The combined onslaught of big data, analytics, optimised pricing and advancing technology has led to a huge growth in hotel revenue management.
Rather than a vague financial grab, a stab in the dark at boosting profits, it has become a bona fide strategy for calculating revenue forecasts. By automating price recommendations and other financially relevant decisions, the process of operating day-to-day revenue streams is condensed and simplified.
Starfleet Media recently brought out a report titled The 2016 Smart Decision Guide to Hospitality Revenue Management that investigates how and why effective hotel revenue management aids widening profit margins. According to the report, “implementation of hospitality revenue management results in a nine percent average increase in RevPAR for large and very large hotels”.
This increase could mean an annual profit increase reaching millions of dollars, which is nothing to be sniffed at. Of course, learning specific techniques for optimising prices and forming strategies is something that requires a more formal, educational setting. However, this report does permit some insight on how managers might choose the right solution or service for their particular needs. This is a crucial step because choosing the wrong one could set a property back in terms of time, resources and money.
The first step is understanding what hotel revenue management actually is and how it is meant to work for you. The basic concept is to work out what guests require which services when, so you can offer the right services to the right people at the right time. The report talks about two key concepts within that: market segmentation and the price elasticity of demand.
Market segmentation involves categorising guests based on what they need and want. For instance, leisure versus business guests, families versus couples, single people versus large groups. All these different types of guests are looking for different experiences at different prices. Then there are categories like those booking through an OTA versus direct, discount versus package deal or special rate promotion. The idea is that all these different categories affect things like what facilities are going to be used during the stay and how often, or whether the hotel restaurant or shop is going to be used. “Effective market segmentation lays the foundation for revenue management. It can also benefit a range of other departments and functions, including sales, marketing and distribution,” notes the report.
The price elasticity of demand refers largely to the pricing changes that can take place. The amount that the price of a particular product or service can change depends on demand. This is obviously critical in hospitality, where the number of rooms in a property are fixed and there are peak travel times that differ from guest category to guest category. None of this will be entirely new information for property managers, who will be well-aware of the necessity of price fluctuations in the accommodation industry. However, where hotel revenue management comes in is to automate and optimise these fluctuations for maximum profitability. There are so many factors to consider, now that guest data is so widely available, that working out an automated strategy verges on common sense.
“Hospitality revenue management has evolved to the point that the goal is no longer just about increasing guestroom occupancy rates, with no consideration for the implications of the pricing decisions,” the report clarifies. It’s also no longer just about rooms! “Revenue streams such as conference hosting, recreational facilities, restaurants and spas – which, taken together typically account for one-quarter of a full-service hotel’s revenue – also now factor into the equation.”
The pricing model of your particular revenue management strategy should take into account all streams of revenue tied to your property. Food and beverage, entertainment, childcare and housekeeping services, spa and beauty facilities, etc., should all be analysed alongside profits generated by room bookings.
The report offers that accommodation providers should generate “precise demand forecasts” for all nights in all rooms, across all seasons. This requires a phenomenal number of calculations and lots of focussed analysis to compile but the benefits are huge. “A mere $2 reduction in the average daily rate for a 500-room hotel with a 75 percent occupancy rate would cost a hotel more than $250,000 in lost profit in a single year.” Although scaled down, smaller accommodation providers face the same pattern, with some technical wizardry they will save (and earn) themselves a sizable chunk of their revenue.
Increased profitability is not the only thing that benefits from hotel revenue management, though. The insight gained has also been show to help boost marketing and sales efficiency and give properties an edge over competitors. Occupancy trends and intelligence on guest demographics are very powerful tools to have at your disposal.
There are a few key elements to consider when it comes to pricing analytics, which is the aspect of hotel revenue management solutions are generally most interested in.
The first element is revenue management metrics, which largely revolves around RevPAR. This is usually calculated by multiplying ADR by occupancy. The problem many managers face is the temptation to constantly aim for occupancy increase when a RevPAR should ideally be the focus. Sometimes maximising occupancy can actually lower profits. The thing missing from this picture is productivity.
Although RevPAR has widely become industry-standard, it does not take productivity into account. Costs per occupied room are something that should be added to the equation. This report offers another metric in place of RevPAR to integrate the two.
Gross operating profit per available room, GopPAR, “takes into account not only the amount of revenue generated but also the actual operational costs”. However, this is also limited in the amount of revenue it takes into consideration as it forgets to look at revenue streams outside of guestrooms. This is where the revenue generating index or RevPAR index, RPI as it is known within the industry, comes into effect. This metric analyses hotel revenue performance by looking at whether a property is successfully pulling in its “fair share of revenue in comparison to a defined group of hotels”. This comparative metric is much more reliable in terms of how well a property is doing and how much it is improving. You can calculate RPI by dividing RevPAR by the RevPAR of that defined group of hotels, a figure that can be passed on to you via a third-party operator, according to the report.
Already, it is clear that data is the pixie dust revenue management needs to work. The better and more conclusive the data, the more accurate the forecasts will be and therefore the more efficient your strategy will become. At the same time, too much useless data can overcrowd and confuse the forecast results. Focus is key, accuracy is the goal. “The volume and depth of clean historical data related to occupancy, rate and revenue figures (including bookings dates, rate codes, arrival dates, departure dates and revenue-by-day) provide the strongest basis for forecasting accuracy.” This will all be located and accessible in a good property management system. The longer data is collected, organised and stored, the more useful it becomes because it can build up an accurate picture of your property over time. Other useful pieces of data include: web shopping data from booking sites, etc., competition pricing, weather reports, guest geo-locations, flight information, and various property website statistics.
Another key element to hospitality revenue management, according to this report, is intelligent pricing. The idea behind this is pricing rooms based on forecast demand, so it changes real-time. There is some discussion on this topic in relation to how prices should fluctuate. Of course there will be seasonal fluctuations and more complex fluctuations that take lots of different pieces of data into account, but there is also the idea that different guests could be offered different prices depending on how they have been categorised and which channel they are booking through. The report notes: “As technology innovation makes it possible for hotels to price their room types, channels and dates independently of each other, the approach would seem to hold promise.”
Buying tools and services to aid revenue management is a huge responsibility because those tools are constantly evolving and new services are constantly popping up. The main tenet of a good solution provider is that they are intent on developing software and strategies that will help you stay ahead of the competition. This is especially important in an environment where OTAs have a wide range of pricing and commission structures that can pose difficulties. Whatever your property’s particular needs and specifications, there will be a solution out there for you but how do you find it? So many factors can influence the decision, not least of which your property’s level of experience with hotel revenue management and the resources you have available to invest in it.
Something essential to consider is technology integration capabilities, according to the report. It is not possible to install a revenue management solution as a single application or isolated piece of software; it has to be able to interact with all other elements of data collection in your property. Whatever PMS operates in your property is the main thing to consider here as it is central to bookings, analytics and data storage and therefore has to be able to work with the chosen revenue management solution.
The key to any of this being successful is getting ahead of your big data processing. The larger your property, the more data you will have and this will only increase as time goes on. The report explains: “Combining all these data sets for just one hotel could easily amount to 200 million-plus observations. Generating the pricing recommendations for that property could require more than 15 gigabytes. Multiply that number for a hotel chain with dozens of properties and it quickly becomes clear that, more than anything, revenue management is a big data challenge.”
If you have a system in place that is overwhelmed by the amount of data it needs to process, or simply doesn’t process much data at all, it will be extremely difficult to make the calculations effective hotel revenue management requires. All solutions seek to address this issue as it is so critical to optimisation.
Another important thing to factor into choosing a revenue management solution is speed. The calculations and information need to be processed as quickly as possible, with as much accuracy as possible, involving all OTAs and channels. If this doesn’t happen, the automated pricing won’t be optimised and overbookings could occur. It is not worth risking negative online reviews and disgruntled guests, when the right solution can prevent all this. How well a solution can manage room change updates automatically and instantaneously is therefore critical in selecting a solution. It is also important to ask about average lag time in implementing channel updates. “Hotels should be able to automatically identify and track their most profitable channels, factoring in the associated costs, including commissions, transaction fees and SEM expenses.”
Solutions also come in various forms of cloud versus on-premise hosting, so this is something that must also factor into the decision-making. With on-premise, the property itself will have to install and maintain hardware as well as cover IT support and data security, according to the report. So this might be a major downside for some providers. Increasingly, solutions are turning towards the cloud. These systems tend to gel better with any existing PMS software or infrastructures, and are more accessible. They are also easier to update, with more and more automated features.
Ease of use is a hugely important thing to factor into any purchase. The easier a solution is to operate and access, the easier it will be to maintain and more useful it will be in the long run. Stylistically, pick something that feels intuitive, that you can learn to operate quickly and effectively. While something too simplistic visually might not give you all the options you’re looking for, anything too convoluted will hold up any real improvements. Customisation is also key, ask about what features you might want to adapt or include, which notifications you want to see and how much interaction you want to have with your solution.
All-in-all, the main purpose of installing a hotel revenue management solution is to optimise the daily profits of your accommodation provider. A ‘solution’ that seems more trouble than it’s worth probably is, so ask lots of questions and make sure you choose the one that’s right for you, your guests and your business model.