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Building a Business Case for Revenue Management
By Tracy Dong - Exclusive for 4Hoteliers.com
Monday, 16th May 2022
 

Exclusive Feature: In a disrupted market, with low or fluctuating occupancy levels, many hoteliers are having to limit operational costs where possible.

This makes sense and hotels today should only invest in systems that will directly improve their revenue performance and deliver a business return.

The fact remains that to be successful, or even to just survive these days, a hotel still needs to optimise demand by attracting the right guest, through the right channel and at the right price. And only a revenue management system (RMS) can help do that – an automated RMS that can make effective pricing decisions to maximise business and revenue, even in a disrupted market.

Unfortunately, while revenue management is not a new industry practice, it’s not always fully understood or equally appreciated by all ownership roles, investor interests, and board members with a stake in a new hotel or resort.

The task of convincing stakeholders within a hotel or hospitality organization of the value of investing in revenue management can be a challenge at times, especially given the current operating environment.

However, it is an exercise worth undertaking especially prior to a new hotel opening when an RMS investment in the early, pre-opening stages can be covered as a capital expense versus a potentially harder-to-swallow operating cost at a later stage.

So how can supporters of revenue management advocate for investment today? What key arguments are likely to attract attention?

RMS: Not Just for Maximising Revenues

When used to its fullest potential, an automated RMS positively impacts efficiency and improves operational performance across an entire property, as well as helping reduce costs. Through integrating forecasts provided by an RMS across a hotel’s operations, properties can use the forecast to inform their staffing decisions and account for periods of higher or lower demand. Once operational forecast data is made available, staffing managers can determine which areas are most affected by the number of guests staying in the hotel. Optimized wage costs translate into savings, which contribute directly to the hotel’s bottom line.

For instance, the number of occupants a hotel carries can directly influence housekeeping needs, the number of staff needed on the front desk to check guests in and out, the number of servers required in restaurants, and valets to park cars. It is vital that staffing levels are appropriately maintained to make the guest experience smooth and pleasant. After all, guest satisfaction is a critical driver of repeat business, reputation management positioning, and brand perception.

Food and beverage can also be a large source of potential waste for hotels, especially when it comes to items with an expiration date. Knowing when there will be periods of high and low demand, as well as from which segments, will be key when working with perishable items and will help hoteliers ensure they order products at the right time and avoid costly spoilage.

Occupancy forecasts can be translated into residential guest forecasts, with the capture ratio (in house vs non-residence) by day of week gathered by restaurants. Hoteliers can forecast use and revenue streams beyond guest rooms more accurately, helping to ensure they order the right products at the right time and avoid product waste.

Attract the Right Guest for Higher Profit

It has never been truer that not all business is good business, and a full hotel doesn’t always equal a profitable hotel. Without revenue management technologies in place, hotels can easily fall into the trap of selling out to lower-rated business, thereby leaving money on the table from higher-rated business opportunities. To identify guests that offer the greatest long-term revenue potential to a property, hoteliers need revenue and pricing systems in place that take a holistic view of their total revenue spend, not just their room revenue.

Data from transaction systems should be integrated to provide a true picture of a guest’s preferred activities and their overall value, considering all ancillary spend from online reservations to check-out, food service to spa services, guest rooms to gift shop, and more. In addition to making more profitable decisions, this data allows hoteliers to make more informed decisions about promotions, service offerings, and inventory levels.

On the flip side, hoteliers need to truly understand the servicing cost and channel cost by market segment, rate code, source, and channel. For example, typically organisations track the cost per occupied room but don’t track the different levels of service: full departure service, stayover service, or interim service.

Knowing the value of those costs can make a big impact, especially in a disrupted market where guests may not want as much service throughout their stay. Channel cost is equally important, given the commission percentage and merchant models vary by various channels, and it directly impacts profitability. The goal of channel optimization is to maximize profits by reducing business from high-cost segments and attracting and retaining the most valuable guests.

Improve Hotel Value

The flow-through additional revenue that comes from the proper use of revenue technology and strategies can directly impact a hotel’s bottom-line results. By using revenue management to increase revenues on a regular basis, the amount of cash available after expenses also increases—making further reinvestment possible.

This powers a positive cycle of higher revenues. To improve cash flow and grow the property value, it is truly in ownership’s best interest to ensure they lead the way when it comes to revenue management.

Additionally, for those owners or group investors with multiple new properties planned, or those looking to expand their portfolio, setting revenue management standards across a hotel group or chain from the outset will improve the performance of the overall portfolio. Through data collection and property benchmarking comparisons, hoteliers can better determine how to price a hotel under different brands within the portfolio or same brand across different countries, so that it doesn’t dilute its brand value.

Accurate forecasting data, combined with market research and analysis, makes it possible for hoteliers to carry out realistic feasibility studies for future hotels looking to join the group, refurbishment investments, or to assess future opportunities to open new properties.

The Opportunity Cost of Not Using an RMS

Given that a typical hotel will make roughly five million pricing decisions every year, it is not humanly possible for any revenue manager to get every decision right, every day without the support of automated systems—especially when considering the sheer volume of data needing to be gathered and analysed.

An advanced RMS can not only generate prices that adapt to market changes but actually anticipates these variations in advance. In a changing hotel market, slight pricing changes can have a big impact on demand. Therefore, any hotelier operating without systems that can analytically decipher the impacts of a specific price change (20 dollars higher or lower) on occupancy and the resulting revenue benefit (or lack thereof) for their property, is operating at a disadvantage.

A hotel not using an RMS and setting their own rates based on their unique business forecast can either base their pricing assumptions on ‘gut-feel’ or look to match a competitor’s pricing activity.

Both approaches are misguided, if not dangerous. By following a competitor price, a hotelier should be prepared to be dictated by strategies they are unaware of, which risks setting off a chain-reaction in price reductions between rival properties that cannibalizes revenues and profitability for both properties.

For more information on how your hotel can benefit from investing in revenue management, please visit: www.ideas.com

Tracy Dong, is the Principal Industry Consultant at IDeaS

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