Revenue Management Health Check: How Does Your Hotel Measure Up?
By Paul van Meerendonk, Director of Advisory Services, IDeaS Revenue Solutions
It is commonly accepted today that revenue management is critical to the successful operation of any hotel. However, while the adoption of this strategic approach to pricing - and the advanced systems that support this - are becoming more widespread, there is still no industry standard for how to evaluate revenue management outcomes. This lack of universal criteria around how to assess revenue management can pose challenges in trying to sell the success of a program within a hotel, as well challenging how to accurately benchmark a hotel's revenue performance against its competitors.
A key challenge revenue managers face when developing a detailed, accurate assessment of their property's performance is sifting through an overload of information. With huge amounts of information available-and with revenue managers naturally inclined to love charts and tables-too many revenue managers attempt to understand, analyse and measure copious amounts of data, losing focus on the critical success factors for the business in the process.
Revenue managers also face major challenges in assessing performance in organisations where there are unclear or conflicting objectives. While many sophisticated hoteliers set clear objectives and critical success criteria, a surprisingly large number of businesses measure success based on more ambiguous criteria, or, in the worst case, conflicting measurements across different business lines. A typical example is a hotel's desire to drive performance in profitability; while concurrently setting corporate sales objectives, which are purely focused on volume and do not take profitability and displacement into account. A high volume room night account is often considered a "good" account, even though it might ultimately not be the optimal business to support the overall revenue goals of the hotel.
Although there may not be one set industry standard for assessing a hotel's revenue management performance today, hoteliers should consider three key objectives when evaluating their properties:
Financial objectives - Are you meeting your investment objectives?
Competitive objectives - Are you outperforming the competition?
Capability objectives - Do you have the capabilities to create sustainable performance?
Assessing Financial Objectives
For a hotel owner or investor, being able to accurately assess the financial performance of their hotel asset is critical. These stakeholders are interested in evaluations that focus on their return on investment, year-on-year growth and ultimately, the value of their hotel asset(s).
For those owners or group investors with multiple properties, or those looking to expand their portfolio, setting revenue management evaluation standards across a hotel group or chain will improve the measurement of the overall portfolio. Through data collection and property comparisons, hoteliers can better determine how pricing strategies impact hotel chains in different countries. Accurate forecasting data, combined with market research and analysis, also makes it possible for hoteliers to carry out realistic feasibility studies for future hotels looking to join the group, refurbishment investments, or to assess future opportunities to open new hotels.
For these same stakeholders, it is important to communicate how revenue management improves the value of their hotel asset in any review. The flow-through additional revenue that comes from the proper utilisation of revenue management systems and strategies can directly impact a hotel's bottom line results, making it a valuable tool in increasing a hotel's valuation. Increased revenue generated by advanced revenue management programs lead to higher cash flow, which can provide the hotel with greater day-to-day liquidity.
Assessing Competitive Objectives
A hotel's revenue management performance may have traditionally been measured by occupancy (Occ), average daily rate (ADR) and revenue per available room (RevPAR); however, the industry has evolved past only using these standards. New revenue management principles are applied beyond just rooms, and certainly beyond a single property itself. Hoteliers used to only look at how their hotel is performing compared to the wider market in terms of market penetration. To do this, hoteliers identified the right competitor set and were able to calculate a hotel's market penetration index (MPI), Average Rate Index (ARI) or Revenue Generated Index (RGI). These metrics are important as it allows hotels to see their position and performance in relation to their competitors and the market in general.
The practice of competitive benchmarking is an extremely helpful process in today's industry because it allows hotels to measure their performance, analyse their competitors' performance and set specific goals that will help them to meet - and exceed - the industry's top standards. It is critical, however, that hoteliers properly understand the purpose of benchmarking, the difference between benchmarking and competitor research, and align their benchmarking practices in conjunction with their hotel's overall management objectives. The latter is extremely important because some organisations may have guidelines on the inclusions of different types of data, or may retain an arsenal of data that is already available for the hotel to use.
In addition to the standard rooms-focused metrics however, the industry should be looking towards a better understanding and comparison of total revenue performance metrics. The results generated in function space, restaurants, spa and other areas of the hotel also contribute to the overall profitability. Leaving these to the side and only focusing on rooms is therefore only telling half the story. At present, there are only limited opportunities to do this effectively, largely because there are no generally accepted standards when it comes to measuring and reporting total revenue performance, total profitability or departmental revenues or profit. This is an area that the industry should be looking to address, through the relevant providers, organizations and associations. Only then will we truly be able to assess how a hotel is performing against its competitors.
Assessing Capability Objectives
Just as the practice of revenue management has evolved, so should the evaluation of revenue management move beyond just the traditional metrics of RevPAR to take in other critical factors.
Effective revenue management and pricing can only be achieved today through the optimal alignment of people, process and technology capabilities. A hotel may have significant capabilities in one of these areas, such as the latest technologies and operational systems in place in their property, but if they don't have experienced, properly-trained staff to utilise these systems the property will not get maximum benefit. When people, processes and technology are in balance and integrated effectively into an organisation's culture, then the real potential of revenue management and a property's true financial performance can be realised.
When assessing the capabilities of a property, hoteliers need to consider if their cross-functional sales, catering and revenue management teams are aligned and working effectively. The challenge in applying revenue management across an entire hotel relates to the convergence of the traditional roles of sales, marketing and revenue management, in addition to including food & beverage, banqueting, finance and other departments. It takes an entire team - not just one department or group - to capture the right guest, at the right time, for the right price, and in the right space. Hoteliers, when undertaking their capability assessment, should look closely at the operational systems they have in place compared to what the industry standard is, how their staff is performing in their roles and if the automated technologies that support key functions like pricing and bookings are able to function effectively in an age of big data. A capability assessment is also particularly useful in determining the type of educational and training support needed for teams to successfully manage pricing and inventory decisions in a scientific and methodological way. Work Out What Success Looks Like
Revenue managers spend a significant amount of time and effort devising strategies and deploying tactics to optimise revenues. However, they are not always as proficient when it comes to establishing and measuring agreed upon success criteria. To be truly effective in the job, devising, implementing and agreeing on "what success looks like" is, in many cases, as important as the activities themselves and will go a long way to support a hotel's success story.
No matter how many measurements of success a hotel has, it is important to remember that the value of any success criteria does not come from the absolute number alone, but the underlying factors and long-time trends which impact the final number including people, processes and technology. An evaluation of a property's revenue performance which focuses on financial, competitive and capability objectives will give hoteliers an accurate assessment of their property's value, and how it is performing in relation to its operating environment and future opportunities.
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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