schemes. One may contribute significantly to your overall objectives and the other may not.

The concept of granularity refers to the price differentials between inventory types. The step up in price from one unit to another should be proportional to the value it represents for the customer segment(s) you are targeting at any given time. By definition, this means that the level of granularity is proportionate to demand levels. During periods of low demand, finer granularity means that it is likely that more guests will self-select a higher category unit type and that during periods of high demand, you can more safely move to coarser granularity and charge a greater premium for higher category unit types. All too often, operators adopt a set it and leave it mentality that is counterproductive.

Take time to review the ratio between your materialized ADR and your published rate for a given period. While each property is different, a material swing in this ratio could point to a mix or strategy issue. While it is true that published rates dictate pricing of other dependent rate plans, truly understanding your mix of business could reveal significant opportunities.

The Fourth Step: Inventory Management

Optimizing the availability of product (accommodations in this case) is a critical aspect that should not be overlooked. Inventory controls are commonly placed at the property, room category, room type, rate category, rate (BAR) level, and rate plan or product levels.

The more common controls are closed, closed to arrival, minimum stay, maximum stay, minimum stay through, maximum stay through, overbooking by unit type and/or property and full pattern length of stay. In the case of automated revenue management systems typically a hurdle or threshold value is adopted which prevents certain reservation values (most typically room, rate, arrival and length of stay combinations) to book, thus preserving availability for more profitable bookings.

Inventory controls must be considered along with pricing adjustments since both can have an impact on realized demand. One easy to deploy but dangerous stay control that exists is “closed” as it prevents guests from arriving or staying through on that particular night. While essential to profitably managing a hospitality operation, having a process in place to monitor stay controls is vital as they can also be very damaging. It goes without saying that developing a complete understanding of the impacts of various stay controls can have at your property and using them judiciously would be wise.

The Fifth Step: Distribution

Once a strategy around pricing and inventory management has been defined, it is time to deploy this strategy and leverage your distribution network to generate booking activity.

Both through your proprietary website and through 3rd party channels, content is key. Engaging guests in a relevant way through photography, descriptive content and a frictionless booking process will contribute greatly to production through these channels.

Taking time to speak with guests who have booked your property via various means to discover insights into their motivations behind why they made the decision to book they way they did. The results may reveal additional opportunities for you.

Costs of distribution through various channels can range widely, so can servicing costs. Any analysis isn’t complete without an understanding ancillary revenue contribution by channel. Of course, in many operations, this data is virtually impossible to obtain and in others it is relatively straightforward. In either case, it is important to have a distribution plan that supports your operation’s objectives.

Most importantly, don’t neglect your voice reservation channels. The sheer revenue contribution coming through the voice channels is largely taken for granted at many properties. Investing in the skills technology and training needed for agents to effectively sell your property is a worthwhile endeavor.

The Sixth Step: Internal Communication

Robert Burns wrote in his poem “The best-laid schemes o’ mice an’ men… “ and nothing is closer to this truth than when a great plan isn’t communicated properly through the organization.

One method to generate buy-in amongst stakeholders charged with assisting with execution of a given strategy is to hold a regular revenue strategy meeting. Common participants would include the general manager, controller, director of sales and marketing, front office manager, reservation manager and of course the director of revenue management. Ideally, this meeting would be conducted by the director of revenue management and is designed to discuss and communicate strategies that have been developed through prior analysis. Creating buy-in amongst these key stakeholders is equally important to positively impact execution.

Between scheduled revenue strategy meetings, the director of revenue management should be building and maintaining relationships with these players and those on the front line at the desk, in group sales and in reservations to identify where there is operational resistance. Your role as a business leader should be to encourage this activity and provide guidance, coaching and support to the individual you have chosen to lead your revenue management efforts. If you ever feel compelled to lead these efforts, it may be time to re-examine the effectiveness of this approach.

Common Pitfalls

As a revenue management practitioner for the past 20 years, I have worked along side many hospitality business leaders from owners and asset managers to general managers, director of sales and marketing plus many others. Here are fifteen of the more common pitfalls to avoid as you work with and support those in a revenue management role.

  • Equating revenue management to pricing. As outlined previously, revenue management is a business process. Pricing is just one component of that process.
  • Making changes too quickly. In order to truly understand the impact of a given modification, you need to give it time to have an impact. Of course, having a mechanism in place to measure the impact is vital.
  • Making too many changes at once. It is important to be able to isolate the impact of a given change. Introducing too many changes at any one time may cloud the interpretation of the results and lead to erroneous assumptions.
  • Relying on experience from your last property. Every property faces it’s own unique set of circumstances and its own rhythm. Pushing the buttons that worked well at your last property may be exactly the wrong thing to do. Take time to test your assumptions.
  • Only trusting gut instinct. Many leaders shoot first and aim second. Intuition is an important aspect of revenue management decision-making; however, gathering data and interpreting relevant metrics correctly will lead to better decision-making.
  • Using historical data as a sole basis for decisions. Using historical data without context is as dangerous as not relying on data at all. Leverage what you and your team knows about the market, competitive landscape, economic environment, your customer sentiment and demand drivers and detractors to make decisions.
  • Putting in the wrong types of incentives. Nothing stimulates a course of action like a meaningful incentive. Think through the potential actions and impact a given incentive plan may produce.
  • Not thinking through reporting lines. Those in a revenue management role can’t effectively work in isolation. They need to engage with others throughout the organization to fully implement strategies. Do they report to the right individuals in your organization? Are these individuals’ goals completely aligned or is performance measured on different factors? If it is the latter, they may be operating at cross-purposes.
  • Allowing the one with the strongest voice to “win”. Draw out thoughts from those impacted by the strategies and tactics that have been developed. Often I see an opinionated controller, charismatic director of sales or a driven general manager dominate the conversation. The resulting decisions are often not optimal.
  • Not involving key stakeholders. Hospitality operations are unique in that they rely on the performance of so many individuals. Revenue strategies do permeate the organization from top to bottom, so it stands to reason that creating buy-in amongst key stakeholders is a recommended best practice.
  • Jumping in to make tactical decisions. If you are ever compelled to regularly make revenue decisions yourself, it should serve as a red flag. Either you don’t have faith in the individual you have assigned to the role, that individual doesn’t have the education or support needed to be effective, or you lead in a way such that others either feel they need to please you or are too dependent on you to make the final decision. Your job should be to manage the business process.
  • Having the wrong person in the role. Sometimes there just isn’t a good fit. Think twice before splitting someone’s responsibilities between revenue management and something else. This approach sometimes can work, but success is really quite rare.
  • Not tolerating mistakes. The revenue management game is messy and it also takes considerable courage. Perfection is simply not possible but excellence is. Failure contributes to excellence, so encourage your team to fail, to fail fast and to learn from that experience.
  • Follow competitors pricing. Don’t fall victim to your dumbest competitor. While you can’t completely ignore market pricing, myopically focusing on the actions of your closest competitor can lead to undermining asset potential.
  • Not having a distribution plan. Knowing hard costs and opportunity costs associated with each channel of distribution is just the start. Consciously choosing channels within which to participate, leveraging them at the right time and understanding their contribution potential can lead to superior performance.

Revenue management today can’t be ignored. It is a multifaceted endeavor that touches many aspects of your operation. Business leaders need to have a basic understanding of the discipline in order to ensure those charged with carrying out the responsibility of revenue management are heading in the right direction. Some will adopt a hands on approach and others will simply set up the race for their team and then get out of the way. Both have merit. What will you do?


This article was first published on Hospitalitynet.org and HotelMarketing.com

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