Dr. Kimes

Revenue Management

Total Hotel Revenue Management

By Sheryl E. Kimes, Professor of Operations Management, Cornell University School of Hotel Administration

Rooms revenue management (RM) has been around for the past 25 years, has been widely adopted and has led to rooms revenue increases of 3 - 5%. Rooms RM systems and practices have increased in sophistication over the years as hotel operators and consulting companies have sought to fine tune the way in which they maximize revenue.

It is not surprising that hotel RM practices started with guest rooms since rooms revenue constitute 70 - 80% of all revenue for full-service hotels. In addition, the high profit margin associated with rooms makes it a strong candidate for RM since maximizing revenue is essentially the same as maximizing profit. But, what about the other 20 - 30% of hotel revenue? Would it be possible to apply RM principles to it?

In a study I did on the future of RM in 2010, I asked respondents a number of questions including what they thought RM would look like in the future and in which other parts of the hotel they thought RM would be applied. Respondents felt that in the future, hotel RM would be more strategic in nature, would be more technology-enabled and that it would encompass all parts of the hotel. The respondents identified function space and restaurants as the most likely candidates for future applications of RM.

The key questions that arise from this are (1) is this possible to do and (2) if so, how should hotels go about doing it? The answer to the first question is a resounding YES! RM principles are essentially the same, no matter what the industry. Think about Robert Cross' classic definition of RM ("Sell the right space at the right price at the right time to the right customer" so as to maximize revenue). With guest rooms, we define space as the guest room and define price as the room rates we charge and the pricing strategies we follow. We define time as when people book their reservations and how long they stay and define Customer as the market segment. When applying RM principles to other industries, think about how these definitions would be altered.

For example, while with rooms RM we define space as the guest room, with function space, space would be defined as the number of square feet of meeting space we have to sell and with restaurants, space would defined as the mix of table-sizes and seats.

With time, rooms are typically sold for a night. Function space is usually sold by day-parts. Restaurants are a bit trickier since we don't normally rent the table by the hour, but we do know about how long customers will stay. Another issue that comes up with time is when (or if) customers place their reservation requests.

Price is determined by the mix of prices offered and the pricing strategies deployed. With rooms, price takes the form of the room rates we charge; with function space, price includes not only the revenue that we obtain from space rental, but also any ancillary revenue from F&B, AV and other sources; and with restaurants, price comes from the variously priced F&B items that we have on our menu. Customers are normally separated by market segment and price sensitivity regardless of where RM is being applied. The key challenge here is determining which market segments to use and figuring out how which methods and distribution channels to use to reach those segments.

Performance Measurement

We generally use RevPAR to measure hotel room performance, but how could the performance of function space and restaurants be measured? Think back to space, time and price. For function space, performance can be measured by revenue per available square foot (RevPASF); for restaurants, it can be measured by revenue per available seat-hour (RevPASH). Having these sorts of metrics would allow you to compare the performance of various types of function space and by comparing the performance of your different restaurants.

For example, you may find that the RevPASF for your small meeting rooms is higher than that of your ballroom. This could be a sign that you should consider reconfiguring your space and adding more small meeting rooms, that you should have your sales force work on generating additional business for the ballroom or even that you should consider increasing the rates for small meetings.

Or, with restaurants, you may find that the RevPASH from one of your casual dining restaurants is higher than that of your fine dining restaurant. This could mean that you might want to consider converting the fine dining restaurant into a more casual concept, that you might want to focus on getting more customers for the fine dining restaurant or that you might even want to increase the menu prices in the casual restaurant.

Like RevPAR, RevPASF and RevPASH can be calculated by day; but unlike RevPAR, RevPASF and RevPASH can be calculated by day part (in the case of function space) or hour of day (in the case of restaurants). This level of detail can provide great operational and marketing insights by helping you better understand your busy and slow periods.

For example, if you find that your ballroom has a higher RevPASF on weekend afternoons than weekend evenings, you could focus on developing additional business for the weekend evenings, reconsider your pricing structures or reconsider your target market. Or, if you find that one of your restaurants has a higher RevPASH for weekday lunches than weekend lunches, you might want to consider trying to build demand for your weekend lunches or be sure to streamline your service delivery process during the week so that you can serve as many guests as possible.

Competitive Performance

A large majority of US hotels use STR reports for assessing their competitive hotel room performance. The RevPAR index, rank and growth rate have become key performance metrics for many hotels, asset managers and owners. By comparing your hotel's revenue per available room night to that of your competitive set, you can tell if you're doing better or worse than the competition.

The RevPAR Index is found by dividing your RevPAR by that of your competitive set. An RevPAR Index great than 100 indicates that you are performing better than our competitive set; while a RevPAR index lower than 100 indicates that you are performing below your competitive set. For example, a hotel with a RevPAR index of 110 has a RevPAR that is 10% higher than that of its competitive set; while one with a RevPAR index of 85 has a RevPAR that is 15% lower than that of it competitive set.

STR will be releasing a new series of reports on F&B this fall. In the report, they will provide competitive performance data for function space, restaurant outlets and in-room dining. Hotels will provide information on the number of square feet in their function space and the number of seats in their restaurant outlets. Participating hotels will provide STR with a monthly report on their function space revenue (food, beverage and other), their restaurant venue revenue (food and beverage), the number of customers served in their restaurant venues and their in-room dining revenue (food and beverage).

The STR F&B report will compile this data for participating hotels and their designated competitive sets and provide information on revenue per available square foot (for function space), on revenue per available seat and revenue per customer (for restaurant venues) and on revenue per occupied room (for in-room dining). In addition, numbers on F&B revenue per available room will be provided. All of this information will be shown for not only the participating hotel, but also for the aggregate of its competitive set.

The format will be similar to that of the traditional rooms STR report in that indices, percentage changes and ranks will be provided. By using this sort of information, hotels will be able to gauge how their function space and restaurants are doing compared to their competitive set. This information will prove useful to not only the hotels, but also to asset managers and owners.

For example, think of your function space. What would you do if you found that your Revenue per Available Square Foot was $10, while that of your competitive set was $12? Perhaps your competitors have better function space, but it seems that they're renting their space more frequently and perhaps at a higher price. Maybe their marketing is better targeted than yours or perhaps their sales team is more effective than yours. Obviously, the reasons for your performance will vary, but you can rest assured that your owners or GM will be asking you questions on what you plan to do about it.

Similarly, what if you found that for your restaurants, that your Revenue per Available Seat was $200, that your Revenue per Customer was $40 and that both had increased by 10% since the previous month. That's good news, but what if the Revenue per Customer for your competitors increased by 20%? Perhaps they raised their menu prices, but maybe they're doing a better job with menu design or suggestive selling? In any case, you will most probably be asked why this happened and what you plan to do about it.

Conclusion

Clearly there is great potential for the application of RM principles to the non-rooms portions of your hotel. As a start, think about how you would define space, time and price for a few of your revenue-generating departments. What methods and distribution channels do you currently use to attract guests to these departments? Once you've done that, think about how you could measure performance and what actions you can take to improve performance.

Finally, if your hotel already uses the STR reports, seriously consider subscribing to their F&B Report. This would give you an excellent gauge of how your function space, restaurants and in-room dining are stacking up again those of your competitors. And remember, rooms revenue only represents SOME of your revenue. Once you start thinking about how to apply RM to the rest of your hotel, you'll be pleasantly surprised at the result.

Sheryl E. Kimes is a professor of operations management in the School of Hotel Administration at Cornell University. From 2005-2006, she served as interim dean of the Hotel School and from 2001- 2005, she served as the school’s director of graduate studies. She teaches courses in restaurant revenue management, advanced revenue management, service operations management and advanced hospitality operations management. Dr. Kimes's research interests include revenue management and forecasting in the restaurant, hotel, and golf industries. Dr. Kimes can be contacted at 607.255.3692 or sek6@cornell.edu Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:
Coming Up In The September Online Hotel Business Review




{300x250.media}
Feature Focus
Hotel Group Meetings: Blue Skies Ahead
After a decade of sacrifice and struggle, it seems that hotels and meeting planners have every reason to be optimistic about the group meeting business going forward. By every industry benchmark and measure, 2017 is shaping up to be a record year, which means more meetings in more locations for more attendees. And though no one in the industry is complaining about this rosy outlook, the strong demand is increasing competition among meeting planners across the board – for the most desirable locations, for the best hotels, for the most creative experiences, for the most talented chefs, and for the best technology available. Because of this robust demand, hotels are in the driver’s seat and they are flexing their collective muscles. Even though over 100,000 new rooms were added last year, hotel rates are expected to rise by a minimum of 4.0%, and they are also charging fees on amenities that were often gratis in the past. In addition, hotels are offering shorter lead times on booking commitments, forcing planners to sign contracts earlier than in past years. Planners are having to work more quickly and to commit farther in advance to secure key properties. Planners are also having to meet increased attendee expectations. They no longer are content with a trade show and a few dinners; they want an experience. Planners need to find ways to create a meaningful experience to ensure that attendees walk away with an impactful memory. This kind of experiential learning can generate a deeper emotional connection, which can ultimately result in increased brand recognition, client retention, and incremental sales. The September Hotel Business Review will examine issues relevant to group business and will report on what some hotels are doing to promote this sector of their operations.