Traditional revenue management concepts in the hospitality industry have evolved significantly in recent years due to technological changes, consumer behavior, and market dynamics. Where revenue management used to focus on maximizing room revenue alone, profit-oriented revenue management shifted the focus to ancillary revenue streams like food and beverage, spa services, events, and other on-site amenities.
Instead of static pricing models that were used in the past, hotels can now rely on dynamic pricing models that adjust rates in real time based on demand, competition, and market conditions using advanced algorithms and AI. Whereas revenue management teams used to operate in silos, independently from other departments such as marketing, sales, and operations, profit-oriented revenue management entails collaboration among these departments to create cohesive strategies that enhance overall profitability.
In the past, when hotels had minimal engagement with guests before and after their stay, the profit-oriented revenue management approach encouraged customer engagement through personalized marketing, loyalty programs, and post-stay follow-ups in order to build long-term relationships and drive repeat business.
Instead of relying on historical booking data and basic metrics (e.g., occupancy rates and RevPar) for pricing decisions, leveraging data analytics enables hotels to deep-dive into real-time booking patterns, change customer behaviour, and respond to market changes in a fast-changing competitive landscape.
Three industry professionals and academics, Associate Professor Dr. Detlev Remy, Brandon Chan, and Anders Johansson, have developed a whitepaper introducing Profit-Oriented Revenue Management (PORM). It is a methodology and a transformational mindset that pivots from mere revenue accumulation to sustainable profit generation.
Today’s landscape requires a nuanced strategy focused on profitability, not just revenue.
Ten actions to improve profits by using the Profit-Oriented Revenue Management (PORM) framework.
Based on general industry experience and knowledge, here are the top 10 actions that often have a significant profit impact.
- Understanding Marginal Profit: The commercial team’s understanding of the marginal profit for every product and service is crucial. This knowledge informs decision makers on what to sell and how to price, which can significantly impact profitability.
- Developing Profitable Products and Services: Focusing on developing and promoting highly profitable products and services that appeal to the target audience can increase marginal profit substantially.] A hotel with a spa operation, for example, can leverage on the range of wellness experiences and spa related products to drive incremental revenues.
- Flexible and Creative Packages: Offering packages that combine various services can increase overall guest spend and improve profit margins. For example, leisure packages can include a complimentary late checkout, or welcome beverage in the bar, or a 30-minute neck and shoulder massage in the spa or a hotel commemorative gift / memento, so as to enhance perceived value.
- Pricing Strategies: Implementing dynamic pricing strategies that consider demand, competition and market conditions can optimize revenues and profits.
- Productive Marketing and Sales: Investing in effective marketing strategies and sales training can attract more guests and close more sales, leading to higher revenues and profits.
- Optimizing Distribution Channels: Actively managing distribution channels to promote the most cost-effective ones can reduce customer acquisition costs and increase profitability.
- Upselling and Cross-selling: Training staff to effectively upsell and cross-sell can increase revenue per guest and improve overall profitability.
- Enhancing Guest Experience: Ensuring a positive guest experience can lead to repeat business and positive reviews, increasing revenues and profits.
- Investing in Technology: Using RMS, CRM, and PMS can increase efficiency, provide valuable insights, and help optimize pricing, all contributing to improved profitability.
- Leveraging Data and Analytics: Using data-driven insight to make informed decisions can lead to more effective strategies and higher profitability.
These actions, when effectively implemented and managed, contribute to significant improvements in a hotel’s profitability.
Implementing Profit Oriented Revenue Management (PORM) – Three Steps Approach
Implementing PORM is crucial to optimizing profit from every revenue source, ensuring long-term growth and sustainability.
1. Brainstorm on Implementation
Identify Stakeholders: Clearly define all the roles and stakeholders within your organization who will have an impact on or will be impacted by the shift to PORM.
Set Clear Objectives: Outline the primary objectives of implementing PORM. These objectives should be measurable and aligned with your hotel’s financial goals.
Develop a Transition Plan: Draft a detailed plan outlining how your hotel will transition from traditional revenue management practices to PORM, considering aspects like technology adaptation, training needs, and changes to the existing processes and SOPs.
2. Understand the Cost Structure
Define and Analyze Costs: Break down and understand all the costs associated with each revenue stream, including the Customer Acquisition Costs (CAC) and the Cost of Goods Sold (COGS).
Calculating Customer Acquisition Cost (CAC): Determine the costs associated with acquiring customers, including marketing and sales costs, commissions, and third-party fees.
Evaluating Marginal Profits: Analyze the marginal profits for each product or service, considering the revenues generated and the variable costs associated with serving an additional unit.
Analyze Profitability: Use the information on costs and marginal profits to analyze the profitability of each revenue stream and customer segment.
3. Allocate Profit Responsibilities
Assign Profit Responsibilities: Depending on the profit levels in the Profit and Loss (P&L) statement, allocate profit responsibility to the corresponding stakeholders.
Define KPIs: Establish clear Key Performance Indicators (KPIs) for each stakeholder to measure their contribution to the hotel’s profitability.
Establishing Cross-Functional Collaboration: Encourage collaboration between operations and the commercial team to promote the most profitable products and services, accurately forecast revenues, and manage scheduling and planning.
Monitoring and Evaluating: Establish regular checkpoints to evaluate progress against the defined metrics and adjust strategies as and when needed.
By following these steps, hotels can implement PORM successfully, with each stakeholder playing a critical role in maximizing the hotel’s profitability. It is a collaborative appro
