Mr. van Meerendonk

Revenue Management

The Total Revenue Performance Journey

Practical Revenue Management Tips

By Paul van Meerendonk, Director of Advisory Services, IDeaS Revenue Solutions

Total Revenue Performance is the intelligent calibration of demand across all hotel functions to meet overall business objectives. It is the ability to instantly and systematically decide which business to accept across multiple revenue streams at all times, based on greatest overall value to the asset. This kind of holistic approach to revenue management considers not only guest room rates or availability but also a myriad of other sources, including revenue streams across your business and other data, such as social media and sales data. Executed successfully, you can drive your revenue performance to whole new heights across your entire asset as you optimize all levels of your competitive positioning, pricing, and inventory management.

However, the journey toward Total Revenue Performance assumes that you are ready to expand the discipline of revenue management across your organization and use its principles strategically. And your readiness to embark on that journey means you've assessed your current revenue management processes and are applying best practices. This article outlines those practical tips for forecasting, pricing, optimizing and managing total hotel revenues, allowing you to determine your readiness for a Total Revenue Performance approach to your business.

Forecasting

  • Do Consider Data Beyond Unqualified Transient Demand

An unconstrained demand forecast is defined as the true demand for a particular product in the absence of any limitations such as when a room or seat is unavailable to purchase. The data and methodologies for unconstraining affect the entire pricing and revenue management process. When it comes to unconstraining the demand forecast, predictive models using only the unqualified transient data are generally considered to be not reliable. Unconstraining requires considering each and all of wholesale, group, corporate negotiated, and unqualified transient demands. This is what we call "holistic unconstraining."

  • Don't Include Regrets and Denials in Demand Forecasting

Most recently, hoteliers experienced claims about the use of regrets and denials data in demand forecasting. The claimed methods primarily source this data set from the booking behaviors captured from a hotel's main website (brand.com), without sufficient regard for the fact that brand.com can only be visible to a small amount of regrets and denials data that a hotel accumulates and is limited to the unqualified transient demand. Forecasting models that are based only on a fraction of the unqualified transient demand in fact disregard the demand for different market segments and/or additional channel behaviors.

Studies confirm that most guests use a variety of websites and meta-search engines to compare prices before they make their booking decisions. Therefore, this increasingly complex guest booking behavior makes it unclear when or if there is cross-usage of additional websites or multiple visits per guest that are unknown in the denial logic that hotels use to capture this type of data. That is primarily why leading data scientists of the world refer to regrets and denials as "dirty data." Use of regrets and denials may cause over-unconstraining of the demand data, which leads to over-protection of inventory and eventually to reduced occupancy levels.

Pricing

Do Sub-Segment Your Unqualified Demand into Independently Priceable Segments

Hotels segment their guests into many market segments. Each segment has its own requirements with distinct price sensitivities. Prices offered to different segments vary greatly. Many of these prices are pre-negotiated based on a qualifying criterion. On days when rooms are in high demand, hotels have to decide how to price demand that is dynamically priceable while controlling the availability for those segments that are pre-negotiated and yieldable. Hotels need to remain nimble and respond to unique requirements from a growing number of market segments.

Priceable demand typically comes to the hotel in form of "unqualified" customers. These customers are acquired via many sources or channels. While OTAs are an important channel, brand.com, and hotel direct continue to remain the dominant channels. Hotels need rate strategies and structures in place to price a "basic" standard room to be offered as a very competitive offer on OTAs and brand.com. They then need to sub-segment their unqualified demand into products that capture the premium packages with specific room-types, amenities, and add-ons that the guests value. These sub-segments should be priced independently based on guests' willingness to pay while maximizing profit or revenue as the case may be.

Independently priceable segmentation must consider the various combinations of market segments, room types and channel of acquisition in order to account for the cost of acquisition and cost to serve. For example, the cost of acquisition for OTAs is a function of revenue which varies by length of stay and room types. When going through this segmentation exercise, at a minimum, some average costs need to be factored in for each segment.

  • Don't Mistake Competitive Pricing with Price Scraping

Competitive pricing is a key aspect of hotel revenue management in today's dynamic marketplace. However, competitive pricing is sometimes mistaken by mere price scraping where some hotels base their revenue management and pricing strategies primarily on their competitors' prices. The obvious questions that comes to mind is what if your competitors' prices are not right? What if they are not truly reflective of the demand that exists for your products or what if they are not optimized for your guests' true willingness-to-pay for your particular offers?

While competitive pricing should take into consideration competitive rate shopping data, it also has to be based on a hotel's historical demand, cancellations, and no-show information available to drive forecasts. In the absence of these major components, a hotel would be missing major capabilities that are required to drive a decision based on available supply versus expected demand. A property that prices with just rate shops and on-the-books figures is still likely to determine what rates to open/close, and what rate to charge - manually. This has all of the limitations that human beings have in making such a decision: difficulty in assessing length-of-stay issues, inability to assess the probabilistic nature of demand (and cancellations), etc. So, even if these figures were sufficient on their own, you would still have a flawed decision process.

And then there is "matching." Matching is also an unreliable decision process for competitive pricing because it doesn't account for the expected demand for a specific property and the available rooms to sell for that particular property. Even if the competitor has chosen the optimal rate for their property, their optimal rate may not be your optimal rate because their available supply vs. remaining demand state may be very different.

For all the reasons stated above, hotel properties should rely on automated decision systems that incorporate competitor prices from rate shopping feeds as well as the price elasticity, demand forecast, and available capacity to determine the prices that will maximize their revenue. The state-of-the art systems today even permit users to specify their hotel's desired relative position with respect to their particular competitive set as well as folding a property's online reputation performance into their pricing algorithms.

Optimization

  • Do Put in Place Controls for Both Pricing and Availability

With constant increase in channel complexity and competitive pressures it is even more important for hotels to value their inventory using availability controls. Hotels that optimize their rates by both rate pricing and availability will outperform hotels that restrict themselves to managing pricing alone. Whether you are managing simple transient rates or controlling for complex length-of-stay interactions, setting appropriate availability controls in conjunction with rates can add significant value to your revenue management decisions.

  • Don't Settle for Pricing-Only Approaches

Hotels that use a pricing-only approach will leave money on the table because it's widely known that in the absence of availability controls, hotels cannot optimize rates effectively to maximize their peak and shoulder night business. However, there are other considerations to take into account when selecting a pricing strategy, for example, what other demand elements influence pricing a specific inventory? Hotels must also understand granularly, how much room inventory is left to sell of the specific inventory, the price sensitivity coming from all different booking channels, and how the demand is distributed in terms of arrivals and length-of-stay.

Contracted rates are an interesting example of the limitations of "pricing only" approaches. A pricing-only approach, by definition, would require floating discounts to be applied to contracted rates. Imagine asking your contract partners if they would be willing to accept a dynamic discount off a dynamic rate. They would most likely not sign such a contract. The inventory-based negotiated discount contracts provide clarity to the contract partner, while still allowing the hotel to "close" the rates on peak days rather than keeping their inventory "open" and shifting prices and discounts dynamically. Managing the floating discount rates by opening and closing inventory allows a hotel to dynamically change pricing, while still ensuring a consistent pricing strategy that is generally acceptable to the contract customer.

Total Revenue Performance

  • Do Align All Your Revenue Driving Teams with Your Revenue Strategy

Today more and more hotels are expanding their revenue management discipline beyond rooms and are instilling the principles of revenue management into other functions such as Food & Beverage (F&B), Sales & Catering (S&C), and Meetings & Events (M&E). Our clients tell us that the most important consideration is to align the people, processes and tools involved in total revenue performance. Some key questions hotel executives should answer are as follows:

-- When evaluating business opportunities today - do you consider overall profitability?

-- Are your various revenue-driving teams incentivized in ways to ensure that the sales and revenue functions support rooms and events together as opposed to separately?

-- Is the ownership of the S&C inventory clear?

-- Are you happy with the communications structures between the RM and M&E sales teams?

-- How could you adopt a demand-based pricing model beyond rooms?

  • Don't Limit Revenue Management to Rooms Only

Group business makes up 40-60 percent of revenues for most hotels when hotels consider the total impact of the group business: all the revenues from guest rooms, food, beverage, audio visual, and ancillary spend, as well as all the set-up costs and concessions. Hotels that take into account Total Revenue Performance goals and evaluate their pricing based on the overall group profit quote better rates. Therefore, it's absolutely imperative that hotels develop capabilities to quote demand-driven prices for their revenue streams as well as they do with guest rooms.

With a better understanding of the demand for all revenue streams and their relationship to guestroom demand, revenue managers and sellers can make better, more strategic decisions about handling priceable inventory. However, hotel executives must also keep in mind that when it comes to expanding revenue management beyond rooms and embarking on a journey toward Total Revenue Performance, technology implementation is just one aspect; elevating the revenue management capabilities of your teams and streamlining your revenue management processes across the organization are equally important.

As Director of Advisory Services for IDeaS Revenue Solutions, Paul van Meerendonk leads a global team of revenue management advisors focused on hotel revenue optimization projects. Mr. van Meerendonk is responsible for global development, management and operations of the Advisory Services team. He oversees the hiring, training and management of industry-leading consultants located in London, Beijing, Singapore and Atlanta. Mr. van Meerendonk also represents IDeaS on industry thought-leadership initiatives related to trends and best practices within revenue management, including authoring a number of white papers, conducting public speaking engagements, as well as leading key client webinars with an average audience of over 200 global representatives. Mr. van Meerendonk can be contacted at +44 (0) 118-82-8100 or Extended Bio...

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