NORM Strategy - Net and Optimal Revenue Management
It is increasingly becoming critical that focusing on top-line revenue growth by Heads of Revenue and Commercial is not enough and profit-centric strategies will find sustenance over time. So, what can perpetuate the next wave of profit-led revenue growth? Over the past few months, I have invested time to learn about Net Revenue Management. Net Revenue Management or ‘NRM’ as popularly known is a concept relatively known within the Fast-Moving Consumer Goods and other associated industries. One can argue that NRM is inspired by airline/hotel revenue management and that it is already practised partially in the hospitality industry. However, the real adoption of Net Revenue Management in hospitality has miles to go, and it will help companies achieve revenue and profit-led growth differently.
Optimal Revenue Management ‘ORM’
Popularly known as Revenue Management or what I like to term ‘Optimal Revenue Management’ ‘ORM’ has been in practice for decades and has evolved over the years in the travel and hospitality industry. Revenue management in hotels has focused on optimizing top line room revenues by selling the ‘Right Product’ at the ‘Right Time’ to the ‘Right Customer’ through the ‘Right Channel’ and at the ‘Right Price’. ORM thrives in an environment of perishable inventory, something that is amiss in the retail industry. Several other factors make optimal revenue management a force it is today, including highly sophisticated algorithms helping hotels make the best possible decisions for their set of perishable inventories and robust market intelligence around structured reporting, which has contributed to delivering higher performances toward top-line rooms revenue.
While the industry has focused on Profit Management (GOPAR) for some time, the function of Optimal Revenue Management is yet to evolve as a fully functional strategic contributor to net profit growth. In many ways, optimal revenue management has graduated from a demand optimization function to a strategic one that interacts and integrates with commercials and operations to drive revenues for different assets. The focus remains on top-line growth. It is another story that many hotel companies have not realized the strategic nature of revenue management. With Net Revenue Management, it has the potential to be.
Net Revenue Management ‘NRM’
In recent years, the highly competitive landscape in FMCG industries pushed it to look at revenue management in a new light to stretch the margins, increase sales and grow profit. Whilst the perishable nature of business does not exist here, it has deployed several strategic levers of revenue management to create a craft that has the potential to increase brand value by delivering net revenue and profit growth. The measurement is different and makes it a worthwhile study.
Net Revenue Management is an application of science to maximize revenues and profit across brand, sub-brand, and product portfolios. It extensively uses data and makes it the focal point of all analysis across market and customer segments and product classes to create a net sustainable profit-led growth over time.
It encourages companies to stop pursuing promotions that do not yield profitable growth and have become an engine of sales volume. It motivates better negotiation of contractual terms and does not encourage layering it with freebies to increase sales. It is highly data driven, and companies found to be practicing Net Revenue Management have yielded EBIT by 2%-5%. For a billion-dollar company practicing NRM, it has the potential to add $ 20 million to $ 50 million increments in net profit.
Revenue Management as a function has wide-ranging possibilities. In the case of both ORM and NRM, it interfaces with several commercial functions to deliver growth. Yet, it conflicts at times as commercial and marketing functions across the spectrum of industries argue relationships, tenure, and past support as reasons to overcome data-led decisions. At times, both concepts have demonstrated that they add tremendous value to different operations' top and bottom lines. Hotels have an opportunity to adopt Net Revenue Management as a potent force and strengthen GOPAR or NETPAR as a valid metric that experts have been talking about for ages.
Both ORM and NRM require a set of competencies that views businesses strategically and provides leadership to achieve optimal results while being a collaborator. It also necessitates the need to have a culture built around these competencies to stay competitive and not treat it as a system’s only or analytics-only driven function.
Unleash (NORM) Net and Optimal Revenue Management
Revenue Management gets activated before the first advanced reservation enters the system and creates business on books. It is about ensuring that the right customer has chosen the right product at the right price. It further accentuates its efforts when an asset receives stable occupancy to optimize the last room available.
Net Revenue Management aims at increasing net revenues and profitability with an intrinsic view of business and its practices. It includes pricing, contractual agreements, optimal customer segment mix, optimal market segment mix, innovation, promotion management and in the hospitality context can also include channel mix. Net Revenue Management allows Revenue Management talent-force to get involved in every little detail and integrates them at every step of business decision-making.
Think of a corporate agreement or an annual promotion that runs every year without fail and only because of the belief that a free night promotion or a long-standing relationship is the reason for the corporate rate. NRM dismantles these half-baked truths by effectively using data to its advantage, promoting net growth, and building strong and effective brand equity.
How will hotels, restaurants, and other ancillary services adopt NRM? Adopting NRM?
The potential Net Revenue Management presents can be a game-changer if adopted and integrated well into the operating business model. It requires a change in the way commercial organizations are structured. The starting point is a deeper understanding of NRM and the different models that can be at play to integrate decision-making at the granular levels and across commercial activities.
Understand Net Revenue Management and Cultural Implications
- Set Objectives and End Goals
- Define and Refine Organization around end goals
- Set Talent Parameters and Stick with them
It requires a wholesome talent in revenue leadership, which is responsible for the optimal turnaround of the business, is focused on negotiations, has contractual understanding, understands business potential and management, and is an expert in data analysis and pricing. It will require hospitality executives to look for talent beyond the usual profile of system managers.
It may not be possible to get everything from one position. There is a need to create a strategic business unit that can assimilate a host of competencies under the umbrella of Revenue Performance.