Mr. Davis

Revenue Management

Revenue-Leaks, or the Holes in the Bucket

By Mark Davis, General Manager, Hilton Los Angeles Universal City

The true art of Revenue Maximization (RevMax) at the elementary foundation is segment mixology including all points of revenue generation. I label this the perfect RevMax Cocktail with the ingredients engineered for total consumption of market share by segment from top rate to the lowest, while also considering each element of contribution to NOI margin. In terms of maximum RevPAR, it is simply maximum achievable occupancy at the highest deliverable ADR. However, before the hotel can celebrate success the team must also have a discipline to avoid the typical erosion of RevMax thru Rev-Leak! Every hotel must have an effective team balance to deliver the sweet spot: the most profitable revenue possible per available room. There is rarely a discovery more damaging than an empty room when market demand was sufficient to fill them all. The old saying still prevails, "nothing happens until somebody sells something, and high-fives are due when everybody sells everything."

But not so fast. As a repositioning expert I find most low hanging fruit in what I term Rev-Leak: The Holes in the Bucket which destroy true maximization. It takes discipline, leadership, proper parameters, and a cohesive team to avoid losing impact from this typically undiscovered phenomenon of delusional revenue. I define delusional revenue as the myth that if you maximize revenue, you will maximize profit. The engaged owner/investor will never trade or accept profit erosion for mere revenue. In fact, when revenue improves there is a natural expectation that profit flow-through also dynamically improves.

Rev-Leak has many facets presented in this article that are "Holes in the Bucket" to watch and avoid falling short to optimize RevPAR performance. Hotels with the right Mixology practices that manage to avoid these leaks will no doubt realize true and improved RevMax as well as RevPAR and GOPPAR. The 'Holes in the Bucket':

Imbalance of Incentives

This occurs typically when team structure divides the incentive in cross constructive manners. Rewards will always drive action and motive greater than any other factor. Group teams will protect and actually have a tendency to steal inventory when incentive is based solely on production to a gap over goal. Group Sales will sell more group rooms well below the market transient demand if their incentive is unique to Group Production as the only gate keeper. Revenue Managers will steal group room book-around if their incentive is weighted toward isolated transient segments. Revenue Managers have been known to drop the Transient discount rate well below the Group rate to drive book-around to feed their incentive plan if driven solely by Transient and Discount production.

The big win-win is when the incentives are based on team efforts to maximize dollars per available room as the gatekeeper. It seems elementary, right? However, one may be surprised what you find if the hotel has a rookie or rebel (manipulating segments toward incentives) in either position that does not protect the "sound balance" and goal of true Revenue Maximization. Set the gate keeper on growth in RevPAR vs. segments and balance both discipline incentives with team goals for segmentation. Nobody wins big over the other without the hotel truly maximizing RevPAR.

Absence of Sound Sell Out Strategy

There must be a hunger and determination to Sell Out every day possible. This process begins with the right Mixology: discovery of market demand generators and property detractors, protecting dates and stay through patterns for anticipated and confirmed demand, sound pricing models ahead of demand pickup for specific inventory, filling in base business to create contained demand when generators are absent for dates and valleys, etc., RevMax 101. To plug this Rev-Leak there must be a "fill to capacity check list discipline" to ensure all hotel teams are on board for those dates and start managing as soon as discovered. This check list is property specific, but must include as a minimum: a focus on all room inventory available, limiting renovation process, confirming all guaranteed reservations for an accurate billable valid Credit Card starting several days out to avoid capturing no-show revenue, anticipating no shows and overselling the trend, having a sound walk policy proactively in place to safely push the envelope, having an established cancelation policy that is enforceable in time to rebook and a cohesive "day of" communication between operations and front desk so no room sleeps empty.

I am sure there are other leaks specific to market and brand, but these are the minimum best practices for anyone wishing to plug this hole of lost opportunity. The business plan should establish a number of Sell Out days' goal for the team. There is no substitute to replace lost revenue when the market demand delivers the ability to consume total available inventory and yet the property falls short of the goal in delivery. This is the true icing on the cup cake. If you miss it, there is no replacement; the property just loses and loses big at typically the highest flow through of GOP revenue element possible.

Absence of Reliable Inventory

A hotel cannot maximize revenue with "sick inventory" and win. There is no substitute for a sound RPM discipline (Repair and Preventive Maintenance). When the opportunity to consume 100% of inventory is derailed with Out of Order or un-rentable inventory due to ill repair the hotel asset is at high risk. It is too risky to rent undesirable inventory due to the loss of guest loyalty and the social media impact that will surely follow. When the revenue producing team is making commitments to clients and relying on every room in inventory to be ready it compromises and damages the moral of the team both in sales and operations when expected inventory is not there. Most brand standards are 3 turns annually with upper scale and luxury properties typically 4 to 5 turns annually; the number of times each room receives a deep thorough renovation face lift for touch up to achieve ETWO (Every Thing In Working Order).

When the rates are at the highest, guest expectation also elevates. Hotels that operate in excess of 85% occupancy, typically have the misfortune and expression, "we cannot take the rooms Off Line to do the RPM." The real answer is you cannot afford NOT to do affective RPM to keep the inventory tuned to perfection. The loss is much greater with distressed product than the occasional room displacement with a good RPM program. Develop a discipline for proper RPM and stick to it. The payoff is irreplaceable when demand is at the highest. Sell Out efficiency is typically measured at 98% which allows 2% inventory flexibility for RPM or complimentary rooms. The hotel that disciplines itself to keep on track with proper RPM turns delivering reliable inventory can then afford to actually "use the reliable inventory" on most 100% days with the confidence there will be no fall out loss due to failure to perform to guest expectation.

Absence of an Effective Empowerment Policy

Retention of guest loyalty is vital for success now more than ever due to the negative power and impact of social media. The statistics I read say that a satisfactory resolution given on first contact of a problem expressed has 5 TIMES MORE positive impact on loyalty than a satisfied guest who did not experience a problem. Likewise, a guest with a problem unresolved commands attention through mass media and negatively influences booking decisions. It is becoming as popular to research the property's problem trends on the internet as checking the price point decision to book. Each team member must be empowered to resolve a guest's issues on first contact.

The impact of resolution falls sharply when a problem experiencing guest is passed up the line to achieve satisfaction/resolution. It will generally cost more and impact RevPAR more due to rate reductions if the resolution is delayed. Many times resolutions can be "no RevPAR loss concessions" (e.g. breakfast, parking, amenities, loyalty points, complimentary return stays on non-full available dates, tours, transportation etc.). Hotel leaders and owners who advocate full empowerment to the front line as well as operational contact staff will best protect the concessions leak of RevPAR on room rate reductions.

Absence of Discipline to Resolve Inventory Discrepancies

In the industry known as "Sleepers": a room that was vacant of billable guests but checked in as occupied. Even on a non-filled night this is a big leak when it occurs due to the double damage of posting error. Often, the room runs as revenue for a guest who was not checked out in the system only to discover the next day there was "nobody home." If the hotel has an early departure fee, sometimes there can be minimal recovery even billed after the guest leaves with proper folio management and correctly signed disclaimers upon check in. However, the room revenue adjustment is double: revenue is subtracted from the revenue posted, therefore it is not just a zero, it is a minus rate adjustment on the next day. The hotel cannot collect the revenue billed or posted as RevPAR and then the adjustment has to be deducted from RevPAR the next day. There must be a team effort between housekeeping and front desk to synchronize and resolve any discrepancy between reality and the system. If inventory discrepancies of occupancy status are not resolved on fill nights, the damage to RevPAR and GOPPAR are devastating with typical high demand rates uncollectable.

Absence to Obtain Proof of Other Room Revenue Disclosures

In addition to no-show revenue, it is becoming an industry practice to charge additional fees for early departure or late cancellation, as well as rate adjustments for extended stays to protect losses due to cost of inventory reselling and demand changes. When guests dispute these other revenue charges successfully, due to lack of proof for disclosure, they win the dispute and the hotel loses Rev-Leak. There must be a diligence to show these other charges at the time of booking as well as confirming them at check-in with proof of disclosure to avoid this loss. There may be significant potential revenue loss to the last minute re-sell of cancelled inventory without the ability to replace cancellations in some markets. When guests book at lower rates and demand changes after booking, the hotel is entitled to the increased rate for dates extending beyond the original booking. Guests who travel are used to this phenomenon practiced by the airlines. It is an easy RevPAR target but can "leak out" if not managed with the discipline to collect and hold guests accountable for policy on all entitled revenue that has been properly disclosed at booking and also confirmed at check-in.

Absence of Productive Parameter Balance of Space to Rooms Ratio

GOPPAR is highly improved when all rooms and all meeting space are occupied with smart revenue production. Typically, group rooms require space for meetings, meals and breakout sessions to be effective. It is very common, minus a disciplined parameter policy, for rooms-to-space ratio to get out of hand. Often seasoned meeting planners start negotiations expecting "free space," ignoring the hotel cost factors associated with maintaining and servicing this space. Too often space fills up before group room inventory strategy is met for baseline revenue. The hotel team should include in the RevMax strategy the right balance of Food & Beverage minimums for space and rooms consumed by any group. Without meeting these minimum thresholds true RevMax potential will not be achieved.

The "free sell of space" for local catering should never be open too quickly to avoid space inventory conflicts for booking group rooms with contributing revenue. It is very rare that any market has sufficient transient room demand to fill all the rooms with the right balance of group room base which does require space to be available and yielded properly. The less contributing revenue any group contracts, the more protective the hotel must be on minimum space use fees (i.e. Meeting Room Rent, Audio Visual, Set-up, Service Charges, etc.). It is also vitally important the Hotel-Client contract terms for rooms and space include internal flexibility solely controlled by the hotel to move space to accommodate multiple groups and pickup patterns of each group. Lastly, the parameter policy should not be static, but managed with yield in mind for RevMax to season and demand patterns.

Absence of Ownership Commitment to Competitive Product Quality

Product Improvement Dollars are a delicate balance and one that must start with a solid operating leadership team to deliver positive growth matching or exceeding market demand to create believability for ownership's commitment to invest. As a repositioning expert, I always found the magic in first showing a foundation of belief before receiving significant commitment for investing product improvement dollars. My favorite repositioning memory was following five short-term General Managers and two Regional VP changes for failing results ending in a property selling for $11M, yet the sale falling apart last minute when finance backing got cold feet.

Due to my record of accomplishment of repositioning success, owners hoping to simply break even out of desperation consistently call me for repositioning assignments. Providing the vision for sound Mixology and an operational focus to minimize Rev-Leak, and with virtually zero new investment in product improvement (due to lack of belief) the property sold for $34M just 2.5 years later. My repositioning strategy rebuilt the value of belief to attract a new buyer at above market value. To establish ownership commitment it is always elementary to understand the business objective and focus to deliver to the investor the value of intention from the onset. Asset investors only understand "change" and their decisions will always be relative to the direction of the results produced. The teams who succeed, are the teams who outperform the Pro Forma of initial projections, nothing more and nothing less will drive investor commitment direction for dollars.

The art of RevMax is flattering when actually accomplished. The Rev-Leaks presented here not only compromise optimum RevPAR, they are typically 100% flow to the bottom line with no new expense associated with collecting full earned Revenue. As a seasoned repositioning leader, I have learned to manage Rev-Leak as aggressively as acquiring the top line Revenue, because of the Profit Flow impact. There are very few revenue sources, if any, that deliver such a high margin while typically only deducting franchise or management fees from the gain. Practicing these disciplines will be hugely gratifying to the overall results a hotel can possibly deliver.

I would challenge anyone to find dollars of greater positive flow than plugging the Holes in the Bucket of Rev-Leak. Each hotel and each market will have a unique set of Rev-Leak potential for discovery and discipline to produce optimum profit performance. There is no surprise that RevPAR and GOPPAR have become two key performance indicators of management disciplined focus by asset owners and management companies. I would suggest that a good honest look at your Rev-Leak opportunities will be your best gain and surprise you with dividends beyond imagination to impact your hotel's highest celebratory goal: maximum GOPPAR.

As President/CEO of Hillcrest Real Estate LLC, Mark Davis demonstrates the continuing success of re-positioning excellence. Mr. Davis joined the company from a global search in January 2012 as General Manager of the companies Hilton Los Angeles Universal City hotel, owned more than 26 years by the same investment group to replace his retiring predecessor of 22 years. At his 3.5 Year anniversary with Hillcrest Real Estate LLC, he was promoted to President/CEO responsible for global hotel expansion, development, operations and acquisitions. In the soon to be 5 years, Mr. Davis has successfully implemented skilled re-positioning strategy achieving 386% Growth in Income Before Tax with 56% growth in Revenue. He credits this high degree of performance from the diverse experience gathered over the past 20 years of diverse markets and economic cycles learning and implementing the disciplines and best practices that maximize Profit. The past 20+ progressive year career in Executive Leadership for Full Service Hotels Mr. Davis has represented a diversity of brands, management companies and markets. Mr. Davis can be contacted at 818-509-2013 or mdavis@hiltonuniversal.com Please visit http://www.hiltonuniversal.com for more information. Extended Bio...

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