IN-DEPTH: As revenue management gains prominence, the discipline has to exhibit its proficiency by focusing on several issues, be it for unpredictable forces shaping demand or taking on responsibilities for broader activities. RM needs to be put in a position to steer the overall revenue activity, armed with detailed forward-looking reporting on segments and channels at the hotel level.

By Ritesh Gupta

The hotel industry has had to deal with complicated pricing situations where every market and every day can be different and therefore one needs assistance from systems to price correctly. This is where revenue management has showed its prowess over the past few years.

RM professionals believe that the most consistent development across the hotel industry in 2011 has been the increased prominence of the discipline itself. 

Revenue management has been in the midst of an evolution for a few years now, and the discipline is approaching a turning point, believes Kelly McGuire, Executive Director, Hospitality and Travel Global Practice, SAS.

RM professionals are continuously looking at ways to apply RM principles to other business functions. In a recent interview with EyeforTravel’s Ritesh Gupta, Dev Koushik, Director, Revenue Optimisation & Analytics, InterContinental Hotels Group mentioned that the focus is on leveraging the intelligence behind the RM systems, specifically demand forecasting, in coming up with need periods and need markets and integrate this intelligence with marketing plans. In addition, RM is trying to evolve strategies for channel optimisation by using the Revenue Optimisation framework. Incorporating cost of sale into a Revenue Optimisation setting to come up with optimal channel mix is still in its infancy - but they are underway, says Koushik. Price Optimisation - using price sensitivity and competitor rates to optimise on price combined with inventory management is being increasingly adopted within the hospitality industry.

Analytics Evolution

The discipline is becoming more strategic and taking on responsibilities for broader activities across the estate, says McGuire.

“This year, what has stood out for me is that evolution is really accelerating. I’ve heard revenue managers talking about being involved in social media activities, being asked to extend the discipline beyond rooms to other areas of the hotel, and thinking about how to manage increasingly complex distribution problems like flash sales and social buying. With all of this activity, there has been a lot of discussion about the need for revenue management analytics to evolve as the role evolves,” said McGuire.

McGuire thinks the analytics evolution will come on two fronts: 

First, due to changes in buying behaviour, recent economic pressures, and increasingly sophisticated skills sets, it has become clear that traditional inventory optimisation analytics no longer provide an optimal solution to the RM problem, says McGuire. The analytics need to consider the complex relationships between market segments and apply the right forecasting and optimisation techniques considering demand sensitivity to price, negotiated contracts, linked pricing, distribution channel costs and willingness to pay. There have already been some developments in price optimisation recently, and work will definitely continue in this area.

Secondly, according to McGuire, revenue management must become more customer-centric and marketing-aware. Customer lifetime value has traditionally been left out of the revenue management decision, and revenue management analytics rarely take promotional activity into account in the demand forecast. These are two valuable pieces of information that need to be accounted for to make better pricing decisions.

“I see marketing data becoming a valuable source of information for revenue management as well,” McGuire said.

Expertise

Specialists recommend that RM professionals should use their expertise and analytical capabilities in not only making tactical revenue management decisions - but also be a key driver of decision-making in making campaign decisions and think strategically in how RM principles can be extended to customer and channel space. With increasing OTAs and the availability of customer behavioral data in the OTA space as well as branded websites - there is a great scope for RM professionals in making key revenue management decisions by integrating customer perspective with the channel data to the traditional revenue management process.

Frederic Deschamps, Vice President, Revenue Generation, Carlson Hotels says there are at least two major ways to increase RM’s contribution to the hotels’ bottom line. One is to start evaluating the worth of a booking on a profit basis and not just a revenue basis and the other is to start evaluating a booking on a lifecycle and not just marginal basis. “By profit, I mean that all revenues and not just room revenues (i.e. including food and services) can be included and the costs of distributing rates and servicing the customer can be included. By lifecycle, I mean that the repeat business or lower price elasticity of a customer can be taken into account to prioritise inventory access, rather than just looking at the single booking transaction,” said Deschamps.

Revenue other than room revenue can represent 25 percent or more of a hotel chain’s revenues, and guests have an average of 2.5 stays in hotels, these are significant multipliers on the typical “room revenue only, single stay” approach of revenue management systems today, added Deschamps.

When it comes to RM and marketing, McGuire says progress is definitely being made in this area.

“We still have a long way to go. The turbulent economic times - that still continue today - have forced revenue management and marketing to stay in closer communication than ever before, which is a really positive step,” said McGuire.

However, there are opportunities to streamline communication and synchronise activities even further. Monthly or weekly meetings are an important start, but the pace of business requires that these two functions have access to information from the other function when decisions are made and they need to access that information in the systems they use every day, rather than waiting for an email or a printout.

“Even though revenue managers and marketers have started working together more often, I still talk to folks from both departments who really don’t have a good understanding of the kinds of decisions that the other makes, and how complimentary their activities really could be. I think every hotel revenue manager and marketer should make a New Year’s Resolution to spend some time in 2012 in the other one’s shoes!” recommended McGuire.

Dealing With Uncertainty

2012 seems to be unfolding as a year with a lot of uncertainty. There are a lot of unpredictable forces shaping demand. Deschamps believes where RM can contribute the most in a situation like this is to be extremely vigilant on forward developments and have solid reporting in place to monitor the outlook, to have a process in place to help steer revenue activity in other areas based on a sophisticated view of the outlook and to have a price elasticity-based revenue optimisation system that can handle the complexity of treating every location and every day as a different pricing situation.

RM needs to be put in a position to steer the overall revenue activity, armed with detailed forward-looking reporting on segments and channels at the hotel level.

There is certainly a need for RM to be nimble, and it has definitely become obvious that traditional RM analytics and processes will need to change to account for this, says McGuire.

“We’ve seen a great deal of turbulence over the past few years, and it isn’t likely to settle down any time soon. Despite all the change that is happening and will continue to happen, I cannot stress enough that RM must not forget the basics,” stated McGuire.

McGuire further added that it doesn’t matter if one is dealing with new data sources, new analytic techniques or new distribution channels, pricing decisions still need to be fact based, and well supported by the data. Careful planning and analysis should accompany every decision, and outcomes need to be continually analysed to identify opportunities for improvement.

“Even if large sections of the traditional playbooks have been rewritten, much of it remains the same. Good fencing accompanying any discount or promotion protects you from dilution. If your hotel is always “on sale”, your advertised discounted rates will quickly become consumers' reference price for your product, and it will be difficult for you to raise prices, so be careful how you present discounts or specials. Keeping an eye on the future while remembering the basic rules will serve revenue managers well in 2012,” concluded McGuire.