Hotel Revenue Management

The Post-Pandemic Evolution to Revenue Strategy

Dave Roberts

• Publisher: Business Expert Press
• Year: 2022
• ISBN:
  9781637421925
• Topic: Business
• Subtopic: Hospitality, Travel & Tourism Industry
• Index: Business

CHAPTER 1

Context

What Does the Evolution to Revenue Strategy Mean?

Figure 1.1 HSMAI ROC, 2019

In June 2019, six months before we learned of the pandemic, I gave a keynote address at the Hotel Sales and Marketing Association International Revenue Optimization Conference (HSMAI ROC) in Minneapolis, Minnesota. The topic was “The Future of Revenue Management,” and the theme of that talk was “revenue management will evolve into revenue strategy.” The pandemic has accelerated this evolution, and that evolution is the guiding theme of this book.

“Revenue management will evolve into revenue strategy.” That sounds like a bit of a platitude, so let me explain what I mean. First off, I am always careful about using the word strategy. It may not be the most overused word in the English language, but I believe it to be the most overused word in a business context. By strategy, I do not mean a business plan, a mission statement, or some lofty vision. I mean a path to differentiated results—a set of actions and decision-making guidelines that add value to the organization. A successful strategy is a recipe for success; this certainly applies to revenue strategy.

The evolution to revenue strategy, which is already underway, has some important implications. It means that the tactical decision making of revenue management will increasingly be done by technology, leaving the strategy work to us humans. The tactics of forecasting, pricing, and inventory management are quite well suited to modern technology, and we will certainly continue down that path. But the evolution to revenue strategy is more than merely a strategic approach to revenue management. I believe that the evolution underway is: tactical revenue management > > strategic revenue management > > revenue strategy. Revenue strategy is quite different from strategic revenue management, and we’ll revisit this in future chapters.

At this point, I’d like to mention what some futurists claim to be the organization of the future: a human, a dog, and a computer. The human’s job is to feed the dog, and the dog’s job is to make sure that the human doesn’t touch the computer! This is certainly an exaggeration, but the theme is real: computers will take on an increasing share of what humans currently do. I believe Andrew Yang has been right about this all along.

The portion of a revenue manager’s day that is devoted to tactical decision making will certainly decline. The revenue manager will need to understand how their system works (if they have one), ensure that all inputs are valid, decide when to override the system, and understand the impacts of those overrides. The portion of a revenue manager’s day that is devoted to strategy will increase. This means taking a holistic look at the topline revenue for a hotel or set of hotels, in a way that a computer cannot. It also means figuring out ways to get better at the tactics, including making wise choices for technology investment and decision-support analytics. And it certainly means setting the right goals, developing plans to achieve those goals, and analyzing and communicating progress.

There are many aspects of revenue management that I love. One is this: as a discipline, we continue to make meaningful progress each year. One can look back a few years and be quite impressed with how far we’ve come. I’m certain this will be the case many years into the future. For those of you that are now in revenue management, this may be the most exciting time to be in this discipline (pandemic aside for the moment), and I believe the same can be said next year, the year after, and so on.

What I’ll share now are a few areas that require some attention for this great discipline of revenue management to evolve to revenue strategy; these were the themes of my talk at the HSMAI conference. The five areas I describe are, by necessity, only a subset of all of the exciting areas of revenue management. Each of these five areas (which I’ve lettered A through E) will be described in much more detail later in the book, along with several other topics that are critical to the evolution to revenue strategy. My intention here is to give a sense of where we are in this discipline and where we are headed. That said, the notion of “where we are as a discipline” is ripe for misinterpretation. To put a fine point on it, we aren’t anywhere. Different organizations, and even parts of organizations, are at very different points in the evolution to revenue strategy. For example, as we’ll discuss later in the book, the great majority of hotels do not yet have a revenue management system (RMS), and yet some organizations are pursuing the use of Artificial Intelligence to provide real-time pricing at the micro-segment level. However, regardless of where your hotel or organization is, my hope is that you will glean some wisdom from this following discussion, as well as from the rest of this book.

(A) Forecasting

One area that is in need of progress is forecasting. By this, I mean demand and supply forecasting in support of decision making, as opposed to higher-level projections, such as next month’s Revenue Per Available Room (RevPAR). As an industry, we have put a lot of time and money into demand forecasting, and we have some of the brightest minds working on it, and yet ... we are not as good at this as we need to be. The tactical decisions of pricing and inventory are based on these forecasts (at least they should be). Why aren’t we better at this? Partly, it has to do with focus. Forecasting is no longer a glamorous part of revenue management, and it can get pretty technical. We have significant opportunity to improve the science of forecasting, from the inputs to the modeling to the measurement. And the COVID-19 pandemic just magnified the importance of forecasting; as demand became less inherently predictable, the forecasting challenge got harder. Much more on forecasting can be found in Chapter 3.

(B) Pricing

Another area for improvement on our path to revenue strategy is pricing. There is a lot of opportunity in the field of price optimization, meaning the price recommendation engines that are a key component of today’s RMSs. To be blunt, however, there is quite a lot of price optimization already in place that is being ignored. Really. Most RMSs today will recommend pricing, at least for retail rates (retail in this context refers to the nondiscounted rates for standard room types). Some RMSs go much further than that, as we’ll see later. Based on many discussions with industry experts, as well as my own experience, these recommendations are overridden perhaps one-third of the time, and some of those overrides are quite significant in magnitude. Have we really built sophisticated price optimization software that is only used when it aligns with the user’s intuition? We, as a discipline, can do better than this. We also need to expand price optimization to all segments and revenue streams, recognizing that this is a long-term effort. Much more on pricing can be found in Chapter 5.

(C) Total Hotel Revenue Management

Total hotel revenue management (THRM) refers to managing demand across multiple revenue streams. In its simplest form, it means managing transient, group, and local catering demand for both sleeping rooms and function space. More advanced THRM involves more revenue streams such as restaurants, outlets, and spas. Revenue management professionals, and others, have been talking about THRM for well over a decade, in some cases, much longer. Several surveys suggest that this has been identified by many as a significant opportunity for many years. THRM makes sense intuitively, and many companies have invested significant time and money into this. And yet ... despite some pockets of progress, we as an industry are not very good at this. This suggests some significant impediments. One impediment is objectives. For example, if you believe that the goal of our hotel’s restaurant is to maximize profits, but I believe it is to drive overall satisfaction with the hotel, and we are evaluated and compensated according to those goals, then we will surely not agree on many decisions. THRM is also hampered by lack of decent quality data. While reservations systems and property management systems (PMSs) can provide a great deal of useful data upon which to make decisions, the same is not at all true for most F&B or Spa outlets, for example. You’ll find much more detail on THRM in Chapter 10.

(D) Topline Analytics

One important step in the evolution to revenue strategy is for revenue managers to be integrally involved in all revenue decisions. This involves revenue management decisions with aligned-upon objectives, perhaps extending beyond short-term profit, as we’ll discuss later. It also involves revenue management decisions for purposes of customer acquisition and customer retention (those pricing and inventory decisions could be quite different). And as hotels continue to develop more appealing features, revenue management must be involved in decisions of demand capture. For example, as hotels offer the ability to choose your room at the time of booking, this value could be captured in terms of a loyalty benefit, a channel benefit, a price increase, or simply a demand increase, to be captured with a combination of rate and occupancy. The revenue manager of the future will need to help guide decisions of the hotel/organization with a compelling narrative. The foundation, though not the entirety, of this guidance will be analytics, both decision-support analytics and performance management analytics. Much more on topline analytics can be found in Chapter 14.

(E) Talent

To state the obvious, talent is how you win. There are many facets of this, some of which I’ll touch on throughout this book. Training in revenue management significantly lags the discipline. This is true all across the industry. Training, both revenue management specific as well as more general training for revenue managers, tends to be an after-thought in many cases. For the continued evolution to revenue strategy, we need a mindset of lifelong learning. We also need to bring in external talent into this discipline, with fresh ideas and new perspectives. However, I hear the following far too frequently: “I could never work in revenue management ... you all just stare at a computer screen all day.” Clearly, some PR is called for here

. In addition to bringing in external talent, we need to send our revenue management talent out and seed our respective organizations. I dream of a day when every leader in every discipline at every hotel, and every above property leader has a revenue management background! Much more on talent is found in Chapter 15.

These five topics are intended to give you a flavor of what’s coming in this book and to provide structure for discussion of a complex discipline. These and many other concepts will be discussed, with some historical context and with a look to the future.

So, what exactly is meant by revenue strategy? As noted earlier, a strategy is a recipe for success; if it’s not a recipe for success, it’s not a strategy. Deciding what your organization is going to do is of course vital to success; deciding what you’re not going to do is equally important, and often much more difficult. If you can’t name some potentially worthwhile endeavors that you will not be undertaking, then you haven’t made the tough tradeoff decisions and you don’t have a strategy. I recommend using that litmus test anytime you see or hear the word strategy in any of your business discussions. Revenue strategy, then, means a recipe for success in revenue generation and capture. It does not mean revenue maximization, or even profit maximization (more on that in the next chapter). It is the set of decisions, based on clearly documented and broadly understood objectives, that determine how we spend our time and money. As Cindy Estis Green, CEO of Kalibri Labs, puts it, “strategy is really planning and resource allocation.” While this of course applies to revenue management decisions related to pricing and inventory, it also applies up-funnel to all sales and marketing activities.

A coherent strategy is highly dependent on clearly articulated goals. . . I’ll come back to this point in the final chapter. For now, let’s note that these goals must spell out the desired balance between sometimes competing objectives, such as profit maximization versus customer acquisition versus customer retention and loyalty versus channel preference, and more. And yet, our language often does not support such clarity. In fact, in my view, our language has gotten lazy. How many of you have read an article about revenue management that describes the need to maximize revenues and profits? With my apologies to anyone who has ever written that, this is lazy wording! Maximizing revenues and profits is a nonstarter; you can maximize one or the other, but not both (with hypothetical exceptions that do not exist in the real world). An analogy would be the desire to maximize rate and occupancy. Both are desirable, but maximizing one means not maximizing the other. There are plenty of other examples of lazy wording. I mention this here, with a few examples, because wording reflects thinking, and lazy thinking will not move us toward revenue strategy. I hereby beseech anyone in hospitality sales and marketing (certainly including revenue management) to stop saying: future data (there is no such thing, nor can one be over-reliant on historical data, since all data are historical; if you mean forecast, kindly say “forecast”

—details are in Chapter 3), understand market dynamics (a common, but useless, platitude), optimal profitability (too vague), healthy mix of business (I don’t know what to say here), optimize our channels (another useless platitude). While I’m on the topic of lazy wording, I cringe when I hear anyone refer to revenue management data or revenue management numbers, usually in reference to some topline metric such as RevPAR Index (RPI). If you hear this, it is likely from someone who doesn’t really understand revenue management or even revenue generation. In the summer of 2020, I read three textbooks on hospitality, looking for ideas to incorporate into my classes; one book describes the role of a revenue manager as “responsible for making decisions that optimize [emphasis is mine] a hotel’s RevPAR.” Is optimize the same as maximize here? If so, say it; if not, describe why not. ...