The Revenue Management Tug of War

Revenue management has been on the minds of most hotel owners and operators as they try to navigate through the worst industry downturn ever. Balancing sound revenue management strategies with the sometimes-desperate need for any and all possible revenues is a daily struggle for many hoteliers. Some in the industry have even blamed computerized revenue management systems for the sharp fall in average rates. We explored this tug of war with Klaus Kohlmayr, director of IDeaS Advantage, the consulting arm of revenue management software marketer IDeaS:

Revenue management technology has improved substantially since the hotel industry's last downturn, yet most hotels have had trouble holding rates in the past year. Can you explain that?
Over the last 18 months, revenue managers increasingly relied on the data and analytics from systems to put some very robust strategies in place, which in many cases have avoided even more RevPAR declines than many experienced. However at the same time, technology is only one of many areas revenue managers need consider when deciding optimal strategies. In many cases, hotels have disregarded the recommendations from their revenue management systems and "overshot" their discounting due to very substantial pressures from management, owners and investors.

Any examples?
In one particular example, we demonstrated to a client that by increasing some rates the hotel could achieve a 3.5-percent increase in transient revenues. A sophisticated revenue management system will connect the hotel’s PMS to distribution channels so revenue management decisions upload automatically, allowing the revenue manager to concentrate on setting optimal strategy instead of spending valuable time uploading rates.

Can an owner or operator rely too much on revenue management technology in setting rates? What role should an operator's 'gut feel' have in rate management?
Gut feel is certainly important when the operator knows something the system is unable to know, like a substantial change in the market due to new competitors, large events or something else. Make sure the system knows what you know and you know what the system knows. It’s key to constantly reevaluate where the hotel stands in relation to the market and the competitive set.

How should an owner or operator respond when a direct competitor irresponsibly slashes its rates?
The best initial response is not to respond. In many instances, operators panic and try to match every change in rate within their competitive set. When all you compete on is price you quickly become commoditized, leaving you few options to get out of the "pricing death spiral." The best response is first to evaluate the potential impact of the rate change. Is it for a certain segment? A certain channel? Is it fenced? Time-specific? Only after this evaluation should the hotel decide what is the best strategy. Secondly—and more long term—is to focus on value rather than price.

What are the dangers of rate cutting in a difficult economic environment?
Rate cutting per-se is not dangerous; irrational rate cutting without a proper strategy is. As a good friend of mine says, "Poor marketing can damage an organization, but poor pricing can damage a market." I’m not against cutting rates, as long as it fits within an overall long-term strategy and actually helps a hotel maintain or grab additional market share.

What are the traits of a good revenue manager?
A good revenue manager is able to take into account a number of business and market variables to come up with the best possible strategy and is then able to sell this strategy to the key internal and external stakeholders. The ideal revenue manager is passionate about achieving the best possible long-term results for the business, combining analytics, strategy and excellent communication skills.

What will be the next innovations in revenue management technology?
In the next few years, we’ll see substantial improvements in the areas of pricing optimization and distribution and marketing automation. Systems will be able to determine the optimal price, will be able to push that optimal price automatically through a variety of channels and will be able to communicate with CRM or marketing systems. We’ll see an increase in optimization according to a customer's propensity to spend with the objective of optimizing total customer value.

Smith Travel Research forecasts it may take five to eight years for inflation-adjusted average rates to rebound to pre-recession levels. Do you agree, and what can revenue management technology do to help a property fight that trend?
I agree it will take some time for rates to rebound. Some research says three or four years, some says it’s longer. We have seen some initial signs of rebounding rates with our clients already and we are helping them to be optimally positioned for the expected upswing. Revenue management technology helps a hotel or corporate office pick up on the smallest upswings in future demand—either at a property level or across a region or cluster. This allows the revenue management team to be much more pro-active than would be possible in a manual environment.

Does sophistication in revenue management techniques and technology differ in various parts of the world?
Working with clients around the world, we’ve noticed while revenue management concepts are the same across the world, sophistication definitely varies. This might be due to technology, particularly in developing countries, or a general lack of focus on revenue optimization. In many emerging markets it’s still very much about "a full hotel is a successful hotel," rather than focusing on optimizing RevPAR.

Other related stories on the topic from LHOnline cover hotel marketing and technology.

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