Revenue Management: There are Two Sides to Every Story
By Bonnie Buckhiester, President, Buckhiester Management Limited
The saying goes that there are always two sides to every story. In the hotel business this couldn't be truer when examining the relationship between operator and owner, or in many cases between operator and asset manager. Both want to optimize performance, but often this requires a careful balancing act between guest satisfaction and profitability. If a hotel is exceeding expectations - i.e. beating budget, surpassing last year, stealing market share - one might ask "does that mean the revenue management effort is optimal"? If a hotel is falling short of expectations, does that mean that somehow the revenue management effort is lacking? These are difficult questions to answer. And some would argue that any answer is subjective in nature. For example, does a 110% RevPAR index (RPI) mean the hotel is doing well? What if the competitive set is misaligned? Or what if the real potential is 120%?
At the end of the day, the data tells the story. But to get the whole story the revenue manager must dig into the detail and the asset manager must give the revenue manager time to do this. Which means (among other things) that the revenue manager doesn't have time to answer a question like "why didn't the hotel do better last Tuesday"? This "micro-managing" of the revenue management effort (which appears to be more and more the norm in the industry) is a ridiculous, wasteful use of time.
So how does one balance the need for the asset manager to have information and the revenue manager to do his or her job? I think the answer is in the very questions that are asked. Certainly it would be a valuable exercise if the revenue manager could stand in the asset manager's shoes for a day and vice versa. Perhaps then they could share perspectives. And hopefully there will be some of our readers willing to try that very approach. In the meantime, however, let's explore some of the questions the asset manager could ask that would not only satisfy the need to deeply understand performance, but encourage the revenue manager to look beyond the usual, typical data sets that define revenue management today.
We all know that key performance indicators are the foundation of success measurement. Occupancy, average rate, revenue, gross operating profit, net operating income, cost per occupied room, market share, ratios to revenue, etc. These are all traditional performance benchmarks. But today's complex markets demand a much deeper set of measurements. And the availability of highly detailed data makes this possible. But only if the revenue manager is looking in the right places and the asset manager is asking the right questions.
I believe that using the term revenue management is outdated. Today the revenue management discipline must be about profit optimization and this goes way beyond a Rooms-centric approach. This is about estimating the potential and then optimizing towards that potential in every aspect of the business, that is every revenue stream and every profit margin. So what are some of the deeper questions an asset manager could ask that would reveal hidden potential?
Let's begin with a more holistic, multi-faceted approach to the entire discipline - one that takes into account six key components - product alignment, competitive benchmarking, strategic pricing, demand forecasting, business mix optimization, and distribution management. What could the revenue manager be examining in each of these areas that would uncover revenue and profit potential? What are some of the lesser-known metrics and less traditional generators of incremental revenue? There isn't time or space in this article to address all these components, and the suggestions below hardly represent a definitive list of profit enhancing techniques, but certainly these are good examples of some of the "hidden" places to look for more revenue and more importantly…additional profit.
Product alignment is about optimizing products to customer demand. Whether one is talking about room types, items on an outlet menu, or treatments in a spa - there will always be imbalances between what the hotel has to offer and what the consumer is buying. Take for example room types - inevitably demand seldom matches supply. In revenue management there may be certain situations where it makes sense to intentionally over sell a room category. Maybe a "well-worth-it" group causes the inventory imbalance or the price point of the lowest rated room type is the best price-positioning move for market conditions. Regardless of the reason, the Revenue Team has a responsibility to optimize room category value in all demand situations. This can be done in the short term by having the best up-sell program on the face of the planet and in the longer run by tracking and analyzing RevPAR by room type.
In the first instance, make a habit of tracking complimentary upgrades on a monthly basis. Revenue managers will be shocked at the amount of complimentary upgrading hotels do every day. Some is justified (loyalty program benefit, service recovery, VIP's), but much is simply operational necessity (or…frankly laziness). Take time to track the upgrades for a month, and calculate the dollar value of what's being given away. For example, if a hotel does 3 free (unnecessary) upgrades a day, with an average length of stay of 1.5 and a value of $30/per room night that's $50,000 a year - 95%+ of which would have dropped to the bottom line. At the end of the day we manage what we measure. Start measuring this revenue and profit leakage
As for the RevPAR by room type metric (one that is easily obtainable in most property management systems), a low RevPAR is a sure sign that something is wrong - either pricing is misaligned, or the product is inferior, or too much upgrading is occurring. Revenue managers need to track and analyze this data on a routine basis, and asset managers need to ask the question of what room types have the strongest (and weakest) RevPAR's and why?
The industry has benchmarked performance for decades. Internal benchmarks against budget, last year, and industry-standard ratios are all very common. External benchmarks, such as market share reports like STR, are also extremely widespread. But in recent years reputation management metrics have also become commonplace. Rankings and ratings on review sites are closely monitored and studies like those conducted by Cornell University (in conjunction with industry partners) have proven that superior review scores translate to a higher probability of being booked and to pricing power.
Social media and consumer-generated content play an important role in pricing acceptance. Ultimately the guest determines price, i.e. whether they accept your pricing or not. Looking at the "Value Index" metric via reputation management reports can help identify whether a hotel's price point is out of alignment with the demand in the marketplace and the expectations of guests. Value indexes are a relatively new metric to the industry and are created by simply comparing your value score to that of your competitive set or that of a single competitor.
For example, if your value score is 4.2 and your comp set's is 4.0, your index would be 105.0. Tracking and analyzing your value index metric should be done in order to monitor fluctuations in the value proposition between your hotel and the competition. If your value index is below 100, this is a sign of trouble because ultimately guests won't return to a hotel if they feel they did not receive value for price paid. There are just too many options out there from which to choose.
A low value index could mean that pricing is out of alignment and/or product quality has slipped; a course correction is needed which might signal to the asset manager that an infusion of capital is required. If your hotel's value score is well over 100 and you have a closely matched competitive set, it is a clear indication of pricing power; i.e. an opportunity to leverage the value proposition without jeopardizing volume.
There isn't really consensus in the industry as to what an ideal index is, but at Buckhiester Management we encourage clients to aim for a range between 98 and 102. This indicates that the price/value relationship is aligned. A value score well over 100 signifies the property has unleveraged pricing power and as such has upward mobility in their rate. A value score well below 100 means trouble. Either pricing has to be reduced, and/or service quality enhanced, and/or capital improvements initiated. In either case, revenue managers should be paying very close attention to their value indexes and asset managers should be asking questions about any fluctuations in this important metric.
Some would argue that pricing optimization is one of the most difficult, if not the most difficult part of a revenue manager's job. So many factors come into play that it is almost impossible to optimize price in every market condition. Even with the help of a sophisticated revenue management system, optimal pricing is extremely challenging. But there is a best practice that is often over-looked by revenue managers and seldom explored by asset managers. In this regard I'm referring to relative index balance. By this I mean the balance between a hotel's occupancy index (MPI) and average rate index (ARI) on a STR report.
Monitoring index balance on a monthly basis is a critical best practice. In fact many companies are now doing market share forecasting to identify imbalances in advance so adjustments can be made to pricing and mix of business strategies that serve to close the gap between the market share index and average rate index. Why is this so important? Well, when the variance between these metrics is too extreme, it points to three potential issues:
- An incorrect competitive set
- Money "left on the table" due to underpricing or over-pricing
- Some degree of both factors at play
The relevance from a revenue management perspective is that in a closely matched and relevant competitive set, there should be no greater than a 10-point variance in the MPI and ARI indexes over the course of a year (this holds true unless a property is a highly dominant player in the competitive set). Relative balance means the hotel played the market conditions optimally, getting rate where they could, and volume when needed.
Certainly there will be circumstances when this imbalance fluctuates, for instance if in a given month a hotel generates a lot of volume (say from a group), and the occupancy index over performs. But generally speaking relative balance should be the objective, because severe imbalance is a clear indication that the market conditions were not optimized. In the graph below the revenue manager has charted the variance between the MPI and ARI metrics to make it easier to detect imbalance trends. If extreme imbalances are consistently the norm, then one metric is jeopardizing the other.
This relationship also holds true when examining relative MPI/ARI balance by market segment. If a hotel reports segmented performance, then close scrutiny of the variance between the occupancy and rates indexes in the Transient and Group markets is definitely warranted. Once again, revenue managers need to track and analyze index balance and asset managers need to be questioning severe imbalances.
These are always going to be two sides to every story and the business of revenue management is no exception. But asset managers must allow revenue managers to do their jobs. And revenue managers must use this time wisely to become better strategists, not just tacticians. This means asking the right questions and time well spent in finding answers that optimize demand.
Bonnie Buckhiester is the principal of Buckhiester Management Limited, the leading Revenue Management consulting and developmental training firm in North America for the hospitality industry. Founded in 1995, now with offices in Vancouver, Seattle and Washington, DC, Ms. Buckhiester’s career in travel, tourism and hospitality is extensive and multi-dimensional including positions as Senior Vice President, Operations for a major North American hotel REIT; General Manager for two 4½-diamond hotels, and General Manager Operations for a major tour operator. Her diverse product knowledge of hotel, tour, cruise, air, rail and car rental inventories offers a unique cross-fertilization of industry strategies. Ms. Buckhiester can be contacted at 703-858-7304 or email@example.com Extended Bio...
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