Background: Hotel Revenue Management
Have you ever heard of revenue management? Well, if you are working in the hospitality or airlines industry most probably yes. However, if this is the first time you hear of it, that’s your lucky day!
To summarize what revenue management is about: it is a technique to optimize revenue from a fixed, but perishable inventory. Its main challenge is to sell the right products to the right customers at the right time for the right price and via the right distribution channel (that’s a lot of “rights”, right?)
It has been launched in the airline’s industry in the 1980s and step-by-step was introduced in the hotel industry. Today, revenue management is a common practice in these two industries and is now extended towards other fields such as Retail, Food & Beverage and a lot of other industries.
Have you ever wondered why the price changes when you look for a flight ticket one month before departure and when you look two days before departure, there is a totally, very often a more expensive price? Well, here you go that’s revenue management.
Yes, there may be a lot of extended analytics, algorithms and science behind all of this, but let’s learn to crawl before we can run. And actually, anyone can apply basics techniques in any businesses.
Here Is How We Do It:
1. Monitor and collect data
As basic as it seems, this is the very first step in any “revenue optimization” strategy and most probably the most efficient. Monitor your performance. Not only track your income revenue but track your expenses, the dates, customer satisfaction, even the weather if you can! Track and collect as much data as you can, it will help you later draw some correlations between the different sources of data or anticipate your performance more accurately.
Sources of information can come from anywhere: your POS (Point Of Sales), PMS (Property Management System) but also from your website (Google Analytics) or any sources online that you have access to.
Again the more information you are collecting on an hourly, daily, monthly and/or annual basis, the better prepared you will be to understand what’s going on, adjust quickly and increase your performance.
2. Forecast your performance
Many advanced techniques could come into play here, such as the one below:
Delphi, Market research, panel consensus, visionary forecast, historical analogy.
Time Series Analysis & Projection
Moving Average, Exponential Smoothing, Box-Jenkins, X-11, Trend Projections.
Regression model, Econometric Model, Intention-to-Buy & Anticipations Surveys, Input-Output Model.
Each of these models could be the topic of one full article and we could debate the accuracy and efficiency of each model in great length. But here again, let’s keep it as simple as possible. I will recommend looking at 2 models in specific: the Regression model (relationships between variables) and the easy (but efficient) Moving Average.
We will not go in details of how to calculate both of these models here, but the main idea is to ask yourself what your performance will be in a few days, weeks, months ahead, in order to anticipate movements, adjust strategies/pricing accordingly, as well as plan accordingly (staff, supply, cash flow, marketing expenses…).
For example this basic situation: Mr Ong has an ice cream business, We have seen historically that a 1 degree Celsius increase in temperature, increases the sales of ice cream by 10%. Therefore if the base revenue performance per day is around 10’000$ for a temperature of 20 degrees, Mr Ong can expect to sell around 11’000$ if next Monday’s temperature reaches 21 degrees.
You get the idea.
3. Price dynamically
Now that you are collecting data, monitoring your performance and forecasting your future activities more (or less) accurately, it’s time for actions!
You have seen and recognized in your data some patterns that are coming back at a regular interval (seasons and/or demand fluctuations). Let’s take this insight as an opportunity to adjust your rates and drive more revenue. In the hotel industry, we are aiming to increase the RevPAR (revenue per available room), which is a combination of ADR (average rate) and occupancy (the number of rooms sold versus the total number of rooms available at the hotel).
By understanding the relationship between these two elements (RevPAR = ADR x OCC%), as well as remembering your economics 101 from high school (Demand / Price / Supply), you can easily understand that you must decrease your rate to increase the demand, therefore:
– Anticipating a high demand day -> focus on ADR (increase rates to control demand and drive more revenue)
– Anticipating a medium demand day -> focus on balancing both ADR/Occ% (maintain your usual rates)
– Anticipating a low demand day -> focus on Occ% (decrease rates to increase demand and drive more revenue)
A practical example: Mr Ong has seen historically that his weekends (Fridays + Saturdays) are busier than his weekdays; therefore he has decided to increase his price by +10% on Fridays and Saturdays and decrease by -5% on weekdays to drive more business. This way Mr Ong drives more revenue in an entire week without any increase in expenditures or staff.
4. Create The right Revenue Culture
To achieve long-term success with revenue management, you need to have all your teams on board. Revenue managers behind their computer are not the one selling the hotel rooms, neither the one cleaning the rooms or servicing the guests in the hotel. Therefore, having a revenue manager who goes out there, talks to everyone and makes it fun for colleagues to try new approaches, experiments to drive a better performance is definitely key and a competitive edge for any organizations.
Make sure everyone in the organization participates in the revenue management movement (ask everyone to brainstorm new ideas to generate more revenue, reward staff upselling and make it fun for everyone!)
For the moment any computers systems, Artificial intelligence or machine learning can do that. Yes, all the hard skills (algorithms, pricing, forecast, …) can be replaced by machines but the soft skills (staff training, experiments, marketing decisions,…) of an experienced (and human) revenue manager cannot be replaced.
Revenue Management In Luxury Hotels
Revenue management is very important in any industry or at any hotel level and must be used to capture revenue opportunities on a daily basis. When it comes to revenue management in luxury hotels, the approach is slightly different.
There is an important factor that we didn’t discuss previously. We call it the price sensitivity of our customers or the level of importance buyers place on price relative to purchasing their criteria. While in upscale and lower-rated hotels, customers tend to have higher price sensitivity. They will choose where they stay depending on the price, in luxury hotels customers are less price sensitive.
The focus has now become on providing the best experience possible and matching guests’ expectations. Price becomes an indicator of quality and luxury.
Based on this, price dynamics shouldn’t be heavily fluctuating but should be rather consistent and in line with the brand it represents. For example: you wouldn’t see a Four Seasons selling for 50$ a night, you will think there was a technical problem behind this low price or the hotel is very (very) desperate to sell and there must be something wrong.
The approach to revenue management explained previously remains the same for luxury hotels however; guests services, creating the best experience and keeping rates consistent with the brands should be in the middle of all your decisions.
About The Author
About the author: Thibault Catala is the Managing Director of Catala Consulting , a firm specializing in revenue solutions for hospitality businesses big and small. Thibault is a former director of revenue for international hotel chains such as InterContinental Hotels Group in Europe and Four Seasons Hotels & Resorts in Asia. He has managed more than 100 millions in hotel annual turnover, and has overseen revenue management operations for multiple large properties.
Strategic hotel repositioning, revenue management consulting and interim, staff trainings and coaching have been numbered among his works.
Need help optimizing your hotel revenue? Contact us today and let’s schedule a call to see how Catala Consulting can help you optimize your revenue performance in your hotel, apartment or restaurant.
Article originally published on The Consultancy Group Blog