Revenue Management – why bother ?

revenue management with SmartOtels

Success through Revenue Management

Although revenue management has come on in leaps and bounds since the early days of its development, there are still many properties that do not have a dedicated revenue and distribution person or who make the mistake of believing that these tasks can easily be covered by the reservations manager effectively, despite the importance of their main role.  This view seems to remain particularly prevalent amongst serviced apartment operators in the U.K., where hotels have embraced revenue management with more gusto.

For this audience, it seems relevant to go back to a simple question: what is revenue management ?  The generally accepted definition is “selling the right room to the right client at the right moment at the right price”.  Xotels rightly added to that definition “on the right distribution channel with the best commission efficiency”.  So, revenue management is not just about rate, occupancy or RevPAR but it’s about profitability – a keen topic for every business owner and manager.  Those who know me well know that, before forming SmartOtels with Joaquin Cababie, my company was called “Profit in Hospitality” and, although that was a bit cumbersome, I wanted to make the same point with the name.

Revenue management is about anticipating, predicting and driving consumer behaviour, so that you can sell your inventory at the best time to maximise occupancy and rate, whilst minimising your cost of distribution.  This last is not a “suppliers versus OTA’s” thing – OTA’s each have an important place in the market and I strongly believe in developing and maintaining healthy relationships with those appropriate to your business – but we all strive to minimise costs in labour and other areas, so why not apply the same concerns to cost of distribution ?

So, what does this mean in practical terms ?  Fundamental to revenue management is understanding your guests – who they are, where they come from, why they come to your location, why they choose your property, how they book and when they book (we call this ‘market segmentation’).  You can only start to influence guests and develop on existing patterns if you know what those are.  In my own opinion, this should include a revenue manager meeting guests face to face some of the time.  It’s all too comfortable to sit in an office analysing data about guests but you don’t really get to know them until you find out something about what makes them tick.

Once you have built up data based on these points, you have the basis on which to start managing and growing your revenue and your profitability.  However, it’s also very important to have established targets.  Normally, this would be in the form of a forecast for occupancy, average room rate, room revenue and other revenue (the possibilities for which depend very much on your property) as well as profitability to at least Gross Operating Profit (before fixed costs) for at least a year ahead.  Without targets, there is nothing to judge the team’s success against.  Targets should be realistic and achievable but, if you are bringing on a revenue manager for the first time, they should also be reasonably ambitious – in that situation, in most circumstances, you should be looking for revenue growth in double figures in year one.  Crucially, preparation of the forecast must involve sales, marketing and front office team members – there has to be a plan by which the forecast is going to be achieved and it is no good if the whole team are not working to the same plan.

How can this data and your forecast be used to grow revenue and profitability ?  That’s largely a topic for another post in this series.  However, let’s consider one easy aspect:  properties all too often find themselves discounting heavily to attract last minute business to fill unsold rooms.  When this happens, it illustrates that they either do not know their business well enough and haven’t done enough to influence it or something has gone badly wrong.  What also happens is that, if done reasonably frequently, you ‘train’ your guests to wait to book last minute, to get the best discount.  If low periods are identified well ahead, then tactics, such as Early Bird Rates, with a lower discount than those last minute rates and good distribution of the rates and inventory, can be used to build good base business there.

Here’s a health warning that I like to include at this early stage – something that revenue management is NOT about:  it is not simply about making the most money possible on a given night. A few years ago, I was stuck having unexpectedly to stay in Rome at short notice on New Year’s Eve.  The only room I could find was in a hotel belonging to a major international chain close to the Coliseum at 600 euros a night on a 3 night stay.  The location was fine but the room no better than a room in the brand one step down within the same chain and the service poor.  Yes, they got a lot of money from me for that short stay but I have never been back to that hotel (although I have been back to Rome since) and I will never stay there again.  My view of the whole chain was tainted by the feeling that I had been badly stung.  So, a Revenue Manager has to look at the bigger picture and be aware of what we call the ‘value proposition’ of his product.  If the product couldn’t be much improved, wouldn’t it have been better to offer a peak rate that didn’t leave me feeling badly cheated and which then encouraged me to stay there again, possibly at a quieter time ?  This kind of short term thinking rarely helps properties to achieve and exceed forecasts and can have a knock on impact.  I didn’t bother but I easily could have written a disparaging review on Tripadvisor, or elsewhere, that would have discouraged other clients from considering staying there.

Lastly for now, how can you choose a Revenue Manager ?  If you don’t have a revenue management background yourself, you could turn to a recruitment service that has someone who has such experience and who can help you.  However, outsourcing revenue management to reputable companies with an experienced revenue management team is a growing trend, which has seen a number of success stories widely publicised.   SmartOtels is a new force in this field – although hardly new to revenue management or the hospitality business, with 40 years experience behind us !

What is your view – have you tried revenue management and what has it done for you ?  Would you consider outsourcing this vital aspect of your business ?  Please comment below.

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3 thoughts on “Revenue Management – why bother ?

  1. Pingback: Market Segmentation – Know Your Business ! | Smart Ideas for Serviced Apartments and Hotels

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