|The Informed Investor.|
By Paul van Meerendonk, Manager at IDeaS Hospitality Consulting
Monday, 25th June 2012
Paul van Meerendonk, Manager at IDeaS Hospitality Consulting, explains why hotel owners and investors are increasingly ‘checking in’ to revenue management.
The rapid development of consumer technology, a growing number of booking channels, constantly evolving customer bases and a dynamic marketplace has meant that the science of revenue management, and its ability to have considerable impact on hotel performance, is continually expanding.
It is not surprising, therefore, that the world of revenue management is coming under increasing scrutiny from those who have a vested interest in the performance of a hotel – namely, hotel investors and owners.
Jake Egberts, Senior Vice President at Jones Lang LaSalle Hotels, highlighted the reason for the increased interest in revenue management on the part of investors. “In a competitive hotel market, revenue management is a key tool to manage the business,” he said. “It assists management in understanding their markets and helps to maximize revenues. Investors should expect their operators to be leading the way on this in order to help them to extract optimum value out of the asset,” he added.
Investors and owners should no longer view revenue management as a discipline that is too ‘micro-level’ to be overly concerned with. Instead there should be an appreciation that not only do revenue managers handle the day-to-day revenue optimization process, but that the often overlooked discipline of revenue management is a crucial tool – savvy owners and investors are already seeking to cooperate more closely with revenue management departments in order to ensure that asset value is optimized throughout the hotel’s life cycle.
It is no secret that strategic forecasting well before the guests arrive is a necessity. This should include a SWOT analysis, an investigation of micro-market and economic factors that might affect performance, as well as an in-depth competitor analysis.
In addition, a finalized pricing structure based on market conditions and hotel positioning, finalized channel strategies according to product positioning and market environment, together with market segmentation strategies with a particular focus on business with long lead times, will put the wheels in motion for a successful hotel launch.
Effective revenue management from this early stage in the hotel’s life cycle will give everyone involved the right information about where they are going and how to get there – from pricing structures to the right business mix, as well as pinpointing any potential ‘red flags’ at the hotel property.
Hiring a revenue manager should also be an early piece of the puzzle to fit. It is at this ‘pre-opening’ stage that key senior executive positions begin to be filled – general managers, sales managers, and so on. Usually, a revenue manager is one of the final pieces to fall in place. But, in consideration of the impact revenue management can have at this early stage, it would be a sound tactical move to ensure that this person is one of the first hires, and then use their skills and talents to build the foundations of a successful hotel from the very start.
Ongoing Revenue Performance
A successful entry into the market can establish a hotel and its revenue generating ability for years to come. If done correctly, the hotel will be able to position itself effectively in the market and ensure revenue optimization at the highest possible level.
If a hotel is incorrectly launched into the market it has the potential to result in a significant underperformance of the asset, and a substantial amount of money can be left on the table.
Beyond the scope of traditional revenue management practices such as selecting the correct overbooking levels, setting rate restrictions, and setting the Best Available Rate, lays the art of setting the right rate in the first place. Things move very fast in the technology world, and it can be difficult to keep up, but owners and investors need to be certain that they understand the role of technology in their business strategy and critically evaluate innovations in the market.
The advanced analytics built into some of the best revenue management systems today can use a hotel’s data for complex, predictive price-sensitivity demand modelling which, when used to inform strategy, leads to increased profitability whilst managing the risks associated with uncertain demand. A lack of strong technology vision and strategy in a hotel will result in missed opportunities.
Revenue management must be considered from the very first feasibility study, and setting a strategy and establishing a long-term action plan is vital. The focus must not only be upon ensuring that the hotel is priced correctly, but also covering a wide-range of pricing, forecasting and optimization related processes, structures, tasks and tools that safeguard the sustainability of the revenue management of your hotel and establish a solid foundation towards continued and market-leading Revenue per Available Room (RevPAR) performance.
As anyone who watched as The Savoy, one of the grand-dames of the London hotel world, underwent its £220 million and three year-long refurbishment will attest, refurbishing can be an expensive and lengthy business.
The overhaul was initially projected to take 17 months, but unexpected structural complications caused the process to take much more time and money than was originally budgeted. It was estimated that for every week it remained shut, the hotel was losing £500,000 in revenue. Thus, in addition to the huge expense, the loss of revenue meant that The Savoy had to “hit the ground” running when it re-opened in 2010 in order to recoup and deliver return on the refurbishment investment.
Now, in 2012, the precision analytics and forecasting of revenue management have played their part in The Savoy’s success story – in 2011 The Savoy had an Average Daily Rate (ADR) of £470, compared to its 2007 pre-refurbishment ADR of £250. The courageous move of a complete refurbishment has allowed The Savoy to position itself at the very top of the London luxury hotel market. While it may be tempting to immediately hike prices once the front doors reopen in order to recoup costs as fast as possible, it is only through the careful application of revenue management that decisions can be made regarding strategic pricing that will safeguard the longevity of renewed revenue.
At IDeaS, our sophisticated analytics, demand modelling and forecasting have helped hotels in key competitive cities across the world – such as London, New York, Dubai and Shanghai – position, and reposition, themselves in order to optimize their revenues in the long-term.
This brief tour through some key phases in a hotel’s life cycle spotlights the importance revenue management plays throughout. Our custom revenue solutions have supported new hotels in their pre-opening phases and hotels undergoing refurbishments, in addition to hotels already operating who want to apply analytics to their long-term pricing strategies and see the clear benefit of investing in revenue management.
If you have a vested interest in the performance of any hotel property, and have not already moved revenue management to the forefront of your priority list, hopefully this article will prompt you to ‘check-in’ too.
About the Author
As Manager of Hospitality Consulting at IDeaS, Paul van Meerendonk leads a global team of revenue management consultants who are focused on Hotel revenue optimization projects. During his time with IDeaS, Paul has successfully led several high-profile consulting projects for key clients and hotel groups in gateway cities, resort destinations and regional hubs. These include pre-opening market studies, price repositioning, performance analysis, mentoring, audits, process and procedure development and a variety of other revenue management engagements.
Paul started his hotel career with Starwood Hotels and Resorts, where he was active in Sales & Marketing and Revenue Management. Paul holds a Bachelor’s Degree in Commercial economics from the Amsterdam School of Business, and is a certified Six Sigma Greenbelt.