Most hotels midsize and up, have implemented a version of a revenue management system with varying degrees of automation. The question is whether they found a satisfactory solution to their revenue generating challenges? Why are hotels, which invested significant dollars in revenue management systems still struggling to meet revenue performance objectives?

Definition

There is no single �golden� definition, which would be accepted by each source. However, most attempts seem to agree in the literature on this: Revenue Management (RM) is a set of revenue maximization strategies and techniques, which may improve the profitability of businesses which work in fixed capacity environments, face time-varied demand, their product (in hotels: room nights) has similarity and their cost structure reflects a high proportion of fixed and a low proportion of variable cost items. (Most of a hotel�s costs are not directly related to its daily performance). The commercial lodging industry fits the bill perfectly just like the airline and the cruise industry among others.

Expectations and Measurement

Can we expect a higher REVPAR (revenue per available room) from revenue management? It depends on our benchmarking. Those hotels, which spent heavily on RM systems, did it expecting a return on their investment. Most of them did their homework and were aware of the claim of a Wall Street Journal article that identified revenue management as the number one emerging business strategy, not too long ago.

These expectations are valid but it is not easy to measure accurately, what REVPAR (mathematically: occupancy multiplied by the average rate) would have been realized without RM. 

• Hotels and hotels can be compared in a given comp set. That is: if they are considered competitors.
• A hotel can compare its performance indicators to industry averages or its own historical data. 

Market Conditions

The current market situation can be described in a nutshell as a painfully slow recovery following an economic downturn, worsened by travel safety and security issues. A survey last fall commissioned by the Travel Industry Association of the USA showed that only a small percentage of those, who choose not to travel, do it because of the 9/11 terrorist attacks. The majority of the guests who stay away from hotels would not travel because of the economy. 

How would all this relate to revenue maximization efforts? If we reduce revenue management at the hotel operations level to manipulating only two key indicators: room rate and occupancy through rate control and duration control for the most part, chances are that we will be disappointed with the results. Revenue management deserves a somewhat different and a more complex approach from hotel managers in order to unlock its full potential. Knee jerk reactions leading to instant discounting may not be the answer. Was it a pricing problem in the first place? If it was not, is it fair to expect a solution through price control?

Changes in market conditions must be clearly understood by management before applying revenue management solutions. If we don't know exactly the root cause behind changes, we may pull or push the wrong lever.

Revenue Management is a lot more than moving the rates around

The point is: a strategy is a lot more than the application of certain techniques. Those techniques are important parts of a strategy. However, a revenue management strategy should include more elements than working with only two of our key indicators if we want our hotels ride out the economic downturns better than we did it in the early nineties.

Anne R. Lloyd-Jones of HVS International Journal wrote in June 2001: �For hotel managers, the battle cry of the last decade was Yield Management! Through sophisticated computer models and highly trained sales, reservation, and front desk staff, most hotels were able to maximize the average rate achieved on a given night, week, month, and year.� 

If hotel managers know all this, how come that we see a wide variance in the efficiency of revenue management systems? Well, the devil always hides in the details.

Duration control techniques, especially stay restrictions, are most useful in periods of high demand. Hotels may require a minimum duration before accepting a reservation and that allows them to tell the higher yield (longer staying) guests apart from the one-nighters. However, looking at room revenue only may not provide us with the full picture in case of guests with a history. Hotels have data on average spending; to a Front Office, the comparison of a 3-night guest paying a premium rate, who spends on room only, and a one-night guest who spends heavily on meeting room rental, food and beverage, parking and internet access -- should be a no-brainer. Provided, our system works with total revenue per stay.

The other most popular revenue management technique is rate control. It has always made me think, why would most front office managers reduce revenue management to a numbers game with room rates? One possible answer is that this is what they are evaluated on. Just compare your hotel�s ADR (average daily rate) to your comp set and there you are� Another possible answer is that this is what they understand best and have the most control over.

Experience suggests that discounting our room rates is a natural first reaction to changes in demand. In a period of high demand we limit the discounts. When we experience low demand, discounting kicks in, if not for other reasons, just because our competitors may have already undercut our rates. We also use sophisticated software to help us doing the number crunching. True enough, computers are extremely useful when it comes to a quick and efficient way of performing complex calculations involving a lot of variables.

An extreme example

After September 11, it was interesting to compare the immediate impact and the longer-term effect of demand changes on the pricing approach of a lot of our hotels in some markets. As soon as hundreds of airplanes were diverted to Canadian airports and thousands of travelers were forced to look for accommodations, hotels at the affected destinations experienced high demand for days. Those cities were swamped. Was it logical that revenue management systems at area hotels quickly adjusted to the market conditions and those managers who followed the pricing suggestions of their computers stopped offering discounted rates? That is exactly why artificial intelligence must never take over human intelligence. Some newspaper articles were pretty quick to condemn some greedy hotels. The accusation was price gauging.

A couple of days later, when travel restrictions were lifted and air spaces reopened, there was only one problem: instead of travelers, most hotels have received cancellations only. Our business is a peace industry, as we know it all too well. During times of political and economical uncertainty, travel is the first item to get canceled, postponed or reconsidered. How did most destinations� hotel managers react? Heavy discounting started from New York to London� If price was not the root cause of the problem why do we expect price cutting to solve it? Makes you think�

Artificial and Human Intelligence

An article by IdeaS on October 29, 2001 posted here on Hotel-Online.com, one of the best electronic newsletters, stated correctly how revenue management became mission critical after the events of September 11: �Automated revenue management (RM) solutions provide hotels with sustainable competitive advantages to navigate through this period of uncertainty. These solutions provide quantifiable financial and operational benefits in all market conditions, critical to the success and longevity of hotel properties worldwide.�

There is some validity in that statement by IdeaS, a leading provider of RM solutions. Yes, every hotel needs the above RM solutions however computerized RM systems in my view, are only part of the picture. They need to be complemented by other elements of revenue maximization strategies, which are not necessarily quick fixes and a longer lasting effect can be expected if done wisely. Creative packages, Backyard Sales Training, Convenience Zone Marketing, Frequent Driver Miles programs are examples of some of the more innovative approaches. 

Those hotel operators which go beyond the day-to-day room rate adjustments and put time and effort into strategy development, create well targeted value packages to cater to the needs of their clientele, will do better than those who only feed the data into their RM program and read their computer printouts.

Revenue management strategies include market segmentation and packaging with the objective of creating revenue from those who are hesitant to buy at the price offered. Do we need to discount when we package room nights with spa visits, show tickets, gastronomic delights or tours? The point is that we may but we don�t have to. The emphasis is on creating perceived value. A package that has an appeal in the eye of the customer may help a hotel sell room nights. This strategy is one of the most underutilized in the RM repertoire.

Another strategy could be the differentiation through value added items. Some brands created theme hotels, others claim to offer the best mattress or stake house in their properties. There is no limitation what can be introduced, provided the hotel has a clear understanding what would do the job for their clientele; high speed wireless internet access, complimentary valet parking, a spa or heightened security with biometrics.

It seems that the current downturn will not have staying power. Those who go the extra mile and look beyond their front office, willing to use more elements from the RM repertoire than discounted room rates, will be better positioned to upgrade their products when guests return to fill our hotels.
 

Dr. Gabor Forgacs, Assistant Director of the School of Hospitality and Tourism Management, Ryerson University in Toronto, Canada, teaches Revenue Management. He may be reached at [email protected]