A revenue-management road map

Now that hotel executives have realized the importance of revenue management, directors filling that role must focus on a top-level strategy that includes revenue optimization for the entire hotel and all its revenue streams.


“Everybody needs to make sure that they do a revenue strategy. Too many dive into revenue management without thinking big picture, without sitting down and creating a plan. Without a strategic plan, how do we know what we should be doing?” Kathleen Cullen told attendees at the HSMAI Revenue Management & Internet Marketing Strategy Conference last month.

During a breakout session titled “Building Your Own Revenue Management Road Map,” Cullen, who is partner of consulting firm inspire resources, presented findings of her HSMAI-sponsored report, “The Evolving Dynamics of Revenue Management: A comprehensive revenue optimization road map for hotel owners, operators and practitioners.”

What follows are highlights of those findings—a road map for revenue managers to guide them to the next level of revenue generation:

Fostering a RM culture

“The first part is the most important—you have to make sure that everyone understands the culture of revenue management,” Cullen said.

There’s more to revenue management than generating room revenue. The practice now touches nearly every aspect of the hotel. Thus, revenue managers must be in a position in the managerial hierarchy where they can influence key decisions.

For each property, revenue managers should report directly to the GM—not the director of sales and marketing, Cullen said. They should also be part of the executive committee.

“It’s very important this person is responsible for the overall revenues of the hotel, so we need to make sure they’re exposed to the proper conversations,” Cullen said.

Revenue managers should expose others to the proper conversation as well. Successful revenue optimization requires a team approach. Managers must report on their efforts and enlist the help of other key stakeholders through regular and structured meetings.

Understanding the market

“It’s very important to make sure that we understand the market—not just the local market but also overall, the bigger picture. What is it the industry is doing?” Cullen said.

There are four key areas to understand:

1. Internal and external influencers—What is happening in the market? Are there new flags, products or construction?

2. Market trends (industry and local)—How are consumers behaving? Are there any new competitive trends? What about pricing trends?

3. Demand indicators—What are some of the behaviors or events, both positive and negative, that will have a direct impact on business?

4. Competition—What is the competitive set? What are the strengths, weaknesses, opportunities and threats?

Forecasting

Forecasting is a crucial aspect of revenue management that allows managers to implement successful strategies and measure performance, Cullen said.

There are four types of forecasting:

1. Demand

Revenue managers must understand the unconstrained demand for their hotels. In other words, how many reservations could they accept if they had an infinite number of rooms?

Kathleen Cullen, partner, inspire resources

“This is one of the most important forecasts that a hotel should be doing, but it’s one that is done the least,” Cullen said.

2. Strategic

A strategic forecast examines demand within the context of a manager’s strategies. How would current or planned initiatives, for example, impact unconstrained demand?

3. Revenue

The most realistic picture of forecasted performance, this is the forecast commonly in practice today—the one that should be shared with ownership.



4. Operational



Used for operational purposes, this is the “working” forecast used to set day-to-day pricing.

Strategizing pricing

Like any good plan, a revenue-management strategy must be documented in great detail, Cullen said. The strategy should be developed with key stakeholders during the course of a single meeting—or several. The plan then must be communicated to team members, with actionable items assigned to promote accountability.

The plan also should include a detailed pricing strategy, with attention paid to every distribution channel for every customer segment for every product. Some elements managers should consider are: market position, seasonal demand, strategic benchmarking, day-of-the-week demand, customer segmentation, special-needs periods, channel strategies, room costs, price fencing, and education for the sales and reservations teams on the process and approach of selling prices outlined in the revenue strategy.

Revenue managers also should develop a strategy around discounting. While Cullen refrained from advising against the practice in its entirety, she did remind attendees that when a hotel realizes revenue growth through rates, 95 percent flows to the bottom line, and if the growth comes through occupancy, approximately 50 percent flows to the bottom line.

In other words: Use caution. Cullen offered the following considerations:

1. If booking pace is slow, do not assume rate is the problem. It may be something else, in which case a price cut is not the answer.

2. Be sure the sales team, including reservations, is asking good questions about customer needs. Qualifying the customer helps reduce the necessity to discount.

3. Ensure the offer is focused on the value, not the price. Educate the reservations team on making the offer, asking for the sale and overcoming objectives.

4. Make the connection between the product offering and what the customer wants.

5. Be sure to do a break-even analysis. With each discount, how many more reservations do you need to capture to achieve the same revenue goal?

6. Discounting will only create demand when it is tied directly with some type of marketing initiative. What type of marketing plan will be put into place to target and capture the right amount of additional reservations?

7. Why is the competitive set decreasing its rate? Following others’ lead without understand the reason behind it is not a good strategy.