Revenue management is a large part of a hotel's sales strategy and how successful it will be. In the world of hospitality, there is no truer statement than “time is money”. Hotels have something called perishable inventory, which means that their inventory (rooms) aren’t able to be sold after that time has passed. Revenue management is a sales strategy originally derived from an inventory centric approach to a consumer centric focus. The first hotel to adopt this idea of revenue management was no other than the Marriott chain of hotels back in the 1980s.
What is revenue management?
Today, revenue management has evolved to place the consumer at the center of the equation. It’s based on the economic concept of “willingness to pay,” which is the maximum amount each consumer is willing to pay for any one unit, item, or service. The overall revenue management strategy aims to closely align the relationship between how a hotel room is priced and what a consumer will pay for that room. The better alignment, the more accurately you can price a room, the more customers will see value in your price to purchase that room, thus bringing up your bottom line. Revenue management can be formulated as:
‘Selling the right room’ X ‘to the right client’ X ‘at the right time’ X ‘at the right price’ X ‘on the right distribution channel with the best commission efficiency’
There are many variables in nailing down your overall strategy and this takes time, experimentation and tweaking. Moreover, it’s also about maximizing a guest’s total spend on property. Revenue managers must collaborate cross-functionally to implement an overarching strategy that delivers peak profitability rather than simply focusing on room revenue or short term gains.
How does it affect your hotel’s sales strategy?
Your revenue manager works closely with their director of sales and sales team to bring this equation to life and it is a fine balance because you don’t want to tip the scales too much in any one direction because this can cause displacement in your hotel’s revenue. Displacement occurs when the cost of accepting group bookings today at discounted rate on average per night is compared with as a loss against potential full-price bookings at a later date.
Your revenue manager plays a central role in aligning marketing, sales and operations in this case. They liaise between the departments to ensure that your hotel is maximizing its profit against all market conditions and especially increasingly complex distribution landscapes. When we say distribution landscapes, we mean online travel agents (OTAs) like Expedia and booking.com, for example, as today’s traveler often uses an online middleman to book their travels.
Today's technologies are definitely more sophisticated and are able to capture and analyze massive datasets to deliver pricing recommendations in real-time. To determine the ideal price of a room, revenue managers use a revenue management system (RMS) to reference the hotel’s available supply, in-market and property-level demand, as well as a consumer’s price sensitivity and demographics like if they are a business/leisure traveler or loyal/transient guest. Ideally, to be able to maximize revenue, a room is priced close to the maximum amount a guest would pay for the value they perceive of your hotel, but not to set too high of an expectation or too high as to send your potential guests to a lower priced competitor.
There are two basic components that give you a place to start when building that foundation for a successful hotel revenue management strategy.
- Compset: stands for “competitive set”. Understanding your compset means you understand your competitors' rates because they shape your target’s perception of the “right price” for a room. It gives you accurate insight on the perceived value of your hotel against your competitors and is a great baseline for you to start with.
- Value analysis: conducting a value analysis places your property among your competitors by comparing its location, amenities, and what sets you apart from the competition. Getting the whole picture of where you stand against your competitors will give you a better understanding of your hotel in the eyes of potential customers.
Now that you understand what a revenue management strategy is and how it plays a role in your hotel, we’ll show you examples of what not to do. We enlisted the help of industry experts, including successful hoteliers themselves, hospitality consultants and founders of their own hospitality software companies to share their stories and experiences with great and not so great revenue management strategies.
4 Mistakes to Avoid in Hotel Revenue Management According to Industry Leaders
1 - Working against OTAs instead of with them
Regardless of if you’re an up and coming hotel or flagship brand, one thing that has molded hospitality today has been the insurgence of OTAs. Online travel agents like Expedia and Hotels.com play the middleman for a customer when booking accommodations. OTAs boost occupancy rates without a doubt, but they do charge a commission of those sales - a hefty chunk at that.
Another route you may think of going is completely avoiding the OTA route thinking that you’d be able to offer enough to your potential customers like offering a free drink or spa visit if you book directly, for example. But as a revenue manager, this would be heavily irresponsible on your part. Perhaps, your director of sales is in talks with a major group deal. But in the event that falls through, you can still lean on OTA business to make up for that difference.
Jos Schaap is no stranger to hospitality. He was the founder of StayNTouch in 2012 with the vision of re-inventing the hotel PMS technology. StayNTouch grew to serve more than 90,000 hotel rooms around the globe. The company was successfully sold to the Shiji Group in September 2018. Prior to StayNTouch, he spent 18 years at MICROS Systems Inc. (now Oracle Hospitality), as a Senior Vice President. He shares his opinion on OTA business and what that means for hospitality:
There are a lot of people that say OTA is bad for hospitality. But the reality is… are they really? Because if you really think about it, how much money does a direct booking actually cost you? If you add up the cost of building a website and managing that website, paying for SEO, paying for PPC, you might end up spending more on average per booking through your own direct booking than through an OTA where the flat fee is you know 10 - 15%. So if you can get people to come in through OTA and you find ways to get their email or their contacts for example by providing self-service check in, providing a mobile check-ins, or providing ways for people to give you their email address. Then on the next trip, you can actually get them to go back to you directly and give them a special offer when they do so. So there's definitely ways, once you've got the initial guests in the hotel through an OTA, to get them to go directly back to you going forward. OTAs open up the doors for new business, but it is up to your hotel to keep them coming back and create incentives for your guests to book directly.
2 - Focussing on competitors instead of your customer
After analyzing your compset and value analysis, you logically approach your revenue management strategy by following the pricing of your competitors. It’s perfectly reasonable but what you're missing here is that you may be following the price optimizer. If you always seem to follow the price optimizer, you are losing out on key market opportunities.
Katie Stewart, leading hospitality consultant, shares her experience of how putting your customer’s at the heart of your revenue management strategy instead of focusing on your competitors will always work for you in the long run.
She explains that retaining business is just as important, if not more, than getting new business. She’s consulted with many hotels that have felt buried with what’s in front of them and she always brings it back to the basics. Find the right person to talk to and find out what will make them choose your hotel.
For example, someone that often gets overlooked when hunting for corporate business is the Human Resources Director. So if there's a corporate account that they're really struggling with and they haven't been able to get their hotel on the list, going through HR and saying, “Why don't we do a special rate for friends and family? How about maybe some staycations? Maybe when they have people come in, let's do a special.” Get involved with the charities that they're doing, get involved with and show them community support and that you're a partner in the community is really important. So start building and trying to make those networking connections for the hotels as well. Focussing on them makes you stand out.
She explains that one of the very first things that she does when she consults is that it’s about believing that the customer should really stay with them. It's interesting when you talk to a salesperson putting their mindset where they call the customer and they tell the customer “I want you to stay at our hotel” or “I want your business. How can we do it?” Very few salespeople are out there doing that. They get on the phone and they immediately get into the list of amenities, or they kind of start the conversation, defeated. It’s really important to let the customer know how much you want their business, how much you want them to stay at the hotel and that will make the difference if you have such similarities to your competition. You build that relationship with them. You want to think outside the box with the customer for other ways that you can also support their business and the people that are coming in, their budgets, and that you're flexible with that and you want to hear what they have to say. By focussing on their needs, you have the upper hand when it comes time to really showcase what you offer them.
3 - Focussing on volume instead of value
Ryan King is currently the Director of Global Strategy at StayNTouch, managing their partner relations. Ryan is a former hotelier himself, with almost 20 years of experience that has spanned just about every department throughout the course of his hotel career. According to King, finding a balance between corporate groups and transient business is essential to the success of a hotel’s sales strategy.
While sometimes an account may seem like it's really good, because the rate is decent and they have a tremendous amount of room nights. But in some cases, they're only coming in on the peak night where you're getting a lot of retail business and you don't want to displace that. So you have to look at that, but at the same time, you know displacement is not always the only metric that you’re going to look at.
He explains that volume always seems to get everybody's attention but what you really should be focussing on actual value. For example, maybe you land IBM and now have 30000 thousand room nights into your little market. They demanded the lowest rate in the entire market and we gave it to them. You gave them free breakfast, free Wi-Fi, and everything. Their production pretty much landed for 75% of their business on every Tuesday and Wednesday of the year. And for the most part, they were in the hotel on every sold out night that we had.
If you could have replaced those 30 rooms on every Tuesday that were sold out from IBM for an average of let’s say $100, if you could have just replaced it with something closer to the hotel’s ADR of say $150, you would have won big time. In this example, they need to do a better job at tracking pattern and making decisions based on pattern. It's not just a volume game.
When you get a small, corporate negotiated rate, you know what their pattern would be over a certain time, why aren't you more eager to get them a drop down rate that you would take, versus when you get this big volume agreement, why are you dropping your rates so much? Do you really know that it's not just going to fall on every Tuesday and Wednesday when every other business traveler is in town?
4 - Not belong aligned with your director of sales
Rupesh Patel is the President and Chief Operating Officer at Zenique Hotels where he has been trusted to oversee the portfolio's operations as well as the company’s acquisitions and developments. He shares his experience with having a director of sales and revenue manager on his team and how their relationship plays an integral role in a successful sales strategy.
Directors of sales are used to getting the business, getting the lead, negotiating with the account, and closing the deal all on their own. With a revenue manager, there's now an approval process to ensure their deals are aligned with the overall strategy and it takes a little bit of an adjustment for them to see why and how. For sales people, this can be a little demotivating as it can delay their deals and anyone would know, you’re in sales to be able to close.
Rupesh explains that it was a process to train and teach all of his directors of sales on why that relationship is there and why they have to go through a little bit of a longer process and in quoting. He explained it as this: sales’ responsibilities should be to find the leads, get the accounts interested, get all the data of production, days a week of stay, peak months and peak nights and whatnot, and then let the revenue manager do the data analysis to see what's the best rate for us to offer for them.
Sales continues to sell while the revenue manager does the analysis. When the revenue managers come back with a rate range that sometimes might be higher than what the accounts budget is, then the sales manager at that point needs to use their skills to show the value of the rate and the value of the hotel and what they're getting. Sales’s number one characteristic and skill is to sell and so that’s what they should spend most of their time doing. At the same time, the revenue managers’ much faster and more intuitive in mining the data to ensure we're getting the business at the right rate.
Displacement can occur as a result of a misaligned revenue manager and director of sales. As a revenue manager, you never want to displace revenue and you want to ensure that you’re segmenting the room nights and revenue in the right balance.
For revenue managers, it is essential to know your hotel, know your competition, know what makes you different, and how that translates into pricing. Technology today makes understanding these key figures easy and it is up to you to decide on a sustainable strategy to achieve your hotel’s sales goals. But having a great strategy isn’t going to translate to the bottom line without your team executing quality sales tactics to achieve those targets. Revenue management doesn't just refer to the strategy itself, it also means managing and motivating a team and making tough decisions on the right revenue calls for your hotel. Their ability to balance all those moving parts is an art, but if you can find the right revenue manager that can, you can guarantee that your hotel is on the right trajectory to success.
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