“2012 seems to be unfolding as a year with a lot of uncertainty”

IN-DEPTH: Uncertainty is once again creeping into market forecasts and turmoil in markets, customer sets and distribution channels is likely to happen in a number of ways. Revenue management systems and processes will need to be nimble to adapt as events unfold, says Frederic Deschamps, Vice President, Revenue Generation, Carlson Hotels

By Ritesh Gupta

Individuals working in revenue management in the hospitality industry often term management of the short term pressures as their major challenge especially when the external forces driving the industry aren't too favourable.

The obvious RM issues relate to the downturn during the financial crisis and the subsequent upswing. Even as the global economy is facing increased uncertainty over the ongoing turmoil in the financial markets, revenue management specialists acknowledge that the industry on the whole hasn't learnt the dangers of price cuts. Numerous studies have demonstrated that this is the least profitable strategy for the long term. Yes, it may yield short term gains, but certainly does more damage in the long term. One needs to be smart in how they drive tactical promotions.

2012 seems to be unfolding as a year with a lot of uncertainty, says Frederic Deschamps, Vice President, Revenue Generation, Carlson Hotels.

According to Deschamps, there are a lot of unpredictable forces shaping demand -- external forces such as the continued financial uncertainty in large markets and the internal forces of competition.

Deschamps says where revenue management can contribute the most in a situation like this is to be extremely vigilant on forward developments and have solid reporting in place to monitor the outlook, to have a process in place to help steer revenue activity in other areas based on a sophisticated view of the outlook and to have a price elasticity-based revenue optimisation system that can handle the complexity of treating every location and every day as a different pricing situation.

EyeforTravel's Ritesh Gupta spoke to Deschamps about major developments pertaining to RM in 2011 and the outlook for 2012. Excerpts:

What according to you have been the major developments this year as far as revenue management is concerned? What do you think stood out in this discipline?

Frederic Deschamps:

The most consistent development across the hotel industry has been the increased prominence of revenue management.. This has been driven by a strong but uneven recovery where hotels face a complicated pricing situation where every market and every day can be different and therefore need assistance from systems to price correctly. Everyone's brought their own solution to this challenge, but everyone's brought some kind of solution.

How do you think the onus is going to be on revenue management to deliver considering the business environment and other external factors, and also the maturity level of RM? What do you think should be the focus of RM professionals going forward?

Frederic Deschamps:

The task of revenue management is going to be to be prepared for any eventuality. Uncertainty is once again creeping into market forecasts and turmoil in markets, customer sets and distribution channels is likely to happen in a number of ways. Revenue management systems and processes will need to be nimble to adapt as events unfold. That implies that revenue management needs to be put in a position to steer the overall revenue activity, armed with detailed forward-looking reporting on segments and channels at the hotel level.

What do you think are the major challenges today for RM professionals in order to optimise pricing, maximise inventory, and drive higher revenue while improving operational efficiencies across the organisation? How do you think RM is going to increase its significance from where it is today?

Frederic Deschamps:

In my estimation there are at least two major ways to increase revenue management's contribution to the hotels' bottom line. One is to start evaluating the worth of a booking on a profit basis and not just a revenue basis and the other is to start evaluating a booking on a lifecycle and not just marginal basis. By profit, I mean that all revenues and not just room revenues (i.e. including food and services) can be included and the costs of distributing rates and servicing the customer can be included. By lifecycle I mean that the repeat business or lower price elasticity of a customer can be taken into account to prioritise inventory access, rather than just looking at the single booking transaction. Revenue other than room revenue can represent 25 percent or more of a hotel chain's revenues, and guests have an average of 2.5 stays in hotels, these are significant multipliers on the typical "room revenue only, single stay" approach of revenue management systems today.

Recently, Amadeus highlighted that price management thrives in an environment where revenue management does not. It is possible to realise a vision of a market tied to customer personalisation in place of more limited customer segmentation. It also indicated that the fluid, dynamic model of price management, and this multi-variable model works much more effectively with the complexities of the hotel industry. How do you assess the situation?

Frederic Deschamps:

Price management, or rate optimisation, claims to maximise revenue by setting the rate just right to truncate demand at the optimal level. Traditional management looks for the combination of customers paying different rates that maximises revenue. To the extent that pricing is becoming more transparent and more and more customers are converging onto a single rate, price management is becoming more in line with market realities. Carlson Hotels has adopted this approach and uses rate optimisation worldwide with strong results. However, it must be said that in price management (or rate optimisation) a lot rides on the quality of the rate calculations so the devil is in the details with that approach.

Within an organisation, RM professionals will not only need to invest more time and effort in liaising with other disciplines, but it is also being mentioned that the more ambitious the RM department and RM system become, the harder it will be to know that every single commercial decision contributes to overall profitability, i.e. to carry out RM's main task. Keeping profitability as the guiding principle for all these new initiatives will require vision and discipline. What do you make of this assessment?

Frederic Deschamps:

I think that's essentially correct, but not all that different from what revenue management tries to do today. Revenue management is uniquely positioned to steer the revenue process, because their expertise is about setting rational expectations of what lies ahead and about the customer. What lies ahead is the actionable window for all other revenue-contributing departments, so revenue management is the natural scout for this activity. Organisations that embrace this view tend to involve revenue management in virtually all their activities, so revenue management itself needs to prioritise effectively to ensure their activity remains productive. Most revenue management organisations develop solid tools and processes to increase their throughput without significantly increase resources to deal with this challenge.

Do you believe that revenue managers seem to still follow too easily the principle of dropping price to generate more demand?

Frederic Deschamps:

Good question! Overall I believe that the last few years where we've seen significant drop-off in demand has had a sobering effect on price-dropping. Revenue management has been reminded that there is a limit to customer elasticity. My perception is that revenue managers today are more discerning with their prices and fairly disciplined about calculating their break-even point before they initiate or respond to pricing activity. I believe that overall this is to the hotel's as well as the customer's benefit. A rationally priced market provides both a reasonable return to the hotel and a fair price to the customer.

The hotel industry has witnessed the emergence of price optimisation tools that incorporate real-time competitive rates with a hotel's demand and booking patterns to recommend the best price. Overall, the industry is focusing more on price elasticity and price optimisation as part of its overall revenue management strategy. What do you make of the situation?

Frederic Deschamps:

I believe that's correct, and Carlson Hotel is an enthusiastic early adopter of this approach. Our assessment is that with increased transparency between distribution channels, and the proliferation of instant-information tools (PDA's etc); it is no longer realistic to price segments of demand discreetly. Therefore, the question is no longer how to prioritise inventory to customers paying different prices in a revenue-maximising way, it is to find the single rate most customer will essentially pay that maximises revenue, taking the customer's alternatives into account. I believe that this approach brings a lot of rationality to the pricing in the market place which is to the hotel's and the customer's benefit.