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Top 3 Must-Dos to Boost Revenue for Hotel Franchisees

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January 9, 2006 - Property owners select a flag group mainly because they believe the franchise will produce more revenue and higher occupancy.  Chains know this and employ the most sophisticated rate management systems to optimize their franchisees’ bottom line, but property-level challenges are preventing many operators from receiving the room-rate optimization they purposely selected their flag to provide. 

Rate Management (RM) is one area of the hospitality industry where even the best technology must be understood by operators to be effective because lack of understanding can cost franchisors money.  With that in mind, four top multi-property revenue management veterans agree that chain RM improves rate-setting that maximizes RevPAR and examine the key rate management challenges facing the industry.  The group focuses on franchisee resistance to centralized rate management, and share three tactics chains can use to overcome operator hesitation to boost revenue for their properties. Contributors are:

  • HVS Technology Strategies VP & Chief Strategist Elizabeth Ivey, CHTP;
  • Thoughtmill Travel and Retail Services Vice President and former VP of Intercontinental and Omni Hotels Rick Warner (Thoughtmill is a division of ASC);
  • Manugistics Chief Scientist and Director of Operations Research, Jon Higbie, Ph.D. (Manugistics is a leading rate management provider for hotel chains and Fortune 1,000 retail companies); and
  • Sentry Hospitality Chief Financial Officer Tom Steinberg.
Executive Summary

Interviews with these experts revealed a consensus that many franchisees ignore their chain’s rate optimization suggestions at the expense of their revenue because property teams take rate setting into their own hands.  The reasons for this include: 

  • A lack of trust in chain RM recommendations because of inadequate understanding by operators about how chains calculate rates; 
  • A belief by franchisees that corporate rate managers are not familiar with their market or booking channels; and
  • A conviction by operators that they have the ability to do a better job of optimizing rates than their franchisor.
Experts recommend that to overcome these property-level challenges and put centralized rate management back to work for franchisees, chains must
  • Work to understand their operators’ positions on pricing strategy;
  • De-mystify the price calculations and rate setting process for franchisees so they will trust their chain’s price optimization process and utilize its rates; and
  • Factor channel booking costs into their rate calculations.
Chains need to understand operators’ thinking on pricing 

Heavily franchised chains have a huge ongoing problem selling franchisees on the story that their flag is adding value to them, and chain revenue management credibility is part of the problem.  Chains must realize that properties often do not understand how chains arrive at their RM recommendations.  Unless a chain teaches franchisees that its rate management recommendations are effective because they are based on real-world market demand factors, operators may continue to ignore them at their own expense.  Thoughtmill Travel and Retail Services Vice President Rick Warner said, “Chains need to remember GMs are often incented on several profitability factors by their owners, so they frequently ignore franchise rate guidelines and handle pricing themselves.  The best rate management technology cannot replace a good human with 10 years of experience in a market, but there are not many of these around anymore. Centralized chain rate management works, and a computerized corporate RM system will often give GMs a foundation for what their gut tells them if chains can get them to use it.” 

Manugistics Chief Scientist and Director of Operations Research,  Dr. Jon Higbie, Ph.D. said, “The major chains that use the Manugistics Rate Management system have spent considerable time working with us to ensure relevant pricing factors like historical data, competitor rates, guest segmentation, seasonality, projected incremental revenue, regional market forecasts and unconstrained demand influences are included in their rate optimization calculations.”  Effective RM tools have proven they increase rates; until chains understand why their operators mistrust centralized RM guidelines, the result will continue to be lowered revenue for those franchisees who do not apply chain pricing.

Chains need to de-mystify rate setting process

HVS Technology Strategies VP & Chief Strategist Elizabeth Ivey, CHTP said, “Most operators do not understand what is behind modern rate management.  They believe they can hire a sales-savvy person to handle the calculations themselves.  This is a mistake; there are too many variables.”  Ivey added that modern RM systems are effective at raising rates and that most owners believe their franchisor should provide this service, but they may doubt the system because they do not believe chain RM addresses regional factors.   Most chains value their operators’ market knowledge, but must strike a balance between honoring franchisees’ pricing abilities and mandating that RM-generated chain rates be applied. 

Chains must factor in channel costs

The third challenge to chain RM-adoption is channel costs.  Every booking channel has fees that impact rate profitability.  Properties pay these fees out of their own pocket, which creates an awareness of the cost, but chains are just beginning to factor fees into RM calculations.  Manugistics’ Higbie said, “Operators know that a property’s rates should be based on a variety of factors, including channel fees.  Manugistics rate management calculations can include channel costs as well as forecasted incidental revenue from F&B and outlets, like spas.  The major chains are starting to focus on ‘yielding’ by channel now because franchisees are asking them to include it.” 

Solutions increase owner property values 

Chain rate management works, but many operators ignore franchisor pricing guidelines at their own expense.  Industry veterans agree that franchisors can improve chain rate adoption by understanding their operators’ pricing concerns, educating them on how chains arrive at rate guidelines, and factoring channel booking fees into their calculations.  “Most owners base their franchise decision on how much a flag will contribute to the value of their property investment in the long term, and how much revenue it will generate to pay for operations along the way,” said Ivey.  “If a chain can teach its owners to apply its RM guidelines and increase the likelihood of its franchisees being able to sell high without increasing the cost of the franchise, then they are supporting the owners’ investment objectives.”

Manugistics Revenue Management Group

For more than 20 years, Manugistics has pioneered and perfected industry leading pricing and revenue management solutions.  Manugistics is the innovator in Revenue Management -- first to market in Integrated Revenue Management, first to market in Price Optimization, and first to market in Price Sensitive Revenue Management. Today, industry leaders in the service-based Travel, Transportation and Hospitality industries leverage Manugistics’ expertise to maximize their profits on more than $100 billion in annual revenues.   Manugistics clients include Caesars, Omni Hotels, Marriott, Princess Cruise Lines, TUI (formerly Thomson Holidays), Delta Air Lines and Continental Airlines. 

About Manugistics Group, Inc. 
Manugistics powers the synchronized supply chain. Clients depend on Manugistics to position them one step ahead of demand. With Manugistics' unparalleled supply chain and revenue management solutions, clients achieve improved forecast and inventory accuracy and leverage industry leading pricing and yield management solutions to maximize profits while ensuring optimum supply for constantly changing demand. Its clients include industry leaders such as Boeing, Canadian Tire, Cingular, Circuit City, Coca-Cola Bottling, Coty International, DHL, Diageo, Dixons, DuPont, Eurostar Group Ltd., Georgia-Pacific, Great North Eastern Railway (GNER), Harley-Davidson, Harrah's Entertainment, H.J. Heinz, L.L. Bean, Limited Brands, Kraft Foods, Marriott, McCormick, Nestle, RadioShack, The Scotts Company, Sears, Roebuck & Co., Sinotrans, Unilever and Wickes Building Supplies. For more information, visit our website at www.manugistics.com.

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Contact:

Ms. Sheila Blackwell
Manugistics
301-255-5486
sblackwell@manu.com
http://www.manugistics.com

Media Contact:
Julie Keyser-Squires
Softscribe Inc.
404-256-5512
julie@softscribeinc.com
http://www.softscribeinc.com
 

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Also See: Manugistics to Showcase Next-Generation Chain Group Pricing Technology; In the ‘Year of ADR,’ Chain Hotels Capture More Group Business; Manugistics Centralized Solution Drives Higher Daily Rate / June 2005
Manugistics Senior Executives to Address Industry Professionals at HSMAI Revenue Conference and MIT INFORMS Event / June 2005
Omni Hotels Reaps Revenue Increase with Manugistics and The Rainmaker Group / Powerful centralized automated revenue management solution maximizes room value while recognizing loyal customers / June 2005


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