The Science and Art of Revenue Management Continue to Evolve
By EJ Schanfarber, President & Chief Executive Officer, Alliance Hospitality
The revenue manager of an individual hotel or hospitality entity has become the "quarterback" of modern hospitality strategy and, in many ways, operations. He or she reviews past game data, surveys the competitive environment, consults with coaching staff (ownership and brand standards) and listens to teammates (especially the general manager and director of sales) before hitting the field on any given day and making a complex play call.
As we know, with revenue management, a lot of things are in motion at once before we can determine and allocate "which rooms, when, at what rates." Certainly, in recent years, the data and analyses available to today's best-trained and most-experienced revenue managers have gotten increasingly powerful. However, the challenges have become concomitantly complex when we consider such factors as the varied room reservation pipelines and their respective commission structures, the continued proliferation of hotel brands, ambitious new build or renovation programs that alter comp set capacity, or new lodging models. Not to mention that often difficult to predict consumer.
Like some other industries, the hospitality sector initially set out to emulate the airlines in their quest to maximize the value of any given seat on a plane-and we keep getting better at it. But we must be careful not to carry the analogy too far. Hotel entities can't add to or subtract from capacity in the same ways; it's impossible to add another "scheduled hotel" on the fly. We also have different cost structures for areas like financing, operating expenses or staff.
In this article, we review some of forces driving hospitality revenue management today, as well as some of the contemporary challenges that our revenue management systems must be capable of accommodating to in the overall drive to profitability and return on investment.
Evolving Pipelines and Concepts of Revenue
The multiplicity of reservation pipelines continues to be a challenge for hospitality revenue managers. We have OTAs like Expedia, brand web sites, individual property web sites, online booking portals for corporate accounts, and opaque web sites on which the consumer isn't aware that the respective property is "sponsoring" the reservation. Each has its own cost of acquisition, but most entities will have to comply with parity issues, especially with their brand.
Although we still see a lot of industry discussion, we are really past arguing about OTAs in general. They are a necessary-and helpful-fact of hospitality life and, as we mention later, stepping up partnerships with hospitality entities. The reality is that we must be on these sites or lose market share; the commissions are a part of doing business in this industry. In fact, booking hotel rooms seems to be an appealing business, with more and more folks entering the fray, a trend we don't see abating soon.
Hospitality revenue managers are also focusing more closely on costs of occupancy, which directly impacts our decisions about room allocation to different acquisition channels. Most of us can relate to this aspect of revenue management. Consider the occupancy costs of a block of rooms occupied by a high school class reunion or convention, as opposed, perhaps, to a group of seniors or regular corporate guests. What about pets? What about the number of guests per room? Ever mindful of discrimination issues, these analyses are being drilled down to the individual guest level. Even if we cannot limit occupancy by behavior, we must be mindful of the costs.
Moreover, as much as hospitality revenue management has historically been and must remain concerned with occupancy and daily rate, our strategies have evolved to focus on total room spend and total property spend. Hotel restaurants and lounges; room service; meeting space; athletic facilities and spas; higher capacity Internet or Wi-Fi; maybe, even parking spaces all have revenue potential. We have come a long way from charging for in-room movies. Depending on property type, these amenities represent substantial investments that must contribute to revenue.
Thus, predicting the total spend behavior of guests becomes another important task for revenue managers in hospitality. As with revenue management in general, the airline industry can help serve as a model of what works and what doesn't. The unbundling of services by the airlines (How much for that extra suitcase?), while understandable, also has generated animosity with flyers. Thus, at a time when hotel guests are objecting loudly to add-on fees on-line or through surveys, these charges for products and services must represent genuine value to guests.
Regardless, the concept of total spend will increasingly impact a host of areas in hospitality, including capital investment, service standards, and brand awareness and marketing.
Catching Hold of Demand
Beyond understanding the cost of an acquisition channel in respect to its potential for revenue, forecasting demand is one of the "eternal" challenges of revenue management in the hospitality industry. Our revenue managers have a rich trove of historical data to draw on where we can study trends, year over year, season over season. "We always do well the third week in August when families take late summer vacations," and so on.
Revenue managers must also be alert to short-term fluctuations in demand that will impact channel decisions and pricing. Has a certain convention or festival that always brings a solid number of guests been cancelled this year? Did the local university add a game to its home schedule this year? And so on.
One tricky area is when new product comes online in a market or comp set hotels schedule renovations that temporarily diminish capacity. In the case of new product, the best-case scenario for existing properties is when a newcomer exercises strong rate integrity; when rates are set lower to get cash flow jump-started, it's more of a challenge. Competitor renovations can also get interesting if a property raises rates to try and make up for lost revenue; the rate hikes are liable to being misinterpreted.
A final example is when a major employer or demand driver leaves a market. Here, the sales team may be charged with "blitzing the market" to find lower level corporate accounts, even when it may take a dozen or so such accounts to make up for one that was lost.
The forgoing emphasizes the value of great communications within an organization so that revenue managers can draw on local market intelligence gleaned by a property's general manager, sales team and other staff.
More Competitive Challenges
Today's revenue managers have outstanding theoretical frameworks, data processing power and practical experience to deal with some of the issues just discussed, along with the customary business cycles to which our industry is subject. But in today's business world, something new and different is always on the horizon. We mention a couple by way of example.
The first is dealing with new business alliances, which includes the hospitality marketplace absorbing the competitive ramifications on the scale of Marriott International's pending acquisition of Starwood Hotels & Resorts Worldwide. Together, the two entities operate more than 5,300 properties worldwide. Are other mergers or acquisitions on the horizon as we reach the heights of the current hospitality cycle?
Reservation systems; loyalty and reward programs; sales and marketing: large-scale mergers put a lot of revenue management factors in motion.
The online reservations marketplace also continues to evolve, with both Red Lion and Marriott announcing alliances with Expedia in recent days. Expedia will power Vacations by Marriott, giving it an Expedia look and feel. Expedia has also agreed that guests booking with Red Lion through its site (and Hotels.com) will be able to access Red Lion's members-only rates. As we indicated earlier, the appeal of OTAs is undeniable and revenue managers must be able to "work their magic" within this competitive framework.
Whose room is it? Last, we consider the formidable challenges to revenue management of nontraditional lodging options, which features AirBNB and a growing list of similar "sharing economy" ventures. While the hospitality industry and local municipalities work to level the competitive-and safety-playing field in areas like licensing and registration, taxation or insurance, this hotel challenger appears here to stay.
We have always had time-share and other venues as competition (or, even, strategic partners) in travel and resort areas, but this newly formulated lodging alternative also seems to be drawing some corporate travellers, to our surprise. Certainly, in all markets, we can no longer take for granted those "icing on the cake" demand generators like major sporting events, political conventions, wedding parties or a Mardi Gras-like festival. Some prospective guests are booking elsewhere.
A major challenge in this situation is being able to ascertain what capacity AirBNB and similar entities are generating in select markets, which is proving difficult at present; and, then, adjusting pricing to capture occupancy when we can.
This is the crux of our discussion. All of the issues we have reviewed in this article have important ramifications across a broad range of hospitality functions, including strategic planning, capital investment, hotel operations and information technology, and sales and marketing. However, most of these issues will first impact hospitality revenue management as it is organized and practiced today, and we will be expecting our revenue managers to be our entity's early warning system, first responders and problem-solvers.
We believe that today's corps of revenue managers is up to the challenge.
As President and Chief Executive Officer of Alliance Hospitality, EJ Schanfarber is directly responsible for day-to-day supervision of Alliance Hospitality’s third-party hotel management assignments. Mr. Schanfarber also directs Alliance Hospitality’s executive staff. Mr. Schanfarber works closely with Alliance Hospitality Chairman Rolf Tweeten in strategic growth planning, brand relationships, acquisitions and investor relations. Working with Tweeten, Mr. Schanfarber has helped forge Alliance Hospitality’s operating philosophy of managing hospitality assets “from the perspective of ownership”. Mr. Schanfarber is known for his management and people skills, as well as his keen understanding of market segments, operations in resort-driven locales and consumer trends. Mr. Schanfarber can be contacted at 919-791-1801 or firstname.lastname@example.org Please visit http://www.alliancehospitality.com for more information. Extended Bio...
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