TRANSLATED…REVENUE MANAGEMENT IS NOT ABOUT PRICING ONLY!
The first association most people still do when they hear about Revenue Management, is pricing and rate management.
This linking is always bringing a bittersweet smile on my face, because this association is only partly true as it diminishes what is the marvelous complexity of the discipline. Pricing is only the visible part, it is the culmination of the way in which we want to communicate the value of our product and place it in the market at a given moment, through a rate amount.
If we concentrate all our efforts in pricing, we are working on Pricing Management, neglecting the elements that are instead the foundations of Revenue Management and as such only partially managing and optimizing the potential revenues that our Hotel could generate.
I have been working in Revenue Management for years, I have collected good successes but also lots of scars through real, tough and rough experience. I have always worked with upscale properties and I have experienced occupancy and demand conditions where the price was exasperated both on the upside and on the downside. From this extreme pricing management (leading not far in the end), I learned that it is much easier to work starting from the foundation – product, moment, channel, segment and total revenue – to increase revenues, optimize profits and average rate and ultimately make conscious and comfortable decisions on the sell rate.
Let’s see how.
I- PRODUCT: WHEN DIFFERENT ROOM TYPES EXIST, VALUE EACH ONE OF THEM
We sell rooms. Obvious but critical if we ask ourselves – do we sell or occupy our room types? Rooms sold are those that the customer actually booked and paid vs Rooms occupied that include upgrades and upselling and can be therefore different from the ones originally booked.
It is common practice in RM to work with room type overbooking to balance the inventory and optimize sales. However, the analysis and measurement of the two indicators mentioned earlier (room sold vs rooms occupied) should not be neglected. In favorable demand conditions, simply by reducing the overbooking of the base rooms and pushing the sale towards higher room types (which does not necessarily imply any price changes), it is possible to increase the overall Hotel’s average rate, rooms revenue and profit.
However, many hotels do not want to even consider the room type overbooking. But what can happen is that they may not be competitive with the entry price of the superior room type that has remained available to sell. Overbooking is not mandatory, when there is resistance towards the method but at the same time there is the need to balance the inventory mix to optimize sales, I suggest leveraging other techniques to move occupancy between room types: on top of all the Upselling at time of booking, before arrival and/or at check in.
Upselling does to mean to force the client and it is not a possibility limited to few Hotel categories. We should leverage it to value to our products (room types) and improve the guest satisfaction and experience.
1% of upsold bookings generate an average + 1.5% increase in average rate. Let’s use it.
II – MOMENT: AT THE RIGHT TIME, IN THE RIGHT WAY AND FOR THE RIGHT LENGTH OF STAY
“Monday, I will be good to you, please be good to me”. The days of the week generate different levels of demand and our RM strategy must take this into account. Often, we fall into the trap of concentrating on the peak occupancy dates only, forgetting about the days before and after and the possibility that two days with average good occupancy but not necessarily full, can be more profitable than one sold-out day.
From my experience, minimum stays are often not used at all, abused or generalized.
- Not used at all: “Because we are afraid of refusing bookings”. We indeed do it to lose them, or better “select”: we apply restrictions on stays to skim the demand and increase the total turnover.
- Abused: “A minimum two-night stay applies to all weekends”. There is no rule, let’s learn to be flexible, adapting to the individual pattern of each day without being stuck to the bad habit of having always done so.
- Generalized: In point I we talked about product (the rooms) focusing on the fact that we sell specific products (room types) that have reason to exist for their peculiarities and demand. These peculiarities apply to restrictions and minimum stays alike: let’s get a bit more into details and capitalize the demand by room type rather than placing fences overall at the hotel level.
Real case: I have applied restrictions on stays in a specific room type only in the past, with the result of increasing the average stay of the room type by 0.5%, the average rate by + 11% and rooms revenue by + 20% compared to the previous year.
Minimum stays, restrictions and fences support our strategy but we cannot be effective on their application if we do not monitor the market and demand trends, we are rigid and are not ready to adapt to real time changes.
III – DISTRIBUTION: ALL CHANNELS BRING VALUE, NO CHANNEL BRINGS COSTANT AND TOTAL VALUE
Not even the direct booking channel.
Yes, I said it. I do not believe we can eliminate intermediaries, to me it is like trying to go back selling vinyl at the time of I-Tunes. However, I think it is our duty as hoteliers to manage distribution and intermediaries for our own good.
Everything is connected: there are room types (point I) that sell well through certain channels compared to others. There are days of the week or times when the occupancy suffers (point II) and specific channels – even if expensive – can help filling those “holes”. We should leverage and use these channels to drive incremental revenue and rate that probably we, through our own site or direct sales, would not be able to generate.
There are no good or bad OTAs: the product is ours and we are the ones that define how our own rooms are distributed. As such, we fight the battles that we choose to fight.
Little digression here: besides the Web factor where we all put a lot of energy and focus on, we should not neglect the V (oice) factor – the telephone reservations.
Turning the receptionist into a salesperson by investing in training, can increase the turnover and the conversion of the phone call from looker into booker up to +30%. With the opportunity to record no sells (the customer says no) and denials (the hotel says no): a priceless metric to adjust our Revenue Management strategy.
IV – SEGMENTATION: SHIFT & LIFT
The reason why we build a segmentation is to group customers who have similar buying behaviors and needs, but above all are willing to pay different rates and have different spending powers according to their trip personas.
Each segment generates demand that we accept or reject based on our forecast. It still often happens though, that besides the anxiety of reaching 100% occupancy still sadly widespread, even the anxiety of filling “as soon as possible” or building the so called “baseline” of reservations, is hard to die.
I have lived situations where despite the Hotel being happily full, my market share was not going anywhere … it was even decreasing and exactly in average rate! I then realized that although my pricing was well managed, the underlying problem was an imbalance in the mix of segments that impacted my total turnover – the preponderance of one or two low-contribution segments (the ones that built the famous “baseline”) was causing the detriment of demand on higher-rate segments that I was rejecting due the hotel being full.
Linking back to point II (Moment) all our decisions are based on the booking window: how far from the date we let one segment prevail to the detriment of the rest. My suggestion is to analyze the optimal segment mix according to the trend of the demand: sometimes the volumes restrictions of some low rated segments in favor of others with higher contribution, bring a general increase in turnover and average rate to the Hotel. And that even before applying any changes on pricing!
To reject business in favor of segments with no guarantee, is a bold choice to be made. But it is part of the work of the Revenue Manager: a good management of the segment mix drives high turnover and overall rate increase and should not be an option, but active part of the activity.
How to define then my optimal segment mix? Besides demand and average rate, what other factors to consider?
V – Total RevPAR, PLEASED TO MEET YOU!
Total Revenue Management is not anything new. Without even realizing it, when building our Hotel’s segmentation, we are already considering the Total RevPAR.
When segmenting between leisure and corporate we are already discriminating for spending capacity.
Each segment’s roomnight (link to point IV) generates room revenue, but also the so called extra or ancillary revenues that come from Spa, Restaurant, BAR, Golf or any spending other than rooms. When we attribute value to the segments, it is important to quantify the total contribution of each one of them: Total RevPAR (total revenue generated (rooms + extra) / rooms available).
Besides, being aware of the total revenue contribution that each segment (or geo source, as not all markets have the same spending power) can generate, allows not only to increase revenue and ADR but also to take conscious decisions on marketing investments and costs – we are neither talking about prices nor costs here…but they are all interwined.
Revenue Management is not just about rooms.
To wrap up: I highlighted just 5 among the many factors that are the essence (and not an option) in Revenue Management. They deserve attention and focus if we aim to drive the best possible results to our Hotels.
Let’s not under evaluate what may seem trivial (e.g. how we sell our rooms) as we need to work on a solid foundation to build the roof = sell rate.
My wish is for you to go back and look at your Hotels in a more critical way: brainstorming a little bit deeper and outside the mere pricing box. Look a little bit far beyond what is visible and focus a little bit more on what is measurable.
This article is an extract of the speech I held at the first Italian Hotel Revenue Forum on March 1st, 2018. For more information www.hotelrevenueforum.it