Hotel Revenue Management - Now more important than ever ( Part 1)
Hotels may be reluctant to invest in systems and software, but the swift implementation of automation in specific departments can payoff and payoff many times over. By investing in revenue management systems, for example, that adjust rates automatically in real time, hoteliers can increase their revenues and ADR, and free up revenue managers to focus on the bigger picture planning that will put the hotel at the front of its market.
The airlines are credited for developing the foundational science behind revenue management. Almost since the beginning of commercial flight, airlines had attempted to maximize their revenues by focusing on filling as many seats as possible on every flight. This meant predicting how many booked passengers would show up for a flight and how many wouldn’t. Overbooking by that predicted amount was the technique that was deployed to meet their objective. In the early 1970’s, airlines began experimenting with “fenced” pricing such as offering a discount to passengers who booked more than 21 days in advance. This meant that airlines now had the opportunity to sell additional seats that may otherwise have gone empty. It also meant that the need for tracking and quantitative analysis grew exponentially since customer response to these fare alternatives varied based on season, day of week, time of day, city pair (origin and destination), reason for travel (business or pleasure) and many other variables.
A decade later fledgling yield management practices began within the hospitality industry. In fact, it wasn’t until 1988 that some of the larger hospitality brands began to experiment by utilizing yield management principles. Unlike the airlines with scores of specialists skilled at quantitative analysis, yield management responsibilities in the hospitality sector fell into the lap of those in other roles – mainly reservation managers.
Today the term ‘yield’ management is outdated and has been replaced with the term ‘revenue’ management which reflects a broader perspective. Yield management generally refers to an inventory-centric approach to selling the right product to the right customer at the right time at the right price. The term revenue management refers to a business practice designed to optimize the revenue potential of an asset through all market conditions. It is important to note that yield management principles remain as a fundamental component of revenue management and several conditions must exist for it to apply. Those conditions include the following:
Revenue management is a combination of art and science. It doesn’t happen by accident or simply good fortune. It takes work and dedication. The first step is to know your competitive business environment. Start with knowing your competition. For those fans of the TV series – ‘Sopranos’, there is an Old Italian proverb which says “Stay close to your friends, but even closer to your enemies”. I hope no one considers business competition this harshly, but this can easily be translated to “Know your hotel well, but know your competition even better”.
Many Hotels still follow the traditional revenue management approach which involves the adjusting of rates and hotel inventory based upon room demand. These adjustments are usually dependent upon current reservations, historical data, forecasting, and a liberal measure of gut-instinct; in traditional revenue management, discounted rate tiers are closed as occupancy increases. Historical data may also indicate that a certain period has high demand even though reservations may be weak at the current time. Basically, as occupancy increases, rates available for sale should also increase. In this way, the hotel is building a “base” of business, which enables the hotel to sell rooms at higher rates. Many hotels build this base with discounted group business; dedicating a portion of their rooms to groups, actually enables the hotel to end up with stronger average rates overall. This would be a very simple process except that revenue management should be applied to group bookings as well. One of the factors affecting good revenue management is the fact that many hotels accept too many group rooms at deeply discounted rates.
To be continued |
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