Mr. Wolf

Revenue Management

From Revpar to Trevpar - A Guideline For Integrating Ancillaries Into a Revenue Optimization Strategy

By Stefan Wolf, Senior Vice President Revenue & Distribution Strategy, Onyx Hospitality Group

Considering ancillary revenue streams can make up to 60% of hotel revenues of why would not any operator embark on the journey of total hotel revenue management? Apart from challenges related to the creation of a functioning revenue management culture the inclusion of F&B, spa and event revenue streams into that culture brings its own set of challenges. This article will explore these challenges and offer a guideline to successfully integrate additional revenue streams into a comprehensive revenue optimization strategy.

Revenue per available room or RevPAR is a measurement of the success of a balanced occupancy versus average daily rate strategy. While there are still owners - and surprisingly sometimes even operators - who favor either an occupancy ("Less than 100% is considered a failure") or ADR ("has to be the most expensive hotel in town") focused strategy, any operator, who started to build a revenue management culture will agree that profits can only be optimized if the focus is on RevPAR.

Depending on positioning, location and other factors profitability for the rooms department should be somewhere above 75%. So optimizing the revenues from a department with high profitability by having a working revenue management culture in place is vital for the financial success of the property. But what is considered a working revenue management culture?

A key element is a revenue management professional and I am purposely using the generic term professional, because that could be a director or manager, could be on property or centralized, could be reporting to the GM or to the commercial leader. What is the most important skill of a revenue management professional? Surprise, surprise it is not the ability build and analyze spreadsheets in record speed nor the ability to create dynamic 3D models of the latest booking pace by segment. In today's fast paced dynamically ever changing constantly disrupted world the number one skill in any revenue management professional should be the ability to clearly and confidently communicate. Some readers might indeed be surprised by this statement, but the most amazing math genius will not be able to get any recommended fact based strategy adopted if s/he is unable to communicate the rationale behind the recommendation especially if it involves change. And we all know how much the hospitality industry and the people working in it love change (article for another time).

Once that professional is in place there is no culture yet. I have heard people saying "Of course we have a revenue management culture - we have a revenue manager", but that is only the starting point. For a revenue management professional to start building a culture s/he needs a lot of support from either the General Manager for independent properties and from the corporate office for chain affiliated properties. Support can mean tools, guidelines, SOP's and sometimes the literal pat on the back to confirm that the culture building is on the right track. A key element of culture building is to improve the understanding of revenue management via training of all departments. And I really mean all departments (gardening, stewarding, housekeeping, engineering) and before anyone disagrees, let me point out that guest satisfaction (expressed via online review sites) and ability to raise rates without negatively impacting occupancy are correlated based on a study from the Cornell Hospitality Research Center(1). All departments have their role in improving guest satisfaction.

Apart from the key message that everybody should be part of a working revenue management culture the training should also focus on the neutrality of fact based decision making. Whether a revenue director accepdt or rejects a group (which has been worked so hard on by the sales manager) is dependent on the balance between short term displacement and long term client value. But to communicate that properly is key to a healthy relationship between the sales and revenue departments. And we are back to communication skills.

At this point I like to point out that automated revenue management systems are not a required element of a revenue management culture - although some vendors certainly want you to believe that. A very communicative revenue manager, who has trained the other departments on the role of revenue management is way more effective using a spreadsheet optimizing revenues than an analytical non-communicative revenue director using a highly sophisticated revenue management system, who was not able to clearly explain the role of revenue management to his colleagues.

Starting on the journey of total hotel revenue management (THRM) without a working revenue management culture will lead to a lot of frustrations and most likely will fail to achieve the desired results.

A working revenue management culture however is still no guarantee that THRM will result in an improved TrevPAR (total revenue per available room) - or this strategy would have been implemented by far more companies, who may have achieved a successful revenue management culture already.

There are two elements to THRM: 1. The optimization of all revenue streams for guests staying in-house, i.e. making them spend more or recognizing their spending potential prior to arrival in order to influence the business mix. 2. The optimization of revenue streams itself regardless if the guests are in-house or outside. This article will concentrate on the first element only.

The first step of moving from RevPAR to TrevPAR is to inform everybody of exactly that - "Effective tomorrow will start the process to move from RevPAR to TrevPAR" and with it of course the explanation of what TrevPAR is and why this move is supposedly going to help make more money. The "what is in it for me?" approach is not to be underestimated in convincing other departments that this strategy is in the best interest for everybody. Phrases like "Higher guest satisfaction" "Higher revenue will lead to higher profits will lead to a higher bonus" might go a long way here. Don't leave out that this approach requires more work, especially in the beginning when the line staff needs to be trained on new initiatives and correct data tracking should be re-emphasized.

One common mistake in starting TrevPAR strategies is to implement them without having other departments on board with this strategy and also not having the correct tracking methods in place. Another pitfall is to implement strategies and tracking across all ancillary revenue streams at the same time. This might sound as more efficient and faster to implement, but might lead to data leakages that are more difficult to isolate. Better to start with one department, for example Spa or one outlet only. Whether the POS (point of sales) system is interfaced with your PMS or it is a manual data transfer the detailed spend per guests has to be recognized correctly.

Once data tracking is correctly implemented across all revenue generating departments TrevPAR data can be analyzed for potential correlation to other data point. For example geo-source correlation: If the property has more guests from one country staying in July compared to August - was the TrevPAR higher or lower? Another example would be market segments correlation: If the property has more guests from one market segment staying in September compared to October - was the TrevPAR higher or lower?

Once correlation has been established strategies can be implemented to focus on the higher TrevPAR generating source markets and/or business segments. For example if the TrevPAR was positively influenced by the amount of customers coming from Switzerland plans can be established to increase the market share from that source market. Or if the Wholesale segment in September led to a higher TrevPAR (despite a lower ADR than the OTA segment) the business mix optimization strategy might change.

Another option to increase TrevPAR would be to influence the spending of in-house guests and increasing the share of wallet. Share of wallet in this context is defined as the total amount a customer is willing to spend during the hotel stay. For example if the average spend of the corporate segment customer is X how can that be improved to X plus? The following potential strategies would come to mind: Improving the in-house capture ratio for breakfast by offering discounted breakfast rates upon check-in, improving in-house capture for spa by offering short duration treatments after their morning work-out or upon returning to the hotel, improving in-house capture in the bar/restaurant by offering healthy dinner options or snack/drink combos. A word of caution for the ubiquitous Happy Hour - duration and offer should be meticulously analyzed or money will be left on the table.

Once strategies have been implemented (which hopefully have been brainstormed together with operations and not just decided by revenue management in isolation) it is vitally important that successes are celebrated together. THRM has a high risk of failure if it is not seen as a cross-departmental strategy and everybody involved supports it. Apart from improving the spending from in-house guests THRM also includes implementing strategies to restrict segments with lower spending potential during high demand periods. While RevPAR strategies would look at potential ADR by segment and restrict lower rated segments during high demand, TrevPAR strategies would look at potential spend by segment, which might result in accepting a lower ADR corporate segment over a higher rated OTA segment if the potential spend for the corporate segment makes it the better profit optimizing segment (not taking into consideration channel cost in this example, which could be higher or lower depending if the corporate customer books on brand.com or via GDS). In conclusion correctly implemented TrevPAR strategies can have a profound impact on revenue and profits of any property, but success of these strategies depend very much on a working revenue management culture and a communicative revenue management professional.

References

(1) "The Impact of Social Media on Lodging Performance." Chris K. Anderson, The Center for Hospitality Research. Cornell University. November 2012.

Stefan Wolf is responsible for revenue management and distribution strategies at the Onyx Hospitality Group based in Bangkok. Onyx Hospitality Group operates four diverse hotel brands – Saffron, Amari, Shama and OZO - each catering to the requirements of today’s business and leisure travelers. Mr. Wolf started his career with Marriott in Germany and Korea, changing from a property to a corporate-based role. He joined the InterContinental Hotels Group in Beijing supporting the North Asia portfolio and was part of a taskforce to develop the revenue management academy for the company. At Shangri-La's corporate office Mr. Wolf created a revenue management culture introducing a dynamic pricing philosophy. Mr. Wolf can be contacted at 66-0-2255-3767 or stefan.wolf@onyx-hospitality.com Extended Bio...

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