By Ahmed Mahmoud
Since the revenue management inception started in the early 80’s, thousands of hotels and just about every airline have implemented revenue management successfully.
Many times revenue management has become a somewhat controversial buzzword in the hospitality industry. As with many common terms, revenue management seems to have various definitions depending upon whom one asks.
While there is general revenue management principles easily applied across different industries, each industry also has specific characteristics that determine the practical aspects of revenue management application in companies that work in it, i.e. what is a successful strategy for the airlines, for example, is not always a working solution for the hotel or restaurant.
Although revenue management is an essential instrument for matching supply and demand by dividing customers into different segments based on their purchase intentions and allocating capacity to the different segments in a way that maximizes a particular firm’s revenues, we define revenue management as the application of information systems and pricing strategies to allocate the right capacity to the right customer at the right price at the right time. This puts revenue management practice into the realm of marketing management where it plays a key role in demand creation and managing consumer behaviour. Revenue management theory has also benefited strongly not only from marketing management research, but more profoundly from operations and pricing research.
We could define hotel revenue management as the constellation of tools and actions dedicated toward the achievement of an optimal level of the hotel’s net revenues and gross operating profit by selling the right product to the right customer at the right time for the right price and with the right tools through the right channels.
While it is true that revenue management is now the most critical function in the hotel industry many hoteliers still have wild misconceptions about what RM can actually deliver. Revenue optimization is about working with what you have (the right product, the right tools, the right pricing …..etc) and not what you expect to have.
Every hotelier should be sure that revenue management or the revenue manager is certainly not a panacea that can deliver miracles. We all should go back to the primary pivot of revenue management one by one and consider them as one cycle to complete a successful revenue management implementation. If one facet is missing we should not expect miracles. Below is the breakout of the revenue management pivot.
Right product
The three main hotel products include room, food and beverage, and conference rooms. The hotels product is essentially a service which cannot be stored for later consumption. Temporary excessive capacity of the hotel cannot be forwarded to periods with high demand. Production and consumption of the hotel services take place simultaneously with the active participation of the consumer. The right product is determined by both the hoteliers and the customers starting from the hotel design, location, accessibility, services, star rating,……etc, and customer reviews, satisfactions and experience.
The hotel is the product that delivers value to the ‘right’ customers by satisfying their needs, wants, and requirements, reflects the customer’s willingness to pay, and is profitable for the hotelier. It is useless to offer services and amenities in the hotel that do not fit the requirements of the target market segment, or offer services/amenities which these customers could not afford to buy or the hotel cannot provide profitably.
Right customer
Not all customers are equally profitable for the hotel. Some of them are too costly to serve, i.e. they may have too high requirements which the hotel as product could not easily and profitably meet, while others are willing to pay too low prices which could hardly cover the hotel’s expenses. In general most hotels start with market segmentation to begin the revenue management process in order to define the various customers of each market for the hotel service.
Hotels typically segment their market (customer base) into a set of categories based on the price each category is willing to pay. Typical categories include the business traveler and the vacation traveler. Because demand patterns for each of these categories may vary significantly, hotels find it difficult to satisfy all of the demand simultaneously.
The ‘right’ customer is a debatable concept from a marketing point of view but could be associated with the target market segment which has been identified by the hotel’s marketing manager and whose requirements are taken into consideration when preparing the product of the hotel. The concept of the ‘right’ customer calls for the hotel to use various marketing techniques in order to attract the customers which it could properly and profitable serve and deny accommodation for the rest. Hotels, for example, put minimum stay requirements during specific busy periods (e.g. during fairs, exhibitions, world championships) so that they dissuade transit one-night stays in favour of more profitable longer stay customers.
Right time
Timing is one of the most significant concepts in revenue management; having the right product and the right customers at the right time. By understanding your seasonality, when is peak season, low demand seasons, moreover break it into weekdays and weekends…..etc., then by linking it all together the timing affects the hotel demand and reservation lead timing will determinate a lot of the pricing strategy on how and when hotel can sell any of its promotions and offers. One and the same offer could be perceived differently only on the basis of when it has been made. A pre-Christmas stay promotion offered in July would most probably remain unnoticed because it is published too early. The same offer at the beginning of December might also be inefficient because it could be too late for the customers to make bookings at the hotel to use the promotion. The right time would depend on the booking patterns of the different market segments. If the target segment usually makes most of the bookings within two weeks before the check-in date, then the optimum date for the release of the promotion might be 2-3 weeks before check-in in order for the promotion to be noticed by the potential customers.
Right price
The price is one of the most important instruments in the arsenal of revenue management tools and include price discrimination, dynamic pricing, lowest price guarantee, price presentation, BAR……etc for individuals and groups because it is directly linked with the level of the revenues. By changing the level of prices over time, the ratio between different prices for various market segments (the so called “price structure”) and the conditions applicable for each price level the hotel can attract the ‘right’ customers and generate high revenues. The ‘right’ price is the price that the customer is willing to pay and the hotel is willing to charge. Obviously the customers would like to pay as little as possible, while the hotels would prefer to charge as much as possible. However, if the customer feels that he has been overcharged and the price paid does not reflect the value received from the product, then future relationships between both parties are at stake.
The right price as one essential pivot of Revenue Management involves redefining pricing strategy and developing disciplined pricing tactics. The key objective of a successful pricing strategy is anticipating the value created for customers and then setting specific prices to capture that value. A hotel may decide to price against their competitors or even their own products, but the most value comes from pricing strategies that closely follow market conditions and demand, especially at a segment level. Once a pricing strategy dictates what a hotel wants to do, pricing tactics determine how a hotel actually captures the value. Tactics involve creating pricing tools that change dynamically, in order to react to changes and continually capture value and gain revenue. Price optimization, for example, involves constantly optimizing multiple variables such as price sensitivity, price ratios, and inventory to maximize revenues. A successful pricing strategy, supported by analytically-based pricing tactics, can drastically improve a hotels profitability which is the main aim for revenue management.
Right tools
A tool is any physical item that can be used to achieve a goal, especially if the tool is not consumed in the process, therefore if you have the right product, the right customers, the right pricing …., no matter we still need the right customized tools and solutions that take into consideration the unique business environment, customer base and operational constraints.
Those tools include the technology factor and the human factor. Start by choosing the right technology for your PMS with advanced rate management options and two -way interface, a PMS to provide you with hundreds of daily/weekly and yearly reports i.e. pick-up report, segment pace report, forecasting tool, month-end summary report, three-month outlook, account production tracking, …..etc.
Hotels can better manage their revenue by taking advantage of various technologies that make it easy to monitor the current state of the economy, the hotel industry itself and the historical performance of the hotel.
You might have correct and sophisticated technology tools, but it is not enough to have analytical and creative revenue management systems running the revenue management activities of a hotel, you must have the human factors represented on the revenue manager, who must be able to put systems in place that can be evaluated and continuously improved.
Without the right tools revenue management implementation is useless, don’t expect that the technology will do miracles, or the revenue manager by himself will do all the jobs.
Right channel
Selling your product at the right price at the right time requires the right channel as revenue management through channels involves strategically driving revenue through different distribution channels. Different channels may represent customers with different price sensitivities. For example, customers who shop online are usually more price sensitive than customers who shop directly through the hotel reservation or front office department. Different channels often have different costs and margins associated with those channels. When faced with multiple channels to retailers and distributors, revenue management techniques can calculate appropriate levels of discounts for companies to offer distributors through opaque channels to push more products without losing integrity with respect to public perception of quality.
The hotel can sell its product via various distribution channels. It could sell directly to the customers or via travel agencies either classical brick-and-mortar tour operators and travel agents, or online travel agencies (OTAs), global distribution systems (GDSs), online reservation systems, social media , digital marketing etc.. Each distribution channel provides access to different customers and requires different costs to sustain. Therefore, from the perspective of revenue management’s goal, the ‘right’ distribution channel is the channel that provides access to the ‘right’ customer and is cost effective to sustain.
Conclusion
1- Revenue management is not solely based on maximizing revenues either. Besides the fact that hotels benefit from implementing revenue management, it also has advantages for the customers. Indeed, they make use of the various offers. Customers for whom a room or a service is very important are happy to get this seat or service, in spite of the price.
2- It is impossible to implement revenue management overnight; many aspects have to be considered. In almost all instances, and based on my personal experience, few aspects were taken into consideration. I think two aspects need to be added: product differentiation and booking classes. Product differentiation, because it not only involves adding an extra service, but also because you have to be able to provide it. It keeps you on your toes. Booking classes, because you have to decide where you want to base your booking classes and, more importantly, what restrictions you want to apply to them.
3- Finally, I would like to mention: “What you don’t know about revenue management could kill you, especially if you have high expectations.
