Download Revenue Strategy: It`s Time to Move Beyond Revenue Management

Revenue Strategy:
It’s Time to Move Beyond
Revenue Management
Revenue Strategy:
It’s Time to Move Beyond
Revenue Management
GLOSSARY
The hospitality industry is nearing an inflection point and the clock is ticking. Industrywide revenues continue to increase, but commissions are growing twice as fast. In
some cases, customer acquisition costs can be as high as 40%.
Industry-wide revenues continue to increase,
but commissions are growing twice as fast.
“If we don’t find a way for all players in the value chain to rationalize the economics, if it
doesn’t work for all, it doesn’t work for anyone,” said Leland Pillsbury, co-chairman and
CEO of Thayer Lodging, about the tenuous state of the hotel industry during last year’s
Revenue Strategy – A comprehensive approach to profit optimization
that: A) accounts for costs associated
with customer acquisition and
retention; B) leverages interdepartmental intelligence to facilitate
a collaborative approach to
revenue generation; and C) unlocks
behavioral insights through new data
sources and price elasticity testing.
Revenue Management - The art
and science of predicting real-time
customer demand and optimizing the
price and availability of products to
match that demand.
Commissions - The payments that
a travel agent receives for each
reservation made on their site.
Revenue Strategy Summit in New York City.
Traditional revenue management is no longer enough. A new revenue strategy is
critical for hoteliers to survive and thrive in this new world of not just intermediaries,
but now metamediaries that are taking a bigger cut of the action. This strategy must
integrate revenue management with sales and marketing and take advantage of the
tools and technologies available to combat distribution complexity.
Commissions vs. Total Revenue
Source: 2013 HAMA Study & Kalibri Labs
40%
30%
20%
Commissons
10%
Total Revenue
0%
2009
2010
2011
2012
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Revenue Strategy: It’s Time to Move Beyond Revenue Management
Times have changed
When Marriott introduced yield management to the hotel industry in the 1980s, the
GLOSSARY
Internet barely existed and most customers were using a rotary phone to make a hotel
Yield - The dynamic pricing,
overbooking, and allocation of
perishable assets to maximize
revenue.
reservation.
Overbooking - The practice of
confirming reservations beyond
capacity, either in expectation of cancellations or no-shows, or in error.
the even more rare walk-in, how many bookings are processed or touched by others?
Channels - Different methods by
which a customer books/reserves a
room.
“direct booking,” and tomorrow, it will be even less.
Booking WIndows - The timeframes
in which hotel reservations come into
hotels for a particular day.
Web Shopping Regrets
and Denials - When a hotel has
been shopped online and a rate was
given but the guest did not book a
reservation, or a rate was not given at
all due to a restriction or sell out.
OTAs – Online Travel Agencies, travel
intermediaries that allow consumers
to research and book their own travel
through the use of travel websites
such as Expedia and Orbitz.
Think about how consumers book hotels today. Besides calling hotels directly, and
Even the most profitable customers visiting the hotel’s website to book are likely first
visiting other sites that are getting a cut of the action. Very little today constitutes a
The Internet, cloud computing, open source
software and mobile technology have
changed the industry for good.
“The majority of a hotel’s bookings will pass through some intermediary and incur
added cost even if the consumer ends up booking on brand.com,” says Cindy Estis
Green, CEO of Kalibri Labs, and co-author of the recent book, Distribution Channel
Analysis: A Guide for Hotels.
The Internet, cloud computing, open source software and mobile technology have
changed the industry for good. If we look at lodging’s booking ecosystem today, we see
a web of distribution complexity and compressed booking windows that did not exist
when traditional revenue management was
devised. The distribution and data science
Macroeconomic
Data
Web Shopping
Regrets & Denials
demanding with new channels, social media
and one-to-one marketing.
Reviews &
Social Media
Leland Pillsbury, the man who helped
Behavioral
Insights
Weather
launch the first hotel revenue management
system while with Marriott in the 1980s,
Competitor
Pricing Data
describes the era beginning in 1996 with
the emergence of OTAs as “the invasion of
TRADITIONAL
REVENUE MANAGEMENT
Booking &
Reservation Data
side of the business has become far more
Air Traffic
the value snatchers.” Yet many, if not most
hoteliers today still employ essentially the
TRADITIONAL
REVENUE MANAGEMENT
same strategies and technologies used
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Revenue Strategy: It’s Time to Move Beyond Revenue Management
twenty years ago before OTAs even existed. So many of the core systems—central
reservation, property management, customer relationship management, revenue
GLOSSARY
management—powering the hotel industry are on their way to obsolescence, if not
already there.
Predictive analytics are a powerful tool - not only
for forecasting demand and pricing rooms but for
management decisions across the entire hotel enterprise.
Fixed-tier best-available-rate pricing is an obsolete strategy when open, fully dynamic
pricing is a viable option. Revenue management is inherently a dynamic function,
Dynamic Pricing - The process
of actively applying revenue
management by selling the same
products at different prices to
different customers.
Demand - The forecast of how many
rooms you could sell if you had an
unlimited number of rooms.
Predictive Analytics - Extracting
information from data and using it to
predict trends and behavior patterns.
where the target—demand—changes every second, as should the strategy and
pricing to meet it. Managing (and pricing) to pre-set budgets and mistaking inventory
management for revenue management are costly errors in today’s competitive
distribution landscape with decreasing margins. The right customer segments must be
correctly understood and defined, and then yielded independently. Otherwise, money
is being left on the table.
A New Revenue Strategy
Beyond revenue management, a new revenue strategy should incorporate shared
intelligence from sales, marketing, distribution, and other departments tasked with
revenue generation.
Revenue management and its supporting
systems have historically been only
responsible for forecasting demand and
then pricing rooms to maximize revenue.
That can no longer be done in a vacuum,
separate from the marketers who are
creating much of that demand and the
sales team trying to convert it. Today,
these departments simply cannot operate
in silos and instead must work together
in furtherance of aligned objectives.
Predictive analytics are a powerful tool - not
Revenue
Management
only for forecasting demand and pricing
Sales &
Marketing
Distribution
Operations
Collaborate Across the Hotel
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Revenue Strategy: It’s Time to Move Beyond Revenue Management
rooms but for management decisions across the entire hotel enterprise.
Market intelligence gleaned from revenue management forecasts are a natural
starting point for proactive revenue strategies. How can marketing know how
aggressive to be with offers and promotions when they don’t know when they’ll need
them? Is a particular offer filling rooms when demand is low or are you flooding the
market with deals on days when it’s not necessary? How much of an upgrade should a
loyalty program member receive for his 20 stays, and might that displace a customer
willing to pay top dollar for that room that night? Data is available today that can
answer those questions, but it’s often not at the fingertips of the individuals making
these decisions.
“We need to have a profit focus
and not a revenue focus.”
-Cindy Estis Green
“Price optimization is an important lever, but there are other levers controlled by sales,
digital marketing, email campaigns and more,” says Estis Green. “We need to have a
profit focus and not a revenue focus. We have to look at acquisition costs and not just
generating revenue, but generating revenue in a cost effective manner.”
The Future is Now
To reclaim value lost to booking intermediaries, it is essential that hotels establish
connections with guests throughout the discovery and booking process.
Ever since online distribution brought transparency, hoteliers started competing with
the emphasis on price. During the most recent economic downturn, when everyone
GLOSSARY
was fighting tooth and nail to fill their rooms with dwindling demand, the downward
pressure on rates played directly into the hands of OTAs. In addition, antiquated
Open Pricing - The ability to price all
room types, channels and dates independently of each other to maximize
revenue without having to close any
off.
BAR – Best Available Rate, a
commonly used base rate upon which
all other priced segments are based
upon.
revenue management practices like fixed-tier BAR pricing have accelerated the race to
the bottom.
But hoteliers are getting smarter with innovative new techniques. Jason Thielbahr,
Senior Vice President of Revenue Optimization and Distribution Services, of Red Lion
Hotels looks to gain competitive advantage after rolling out a suite of technology that
will enable an open pricing revenue strategy.
“The window is now,” says Thielbahr. “We had a choice to play catch up or to leapfrog
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Revenue Strategy: It’s Time to Move Beyond Revenue Management
the competition. We chose the latter and are exited to get this system in place. The
industry outlook for next year is strong and we have very high expectations beyond
that.”
It’s not too late for hoteliers to regain control of their customers and business, but
they can’t wait much longer. It’s time to drop artificial constraints on pricing and
align incentives. Budgets can be useful guidelines, but they are static, while customer
demand is dynamic. Too many hotels fall into the trap of managing rates not to
maximize revenue, but to meet budgets.
Hoteliers need to better track customer behavior as OTAs have been doing for years.
Some of the more powerful insights a hotel can have about prospective customers are
readily obtained by tracking website booking inquiries. That data can provide real-time
feedback on pricing strategies and better approximate price elasticity.
It’s not enough to have good data;
it must be actionable.
But it’s not enough to have good data; it must be actionable. Revenue strategists need
systems that automate data management and make information easily and quickly
digestible. It’s no longer a realistic proposition to wade through a multitude of data
on an Excel spreadsheet and expect to make timely and accurate pricing decisions.
Systems facilitating this process need clear user interfaces that serve up complex
information simply and quickly and enable flexible pricing strategies.
Hoteliers must act now to embrace a more holistic view of generating profit. They
must move past an old way of thinking and antiquated systems that no longer work,
and look to the future with more sophisticated technologies and a new, comprehensive
revenue strategy.
GLOSSARY
Price Elasticity - A measure of the
relationship between a change in the
quantity demanded of a particular
good, in this case a hotel room, and a
change in its price.
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Revenue Strategy: It’s Time to Move Beyond Revenue Management