By Jean Francois Mourier 
July 22, 2010

This article is the first in a series addressing best practices in the area of hotel revenue management. 

Revenue or yield management in hotels is a practice that has evolved significantly in its relatively short history.  Adopted by hotels in the late 1980s, after the airline industry demonstrated great success using inventory, capacity and pricing to ‘manage’ revenue, revenue management has become one of the most integral and identifiable aspects of hotel operating strategy.  Yet perhaps understandably, today’s brand of hotel revenue management differs significantly from that of two decades ago.  Changes in the general approach to revenue management, pricing strategy, channel management, inventory allocation and the use of information as pertains to revenue management have redefined the field.
 
Just as detailed historical analysis might have represented best pricing practice in the early 1990s, stock market-influenced algorithms reside on the cutting edge of today’s pricing thought.  Similarly, the emphasis on occupancy or average daily rate that might have dominated revenue managers’ attitudes two decades ago has given way to the primacy of revenue per available room (RevPAR).  Examples like this abound, and in the next couple of columns we’ll be sharing all of our revenue management expertise with our readers, in a series that examines the current best practices of revenue management. 
 
Today’s article looks at pricing and overall revenue management approaches, while the next article will focus on channel management and inventory allocation, and the third and final article in the series will deal with the role information plays in revenue management today, and the best practices associated with harnessing that information to best effect.
 
Strategic Pricing
Pricing is an aspect of revenue management that features several intriguing and innovative developments in recent years.  While pricing has always been a significant driver affecting both occupancy and RevPAR, in the current environment of unprecedented price transparency, rates have assumed an even greater role.  Determining the optimal rate to present to a potential customer has therefore become one of the single most important aspects of revenue management.  The fundamental fact that the right rate- one that attains the balance between simulating enough demand to maximize occupancy, while not leaving money on the table in the form of too-low ADR- is the key to a successful revenue management strategy makes pricing perhaps the most important aspect of revenue management.
 
The question then becomes, how can a hotel determine what an optimal rate should be at any given time?  In times past, this would hinge on historical analysis and be computed by applying a discount to a predetermined rack rate.  In this basic form, the aims of revenue management are barely met, and in today’s environment they cannot provide an adequate competitive advantage.  Rather, the best revenue managers and revenue management systems rely on stock market principles to formulate complex algorithms that can generate with accuracy the optimal rate.  Furthermore, these systems work in real time, making subtle adjustments at brief intervals of time to maintain the best rate.  The two best practices at work here are automation and an advanced algorithmic approach to pricing.
 
Stock Market Pricing
The principle of optimum pricing is familiar to financial experts, particularly those that work with commodities.  For hotels, it’s a less familiar concept, but there is no reason this should be so.  High-performing hotels utilize a comprehensive revenue management system that sets prices based on both historical considerations and current market conditions, giving it twice the range of more traditional pricing strategies.  These systems mirror similar systems in place at financial companies.
 
Most financial price-setting formulae utilize two decision makers to ensure the highest level off effectiveness, with one system correcting and accounting for the other.  Sophisticated hotel revenue management programs do the same thing. A hallmark of these innovative revenue management systems is dual programs: a main program and a secondary program.  The main program generates rates based on historical data, taking into account page positioning on online sales channels, competitors’ rates, inventory availability and other variables, and implements them across the sales channels.  The second program monitors the first program in terms of effectiveness, and makes adjustments accordingly.
 
This process, a mathematical generator coupled with an efficacy-driven monitoring program, is the foundation of every neural network employed by large trading firms. Because the two programs work off of one another, the system as a whole becomes adaptive.  It is this adaptive nature of such revenue management systems that enable them to consistently outperform traditional revenue management techniques, and that truly highlight the advantage of applying stock market principles to hotel revenue management.
 
Automation
The innovative nature of the above systems and all of their algorithmic and computational power would be wasted without a significant measure of automation.  Automation is the best practice that often makes or breaks a pricing strategy or the pricing aspect of a revenue management system.
 
Determining which channel is selling inventory fastest is usually a minute-to-minute decision, and that determination is best left to an automated system. Moreover, an automated RMS of the appropriate sophistication makes those decisions with less information than a human revenue manager.  An algorithm-based computer program can recognize, by combing through data faster and by extrapolating trends and tendencies with less raw input, which channel is performing best, and allocate inventory there at the appropriate price.  This can- and should- happen automatically; those hotels that incorporate a high degree of automation into their revenue management systems can be said to be exhibiting an industry best practice.
 
General Approaches to Revenue Management
As changes in approach to revenue management have flourished in the past few years, those approaches that work best have distinguished themselves as a special sort of best practices.  The best approaches to revenue management in general are those that use RevPAR as the dominant metric, and those that emphasize the usage of revenue management systems to enhance revenue managers’ efficacy, rather than making revenue managers take control of the never-ending calculations and pricing updates.  In hotels displaying RM best practices, revenue managers think proactively, not reactively and focus more on optimizing processes and working with other sales/marketing teams to develop and implement long-term pricing strategies.
 
RevPAR
At the dawn of revenue management, occupancy was the metric of the moment. The mantra of ‘heads in beds’ was on the lips of every general manager and hotel owner, with the rationale being that higher occupancy inevitably led to more revenue.  That approach has changed significantly, and continues to evolve. 
 
New metrics of the moment crop up every day, with various analysts and experts touting ADR and even exotic constructions like GOPPAR (gross operating profit per available room) as the best yardstick for determining revenue management efficacy.  The best measure, though, remains RevPAR; a hotel that uses RevPAR as the guiding goal for a revenue management strategy is a hotel that is exhibiting the best approach to revenue management.
 
RevPAR remains the only revenue management metric that a hotel can literally “take to the bank”- and as such keeping RevPAR at the forefront of any revenue management strategy is a best practice in the industry.
 
Revenue Management Systems
There is a latent distrust of revenue management systems among some hotels (and some revenue managers), driven by the fear or assumption that a comprehensive RMS - one that handles aspects of pricing, channel management, inventory management and distribution- cannot perform as well as a trained and talented revenue management team.  The best hotels, however, have embraced RMS as technological enhancements to existing revenue management teams, an advancement that frees key personnel to work on productive, revenue-generating tasks rather than the minutia of revenue management maintenance. 
 
Fully-function RMS that interact with property management systems and perform all of the tasks outlined above have become indispensible to high-performing hotels both of the large-chain variety and among forward-thinking independent properties.  The use of such systems has become a best practice in the industry.
 
Each of these best practices- using stock market principles and systems as the basis of a pricing strategy, executing that pricing strategy with automation, approaching revenue management through a RevPAR lens, and placing an emphasis on comprehensive RMS systems- is in use at many of the best performing hotels in the US and around the world.  Moreover, each of these practices can be implemented for any hotels that wish to establish a competitive advantage in their markets.  Both pricing and general approach to revenue management are inescapable aspects of the field, and of overall hotel operations, and so emulating these best practices should become an imperative for any hotel seeking positive growth.
 
Be sure to return for Jean Francois Mourier’s next best practices article which will examine channel management and inventory allocation, two incredibly relevant components of revenue management in the internet age.

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Jean Francois Mourier is CEO & Founder of RevPar Guru, a company that has developed an alternative type of revenue management and real-time pricing solution (combined with automated online distribution) to help hotels maximize occupancy and increase their profits. The company’s Yield Dynamic Price Engine, an integrated revenue management and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving managers more time to run their hotels. You may reach him through www.revparguru.com or by calling +1.786.478.3500.