Industry Update
Opinion Article22 July 2015

The Role of the Guest in Total Hotel Revenue Management

By Kelly McGuire, Managing Principal, ZS

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For the past decade or more, when speaking about the future or a vision, revenue management has been focused on two terms: total hotel revenue management and customer, or guest, centric revenue management. While we have spent time and energy discussing these concepts, neither has been widely implemented. I believe there are several reasons for this. First, the siloed organizational structure of most hotel companies makes it difficult to organize the coordinated effort necessary to implement initiatives that span departments and functional areas. Secondly, the data and technology required to support the successful implementation of these initiatives is not readily available for most organizations. Finally, and perhaps most importantly, I am not convinced, despite how much we talk about these concepts, that as an industry we fully understand them, and we definitely have not yet taken the time to think through how to actually execute.

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A lot has been written about the problem of siloed functions within the hotel. Recently, there have been some encouraging movements towards breaking down these silos. Many hotels companies are starting to combine sales, marketing and revenue management into broader commercial functions, and incentives are starting to line up accordingly. Technology vendors have also begun to deliver solutions that address these areas as well, from robust food and beverage reports that transform POS data to actionable insight, or forecasting and optimization solutions for alternative revenue sources like function space. This is great progress, but it needs to be taken in the right context. In this article, I will attempt to build this context - helping us as an industry to better understand what these concepts really mean and how to properly implement them.

It's not that we are not trying. Many organizations have embarked on initiatives that are putting them on the path to either total hotel revenue management or guest-centric revenue management. Some hotel companies are already expanding revenue management practices to restaurants or function space. Some in the casino industry offer specialized hotel room pricing (or other kinds of packages) based on a patron's value, derived from their gaming behavior. Hotels are conceptualizing personalization efforts to put the guest in the center of marketing, and pricing, efforts. These initiatives are driving additional value for these organizations, whether through better management of capacity and price in non-traditional areas, or ensuring that the most valuable patrons have specialized access and differentiated pricing.

Bringing Total Hotel and Guest Centric Efforts Together

The first problem to overcome is that total hotel revenue management and guest-centric revenue management should not be thought of as two separate initiatives. In fact, I believe that when total hotel revenue management is executed properly, it actually is guest-centric revenue management. Total hotel revenue management will never be successful if the revenue generating potential of guests, or guest segments is not taken into account. Further, for hotels, guest-centric revenue management on its own will likely not generate the level of profits to justify the investment. Total hotel revenue management, however, has the potential to significantly impact revenue and profits. Let me first describe why I believe guest-centric revenue management programs alone will not prove sufficiently profitable to the hotel, and then I will explain how the guest plays a central role in total hotel revenue management programs, allowing these two concepts to merge.

Guest-Centric Revenue Management, Explained

The proper execution of guest-centric revenue management requires an in-depth understanding of guest value. This information is gathered from observing past spend behavior (how often they stay, the rate they pay, the other services they use), and using that to predict what they are likely to spend in the future. After guest value is calculated, and the most profitable guests are identified, then programs are put in place to attract these guest, while encouraging higher share of wallet and more spending across the customer base. This activity is typically owned by the marketing department, and is very close to what some in industry are now calling personalization. It can also be thought of as guest-centric marketing. Guest-centric revenue management, as it is commonly defined, takes this a step further, using the guest value to derive a specialized price for each guest based on their value to the firm. The price is meant to entice them to book, and is based on their individual price-sensitivity and product preferences.

This works well for pricing hotel rooms in casino resorts, because the primary revenue source, gaming revenue, is so large and so profitable, that casinos are willing to give away products and services to attract high-valued players to the property. They are happy to discount or give away what they consider to be ancillary services like hotel rooms, restaurant vouchers, or spa treatments, if it means a high valued patron will stay and play. It also means that there is a clear fence around access to these discounts or offers, and all patrons understand what they need to do (gamble more) to have access to them.

In the hotel industry, the primary and arguably most profitable revenue source is the sale of hotel rooms themselves. It is probably not in the hotel's best interest to systematically discount hotel rooms for high valued guests, as this could dilute the core revenue source during peak periods. It is also risky to offer a higher price to a high-valued guest, even if their price sensitivity indicates they would pay, as you risk unfairness perceptions when they inevitably discover that they paid more than other guests. If you don't want to discount, and you don't want to charge more, this leaves offering specialized access, discounted ancillary products or personalized packages (which sounds more like marketing than revenue management anyway). Any of these options could increase guest satisfaction, loyalty behavior and retention (all good), but the revenue up-side is certainly not as large as what the casinos experience from attracting that high value gaming player.

Adding to this, you need a relatively robust historical profile to calculate guest value. Depending on the percentage of known guests with enough history to reliably calculate value, you may only be reaching a small percentage of your overall revenue potential by strictly focusing on pricing for "known" guests. Not that a hotel shouldn't attempt to collect more information about more of their guests, or focus marketing efforts on more personalized, guest-centric initiatives. I am not arguing that these initiatives are not valuable, particularly for sustainable longe- term revenue. I am merely pointing out that guest centric revenue management on its own, is probably not the lowest hanging fruit for revenue management to focus on. There are definitely long term benefits to marketing and operations focusing on nurturing an individual guest's value through personalized promotions and programs. However, good revenue practice would dictate that they ensure the offers and incentives are incremental (not diluting other revenue) and profitable.

The Role of the Guest in Total Hotel Revenue Management

Total hotel revenue management on the other hand, does hold some strong potential for revenue upside. Many think that total hotel revenue management starts and stops with extending revenue management practices to all revenue generating assets in the hotel. I would argue that extending revenue management practices across the hotel is the foundation for total hotel revenue management, but it definitely does not stop there.

A crucial part of the successful implementation of total hotel revenue management is to instill a revenue culture throughout the hotel. A revenue culture forms the foundation for synchronized decision making that can optimize profits for the entire hotel as an asset, as opposed to each individual department taken on its own. As revenue management programs are rolled out across all revenue generating assets, all departments and functions are trained to think like revenue managers, looking for opportunities to profitably increase revenue in their areas. Line-level employees within each area need to understand the importance of following revenue management policies and procedures. The hotel should form a cross-departmental revenue team that works together to find opportunities to generate revenue and identify potential barriers to success. Obviously, incentives need to be aligned so that when revenue in one area is sacrificed for the good of the whole, managers are not penalized.

Core to the concept of total hotel revenue management is the idea of optimizing all revenue streams together as opposed to thinking of each department separately. In order for this to work, there needs to be a common element that unites the revenue streams, and that is the spending behavior of the guest mix. Total hotel revenue management is only complete when the hotel understands how each of their guest segments use the assets within the hotel, and identifies the behaviors and segments that are most profitable. The end goal of total hotel revenue management is to identify the most profitable mix of business for the hotel, and determine a plan to attract, nurture and retain that demand. Again, this will require the hotel team to work cross-functionally.

Marketing is responsible for attracting the right mix of demand – going after the most profitable guests first and designing offers and incentives to grow the value of that mix. Operations are responsible for delivering service levels that satisfy the needs and preferences of guests profitably. Revenue management still forecasts demand and optimizes prices, but is also responsible for continuous improvement and ongoing training for all departments. They also need to understand demand patterns by segment, and continually strive to help the organization improve the business mix.

When total hotel revenue management is successful, the revenue team will determine what is required to maximize revenue for the hotel during each period – whether it is dedicating rooms to a large function that won't use the restaurants and retail outlets, because the function revenue is so profitable, or providing discounted spa offers to attract more hotel room bookings. In each of these cases, the individual outlets revenue might suffer, but the overall profitability of the hotel is preserved. If all hotel outlets are part of the revenue-oriented culture, their job is to preserve the space within their outlets to serve the most profitable guest mix, and then fill in around that mix with incremental revenue programs. For example, during the large function, the restaurant could try a marketing program to attract locals, or the spa could sell add-on treatments or products to the patrons redeeming discounts. When each outlet understands their role in total hotel profits, as well as their opportunity to generate incremental revenue, the hotel has fully achieved total hotel revenue management.

For hotels, the concept of guest-centric revenue management needs to be subsumed into the umbrella of total hotel revenue management. The same requirements of knowing the guests needs and preferences, understanding their behavior and calculating their value to the hotel apply. However, instead of using this information to offer guest-specific pricing, which is difficult to accomplish with price transparency, and might potentially dilute revenue, this information is used to attract the mix of guests that will optimize profits for the entire enterprise, which is grounded in a foundation of revenue management practice, synchronized decision making and a revenue-oriented culture.

Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com

Kelly McGuire

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