HOTEL REVENUE MANAGEMENT REVENUE MANAGEMENT It Really Should Be Called Profit Management by Mark Haley & Jon Inge Revenue management is more complex about revenue management. Anyone selling than ever and potentially more rewarding, a perishable product knows that you need too. The entire organization must pull to- to flex your pricing in accordance with de- $$$gether to make revenue management suc- mand, lead time, competitors and a host of Put most simply, revenue management cessful, but the right RM implementation can other factors. Hotel rooms, airplane seats, positively drive results, creating not only rev- advertising time, fresh produce and winter is a way of doing enues but also profits. clothing are all subject to revenue manage- business that means Most practitioners accept that imple- ment tactics. every department menting revenue management in a hotel can Revenue management as a formal dis- increase revenues 3 percent to 6 percent. cipline has its origins in the domestic Ameri- focuses on what they Many have won much greater increases. can airline industry of the 1970s. Estab- need to do to drive the Affinia Hospitality saw revenues increase 17 lished, regulated airlines were threatened by total profitability of the percent over the prior year in the first month unregulated charter competitors. American after implementing manual RM processes in Airlines (AA), led by the legendary Bob organization. a new central reservations office. The Mil- Crandall, sought to cut the charters off at the lennium Bostonian Hotel paid back all of pass. AA did so successfully with advance their start-up costs and more in the first purchase restrictions on deeply discounted month after converting from manual RM pro- fares. Thus was born yield management cesses to an ASP-based service. Harrah’s En- (YM), the precursor to today’s revenue man- tertainment credited its RM system (installed agement. in 2001) with increasing room and gaming AA and other airlines refined and ex- revenues 13 percent for the year in 2002. tended their YM capabilities during the early Focus on that for a moment. years of deregulation, ultimately giving them Implementing revenue management the ability to price every seat on every flight can increase revenues 3 percent to 6 per- for maximum value, selling low cost seats to cent, or more. price-sensitive travelers (usually the leisure Then consider that most of that incre- segment) and high-cost seats to time-sensi- mental revenue flows through to operating tive travelers (usually on business). The im- profit. So, you might think you can increase pact and benefit of these capabilities became profitability merely by installing a computer transparent to all observers by the end of system. Well, not exactly: Revenue manage- 1985, when AA reported 48 percent profit ment is not a computer system or a set of growth on 14.5 percent revenue growth, arcane statistical algorithms. It isn’t even a while low-cost competitor People’s Express very hotel manager, operator department in your hotel. Put most simply, was hemorrhaging customers and cash. and owner has a fundamental revenue management is a way of doing busi- These financial results and the overwhelm- obligation to optimize the ness that means every department focuses ing competitive advantage attracted a great long-term profitability of the on what they need to do to drive the total deal of attention from many industries. Eassets he or she oversees. Ful- profitability of the organization. Computer Cruise lines, car rental agencies and ho- filling this obligation means increasing rates systems drive a much more disciplined and tel companies started to evaluate the ben- during busy periods and dropping them dur- consistent implementation of RM, but the or- efits of adopting YM as a business strategy. ing slower times to maintain occupancy or it ganization must embrace the cultural shifts Early adopters in the hotel space included means incurring expenses like a room reno- required to benefit from revenue manage- Marriott International, Holiday Inns World- vation or investment in technology. Given the ment. It’s the culture, not the computer. wide (now InterContinental Hotels Group), uptick in demand of the past year, one area of Hilton Hotels Corporation and ITT Sheraton. investment more and more hotel companies How Did All This Start? Organizations with centralized information are evaluating is revenue management (RM). Let’s examine the history of RM and systems and management structures adopted Hoteliers believe that they can drive increased some of the basic concepts. Many people centralized systems. More decentralized profitability using RM tools and techniques. correctly observe that there is nothing new organizations sought property-based systems. >> 6 • HOSPITALITY UPGRADE • www.hospitalityupgrade.com | Fall 2004 $ HOTEL REVENUE MANAGEMENT What Does RM Mean? Some of today’s sys- As yield management matured into rev- tems optimize ancillary enue management, the standard definition revenues as well as room of the art evolved: Revenue management is revenue. In this scenario the practice of selling the right product management provides an (room, seat and banana) for the right price estimated profit margin (rate and fare) at the right time to the right for each ancillary rev- customer. In the era of compound distribu- enue stream (casino play, tion channels and merchant model outlets, lift tickets and food and we can also add via the right channel. Dif- beverage sales) as well as ferent channels demand different prices and rooms margin. The sys- yielding strategies, and guests have come to tem then generates rec- expect different prices by channel because ommendations that opti- mize profit rather than the product itself is subtly different on each. Sample Calendar View of an RMS. This screen is where the revenue manager typi- A good example of differentiation by service revenue. For example, cally first goes in the system. Note flags for high or low occupancy, special events could be a low-priced merchant model room Intrawest Resorts’ group and alerts. These flags make the Calendar View exception-driven, so the revenue sale that excludes frequency program points RM module may recom- manager goes straight to the arrival dates flagged as opportunities to increase rev- or upgrade benefits. mend accepting a group enue. Screen shot courtesy of IDeaS, Inc. Drilling down on that definition a little with a ski lift ticket com- bit, let’s see what it takes to execute against mitment at a lower room The Revenue Management Cycle it. The first building block is an accurate rate than would be sold to record of demand for past arrival dates with transients with a smaller arrival date, departure date, booking date, lift ticket revenue forecast. rate and market segment, including book- The same logic applies to ing channel, captured for every reservation. optimizing room revenue The system then calculates the day of week by cost of distribution (DOW) for the arrival and departure dates channel. and length of stay (LOS). Ideally, you will Most RMSs provide a start with just over a year’s worth of history, choice of merely offering but that often is not practical. up recommendations or The next element is data about known automatically triggering demand for future arrival dates, again by seg- status and inventory con- ment. The revenue management system trols in the PMS or CRS. (RMS) extracts this data from the PMS or A recommendation- CRS daily (or more often) on an on-going driven system requires basis. The historical data, in combination more time, expertise and with the known demand for future arrival attention from the hotel’s dates, is then used to forecast demand by revenue manager to enter segment for all future arrival dates within a the recommendation into defined window. This forecast is usually sen- the PMS, CRS or other sitive to DOW factors and seasonal and secu- channel. A command- lar demand shifts. driven system automates The system then optimizes the available the input, but naturally re- rate and stay pattern controls against the fore- quires a more robust inter- casted demand and makes recommendations face to the PMS or CRS. ized demand that trigger status controls when as to what controls to apply on what arrival There are also hybrid solutions that allow “X” number of rooms are booked for a given dates to generate the most total revenue. hotels to establish parameters defining the rec- arrival date. While these triggers offer value and Finally, the system captures actual perfor- ommendations that can be implemented auto- discipline in managing inventory, they are reac- mance (again via extracts from PMS or CRS) matically vs. those that need to be reviewed be- tive rather than proactive, responding only to on the arrival date and, in some cases, modi- fore implementation. In these systems all, some pre-set triggers and not identifying changes in fies the forecasting and optimization algo- or no recommendations can be deployed auto- booking pace. We would label these features as rithms for no shows or walk-ins and the matically depending on the client’s needs. rate management, and argue that they do not impact of the controls actually imposed. This Some PMS or CRS products offer auto- represent revenue management because they element closes the feedback loop and makes mated yielding tools that may appear to sup- lack the crucial forecasting and revenue opti- the system heuristic, able to learn from its port RM functions. These features allow the mization algorithms. experience over time. hotel to define business rules sensitive to real- Likewise, a number of business intelligence >> 8 • HOSPITALITY UPGRADE • www.hospitalityupgrade.com | Fall 2004 $ HOTEL REVENUE MANAGEMENT (BI) tools provide tremendous analytical support to the revenue man- agement function. Decisions, from Datavision Technologies (http:// datavisiontech.com/index.html), extracts a wealth of PMS data on past and future performance and presents it in an accessible and interac- tive manner facilitating decision-making, but not necessarily calculat- ing forecasts and optimized controls.