Money On The Mind
To take the next step in revenue management, hoteliers must adopt forward-thinking strategies.
By Derek Gale, Associate Editor -- HOTELS Magazine, 2/1/2006
As hoteliers move ahead in the field of revenue management and automated systems get ever better at optimizing rates and business mix for particular nights, weeks, months and seasons, a new challenge will emerge: making the proper operating decisions to manage revenue not only in the present and near future, but also for the long-term health of the business. To do this effectively, hoteliers must adopt forward-thinking strategies at the enterprise level. These strategies by definition involve more team members and more departments than just those that have traditionally been involved with revenue management. But to stay healthy and competitive, hotels and hotel companies must adapt and leverage their resources to produce optimum results.
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Strategy 1: Factoring Guest Value Into Revenue Optimization
Imagine you’re in an overbook situation for three nights, with the average rate for these nights well above your normal ADR. Shortly before these particular nights come around, a number of loyalty club members call to request rooms for these nights, expecting to get the rooms at a loyalty rate. You’re already overbooked and likely will have to walk guests. Do you deny the loyalty club members availability? Do you offer them rooms at the rack rate? In doing either, what damage might you do to these customers’ long-term value? What is the likelihood you would lose some portion of the future revenue stream associated with these guests, or worse, the entire future revenue stream? What is the impact on your brand equity and goodwill?
These are difficult things to measure, but valuable things to consider in terms of managing revenue not just for the present, but also for the future. If you know certain things about these specific loyalty club members, however, your decision may be simpler. What if you had easily accessible historical data on all your loyalty club members and could see their total number of past stays and track their spend throughout those stays? This would help to forecast future stay patterns and revenues, and might give you a clue as to the future loss of denying availability now. Or perhaps you could see that you had denied availability to these guests in the past, but that doing so didn’t change their stay/spend behavior. That might make your decision easier.
Ultimately, what is being discussed here is the lifetime value of particular guests, and the role that value can play in revenue management. For now, “no one has quite folded this directly into optimization,” says Jon Higbie, chief scientist and director of operations research at Rockville, Maryland-based Manugistics, a revenue management solutions provider. “That has to do with how to get a good estimate of lifetime customer value.” To do so requires extensive historical data (think about what’s in your PMS or CRM system), and even with such data and such an estimate, there are no absolutes. Denying an availability request for the first time may or may not cause you to lose a customer. Indeed, “the biggest hurdle a company would have [to incorporating this into revenue optimization] is understanding the opportunity cost of denying a reservation to a loyal customer,” says Amitava Chatterjee, senior consultant, hospitality and leisure, IBM Global Services. “Instead of denying a guest for the first time, companies will play with the room rate variable,” Chatterjee says. “They will up the rate, and then that’s how they measure guests’ reactions.” He stresses the importance of tracking such reactions in order to be able to incorporate the value of a guest into revenue management. “As years go by, and more data is gathered, it becomes more robust,” he says. “Patterns will start to emerge” allowing this to be factored into revenue management equations.
Strategy 2: Managing Distribution For Profit
Multichannel distribution in the hospitality industry has complicated the pricing and selling of hotel rooms, especially in the transparent world of the Internet. Hotels now must manage inventory, rates and business mix across a large number of channels to optimize revenue. “Basically they have to master which levers to push to turn business on and off as needed. And there are a lot of levers to manage,” writes Cindy Estis Green, a marketing and distribution consultant, in a special report titled DeMystifying Distribution. Deciding how many rooms to make available through each channel should be based on accurate forecasting of demand for each day, week, month and season of the year. A comprehensive distribution strategy also will aim to harness the best potential business from the various channels while limiting the corresponding costs. “Channel management is a complex operation that requires technical expertise and very specialized skills that are found both within revenue managers and distribution team members,” says Dyan Stone, group yield and strategy director, Thistle Hotels, London. The bottom line is that revenue managers need to be central to the development and execution of the distribution strategy of a hotel or hotel company, as channel management can have a serious impact on profitability. For this reason, hotel companies like Thistle are either integrating these positions or combining distribution and revenue management under one team.
“Distribution, channel management and revenue management are naturally interlinked, and we feel that commercially the ultimate solution is when all three parts are working well together,” Stone says. “It really is a natural evolution in the hotel industry that they should merge. Therefore, we have essentially merged all three under what we call our yield & pricing strategy team.” That team then works in tandem with Thistle’s sales and marketing team and centralized sales offices for optimal results, Stone says. “Our operations have benefited as we are able to [more easily] identify challenges by being one centralized team. By having the distribution and channel analysts working side-by-side in the same office, this allows us to find effective solutions.” Stone further notes the importance of well-trained, skilled people. “We want to invest in training our people. We will focus on cross-training so that they are multi-skilled and are proficient in distribution, channel management and revenue management.”
Beverly Ramsook, director of revenue management for New York-based Affinia Hospitality, says that company also has teams working together. “We have all of our revenue managers in the same office—that’s more beneficial because they run different strategies off of each other,” she says. Also, “we work very closely with the business intelligence department and interactive department as well as our sales and marketing team to be strong in [distribution],” she says.
Strategy 3: Group Revenue Management
Group revenue optimization is “one of the untapped frontiers of revenue management,” Higbie says. “Traditionally, if anyone’s done anything at all in group revenue management from an automation standpoint, it’s been computing the opportunity cost of taking a group booking, looking only at transient displacement,” he says. But now revenue management solution providers are starting to do more, he notes. Manugistics, for example, offers a group pricing solution to help hoteliers assess the profitability of group bookings and, in turn, focus on winning the right business for the bottom line. The solution computes optimal target prices based on demand forecasts, opportunity cost estimates and more complicated market response models. And Minneapolis-based IDeaS’ software also does group forecasting and evaluation, providing pricing
recommendations and guidance for optimal placement. But this is still just the beginning.
“As far as looking to the future, we’ll look at what we can do to more finely tune that forecast [and end price],” says Linda Hatfield, IDeaS’ vice president, project management. “This could mean taking into account additional group attributes,” such as how a group uses function space, Hatfield says. “We haven’t done [this] in the past because some attributes are not easily captured in PMSs or CRSs,” she says. For this reason, IDeaS may look to partner with some of the sales and catering software companies to go further with its group pricing capabilities for certain clients (clients using a sales and catering system are more likely to have better data capture and more data to work with, Hatfield notes).
“We’d love to” look at group revenue optimization in terms of function space, says Ben George, director of revenue development for Hilton International, London. He says Hilton has talked with partner IDeaS about the concept, but “we’re not in a position to start it yet. The problem is saying that you have a lump of money that you are ready to spend,” George says. “Realistically it’s something we’d like to do, it’s just a question of when is the right time to focus our efforts on that.” For now, he says, Hilton has other revenue management projects and priorities in the short-term, such as completing its work on a single-image inventory. But he says he’s talked with colleagues at other hotel companies, and “there is an appetite for this.”
Forward-thinking strategies such as projecting the lifetime value of a guest and tracking guest response to availability and rate offerings, combining revenue management and distribution specialists, and thinking about optimizing group business and function space will help hoteliers reach the next level in revenue management. And with the year ahead looking brighter than ever but the outlook beyond that uncertain, there’s no better time than the present to start looking ahead and thinking about things you can do now to secure your ideal future.
Electronic Distribution News
Hotel Technology Next Generation announces a new workgroup to focus on content management for distribution. Sponsoring companies are Cendant Travel Distribution Services, Global Hyatt Corp., Lanyon, Leonardo, OpenTravelTM Alliance, Pegasus Solutions and Starwood Hotels and Resorts Worldwide. The workgroup will seek to create one or more solution sets that hotels, hotel companies, distribution channels, promotional channels and intermediary service companies can plug into to achieve simple and consistent management of content (multilingual text, audio, photographs, video, maps, etc.) from the source to the destination.
Expedia and Hotels.com have signed a new three-year agreement with Marriott International that features an incentive arrangement designed to reward Expedia for delivering business to Marriott hotels during off-peak travel periods, and provides Marriott hotels with flexible economic terms. In addition, Marriott will expand its direct connect technology arrangement with Expedia globally and provide Expedia customers with greater access to Marriott inventory and rates.
Group Travel Planet LLC has built the first-ever direct connections that pull group hotel rates and inventory from hotel central reservation systems (CRSs), property management systems (PMSs), providers of distribution management solutions and merchant hotel distributors. The new proprietary technology, called GTPDirectConnect, provides hoteliers with an efficient way to book groups through Group Travel Planet’s distribution network by eliminating the need to load group rates and inventory manually into an extranet system.
Hilton Hotels Corp. announces the accreditation of Hotwire.com, Priceline.com and Priceline subsidiary Travelweb as online distributors of participating Hilton Family of Hotels’ room inventory.
Leonardo and Florida-based ICE Portal have joined forces to create an Internet content distribution service. The partnership allows travel suppliers and hoteliers seamless distribution of Internet sales content to more than 20,000 leading travel Web sites, including the four global distribution systems (GDSs). The companies offer 24/7 delivery of static and moving images from a central database.
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