The first is profit management, a term for a management practice that focuses on profit generation, not revenue. The second, a metric for the efficacy of “profit management” is GOPPAR, or gross operating profit per available room, something our company has commented on before. Both of these represent variations on a theme, namely that profit, and not revenue, should be the focus of any revenue or yield management strategy. Some analysts have gone so far as to say that profit management ought to replace revenue management in hotels.
This trend is not so disturbing as it is completely mystifying.
Straightforward…but narrow
The fact that the trend is so simple- and so obvious-seeming- is what is driving its repetition, in my opinion. Not that it is particularly innovative, groundbreaking, or effective, mind you… just obvious. There’s a seductiveness to an idea that aligns so perfectly with conventional wisdom; in the end, though, that doesn’t make it right.
Such is the case with GOPPAR and profit management. There is nothing inherently wrong with tailoring a management strategy to maximize profit; in fact, this is the ultimate goal of any management strategy.
But to exclude established metrics and practices in favor of more all-encompassing measures and methods is to lose some valuable nuance. More importantly, some of the theoretical points of “profit management” don’t apply universally, and may not be as effective for many hotels as a traditional revenue management strategy.
Tradition for tradition’s sake?
Far be it from me to defend established practices simply for being established. The only way to be successful in the hotel business is to be an envelope-pusher; for instance, I wholeheartedly believe in leveraging the very latest in revenue management technology and technique to achieve revenue maximization results, and I believe that some conventional revenue management tactics like historical pricing are real barriers to hotels’ success. But there is a reason revenue management and RevPAR have become pillars of the industry. There is a reason a generation of hotel owners and managers have staked their livelihoods to the revenue their properties generate per available room, and to strategies designed to consistently grow this revenue.
And the reason is simple: It works.
The same cannot be said for “profit management”. Take a hypothetical example that would seem to reinforce profit management as a preferred strategy: two hotels have equivalent RevPAR figures, one by posting 84% occupancy at an average daily rate of $87, the other with 78% occupancy at an ADR of $94. The argument is that while the RevPARs remain approximate, the cost of goods sold associated with higher occupancy makes the second scenario preferable from a profit management standpoint. Obvious, right? Makes perfect sense.
This theory misses three important points. One, an $8 increase to average daily rate is likely to have a much greater impact than a 7% decline in occupancy. With the amount of price transparency in a given hotel market, such a rate hike would probably have a much more significant effect on occupancy, nullifying the profit gains earned through the elevated ADR. Second, this calculus does not apply to all classes of hotels equally. To a luxury property, this may hold true, but a majority of hotels encounter a higher degree of price elasticity than luxury properties. Demand falls off much more sharply with rate increases in this segment, a result that is magnified by the instant availability of competitors’ rates provided by online travel agencies and other booking sites.
Third, and this is the mystifying aspect of the profit management trend, is that it actually doesn’t account for many aspects of hotel operations that most owners and operators will recognize as truly important. Yes, in certain situations higher occupancy implies a higher ration of expenses to revenue. But it also guarantees more individual guest impressions of the hotel, which can translate to more future bookings. Higher occupancy also usually correlates to higher ancillary sales, including food and beverage, retail, spa services, in-room F&B, among others. Granted, many ancillary revenue sources carry a higher cost of sales that hotel rooms, but under the right circumstances, the amount a guest might spend on ancillaries could exceed the room rate itself, as we often saw during the recession.
“Profit management”, with its emphasis on ADR, oversimplifies the delicate equilibrium between hoteliers who want to consistently present higher rates (for profit maximization or to position themselves as luxury) and consumers who- at every level- are seeking value. There are, however, both a metric and management that do account for this equilibrium, and when executed at the highest levels, achieve it to great benefit. That metric, of course, is RevPAR, and the management strategy defined as revenue management.
The belief that as occupancy goes up so should rates is a myth that has cost many hotel owners and operators a lot of money. Profit management is a good idea, but it rests too firmly upon this assumption. Revenue management remains the best way to maximize profits for the vast majority of hotels, and RevPAR remains the best measurement for revenue management performance. And to make sure that your property’s revenue management tactics are the most effective ones possible, it is important to continually search for innovation and embrace forward-thinking strategies. Because good revenue management tactics will never be replaced.
It’s just that simple.
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