Finance

Traditionally, RevPAR was the gold standard metric to apply to revenue KPIs. It was and still is used as the measure of financial market strength. While RevPAR is a good depiction of profitability when the market is in a "typical" state, it can obscure a hotel's performance when it veers away from the norm – a condition the industry hasn't seen since early 2020.

I am happy to see this topic gaining momentum. Profit optimization in today's environment is key to your entity's success. Revenue optimization will continue to evolve and grow in sophistication as the practice matures, as the distribution landscape changes around it, and as new technologies emerge to support and disrupt hotels' strategies.

Back in 2014, I published an article "Things you didn't know about RevPAR (or: ARPAR as a better performance indicator" where I described the new index for profit tracking and profit maximization I had developed: Adjusted RevPAR (ARPAR), which also made its way to wikipedia and has been adopted by hospitality companies across the globe.

Just like any accounting topic, flow through and flex ratios look complex to many, and the interpretation with both the positive and negative signs resulting from the calculation also seems complicated. However, just like any accounting topic, once we take a few minutes and explore some examples, they are actually quite simple and amazingly useful.

Flow thru is first of all "a concept" and it's wrapped around the idea that if revenues go up or down my profit "should" react in a prescribed manner if I'm doing a good job as a manager controlling my payroll and expenses. It's rather straightforward when things move up together, for example, revenues are up 100k compared to the same month last year and my GOP is up 60k – my flow is 60%.

The simplest way to calculate profit flow through is take following steps: 1. Determine difference in dollar amount between Current Period Profit (Net Income, GOP or other profit KPI) and Previous Period Profit. This is A in the formula that will follow.

First things first: THERE IS NO NEW NORMAL! The new normal was a mix of government imposed social distancing restrictions that lead to increased costs coupled with mass layoffs and reduced available inventory = Pay it, suck it up or leave it.

Focus to increase NOI, I think is an import topic and item to think about when hotels are working to further optimize revenue. So finding revenue with a high margin is key. A first process to implement, ideally fully automated would be upselling of room upgrades, and monazite early arrival and late departure.

Historical data has become completely obsolete because of the pandemic and the current inflation. If your King Room went for $200 on September 20th of 2019 at 75% occupancy, how much should you charge in 2022 at 60% occupancy, citywides down by 70%; corporate groups down by 40%; corporate transients down 35% and Inflation at 8.5%?

Post Covid-19, more than ever what will get reinforced is that resources (human & others) will follow business volumes more closely even given that the hospitality is a seasonal business for decades.While this may not necessarily cause drastic changes in rank and file headcount, in my opinion what will definitely be shaken up is the managerial level and the manager to employee ratioMore supervisors and assistant managers will be expected to take on managerial roles while managers will be expected to become more hands on - ready to take on an assistant manager or sometimes even supervisor role when business volumes are strainedCubicle bound managers (if ever in the hospitality business that scourge existed!) will be eliminated;I see something else coming - the back or rather heart of house roles like finance, human resources, engineering may now need to become all round operation individuals and contribute to serving the customer; after all, say, in finance, what accounting will need to be done when there is no customer coming through the doorAs far as leadership is concerned, what will change is a mindset of general managers becoming hands on - they may not have the luxury any more of delegating to a RM or HM who honestly may not be thereGiven volatile business levels, having combined property and regional positions may not be justifiable as a business decision; moreover, in that combination, the property focus will now become 100% which again negates any combination positions being thought ofIn all of this, and underpinning strategies, a Flexible Budgeting process will become mandatory - flexibility in headcount levels in conjunction with fluctuating business volumes, remuneration cuts when business volumes drop below a certain point, increments tied to incremental revenue and bottom line and so on.If hospitality was and will always be a seasonal industry it is going to become an industry of focused business volumes metric driven resource utilization strategiesBottom line retention will be dictated by the customer in all of these scenarios

During the peak period of the pandemic, we saw a widespread purge of unit, area/regional, and corporate level leadership roles being consolidated or purged altogether. Those initiatives were taken to preserve cash flow by controlling labor-related expenses.

I think in life you get what you pay for. My point of reference here is a full-service managed and branded hotel. I believe when you pay for and get an executive team that has all the critical bases covered your hotel will get better results in all areas, including service, engagement, and profits.

During pandemic we have seen an increase in package and leisure sales, especially for the non-central hotels. With travelers willing to spend more money on theirselves many hotels have seen an increase in incremental revenue. We see an increase in requests for Total Revenue Management projects now that restrictions are lifted and demand is returning.

More than asking if hotels should diversify their revenue streams now, they should be asked what has stopped them doing so earlier!, or in other words, why do hotels only do revenue management in the space where there is a bed?

Many hotels have been diversifying their income streams for ages. Though, the entire industry has still been measuring its performance through RevPAR as being a de facto metric since the Revenue Management discipline was born.

Having spend the last few years making exactly this point, and previously in hotel operational finance, I am very pleased to see the industry moving in this direction. Many operators have already moved to include a profit index in their reporting and some owners have even been successful in including in the management agreement as a performance measure.

Owners have historically used avaialble financial benchmarking reports becuase their ability to pay debt and earn a return on their investment is dependent on the bottom-line, not the top-line. It takes more of an effort to convince operators that they can benefit by comparing the operating performance of their hotels to comparable properties.

I'm a firm believer that the best hoteliers and GM's are those that are financially literate. Obviously, there is more to leading a hotel than just financial literacy, but it is a huge component. I also believe that as hotel leaders we should constantly be growing our Lid's to steal a concept from John Maxwell.

First and foremost we need to make sure that we are showcasing commercials in hotels as a career path that is worth pursuing as we have seen industry drainage of talent due to working conditions as well as pay-scale. As a career path you can come up to the top of commercials across all three and where you spent your majority of time will determine which part of the hotels lifecycle your skills will be useful.

It's RM, no doubt. As this is the only discipline that truly knows what's going on, as the only data-oriented department in hotel operations.We already have very many examples in the industry of former revenue managers advancing into C-level roles and becoming successful strategic leaders thanks to their analytical skills, deep understanding of data, and ability to see how different actions by different departments affect the bottom-line profit and operating efficiencies of the entire organization.Our new digitized reality dictates that data is our new currency.

One fairly simple focus will be to implement a digital up-sell strategy. Exact figures are hard to find but it seems that 85% of the hotels globally do not have a digital up-sell strategy. Some don't even up-sell at all. This is basically leaving money on the table.

Having clients all over the world, I can say I have direct experience with the issue. And it's no fun. As a consultant, it's frustrating to go on a call and celebrate the hotel's best year ever, hang up and speak to another client running at 1/10 of 2019 occupation rate...

Let's remind everyone what the primary goal of revenue management (RM) is: to ensure that the property sells the right product to the right customer at the right time for the right price on the right channel. In the past revenue management systems (RMS) and revenue managers used historical, comp set pricing and market data and combined this with forward-looking demand signals like pacing to recommend the optimum rates.

To me, it's not a question of whether technology (and AI/ML in particular) is good or not for the Revenue Management discipline. The question is: why are we, as an industry, so far behind other sectors when it comes to the adoption of automated tools and especially Machine Learning in our decision making process?

Over the last 10 years, there have been great advancements on hotel revenue management systems, especially in the areas of price optimization as well as inventory controls. With most major brands and independent hotels on high performing markets adopting customized systems, these applications have proven to be essential for the revenue management in today's world.

Hardship sparks creativity. Hotels all around the globe were forced to fundamentally rethink revenue generation during the Covid crisis. Like so often, many successful concepts started with putting the guest at the centre and looking at what (s)he really wants right now, not what it is that we traditionally like to sell (a room night with breakfast).

In the post-pandemic world, I see three significant revenue generation initiatives for the utilization of the hotel spaces: 1. Create co-working spaces: Similar to Roger Smith Hotel's KettleSpace Flexible Workspaces, create work-from-hotel spaces for out-of-towners, digital nomads and local entrepreneurs who do not want to be tied down by office leases.

Every square metre can potentially generate extra revenue for a hotel, but many properties keep only strategizing the bedrooms' revenue.Ideas? Here are a few:Pre-arrival:Upsell rooms and added value packages and items via app and mailing, with tools such as Oaky or UpsellGuruReview your room inventory.

If there is one thing we know, it is most likely that we know nothing at all anymore. We do not know which border will open or close tomorrow due to a newly spotted variant. We do not know who will be our guest two weeks, three weeks, let alone a month from now, and we do not know who we will be competing with for those guests.

The traditional competitive set selection process in the US has always been driven by financial models, which are developed to satisfy financing and banking requirements. As such, they are usually based on aspirational comp sets in order to show future growth opportunity and return on investment.

Today, every hotel in the world has not one, but three categories of direct competitors. Official Comp Set This is your traditional comp set, included in the property's dSTAR Report by STR or rate shopping report by Fornova. These reports provide real value by benchmarking how well your property is performing against the “official” competition.

Start Treating Direct Online Distribution Costs as… Distribution Costs! Currently direct online bookings and their distribution costs: ongoing website hosting and technology upgrades, website content optimization, SEO, website visitors referrals fees (metasearch and paid search CPCs, online media and retargeting referrals, etc.), hosting, analytics, data marketing, email marketing, social media marketing, digital marketing agency fees, etc.

While cost optimization (or rather, profit measurement in general) is crucial for hotel operators, just like for any other business, our current reality is that hoteliers are offered a very minimal amount of technical functionality that would make profit maximization a user-friendly task.

Finding a calculation that fits every hotel is impossible – different taxation, rules of cost allocation, franchise vs managed vs owned % fees, P&L fee structures, etc. We also need to be realistic. RM has never had the notion of cost optimization – it's just been talked about for the last 1000 years, as much as we talk about TRevPAR.

In Q1, 2021 labor costs consumed 60%-87% of RevPAR globally (CBRE, HotelEffectiveness), making hotel operations completely unsustainable. Labor costs are increasing up to 5x faster than RevPAR (HotelEffectiveness). The travel rebound in Q2, 2021 has added another headache for the industry - acute labor shortage.

My view is strongly that hospitality needs real people or it can't be hospitality. The humans need to be there to make the guest feel welcomed and taken care of. A little friendly contact goes a long way to improve guest satisfaction.

I think one of the first things hotels need to do, especially those that are on older "closed systems" is to convert their core technology stack to the cloud. Why? Simple, once they do, they have a whole set of new services they can subscribe to that can help with automation, make things more efficient.

Oh boy! Are we tired of the game of whack-a-mole yet? Maintaining rate parity is a major effort and somehow OTA "partners" find a way to skirt the rule by offering member-only rates (with very few qualifications), bundling with air, or grabbing a wholesale rate and unbundling it.

Rate Parity is not a new pricing strategy nor is it a hospitality industry-specific invention. It has been used in retail for many decades: fashion clothing, perfumes, appliances, golf equipment, smartphones, automobiles, etc.

Rate Integrity should be the focus, not rate parity. With so many different distribution channels, programmes and closed user groups, making sure the correct rate is getting to the right audience is very challenging. Importantly, at the core of any pricing architecture, a clear understanding of how rates relate to each other, should drive client/customer value taking into account contractual obligations, holistic customer value as well as the contribution to profit of each rate/channel of distribution.

There are significant revenue opportunities outside of room revenue:1. Make your property the “hero of the destination:”Bundling rooms with local places of interest and activities into attractive hotel packages offers significant revenue opportunities.

Revenue managers need to focus on revenue generation. Upselling, cross-selling, total revenue management, new revenue streams should be part of the business strategy. Customization and personalization have to be at the core of revenue generation strategies.

By viewing the entire building/space as a series of opportunities to drive revenue will not only drive top line revenue but also increase asset value. The obvious focus would be to concentrate on staying customers to increase revenue opportunity through F&B, MICE or other retail streams, however looking at local footfall and local residents could also unlock opportunity.

First thing hoteliers should do is invest and implement technology NOW! With today's SaaS monthly fees and free trials, even in this time with little cash on hand, implementing new technology is possible and affordable. Focus on automation.

While there are reasons for optimism for sure, now is not the time to let up. Hard work will be required to stay ahead of the curve (or, let's be honest, with continued uncertainty, just on the curve would be great!). Guest behaviour, travel purpose and travel preferences will not be stable.

Due to the pandemic, in 2020 hoteliers slashed their IT and marketing spending by over 50% compared to 2019 (STR, 2021). Due to budget constraints, this year the big question is what can hoteliers do in this environment of weak but growing travel demand and limited resources?

Let's remind everyone what the primary goal of revenue management (RM) is: to ensure that the property sells the right product to the right customer at the right time for the right price on the right channel. Typically revenue management systems (RMS) and revenue managers use historical, comp set pricing and market data and combine this with forward-looking demand signals like pacing to recommend the optimum rates.

The current pandemic will certainly have a long term shift in how we satisfy future demand. While there has been a lot of discussion around how it will evolve, it is still too early to figure out how things will materially change, and as such, technology has not caught up to it.

For individuals new to the concepts of revenue optimization, the first step would be to understand the breadth and depth of what is involved. Hint, it goes far beyond pricing. Work alongside an expert until you are ready to fly solo.

In the pre-COVID-19 era, some revenue managers were indeed stuck in the rut. Who were they? Revenue managers who acted as mere “OTA Relationship Managers.” Or as comp-set pricing strategy plagiarists. Who used an Excel spreadsheet as their only technology tool.

The industry needs to face some important challenges, the first one incorporates more technology in our ecosystem, hotels and chains need to have more information on the daily basic decision, but they need to be more disrupted in this area, for example, smart destination software must come to our technology ecosystem.

Thank you for the viewpoint, Scott. First of all, I'd like to express my opinion that the discipline of Revenue Management will never lose its relevance, no matter what happens in the industry and in the world. A business simply can't be successful without some type of RM tactics in place.

Here are the three main action steps in revenue management in the post-crisis period: 1. Break down the silos! The post-crisis requires a completely new approach to revenue management (RM), not going back to the old ways of doing RM.

While none of us have any idea when the virus outbreak will be contained and when currently closed hotels will be allowed to open again, we can and should get ready for the day which will eventually come. At the same time, we can't plan too early without proper data and information.Action A: Resist the temptation to hand over your inventory, promotions and rate strategy to the OTAs.

It's true that the hotel industry has been through many storms. However, it has never seen a black swan event like this one. As the leading brands expect revenues to decline by an unprecedented 70% or more, millions of people are out of work and we are still 3-6 weeks away from the peak of the crisis.