Next Generation Hotel Revenue Management - Profit Management 3.0
By Neil Salerno
Revenue management has been in the hospitality spotlight since the mid 1980's; a gift from American Airlines. American successfully created, what was then called yield management, in order to compete with the deeply discounted fares of People Express airlines. The problem was fairly simple; how can we offer lower rates, to be more competitive, without reducing our total revenue "yield"?
Since then, many hotels adopted the basic principle of yield management; as room supply decreases, available room rates should increase; This is the principle of supply and demand. It would help us to finally change our focus from merely selling rooms to concentrating on improving our daily revenue yield. Revenue management is not a matter of changing traveler behavior or their decision-making process; it is a matter of changing our hotel management behavior and our decision-making process.
The second function of yield management, which our industry would later rename revenue management, is to look out into the future to determine market demand from seasonal changes, holidays, special events, city-wide conventions, and other market fluctuations. This would give us a chance to adjust rates upward, in advance, for future anticipated high demand periods.
American Airlines proved that there are several levels of buyers, as with hotel room buyers. Contrary to popular belief, not all travelers are looking for the lowest rates. Revenue management enables us to price our product to the various levels of guest perceived value rather than simply lower rates to boost room sales..
Profit Management 3.0
Now, I admit that this is a pretty tawdry way for me to introduce a new term, profit management, into our industry's vocabulary, but I have a theory. I believe that many more hoteliers would consider practicing this "supply and demand" technique if our focus is on profit rather than just revenue. This might help more hoteliers to understand that a hotel's market mix can greatly affect profit levels..
The goal should not be 100 percent occupancy; the old concept of "heads-in-beds" is long dead. The mission is to sell as many rooms as possible, at the highest rates possible. Which scenario would you prefer?
- A. 84% occupancy with an ADR of $87…or
- B. 78% occupancy with an ADR of $94
If you chose scenario A, I guess profit management is not for you. Although the RevPar values for both these scenarios are close, scenario B produces far more profit. Every room sold has an associated added cost of sales; increased ADR has none. Profit management allows hotels to focus on improving profit whether or not room revenue actually increases.
What does a good profit management program actually accomplish? It maximizes gross revenue while optimizing potential room profit. It works on the principle that average rate is not the amount one sells a room for, it's what one sells all rooms for. This simply means that a hotel can sell some rooms at very low competitive rates, as long as it limits the number sold.
Profit Management Is Not A Complicated Process
The notion that profit management is a complicated process is nonsense, although some revenue managers would like others to think it is. Creating their own job security is important, but the PM process is pretty straight-forward.
Profit management is an art, not a science. It involves a series of decisions, such as creating the initial rate structure, when to close-out lower rates, and having a full understanding of your hotel's market demand. Today, hoteliers have numerous ways to collect accurate data about their competition. Every hotelier should learn how to use those wonderful Internet tools. We are far from the old days of counting cars in your competition's parking lot.
To facilitate a basic form of profit management, we create several rate levels; your saver rate, all the way up to your highest rate, your "rack" rate. The next step is to determine your "optimum" rate potential. It could go something like this for a 100 room hotel: On any particular night:
- When 1- 20 rooms are reserved or anticipated– Rate Quoted @ $80
- When 21-45 rooms are reserved or anticipated – Rate Quoted @ $89
- When 46-65 rooms are reserved or anticipated – Rate Quoted @ $99
- When 66 rooms or more are reserved or anticipated - Rate Quoted @ $110
This rate schedule could produce an average rate potential of $96.55 after selling 20 rooms for only $80.
Obviously, the rates and numbers of rooms sold may vary greatly from this example depending upon your rate structure and market demand. The principle, however, is to have a plan for room sales. In this example, the lowest rate available for sale, when 45 rooms are reserved or anticipated, would be $99.
Is Your Website In-Sync With Your Profit Management Plan?
It's finally fading away, but there are still too many hotels that are posting rates on their websites. It is obvious that these hotels are not using profit management. Rates should only be accessed through your site's booking engine; based upon a specific date and rate availability search.
Creating your optimum rate schedule is best done by analyzing your room sales history on a day-by-day basis, but if you do not have a good sales history, establishing this is not that difficult. Profit management relies upon the collection and analysis of data, which can be done by small or large hotels. Most front office systems collect and maintain this information for you.
Profit management can help you stop hemorrhaging profit dollars.
Neil Salerno, CHME, CHA
Consultant, Marketing Coach, and Author
Phone: +1 941/822-0662
Fax: +1 941/726-3719