The Revenue Management Business Process, Designed to Produce Results
By Trevor Stuart-Hill, Founder and president of Revenue Matters
The unique aspect of the hospitality industry when compared to many others is that lodging establishments come in all sorts of shapes and sizes. Some have extensive resources at their disposal while others simply don't. In smaller lodging establishments and in a vacation rental management setting where margins are often razor thin, individuals often perform several roles simultaneously. In cases of larger hotels and resort properties, specific individuals are dedicated to the role of revenue management. Despite these apparent differences, there are some core best practices relating to revenue management that are universal.
What is Revenue Management?
"Revenue management is a business process that is designed to optimize the revenue performance of an asset through all market conditions." – Trevor Stuart-Hill
In order for revenue management principles to apply, four criteria must be met:
- Constrained Capacity: fixed inventory (or resources) available for sale
- Perishability: revenue producing potential of inventory (or resources) diminishes rapidly or instantly
- Customer Segmentation: different customers are willing to pay different prices
- Predictability: ability exists to forecast demand for future points in time
Given the above set of criteria, it is easy to comprehend how revenue management principles can apply in a variety of settings including, parking lots, apartment housing, advertising, restaurants, golf courses, spas and even surgery centers.
Culture is one factor that can't be understated. The benefit that revenue management promises can't be realized if an organizational culture isn't geared towards supporting this discipline as a core business function. Generally speaking, this either requires key stakeholders to actively participate in revenue management-related decision-making or to both accept and support the decisions made by revenue management practitioners. In progressive organizations, revenue management is considered an executive level position.
Reporting lines is another important consideration. Some subscribe to the philosophy that revenue management should report directly to senior operational management, while others believe it is appropriate for revenue management to report into sales and marketing. Either approach can work, provided it will provide the greatest opportunity to reap the rewards that revenue management brings and will offer the greatest level of support for revenue management practitioner(s).
Goal alignment is another critical component to think through. If the decision is made to have revenue management report into the sales and marketing function, incentive plans and inherent biases of the relevant players need to be carefully considered. If goals are clearly aligned, magic can happen.
Given the differences in property attributes, combined with varying dynamics in local markets across various seasons, it is quite appropriate that different organizations structure their approach to revenue management differently. Fortunately, there are several business processes that a property can follow. Below is a best practice approach that will allow any property to leverage the power of revenue management.
Revenue Management Applied
There are essentially six basic tasks associated with the application of revenue management. While very much interrelated, these are arranged below in their most logical sequence – which then repeats in a continuous cycle of improvement:
- Availability Management
There are some basic metrics that should be recorded over time regardless of property type.
Historical Key Performance Indicators (KPI's) such as units available, units sold, occupancy, average rate and revenue per available room will help stakeholders understand trends and spot opportunities. This baseline data set is also very helpful for planning purposes (i.e. forecasting and budgeting). Tracking this on a day-by-day basis will also reveal day-of-week patterns that can vary by season or over certain holidays, for example. Benchmarking these performance indicators against an identified competitive set via subscription to Smith Travel Research (STR), TravelCLICK's Demand360 and/or DestiMetrics is always a good idea.
For slightly more advanced analysis, tracking the above KPI's based on broad customer segmentation, such as transient, group and contract, may provide additional insights. Slightly more advanced applications may involve dividing the three broad customer segments into sub-segments, such as corporate, discount, package, government and promotion for transient segments, and association, SMERF, corporate and government, for group segments, for example.
In all cases, tracking both rate plan production and channel production (to include voice reservation sales volumes and conversion) will also help operators to spot trends and opportunities more rapidly. The above should be done on a monthly basis, at a minimum. Also consider tracking these metrics on a reserved date basis in addition to an arrival (or consumed) date basis.
In progressive organizations with the technological capabilities to do so, tracking based on guest behavior, loyalty and demographics may also be possible. This level of detail is helpful in setting rate, availability and policies to attract and retain more profitable guests that are more likely to spend on ancillary services, or are more likely to return often.
Capturing point-in-time data relating to pace and group backlog, for example, is vital since most property management systems are incapable of doing this. Having the ability to compare what your booking pace is for a given future period, relative to the same point in time for the equivalent period a year ago, can help you make better decisions.
Of course, as the revenue management discipline has evolved and become vastly more complex, automation and revenue decision support technologies have also evolved to help operators meet the challenge. It is important to note that these technologies are not designed to replace a revenue management practitioner, but rather to assist the practitioner within their role.
While the Securities and Exchange Commission (SEC) requires funds to warn potential investors that "past performance is no guarantee of future results", reviewing past performance is a great place to start when forecasting in our business.
Yes – market conditions change. New (or renovated) supply may need to be considered, customer segmentation may shift or perhaps the economic climate or other external factors necessitate a recalibration of expectations. The real key becomes what to forecast.
Typically hospitality P&L statements have some level of customer segmentation breakdown (see tracking section above). KPI's within these segments are a byproduct of numerous other activities related to sales, marketing, pricing, distribution strategies and even product positioning. To make matters even more challenging, consumer behavior has shifted to traveling for more than one purpose. A guest on a business trip may stay a bit longer to explore the city or an incentive trip consists of combining some fun activities and leisure time with delegate meetings, for example, so consistently categorizing segments is emerging as a significant problem.
It is best to first think about customer segmentation in terms of customer behavior. Forecasting channel performance or rate plan production based on specific courses of action that may influence buying behavior, may lead to further refinement of strategies and tactics. Predictions in channel performance combined with rate plan production can then be molded to fit the confines of a traditional P&L statement, but by approaching forecasting in this way, additional revenue enhancing opportunities can be revealed.
Those without an appreciation for the full scope of the revenue management discipline equate it to simply making pricing changes. "If we are manipulating prices, then we must be doing revenue management." Of course, this is not the case at all. Pricing is but one piece (a very important piece, mind you) of the revenue management business process.
Economics 101 teaches us that theoretical equilibrium pricing (where supply meets demand) is optimal. However, in the cases where inventory is perishable, such as with rooms, restaurant seats, tee times or spa services, uniformly applying a blanket price in hopes of achieving equilibrium (so that demand exactly meets the level of available inventory for any given day) is virtually impossible. This helps to explain why pricing in the hospitality business is dynamic.
As with forecasting, it is best to think of pricing in terms of guest behavior. Based on such factors as booking windows, stay patterns, price sensitivity, channel, seasonality, etc., different types of guests will behave differently from others. It is then possible to map a pricing strategy based on these differences to throttle demand as and when you need to.
To prevent cannibalization, whereby a lower price point would be available to a guest perfectly willing to pay a higher price for a given stay, it is appropriate to consider fences – or conditions that must be met for a given rate to be made available. A typical fence consists of some combination of policies, stay restrictions, booking windows and affinities.
Before implementing a fence, it is important to validate if the fence will help you meet your financial goals and positively contribute to your relationship with your most valued guests. For example, publically offering a discount to first-time guests without affixing additional conditions or restrictions that are not desirable to your existing loyal guests may not be a good strategy to help grow your following.
While pricing may help to shape demand that best fits the needs of a property, sometimes additional controls must be placed on remaining available inventory in order to capitalize on the revenue potential this inventory represents.
A large group, for example, may have been booked for a given night, which means that if inventory remains unchecked, shoulder nights on either side of the peak group night will become more difficult to sell. The natural tendency is to raise rate on the peak demand night to maximize the amount of revenue that can be generated on that night. This may be exactly the wrong strategy.
By considering what natural remaining demand may exist for that peak night, regardless of capacity constraints introduced by the group piece of business and with the objective of optimizing revenue performance on the shoulder nights, a better course of action may reveal itself. For example, it may be appropriate to place an availability restriction on discounted rate categories so that longer lengths of stay are accepted and one night stays on the peak night are not. Alternatively, shrinking the level of a given discount off the best unrestricted rate (BAR) from 15% to 5% on the peak night, while overselling a base unit type to help get to a sell-out on that night, may be the right strategy. It all depends on the situation.
As you can see, shifting the conversation from inventory management to availability management will provide some creative latitude in extracting the most from a fixed supply of perishable inventory.
Think of distribution simply as the means by which guests find and book a property. Telephone, property website booking engine, mobile booking engine, brick-and-mortar travel agencies and online travel agencies are all examples of distribution channels.
Each has their own costs and their own value proposition. While much emphasis has been placed on cost associated with third-party intermediation, it is also critical to understand the market penetration and spend profile of guests booking through various channels.
Managed appropriately, OTA production can contribute positively to a given property's overall objectives. Conversely, blindly buying into the promise that the cheapest form of distribution results from bookings originating from the property's own website, may not serve you well.
It is a best practice to consider all the costs (hard, soft and opportunity) associated with channel production. Given a choice, actively engage in those channels that will deliver the most profitable guests to your property.
A carefully considered revenue management strategy can become quickly unraveled if stakeholders either don't understand their role or don't believe in a given approach.
A group sales manager that adds an unnecessary concession, such as offering complimentary upgrades to meeting delegates after the contract has been signed, or a reservation sales agent who overrides a length of stay restriction for a guest requesting a deeply discounted rate plan, may not fully understand the implications of their actions.
It is vital that a baseline level of education be provided in order to enhance awareness of how each stakeholder can contribute to the revenue management efforts of their respective property.
Whether structured strategy meetings occur regularly and/or ad-hoc communication between various individuals takes place sporadically, it is a best practice to document key decisions and actions and to measure their impact. In a dynamic business such as hospitality, remaining flexible and being able to adapt to rapidly changing conditions puts you in a superior competitive position.
A Final Thought
Operating a successful lodging operation is not an easy task – regardless of type, size or location. Creating an environment where best practices associated with the revenue management discipline are fostered will expand your reach to new markets and positively impact your guest retention objectives while contributing directly to your financial success.
Trevor Stuart Hill