Revenue Management to Revenue Strategy: The changing role of RM in hotels
With U.S. hotel occupancy levels registering record-breaking performance,1 hoteliers must get creative when it comes forging a path toward higher rates and greater profits. And they increasingly look to their revenue managers to chart the course. As a result, we’re seeing a transformation of the revenue management (RM) role – from revenue manager to revenue strategist.
Revenue management of the past
Hospitality revenue management (RM) began in 19722 when BOAC airlines (now British Airways) began offering discounted fares to “early bird” passenger bookings, while charging full price to others on the same flight. The lodging industry introduced multitier rate systems for rooms in the 80s, and the first hotel RM positions made their debut about a decade later. Initially, revenue management was a discipline in which hoteliers were systems experts, working under a hotel’s director of sales and marketing.3 Early applications of RM were reactive and focused on room rate management4 – i.e. rates and inventory – and were not proactive long-term propositions.5
Yield management decisions were typically only reviewed a few times per year (at best), with occasional adjustments made based on year-over-year pace 30 days out, or 90 days at the most. Relying on SQL programming skills and the advanced functions of Excel spreadsheets, revenue managers compiled a list of standard reports that were presented to the management team, who in turn made decisions regarding pricing and allotment.
RM took a tactical and reactionary position rather than a strategic one – working to manage incoming demand and pricing in ways that were focused more on occupancy and/or ADR than revenue and profit. Consideration of what source the business was coming from or length of stay pattern, although important, was difficult to factor into a pricing decision in a timely fashion. Therefore, an increase in year-over-year occupancy or ADR meant you were “winning” even though profit growth may have said otherwise.
The advent of big data & technology
RM in the hotel industry has bloomed in the past decade – particularly over the last few years – moving beyond its former role of simply managing rates and inventory to guiding hotels toward true revenue growth with long-term strategies. And big data in conjunction with technology have been catalysts for that growth.
Hotels now have access to massive amounts of data which can be used as part of a hotel’s RM effort. Segmented guest data allows you to personalize experiences and promotions to gain repeat business, demand forecasts help improve pricing strategies, and up-close views of your operating expenses help you avoid revenue leakage – all of which mean greater profits for your hotel. But managing the complexity and accuracy of all this data presents a unique challenge.
Leaps in technology and revenue management systems that incorporate algorithms, along with data capture and analytic capabilities are making revenue management tools more sophisticated than ever. Advanced revenue management systems (RMSs) now play a key role in translating complex big data into accurate and understandable insights that provide immediate takeaways. System automation can quickly tell hoteliers how their property is performing at the market segment, channel, and room type level – on a daily, weekly, monthly, and annual basis. And using a RMS enhanced with machine learning and business intelligence gives revenue managers methods to identify and understand complex data in new ways.
Cloud-based RMS architecture collates data all in one place, incorporating information on demand, market segments, competitor rates, historical data, local events, changing market conditions, and more. All of this data creates a significantly more accurate market view, helping you understand which customers the hotel should be targeting and when, and what it all means for your hotel’s future story. Evolutions in technology have made it possible for RMSs to process more data faster,6 resulting in detailed and accurate forecasts, and more profitable pricing recommendations.
A further benefit of cloud-based technology is that it allows the RM role to become increasingly collaborative,7 with every department working with the same data and toward the same goal. Instead of working for the sales and marketing director, RM now works in tandem with these teams to boost occupancy from the highest-paying guests, and ensure rooms are not underpriced.
Revenue management of today
Modern RM has transitioned from a short-term, myopic tactical focus to developing long-term, big picture strategies for both transient and group business.8 Taking a long-term approach that balances occupancy and rate strategies for these two segments, leads you down a pathway of intelligent pricing decisions and greater profitability for your hotel.
Transient pricing strategies encompass your business and leisure travelers. A RMS allows you to look at forecasted demand in comparison to what’s on the books (OTB), year-over-year occupancy, and pace/pickup, as well as incorporating real-time data like comp set pricing and current market conditions. A RMS will also take lead times, distribution channels, length of stay, shopping behaviors, and more into account. This allows you to adjust rates based on length of stay by market segment and channel in ways that maximize profit.
For instance, during a period where demand is pacing behind, you may offer special packages with specific amenities that add value without necessarily dropping your rates. Your transient strategy will help you determine when to use OTAs and third-party booking channels, and ensure your loyalty program and direct bookings are truly contributing to your bottom line. And it incorporates occupancy forecasts that help you manage operations more efficiently, accurately planning for all staffing, supplies, and food-and-beverage needs.
Group Business Strategies
Strategizing group business pricing forms the second half of a hotel’s modern RM strategy – with group revenue playing a significant role in hotel profitability. Pricing for groups is even more complex9 than pricing your transient business, because to determine the true profitability of a group, you must look beyond room revenue to take other factors into account.
On top of room inventory, you need to consider forecasted revenue from catering packages, function space rental, audio/visual equipment rentals, and other ancillary sources that can yield tremendous profit. A scientific RMS with a group forecasting component allows you to incorporate these revenue sources. It should even perform a complete displacement analysis, so you can compare the total value of a forecasted group with the value of displaced business – both proposed transient and other groups that have not yet booked. Only then can you proactively price your business for bookings yet to come, and strategize the optimal business mix for your hotel.
It takes the right combination of big data and smart technology, combined with a role transition from revenue management to revenue strategist, to create the foundation of a successful RM approach for your hotel.
About the Author
Kevin Duncan is an energetic leader who has been an innovator of total revenue management principles for the entire hospitality industry. His strategic guidance at every hotel he has interacted with has helped increase profitability and overall service levels. He brings over 20 years of hotel experience and has achieved tremendous success through his hands-on approach of leadership creating a positive working atmosphere. Kevin is currently the Senior Director, Strategic Commercial Initiatives at The Rainmaker Group. He has the rare blend of revenue management experience combined with years of hands on knowledge of sales, marketing and operations. He has volunteered his time for industry associations to ensure the education of our future leaders. He continues to look at how to advance Total Hotel Revenue Management for our ever-changing economy.
1“STR: US Hotels Post Another Record Year in 2018.” Hotel News Now, 18 Jan. 2019, hotelnewsnow.com/Articles/292373/STR-US-hotels-post-another-record-year-in-2018.
2Ferguson, Mark, and Scott Smith. “The Changing Landscape of Hotel Revenue Management and the Role of the Hotel Revenue Manager.” ResearchGate.net, Journal of Revenue & Pricing Management, Apr. 2014, www.researchgate.net/publication/262774430_The_changing_landscape_of_hotel_revenue_management_and_the_role_of_the_hotel_revenue_manager.
3“Revenue-Management Roles Continue to Evolve.” Hotel News Now, 24 July 2018, www.hotelnewsnow.com/Articles/287441/Revenue-management-roles-continue-to-evolve.
4“How Revenue Management Is Becoming Revenue Strategy.” Hotel News Now, 28 Sept. 2018, hotelnewsnow.com/Articles/290638/How-revenue-management-is-becoming-revenue-strategy.
5Bacon, Tom. “Look Long-Term: Is Your Revenue Management Strategy Looking out beyond Its Nose?: Travel Industry News & Conferences.” EyeforTravel, 6 June 2013, www.eyefortravel.com/revenue-and-data-management/look-long-term-your-revenue-management-strategy-looking-out-beyond-its-n.
6McGuire, Kelly A. “Big Data, Big Analytics, and Revenue Management – 2015 – Wiley Online Books.” Wiley Online Library, John Wiley & Sons, Ltd, 26 Oct. 2015, onlinelibrary.wiley.com/doi/10.1002/9781119162285.ch3.
8Chen, Lio. “7 Revenue Management Tactics to Increase Overall ROI.” Insights, 29 Sept. 2016, insights.ehotelier.com/insights/2016/09/29/7-revenue-management-tactics-increase-overall-roi/.
9Noone, Breffni M., et al. “Total Hotel Revenue Management: A Strategic Profit Perspective.” Cornell SHA, Oct. 2016, sha.cornell.edu/faculty-research/centers-institutes/chr/research-publications/total-hotel-revenue-management-strategic-profit-perspective/.