Strategic Revenue Management / Dr. Gabor Forgacs / February 2010

By Dr. Gabor Forgacs, February 2010

MANY REVENUE MANAGERS can skillfully use tactical measures to improve revenue generation in the short term. Such managers may well �hit a home run� once in a while. But in order to truly maximize revenue in a coherent and effective way over the long term, revenue managers must move beyond short-term tactics to embrace long-term strategic planning. Tactics are most effective when they support an overarching strategic goal. The proof of this is in the results. Hotels that use only revenue management tactics are not as consistently successful as hotels that use such tactics in support of a clear strategic goal. Hotels are long-term capital investments by nature. They have the ability to use revenue management as a strategic tool to help lay the foundations of sustainable success.

The integration of tactical and strategic revenue management helps management generate demand with proven marketing measures. The strategic approach sees pricing in the larger context of desired target markets, rather than as a nightly race to the highest possible revenue. Strategic revenue management topics also include the overall management of all a hotel�s revenue streams, as well as strategic packaging and distribution channel management.

These topics are complex and exciting because it is at the strategic level where true success can be secured. Revenue managers who recognize and apply the full arsenal of strategic revenue management are able to handle any challenges offered by a dynamic marketplace. Using strategy as a guide, the best managers find optimum solutions under any set of circumstances.

Demand Generation

The objective of demand generation is to produce the most possible revenue under any supply/demand conditions. In order to achieve this, strategic revenue management goes beyond the management of existing demand to manipulate and increase demand. Using demand generation strategies, revenue managers can take a proactive rather than reactive approach to maximizing revenue.
Supply/demand dynamics are driven primarily by market forces. A hotel can influence demand because it is an active player in its market. Revenue managers have a significant role in helping the members of chosen market segments to become guests of their hotels. They do this in part through product development and careful product positioning among the comparable options available to potential guests.

Ambitious hotels want their voices to stand out and be heard by targeted customers against the noise of the market. The market noise is loud and constant, as customers get bombarded by advertisements and marketing appeals of all sorts. A hotel�s marketing budget is limited even in good times, and marketing managers can work only with the value proposition of a given hotel, branded or not. At the very heart of even the most creative marketing appeal, there must be a marketable product. One of the key drivers of marketability is differentiation.

Differentiation

A hotel can differentiate itself from its competitors in more meaningful ways than room rate. Two examples of successful hotel brands that got started in the early 1960s in North America illustrate the theory quite well. La Quinta Inns championed a concept called limited service by offering hotels without restaurants and catering to the needs of budget-conscious business travelers by placing the telephone on a desk rather than beside the bed. This helped those who needed the telephone for business purposes. The other example is Four Seasons Hotels, which was the first luxury chain in North America to offer concierges, complementary overnight shoe shines, 24-hour room service, bathrobes, and shampoo in their hotels at premium rates. Both brands became successful by differentiating their products and grew to become significant players in their fields over the years.

The success of differentiation is in eye of the guest. A feature needs to be more than simply different. Guests need to value the feature for differentiation based on that feature to work. For example, it might make little sense for an all-inclusive resort hotel to offer no-charge faxing and photocopying as a differentiating feature, because this feature would probably not be relevant to vacationing leisure guests. On the other hand, a hotel offering �one-minute check-in after 3 P.M. or the night is free� to loyalty program members might find that its time-pressed business travelers highly value this feature.

The most frequently applied differentiation strategies build on unique features, level of services, location, and brand affiliation.
Unique Features. If a hotel has a unique feature that can be successfully exploited to differentiate it, marketing communications can be built around that feature. Some hotels can be considered one-of-a-kind because of their unique locations or architecture, such as historic hotels converted from ancient buildings (castles, chateaux, palaces, monasteries, manors, etc.), underwater hotels, ice hotels, atrium hotels, and hotels on any theme from an Egyptian pyramid to Venetian lagoons to rock and roll.

If the hotel is not unique as a building, it may still develop unique amenities. A hotel may have the largest water slide in town or the only ice skating rink in a desert location. It may be the only hotel inside a baseball stadium with a field view or the place with the most famous musical dancing fountains, the best gym, or the smartest and fastest elevators. Any of these could be a unique selling point. Several years ago, Starwood Hotels and Resorts upgraded essential amenities to gain successful differentiation. This multi-brand corporation began its campaign after a commissioned sleep study concluded that many guests have unsatisfactory sleep experiences in hotels. Starwood launched the Heavenly Bed�top quality mattresses and bedding upgrades�at its Westin Hotels brand. The successful differentiation led to similar initiatives at other Starwood brands (such as the Sweet Sleeper at Sheraton).
Some landmark hotels are so famous and prestigious that even a brand affiliation essentially becomes a subtitle (The Waldorf=Astoria New York, managed by Hilton, or The Savoy in London, managed by Fairmont, are such properties). The cachet of the name a landmark hotel has successfully established over the years can eclipse everything else. That can be the best source of differentiation, but it is also the hardest to earn.

Any unique feature not provided by default (like a location or architecture) can be difficult to earn, but once established, it can be the source of competitive advantage for years to come. Any hotel that can claim a unique feature is in a strong position to build on its unique value proposition through premium pricing and a high level of awareness that helps generate and sustain demand.

Level of Service. An extraordinary level of service can also be a differentiator. For example, some hotel chains have built a culture of service excellence. The challenges are significant. The approach to business must incorporate every facet of operations, from hiring to supply chain management. A high employee-to-guest ratio is one piece of the puzzle. Detailed attention must be given to the thread count of the chosen linens, the angle of pen placement on the note pad, the temperature settings in guestrooms, and the maximum number of rings allowed when answering a call. In every guestroom, consistent quality must be delivered every day. Individualized �high touch� services are offered, and empowered employees never settle for a compromise in the pursuit of perfection, whether it concerns a meal, a floral arrangement, or a last minute ticket request for a sold-out event.

Service-related differentiation may not always be so resource-intensive. Pet-friendly hotels offer a service that typically does not require extensive investment, even when providing special menu and room service for pets. This differentiation can matter a great deal to some market segments.

There is an emerging category classified as select service that is somewhere between full service and limited service. The intended differentiation targets business travelers who may not need the whole range of services offered by a traditional full-service hotel, but who need more services than a limited-service hotel traditionally offers. This service category offers value for the traveler through hip design, high-end technological amenities, and selected food and beverage service to meet the needs of emerging customer segments. These brands (for example, Four Points by Sheraton, Holiday Inn Express, Hyatt Place, Element and Aloft from Starwood) in many cases use the halo of a well-established �mother ship� brand. The lower investment requirements help to take certain brands down-market and make them feasible options for interested franchisees. In smaller markets where a full-service hotel is not financially viable, a select-service operation with streamlined food and beverage services may be the best fit.

Location. A prime or unique location can provide a highly valuable point of differentiation in markets with high barriers to entry. The airport hotel inside the terminal building, the closest hotel to a main attraction (festival site, museum, theme park, etc.), the best ocean front among other resort hotels, and the hotel right on the slopes at a ski resort will (other things being equal) generate higher revenue than competitors in less favorable locations.

As many hotels have learned over the years, the factors that determine whether a location is prime or not can change over time. Many one-time prime locations have become secondary over time for a variety of reasons. Hotels built near railway stations in the heart of a city have often suffered when the station relocated. For that matter, hotels near railway stations also lost a lot of their business when people began to travel primarily by automobile. U.S. hotels on important roads through towns and cities lost a lot of their business when the interstate highway system begun in the 1950s bypassed them and traffic volume dropped deeply on what came to be considered the old country roads. A fine seashore resort can be badly damaged by hurricanes, or a city famous for top-notch entertainment and fine cuisine can lose its market position as a favored destination after a tragic flood, as the industry has witnessed in New Orleans. These examples are humbling reminders that even the advantage of a prime location cannot be taken for granted.

Some locations offer such unique differentiation that a hotel can become an attraction in itself. Examples include under the sea in Dubai; high on the cliff wall of an ancient volcano on the Greek island of Santorini; deep in the Canadian wilderness on a lake accessible only by float plane; on a tiny private coral island in the Maldives; in the heart of Paris just steps away from the sights; or right on Times Square in New York City. These locations offer the highest barriers to entry for any possible competitor.

Brand. A brand name can help a hotel differentiate itself from competitors. A successful brand can be the source of quantifiable competitive advantages. Most branded properties outperform non-branded ones as a result of premium pricing and efficient central reservation systems. Brands tend to have more resources for promotions and for efficiently managing their distribution channels. As the commercial lodging industry is a very competitive one, successful brands can be significant factors in revenue maximization. The brand recognition a flag can bring to a hotel will help the guest know what to expect in terms of price level, service quality, amenities, and other product attributes.

Branding is prevalent in the lodging industry. Single- and multi-brand hotel companies capitalize on this marketing trend and continually create new brands to cater to changing lifestyles and consumer preferences. Some brands own and operate their properties, but franchising and management contracts have become the preferred methods of brand growth. Under both the franchising and management contract business models, revenue generation is the key source of financial viability. As a result, revenue management has become mission critical for each stakeholder.

For hotel property owners who consider acquiring a brand through franchising, the main considerations are the advantages gained through brand recognition and the sales and marketing support a brand would deliver.

For property owners who consider finding a qualified manager to run the operations, the main consideration is creating a management contract that aligns the interests of owners and managers. In the earlier days of management contracts, the contracts often favored the management company. By the 1990s, owners and their representatives (known as asset managers) began to effectively negotiate contracts in a way that better aligned the parties� interests. Some management companies (known as first-tier or branded management contract companies) offer a brand of their own, while others (known as second-tier or unbranded management contract companies) may manage properties under many flags. First-tier companies offer the power of their recognized brand, efficiencies on the cost side based on their supply chain management systems and volume discounts, and impressive revenue potential through multi-channel distribution systems. Second-tier companies can�t provide the added benefit of a proven hotel brand, so hiring them will not produce any extra cachet that could translate into premium rates, but an owner may have more negotiating power and can exert more influence on balance. Owners who hire second-tier management contract companies may also decide to purchase a franchise or to use other branding options, such as referral organizations or marketing alliances (Best Western Hotels, Leading Hotels of the World, Relais & Chateaux, Small Luxury Hotels of the World, etc.).

Brand penetration in the hotel industry varies significantly on a global scale. In the United States, more than over 70 percent of the hotels are branded. In Canada, the ratio is around 40 percent. France has the highest brand penetration in Europe, where about 25 percent of hotels are flagged.

This is an excerpt from �Revenue Management: Maximizing Revenue in Hospitality Operations,� published by the American Hotel & Lodging Educational Institute (EI). The book is available for $75.95 ($45.95 for AH&LA members). For information or to order, visit www.ahlei.org or call 800-752-4567 or 517-372-8800. Outside the U.S. and Canada, please call 407-999-8100.