Four Steps to Getting There

by Bernard Ellis

Technology is often blamed for raising the biggest barrier to embracing a "total revenue management" approach. But chances are that you have systems in place that are already up to the task, if only you would set them up to succeed. You may need to make PMS configuration changes and refine certain business practices, but it will be more than worth it.

It seems like every time RevPAR growth slows down, as it is now in the US, hoteliers instinctively turn first to investigate their revenue management systems, which surely must have blown a fuse or broken a fan belt or something. Upon finding that data was flowing, optimization was happening, channels were booking, and all was generally humming, the next in line for blame is the revenue manager. After being chided for overriding the system too much, he or she now is under suspicion of being asleep at the revenue management switch. Then out comes one of the greatest peacekeepers of all KPIs: "the RevPAR Index," which indicates whether the hotel got its fair share of the available demand in the market, lost share to its competitors presumably due to being overpriced, or stole share from them, hopefully by undercutting them just enough to attract all the bookings away like a magnet. With RevPAR Index Report in hand, the revenue manager can once and for all prove that, even though demand has fallen off for the whole market, he or she still won the game.

If the RevPAR Index didn't tell a good story, then just start over at the beginning with the RMS again. Only after few of these iterations do hotels then face the fact that, no matter how they made out in the RevPAR Index game, RevPAR growth is going down for everybody-not RevPAR–just its growth. And finally, when the sad moment arrives when RevPAR itself starts to slip, then, and usually only then, will hotels start to ask themselves the question, "Why are we only looking at rooms?" Our gaming colleagues face an analogous challenge as a new generation of players brings a much lower theoretical loss than their parents and grandparents: "Why are we only looking at theo?" Even resorts with plenty of diverse revenue streams may find they've been too enamored with one type of revenue, whether it be greens fees or lift tickets. The thinking is often, "If you get that right, everything else is gravy." That is, until you don't, or can't, then suddenly gravy becomes the new meat. Before we find ourselves mired in the unpleasantness of a mixed metaphor, let it suffice to say that "the secret is in the sauce" and has been all along. By looking beyond just the primary revenue source, a "total revenue management" approach can boost hotel profitability even in the face of flagging RevPAR.

What is a total revenue management approach? It can have several components:

  1. Don't just look at room rate when deciding what business to accept, but also at the ancillary revenue that each segment typically brings as well. When room rates start to stagnate, holding out for demand from the segments which drive more ancillary revenue is a great way to shore up profitability.
  2. Don't just forecast room revenue, but also other revenue categories as well. You may already be achieving optimal results during busy times, and should focus your quest for growth on shoulder nights and other slower periods.
  3. Don't just consider the capacity constraints on your room inventory, but also in your F&B outlets, spa, golf course, anywhere where there is more demand for a facility than you have ability to accommodate it. Do you have the ability to drive higher prices during peak times, or to siphon business to slower times through promotions, versus losing it altogether?
  4. Don't ignore the contribution margins of different types of revenue. Just as distribution costs should guide your room revenue strategy, so should the costs associated with delivering ancillary revenue, such as the real cost of food, spa products, and labor which are provided.

"Oh, if only our revenue management system could handle it," most hoteliers will lament. And many will be right. But many will be dead wrong, certainly the EzRMS users, not realizing that the very same revenue management system they lean on for RevPAR could be executing a total revenue management approach for them, but may not have been configured to do so amidst the whirlwind of change management that accompanied the initial implementation. Rather than wait until RevPAR not only stops growing but starts sliding, why not get ahead of this now? Here are some things you can do now to make sure you and your system are well prepared for a total RM approach.

Take Out the Garbage We've all heard the saying "garbage in, garbage out" more than enough times. But PMS-RMS interfaces can sometimes take it to a new level, when interfaces that worked just fine in testing mysteriously produce intermittent discrepancies in a live environment. Often the discrepancies are too small to have a material effect on the room demand forecasting, but don't count on that carrying over to ancillary revenue, which usually has a smaller sample, and greater swings. So before you embark on a total revenue management approach and turn a small problem into a big one, work with your PMS and RMS providers to get to the bottom of your interface hiccups. You will need to stay involved, because most discrepancies result from inconsistent business practices being followed by your reservations, front office and night audit teams for things such as the following:

  • The use of composite room types to book suites, versus booking component rooms individually.
  • The handling of rate code or market code changes mid-stay.
  • How and when no-show charges are billed.
  • Orphaned share-with reservations that require adjustment.

Even when a policy is well documented, new employees can often introduce a new business practice simply because that was how it was done at their last place of employment. All it takes is one or two employees doing something intermittently, to cause all confidence to be lost in a perfectly functioning interface, preventing any thought of expanding its role.

Pass the Buckets Revenue buckets that is, which typically come from your property management system, and are groupings of multiple of revenue codes. Why not just go down to the code level? Because even worse than its rate codes, a full service hotel's PMS revenue codes can number in the hundreds, having long ago blown past the 99-code maximum imposed by some early PMS', and now often bumping against the modern limit of 999 which is still in place for report formatting purposes. Besides being quite large in number, revenue codes highly differ in how much revenue they contribute. How are those postage stamp sales going? What's worse, they can be some of the least standardized, thanks to our industry's fragmented owner/operator structure and the frequent comings and goings typical of many hotel portfolios. How deep of a dive should this total RM approach take anyway?

Our colleagues in finance face this complexity without fear, because most PMS' provide a mapping table to allow each revenue code's totals to be exported directly to the right general ledger account. But whether that chart of accounts was dictated by USALI or some other accounting standard, it was probably not defined with revenue management's needs in mind. What about Hotel Flash Reports, which certainly don't itemize hundreds of totals? No, but these reports usually follow a brittle, manual report writer definition of what revenue codes should be included and combined, according to the GM who happened to be in place during the original implementation. And as with the G/L, its purpose isn't terribly forward looking.

So then what? Well did you know that most property management systems allow you to define another set of revenue buckets, as many as 15 or 20, which can be used to take those hundreds of revenue codes and combine them into more meaningful categories? Don't feel bad if you didn't–they are often hiding behind default values of "Room, Food & Beverage, and Other." When your PMS was installed, there was likely no CRM or RMS in place yet. If the controller and GM were both happy, why would a PMS installer introduce unnecessary complexity of revenue buckets? And, who would he or she ask to define them?

Today, your marketing and revenue managers should hopefully be fighting over them. Your hotel may use a system which now provides a 360-degree view of the guest, detailing his past stays and spending totals by category-you guessed it, usually "Room, Food and Beverage, and Other." This is certainly great for general guest valuation, but is practically useless for getting to know more about the guest's interests, and how to target future offers. Your marketing and revenue managers have yet another opportunity to align their goals by defining revenue buckets that meet both of their needs. Here are some criteria to use when defining buckets and the revenue codes of which they will be comprised:

  • Will the bucket contain enough revenue to be worthy of analysis?
  • Do the revenue codes generally exhibit similar forecasting behavior? For example, greens fees and pro-shop revenue are likely to track together, as are spa and salon, but meeting room food & beverage should not be lumped in with a la carte outlets.
  • Do the revenue codes generally coincide with customer preferences, and lend themselves to similar marketing campaigns? For instance, those interested in spa may not be as interested in food and beverage or golf. Even if they tend to track together for forecasting, you should still break them out to enable CRM, and identify any patterns that may have evaded the human eye.

The bucket definitions should NOT be influenced by:

  • The commissionable status or tax treatment of its revenue codes.
  • Whether an outlet generating the revenue is operated by the hotel or leased.
  • A hotel's organizational structure.

There are other means to categorize revenue for these purposes, and the targeting of offers can also take them into account. But the result of your new bucket structure should be the ability to capture a more meaningful picture of what revenue was contributed by both market segments and individual guests.

Don't Lose the Breadcrumb Trail When an in-house guest spends money in one of your outlets, but pays by cash or credit card instead of charging it to the room, you have lost the ability to connect him or his market segment with that revenue. Some methods of linking transactions with a matching credit card number showed promise, but in the age of tokenization, they are no longer precise enough. Point of sale interfaces can query for and display a guest profile, but usually don't link transactions to it unless a room charge is posted. That assumes of course, that the outlet cashier will look up the guest profile in the first place, when a credit card has been presented. All that preference data that's been stored regarding food preferences and allergies? Most of that surfaces after it's too late – when the server or cashier is validating the guest's ability to charge to his room.

To set yourself up for a total revenue management approach, not to mention provide better service, train your staff in all outlets to ask every customer to identify himself as a hotel guest or not, right upon entering the outlet, so he or she can access the guest's profile, and take advantage of whatever functionality the POS allows to open a check against it, and view the guest's preferences to guide service. Yes, this is common practice, but is it your hotel's practice? And when it comes time to pay, try to take away any reason why the guest wouldn't charge it to his or her room. It's usually because the purchase isn't something that will be reimbursed by their company, and besides that, there's no need for anyone there to see that he hit the spa during the conference. Make sure outlet staff are well versed on the PMS' capabilities to create multiple folios for incidentals and to even route future similar charges to them automatically, so that they can assure guests that their bill can be split however they need it, as well as use different forms of payment.

Remember That Good Things Come in Packages One definite revenue management shortcoming that ancillary revenue has is that, unlike room revenue, it is often not booked in advance. This makes it difficult for your revenue management system to use booking pace as an indicator of whether demand for that revenue type will be higher or lower than it has been historically. Some resort call centers do a great job of booking more elements of the guest stay during the initial booking, but most hotels, even resorts, don't, citing the difficulties raised when the guest modifies or cancels his reservation. And if your systems are not integrated to support a single guest itinerary, this is an extremely valid concern.

But just because you don't want to reserve it doesn't mean you shouldn't sell it. Instead, use pre-built package rates, as well as whatever functionality your booking systems offer to create packages on the fly, to pre-sell ancillary revenue types. It's your best differentiator against OTA's who don't have access to book those on-property amenities, and it might prevent cancel-rebook behavior as well. The package must be specifically defined enough for the system to know what kind of ancillary revenue to expect, and ideally on which nights of the stay. The earlier the system can get a sense of how much demand there is for certain kinds of ancillary revenue, the more accurate its forecast will be.

If you get these practices in place today, you-and your system-will be well prepared to take a total revenue management approach long before softening ADR's force you to.

Reprinted from the Hotel Business Review with permission from