Us Versus Them
Revenue management strategies depend on clearly defined notions of competition and kin.
By Joan Marsan, Technology Editor -- HOTELS Magazine, 2/1/2001
A new term, fair-share forecasting, has entered the lexicon of revenue management professionals. Fair-share forecasting implies that no revenue management strategy is well-rounded unless it considers the successes and failures, the peaks and valleys, of occupancy and rate within a property’s competitive set. Historically, a hotel might not have done as well as it could have at securing the best rack rates. Therefore, basing rate recommendations on that sub-par historical data will result in the hotel continually underselling itself. If, however, data on the higher rates competitors achieved is incorporated in the system, as it would be in a fair-share forecast, the system will recommend more profitable rate recommendations.
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“You put the focus on your closest competition rather than starting with your own system,” says Kim von Bahr-Lindemann, senior analyst, Yield Management Research and Development, Seattle. On the surface, the theory is sound and sensible. But as revenue managers start asking the questions that enable them to establish a system based on this strategy, complications arise.
First and foremost, revenue managers must consider what constitutes their hotel’s competitive set. Take, for example, a casino resort in the Bahamas. The competitive set for this property, narrowly conceived, could be other casino properties in the Bahamas. Or , more broadly imagined, it could include any other island resorts. The competitive set might also encompass Las Vegas casinos. All of these categories would need to be accounted for, to at least some degree, in a fair-share forecast. But to what degree? A revenue manager, and certainly a revenue management system (RMS) relying on fixed algorithms, would have difficulty determining to what extent it would be appropriate to base occupancy projections at a property in the Bahamas in September during hurricane season on those of a casino hotel in Las Vegas in autumn during a convention.
While proponents of fair-share forecasting raise a legitimate concern—that a revenue management strategy that fails to consider the competitions’ successes against the home base’s is ignoring vital statistics—opponents of the strategy point out that each property has a unique set of concerns. While competitors provide a useful benchmark, and might rightly hint that a hotel could be doing better, there are inherent differences setting each property apart from its competitors, and a fair-share forecast might not be sensitive enough to adequately acknowledge these differences. “Continually polling competitors is an outgrowth of not having the tools to understand the market forces that are influencing your particular property,” says Harley Kaufman, executive vice president, Yield Management Systems, Atlanta. It is a practice that cannot substitute for knowing the individual property’s unique place in its market, and its unique formulas for success.
Considering The Competition
Benchmarking data is an essential tool, says Ken Gifford, corporate director of revenue management, Omni Hotels, Dallas. “But I wouldn’t want it as input for my revenue management system,” Gifford says. According to benchmarking data, each year a primary competitor may come out ahead with respect to securing higher occupancies. “But that may be a marketing issue, not rates,” Gifford says.
Rather than lowering rates, hoteliers might find the answers to seemingly middling performance by noting whether their particular product is in high demand, and then marketing to the appropriate groups. Targeted advertisements, rather than rate adjustments, may well secure higher RevPAR (revenue per available room). Furthermore, Gifford notes, while a hotel may have lower occupancies than its competitors on a given date, this could be balanced by greater lengths of stay, and therefore minimized costs and gains in RevPAC (revenue per available customer). Simply viewing a competitor’s data occupancy and rate data will not guarantee winning revenue management decisions.
Gifford prefers to focus on perfecting his properties’ generation of future revenues rather than fixating on the competitions’ past gains and losses. Revenue management’s primary purpose, Gifford and many others would assert, is forecasting. Certainly this involves historical analysis of data. But the true product of RMSs is a forward-looking report. And as such, the balance between historically based assessments and an analysis of what is currently happening in the marketplace provides the best opportunity for creating an accurate forecast. A system must be dynamic, accounting for current alterations in the marketplace, and increasingly accounting for this information as the actual booking date draws near.
“If you look at our forecasts, they’re never right,” Gifford says. No forecasting system, he explains, is perfect. “So it’s just that variance of wrongness where we lose it.” There are three ways to lose money, Gifford says. Knowing demand is high, a hotel can sell out too soon at low rates. When demand is low, a hotel might over- or under-price rooms and fail to secure the highest valued customers, those who might stay longer or spend more. Alternately, a property might not overbook enough in a high-demand situation and wind up with spoilage.
To help its revenue managers avoid these scenarios, Omni aimed to develop a sophisticated, computerized RMS, OmniCHARM, in the late 1990s. But Omni opted not to complete installations because the system couldn’t meet the group’s needs. “We didn’t think it was dynamic enough in switching from historical-based bookings to what was happening now, bookings-wise,” Gifford says. Additionally, the user interface was difficult for employees to work with, and the system itself was slow. OmniCHARM originally was a property-based system and had been imported up to a centralized system, but the architecture wasn’t right for the centralized environment within which Omni wanted its revenue management system to work.
So Omni decided to switch to a different system. Because Omni has already prepared its central reservation system (CRS) to interface with a RMS, the second rollout, to a Talus system similar to those used at Hilton, Marriott, and Disney properties, is expected to be much easier. Beta versions of the system, which allows the RevPAC rather than fair-share emphasis that Gifford craves, will be in place in April, and Omni expects to complete a full rollout by June. The switch to a tried-and-true system promises quicker, and longer-lasting, results, Gifford says. “Others have their own in-house system and struggle with the next generation,” he says.
All In The Family
Just as the need for a RMS that functioned within a centralized environment drove Omni’s decision to proceed with a new installation, the desire for centralization is driving Accor to try a new revenue management strategy backed by a new RMS. Accor, which has the OPTIMS system running in 50 hotels, is converting properties to the City.OPTIMS system, which allows hotels in a particular environment to aggregate demand and distribute it most profitably within a group. Accor plans to test the system in the Paris metropolitan area, where the group has about 250 hotels.
“We use OPTIMS only for intra-hotel revenue management,” says Christine Rapuc, development and reservations director, Accor, Paris. But just as a growing number of hotels have exploited the power of CRSs to cross-sell sister properties, Rapuc believes in the potential to enhance revenues within a city-wide environment through a city-wide RMS. “We have to prepare property managers not only for their hotel, but for the city. We can enhance revenues if we transfer customers from one hotel to another. We think we are in a good position to work on that.”
Obviously, not every reservation request is transferable. A Sofitel customer may not be satisfied with a Novotel. But if a valued guest cannot secure a reservation at the Sofitel La Défense Grande Arche in Paris, and the RMS can recommend an available room at the Parisian Sofitel Le Faubourg at a competitive rate, everyone stands to gain.
It takes a sophisticated system and a savvy staff working in unison to make such recommendations. “Revenue management is a whole package,” Rapuc says. The whole package at Accor includes a RMS that is tied to the CRS rather than strictly to the property management system. A revenue manager dedicated to 15 to 20 hotels within a city masters each hotels’ booking policies and assists with distributing demand in the most profitable manner. A city-wide revenue manager oversees the process. And a sales staff with a group mentality guarantees cross-selling at its most basic level.
While the tools, the RMS and the CRS, are integral, Rapuc warns, “Revenue management can be very dangerous when you make too much of it.” People ultimately must make decisions about what rates to offer, and so those people must be trained and aligned with the company’s “family-oriented” revenue management philosophy. “The system provides only 20% of what revenue management can do,” Rapuc says. “The property manager and the sales people need to think about these things to make them work better.”
Which is not to say the system is unimportant, Kaufman warns. “I’m very concerned that during this period of extreme health, hotels are not demanding revenue management systems,” Kaufman says. Periods of high demand, he notes, afford the greatest opportunities for enhancing revenues, whether at an individual property or system-wide.
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