Dr. Higbie

Revenue Management

The Intersect of Cloud Computing and Revenue Management

By Jon Higbie, Chief Science Officer, Revenue Analytics, Inc.

Why Hotel Executives Should Have Their Heads in the Cloud

Cloud computing is a term that most people know about and are familiar with. However, many hotel executives don't know that the advent of the cloud is reshaping the future of hotel Revenue Management - and they can benefit from it. First, executives need to understand the evolution of cloud computing. As the size of datasets increased - giving rise to the term Big Data - the cost to both store all that data and perform the processing required to leverage it has become incredibly expensive. Meanwhile, innovation in cloud computing - which means harnessing latent computing capacity to dramatically increase storage and computing capacity - has been moving at warp speed lately after evolving for decades.

In the late 1980s and '90s, cloud efforts were largely centered on linking a company's desktop computers and servers at night to solve problems, a cumbersome process that never quite worked except for a handful of specific applications. Then, as the internet grew, data and processing needs for e-commerce companies also grew. Suddenly, a single server, no matter how many CPUs, was not big enough. Multiple servers that could seamlessly collaborate were needed.

The technology - mostly software - has evolved to the point where today it is feasible for any company to implement applications in the cloud. Additionally, service providers such as Amazon Web Services (AWS) have reduced the need for large computers housed by a hotel enterprise.

This technological shift has made developing and delivering Revenue Management applications much faster, and supporting them much less expensive. Cloud computing is enabling the development of capabilities that Revenue Management practitioners have been striving towards for more than a decade, such as real-time integration of Customer Lifetime Value into pricing and availability; modeling consumer behavior from click-stream data to improving merchandising on the brand website; and integrating loyalty and total property spend into Revenue Management decision-making.

Today, many of the latest Revenue Management applications are being developed and hosted in the cloud. In some other industries, like retail and start-ups, the pace of adoption is even faster.

The reason - and one that should interest the C-suite - is that these companies have learned that moving to the cloud speeds the delivery of critical revenue-generating applications.

The Bigger the Data, the Bigger the Need for Cloud Computing

The explosion of the internet, and the enormous amount of data generated, spurred the rapid development of cloud computing in the private sector. Companies like Google, Facebook and Amazon would not have been able to grow to their current scale without it. For example, distributed cloud computing allows Facebook to handle 1 billion page views per day. They also host approximately 1 million other web sites. To enable all this activity, Facebook operates at least five gigantic data centers across the globe.(1)

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Most hotel companies do not have data as big as Amazon, Facebook and Google, but their data is large enough to constantly stretch the limits of on-premise data storage and computing capacity. For example, one major hotel's Revenue Management solution includes a tactical forecasting capability that generates 48 million forecasts nightly for each hotel, segment, room type, and channel for the next 394 days. The processing and algorithms require enormous amounts of data storage and processing capacity while running.

The insatiable appetite for computing resources illustrates how cloud computing is transforming Revenue Management. Smart hotel enterprises are developing innovative applications in the cloud rather than on-premise, thereby eliminating any need for additional servers on-premise with their associated overhead costs and headaches.

Cloud computing also allows development of a new Revenue Management capability to begin immediately. In the cloud, an entire computing environment can be created in less than a day. Compare that to the weeks or even months to acquire servers and all the licenses necessary before development can even begin. And there is no need for a hotel enterprise to build its own cloud. There are several reliable cloud hosting providers who will "lease" resources for your hotel's applications.

These partners already have enormous amounts of computing capacity available and all the software - including security - to enable multiple servers to collaborate for your applications. Some of the most popular cloud partners include Amazon (AWS), Microsoft (Azure), Rackspace and Google (GCP).

Overcoming Misconceptions and Concerns About the Cloud

The reason some hoteliers may be wary of cloud computing is concerns about security, regulatory guidelines, their lack of expertise in moving to the cloud, and the cost of doing so. These are legitimate concerns, yet largely borne out of misconceptions about the cloud.

Many companies believe the cloud is less secure than their own environments, yet the truth is that top-tier cloud providers attract and can afford to employ the best security experts in the industry. Using economies of scale and specialization, they invest in people and software that even the largest companies can't compete with. In fact, hosting your application and data in the cloud is more secure than hosting it in your on-premise environment.

In terms of regulatory obstacles, it's also important to point out that cloud providers today are compliant with the most stringent certifications, including PCI, HIPAA, FedRAMP and more.

There is no doubt that moving from the traditional approach of owning and operating your hardware to developing and operating in a cloud environment is a big transformation for any company. The skill sets are certainly different and once in the cloud, your IT staff needs to think like software developers - incorporating concepts like code reuse, cattle not pets, and version control.(2)

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As for costs associated with the cloud, one problem is that executives often make the apples-to-oranges mistake when comparing cloud environments to old school data centers. It may be true that the cost of an equivalent server in a traditional data center is cheaper than the cost of the same server in a cloud environment, yet servers are rarely fully utilized in a typical data center because most application loads have daily and/or seasonal spikes.

If you build your own data center, you must predict and pay for your expected max load 24x7x365. If you predict high, you pay for unused capacity. If you predict low, you risk lost revenue and/or angry customers. When used wisely, the cloud allows you to pay for exactly what you need when you need it.

In addition, critical applications require high availability and disaster recovery. Implementing redundancy in a traditional environment can easily double hardware costs, not to mention the difficulty testing your disaster recovery environment. Cloud environments allow you to turn costly data center and server purchases into software - reducing capital purchases and the costs to perform periodic disaster recovery tests.

How to Move to the Cloud the Right Way

From a strategic perspective, don't start by moving your existing capabilities to the cloud. Instead, build a new capability first, then add another, and perhaps another, gaining a critical mass, expertise, and economies of scale in the cloud. Once you've had the opportunity to access the progress, test and learn, and start building a roadmap to move existing Revenue Management capabilities to the cloud.

In addition, try not to bite off more than you can chew. Like the popular elephant metaphor - the only way to eat one is a bite at a time - the best strategy is to perform your cloud integration one piece at a time. A one-time, full-scale shift to the cloud is likely to overwhelm your IT team with unexpected issues. Take it slowly and do plenty of testing along the way so that you understand what works best and what to avoid making your migration more successful.

It's also recommended that you partner with a firm that is expert in application development in the cloud. Not everyone can do this type of work or has the technical and strategic know-how to advise at every step along the way. Getting the right partner will make the move to the cloud much easier, more efficient and less stressful. A strong partner will also bring Revenue Management domain expertise and a set of tools to efficiently harness the power of the cloud.

The Many Benefits of Cloud Computing - Including How to Get Customers to Buy More

A hotel operator can benefit from moving from on-premise to cloud development. Start with reducing IT spending - from hardware to software - and the associated hassle. There's no more need to buy new servers, update the software, and all the other money-draining requirements of running a data center to host your Revenue Management applications. On-premise approaches require more time and investment. Cloud application investments are more cost-effective. The cloud also means faster speed to delivery on solutions, recommendations and forecasts. When every second counts toward higher profitability, why go slower?

Cloud computing also provides ease of access to your trusted partner(s), who no longer need to travel to your offices to make programming and other changes. Instead, it's all available anywhere and at any time on the servers of your cloud provider. And since your cloud solution provider also is your business partner, you can expect (or demand) higher levels of service than with your own employees.

Yet the benefits of cloud computing go much further - right to the heart of successful Revenue Management. This begins with a holistic, customer-centric approach which seeks to optimize total customer profit while enriching the guest experience. To create these capabilities, huge amounts of disparate data on your existing customers and hoped-for future customers are needed. This data resides in the cloud, and that's where the computing power is also. This suite of capabilities aligns with the customer journey, thereby enticing your customers to "return more" and "buy more." "Return more" is about maximizing the customer's expected lifetime value. This can be done by tracking and predicting customer churn and aligning your sales incentives; identifying similar cohorts and modeling desired hotel stays; and leveraging a broader range of consumer data sources to integrate marketing offers with your Customer Relationship Management (CRM) and Revenue Management systems.

Leveraging past customer occasion data to understand the customer, not the transaction, is essential, and knowing how to integrate customer-level analytics into your CRM and distribution systems. This allows you to predict the next trip, which then helps with the "buy more" proposition.

"Buy more" means increasing the share of wallet and pulling forward customer spend to increase the size of wallet. The cruise industry has already seen a sizable revenue uplift from this, offering targeted ancillaries and bundles at the time of booking, and offering deals - such as shore excursions - before departure. Hoteliers can employ promotion optimization to generate tactical promotions to fill need dates, presenting the right discount to the right person at the right time.

These targeted advance arrival offers generate unique offers based on trip context/customer segmentation and generate organic revenue. Cloud computing makes it all possible.

Once the mystery - and worry - is removed from cloud computing, hotel enterprises will more easily visualize its strengths and the possibilities of utilizing the cloud and Big Data to create new Revenue Management capabilities. Those who fret about security, regulatory issues, lack of experience in moving to the cloud and its related costs risk staying too long with current Revenue Management solutions and getting left behind by competitors. Continued investment in on-premise capabilities is a wasted investment and places you further behind your competitors.

Innovative new Revenue Management solutions will be implemented in the cloud as will many enhancements to existing solutions, making a hotel enterprise more agile and capable of adapting to the accelerating changes in the hospitality industry.

The key is to proceed in small steps, using a proven cloud service provider and an A-team of experts with a set of battle-tested technologies. These experts bring their own set of tools to expedite application development and ensure reliable execution when the application is deployed. They can help your company reduce its reliance on development and computing resources, while leveraging the cloud to your competitive advantage.

References:

(1) http://www.datacenterknowledge.com/the-facebook-data-center-faq/ Accessed July 3, 2017. Facebook DataCenter, Servers and Infrastructure FAQ. (2016, September 16). Retrieved July 13, 2017, from http://www.datacenterknowledge.com/the-facebook-data-center-faq/

(2) Bias, R. (2016, September 29). The History of Pets vs Cattle and How to Use the Analogy Properly. Retrieved July 13, 2017

Jon Higbie, PhD, Chief Science Officer at Revenue Analyticoversees the company’s science and innovation efforts, including solution design and technological innovation capabilities. In addition, Dr. Higbie is responsible for delivering excellence in science and analytics as it relates to creating Revenue Analytics’ intellectual property. He is an instrumental force in helping Fortune 1000 companies drive organic revenue and profit by leveraging Big Data with advanced analytics to implement sophisticated pricing, forecasting and Revenue Management techniques. Dr. Higbie is particularly known for his groundbreaking work in the hospitality and advertising industries. He has been recognized for his contributions to the science of group Revenue Management, real-time price management. Dr. Higbie can be contacted at 770-661-1444 or jhigbie@revenueanalytics.com Extended Bio...

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