Mastering the Art of Revenue Management

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"What the Heck is Hotel Revenue Management, Anyway?"

Mastering The Art of Hotel Revenue Management

Part One…The Mission

By: Neil Salerno – Hotel Marketing Coach

In previous articles, I mentioned that we've come a long way since the old days of the "heads-in-beds" mentality when it comes to rate-setting; I should modify that statement. Although many hotels have progressed to revenue management, it appears that too many have not. I am surprised that so many hoteliers have not taken steps to improve their financial position in the marketplace.

I am primarily concerned about the huge number of hotels which cannot support a full-time trained revenue manager. All hotels could benefit from revenue management.

I still prefer the term "Yield Management" to the modernized term of Revenue management because it's much more descriptive of the mission at hand; to improve yield or profit. There are many forms and varying degrees of revenue management out there, depending upon the knowledge and skill levels of the people implementing it. But it's all good.

The unfortunate aspect of RM is that it does require some work and forethought to do it well. When times get tough, many hoteliers tend to go with the easiest perceived remedy – lower rates. This is often viewed as a "logical" remedy, when, in truth, it is not a remedy at all. In fact, lower rates have never generated new demand. In only rare instances have lower rates ever generated enough incremental revenue to offset the net result of lower rates.

The answer is that you can have both discounted rates and profitable rates. It all depends upon whether or not they are managed, properly.

I believe that the profit motive of revenue management sometimes gets lost in the thought-process of the RM discussion. The principal purpose of RM is to enhance the yield or profit results of room sales, not simply to increase room occupancy.

The Mission

The mission for hoteliers, with the heads-in-beds mentality, is simply to sell as many rooms as possible and their goal is 100% occupancy.

The revenue management mission is to sell as many rooms as possible, but, at the best rates possible; their goal is profit. They know that every sold room comes with an associated cost-of-sales; there is no added cost associated in average rate increases. To sacrifice average rate to sell a few more rooms just doesn't make sense.

Basic Revenue Management Assumptions

When American Airlines created revenue management in the 80's, their mission was to create a program which would allow them to compete with People Express Airlines, a deep discount airline at the time, yet would allow them to pay expenses and build profit. To this end, they

realized that there wasn't a centralized market for air travel; instead, there were many separate markets.

First, they realized that there was a market for discount travel, but that travelers seeking discounts with bare-bones service was only one part of the overall marketplace. They realized that there are various market segments which have varying levels of rate tolerance and that many travelers consider value and other factors more important than just the rate.

Their solution was to create a series of "super-saver" rates to participate in the discount market, but their "twist" was to only sell a limited number of these seats. When a limited number of these seats were sold, rates would escalate to the next level; and so on.

This became the model for modern-day hotel Revenue management.

A Common-Sense Approach to Driving Profit

The old-style heads-in-beds mentality focused almost entirely on occupancy. "I'd rather have lower rates instead of empty rooms". How often have you heard that? That statement is very short-sighted. It ignores cost-of-sales and can actually worsen your bottom-line. Unless you have learned how to deposit occupancy into your bank account, it's a poor way to operate.

To illustrate my point; two hotels, each with 100 rooms; last night, one had an occupancy of 55% and an average rate of $140 and the other had an occupancy of 64% and an average rate of $120. Which would you prefer? Which hotel had a more profitable night?

Before you hunt-down your calculator, both hotels did virtually the same revenue for the night (the second hotel did only $20 less revenue than the first). But, which was more profitable? OK, the second hotel was able to sell 9 more rooms, through lower rates. Great accomplishment, right?

Using the same cost-of-sales for both hotels ($40 per room for each hotel). 9 more rooms comes to an incremental cost of $360 per night or $10,800 per month, for the second hotel as compared to the first..

Hotel #1 55 rooms @ $140 equals $7,700 less $2,200 COS equals $5,500 GOP

Hotel #2 64 rooms @ $120 equals $7,680 less $2,560 COS equals $5,120 GOP

And that's for only one night! More than $10,000 for a month.

For all you RevPar fans, both hotels have virtually the same RevPar values; hotel #1 at $77.00 and hotel# 2 at $76.80. The mission is increased RevPar, but how you get there counts. Hotel #2 would have to sell 4 additional rooms (a total of 13 more rooms) just to equal hotel #1' s GOP.

Rate Management

It's alright to have a set of lower competitive rates to attract the more rate-sensitive segment of the marketplace, but you simply cannot sell too many of them. As previously stated, there are several levels of rate sensitivity in the marketplace. Knowing when to close low rates is a key to revenue management.

Managing available rates begins with reviewing room availability into the future. No matter how weak a month might be, there are always specific dates in which there is stronger demand. Managing offering rates, in advance, will reap great rewards.

In part two of this article, we will explore the review process, rate setting and the details for using past experience, demand dates and events in the future, and measuring revenue management results.

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