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 Revenue Management Doesn’t Take a
Back Seat During a Downturn
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by Bruce W. Mainzer, January 2009

A common misperception about hotel revenue management (RM) is that its value diminishes when room occupancy falls.  With a healthy economy, an RM system can often appear to be a well running car engine, doing its job to manage the mix of bookings to maximize revenues.   During low occupancy periods, some hotel management teams mistakenly view RM as a low priority activity.  However, it is precisely during these challenging times that hotel professionals should be looking under the hood, and asking questions regarding the methods and the data used to manage hotel pricing and customer mix.  Hotel teams should rely on RM processes to enable responsive sales, marketing, cost containment and pricing decisions that work in today’s economy.

Case studies have shown that 4 to 12% improvements in RevPAR are achievable with effective RM processes.   Recently, one large property that implemented a revised RM strategy during a 5% decline in demand still experienced a RevPAR increase of this magnitude.   Since a single digit increase in RevPAR can easily translate to double digit increases in gross operating profit, RM’s value during this period should never be ignored. 

Hotel managers should be focusing on the following activities to maximize the contribution of their RM processes to hotel profitability during this economic downturn:

1. Proactively Manage Booking Demand Forecast 

Most RM systems use a blending of historical demand and the latest booking trend information to develop a booking forecast.   However, during these times when recent booking behavior can be volatile and last year’s performance may be irrelevant for today’s situation, hotel management should confirm that the weighting between the latest trends and last year’s performance is appropriate.  These demand forecasts are also heavily dependent on up to date and realistic group materialization rates and the latest advance booking window trends to generate improved forecasts of room inventory usage.  Ensuring that these forecasts are up to date and responsive to the latest trends will permit better pricing decisions by day of week or identification of new profit maximizing pricing restrictions and packages.  Accurate and reliable demand forecasts also play a critical role in providing hotel teams with opportunities to identify cost containment decisions for total profitability. 

2. Update Revenue Strategies and Policies to Reflect Current Conditions

The latest booking trends should be examined to identify pockets of opportunity.  What channels or demand segments seem to be performing better than average?   What does this imply about current sales targets and pricing? Now is the time to use RM data to determine which marketing programs are generating incremental room nights, and focus on those advertising/promotion programs that are working.  Assumptions regarding profit margin for different demand types or pricing products need to be updated to ensure that the right pricing is made available, and room nights from the most profitable customer segment type can be maximized. 

The review of hotel policies should be comprehensive and challenge prior decision-making made under different economic conditions.   As an example, policies regarding contracted or recurring room nights need to be reviewed.  Perhaps a very restrictive policy toward accepting contract room nights was appropriate last year with higher occupancies, but in today’s economy this source of demand may be an opportunity to fill otherwise empty rooms.

3. Revenue Manage Across All Revenue Streams

Many resorts and other properties go beyond room inventory revenues and incorporate all revenue streams (spa, food and beverage, golf, telecommunications, parking, etc.) for their RM decision-making.  These “total revenue managed” properties should be updating their assumptions about ancillary revenues by analyzing the latest trends by customer segment, so that the RM processes are working with the most current information.

For those properties that are not applying “flow through” operating income derived from ancillary revenues to their RM processes, now is a good time to upgrade their RM systems and decision-making to do just that.   By analyzing ancillary revenue behavior by customer segment (segments can include type of guest, pricing product used, lead booking time, and or channel used for booking),  the RM system can drive further profitability through more sophisticated pricing and availability by pricing product/ customer segment. 

4.   Maintain Rate Integrity with Effective Channel Management

After the travel downturn caused by 9/11,  RevPAR declines were often compounded by some hotels abandoning rate integrity and allowing third party Web site properties to price room inventory independently of the hotel property.  The result was that, at times, third party Web sites could have lower yielding room rates that were priced under the lowest available rate offered on the hotel’s own Web sites, or call center.   Today, hotel managers understand the need for rate integrity, and frequently employ channel management policies and processes that maintain control over rates, even when room nights are distributed through third parties.

To protect RevPAR, it is essential that all third party room night distribution agreements are reviewed to retain control of rates and availability. Although the hotel should have a conservative approach to discounting rates, there will be certain cases in which a discount or promotional rate will make sense to generate profitability.  Establishing that these price discounts are contained and not spread to unmanaged distribution channels is a key requirement.  Availability of room inventory should be set according to the channel’s per booking costs/ net yield so that booking availability is restricted if higher yielding channels can be relied on to produce those same room nights.


About the Author: 
Bruce W. Mainzer formed Mainzer Consulting Group LLC to provide hotel owners, asset managers, and hospitality management companies with clear assessments of the revenue management needs of their hotel properties.  Mainzer Consulting Group provides the hotel industry with identification and development of solutions to empower property revenue management systems to reach their full potential.   Mainzer Consulting Group has assisted owners such as Strategic Hotels & Resorts, Inc., Maritz Wolff & Company, and Broadreach Capital Partners to maximize the revenue performance of their property portfolios.

Bruce is a recognized authority on revenue management and currently serves as a member of the Editorial Board of the Journal of Pricing and Revenue Management.  He has over 24 years of experience in the travel industry, serving as Vice President of Marketing of Hyatt Hotels Corporation, and Senior Vice President of Marketing for TravelCLICK.  Bruce’s revenue management expertise began at United Airlines where he developed and implemented the airline’s first yield management system.  As Vice President of Marketing for Norwegian Cruise Line, he introduced new yield management concepts to the cruise industry, and later extended these concepts to the ski and resort industry as Sr. Vice President of Marketing and Sales at Vail Resorts. 

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Contact:


Mainzer Consulting Group LLC 
230 Ridge Road 
Highland Park, IL 60035 
Phone: 847 275 1309 
Fax: 847 572 1557 
bruce@mainzergroup.com
www.mainzergroup.com

 

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