Robert Cross, a Revenue Management (RM) guru who pioneered RM in the late 80s explains about RM as follows.
“Revenue Management is the application of disciplined tactics that predict consumer behaviour at the micro market level, and optimize product availability and price to maximize revenue”
It is a science that makes use of past history and current levels of booking activity to forecast demand as accurately as possible and use optimization methodologies to maximize revenue. Even in times of declining demand, hotels with automated RM solutions have been known to outperform other hotels in their markets. In essence, Revenue Management allows hoteliers to make informed decisions and not decisions based on gut feel or just pure historical experiences.
Objective of RM
The objective of RM is to maximize revenue per total available capacity. In the price occupancy relationship of the hotel its objective will be to find out the optimal balance between average price and average occupancy.
The central concept of Revenue Management is EMR (Expected Marginal Revenue).
The idea being that with each room sold the probability of selling one more room declines. EMR is that probability into the rate at which it is offered.
If the probability of the next room being sold is 30%, then EMR is 30% of the rate applicable at that time.
If there is only one room to be sold, then there is a very high likelihood of selling that room without the need to discount. Therefore this one room will have a relatively high EMR. However with every additional room on offer or sold, the probability of selling that room will decrease. This necessitates the need for increased discounting. This means that the EMR too will decrease. Knowledge of EMR, and expected demand on a given day thanks to sound forecasting will enable the property to calculate the discounts and rates that need to be offered to sell an additional room. This approach requires total demand, which includes the expected arrivals and the spilled demand and not just the demand forecast as per the data control triggers.
RM systems are known to calculate the Expected Marginal Revenue (EMR) associated with each room of the property on a given day. EMR is computed by multiplying the rate offered by the probability of obtaining a booking for that room on that day.
Are Computer systems that excel in high-speed evaluation? The system takes the historical data, the current booking activity levels and makes a forecast of which segments of the market will be looking for rooms in the future. In the optimization, the system would balance the various price tolerances of these segments and set minimum price barriers and length-of-stay constraints below which a current booking should not be accepted. The system does nightly processing of data – some systems are known to process by the hour – so that decision on whether to accept or reject a current booking would not be delayed.
In the first step advance booking data is downloaded from PMS or CRS.
In the second step optimal room allocations based on price and length of stay hurdles are uploaded to the PMS or CRS. The sophisticated algorithms used in the Revenue Management software takes care of these complex calculations so that the management is free to monitor the activity and check on the marketing direction. The management can ensure that the system is updated with information that it is unaware of, such as a special event coming up, a new property opening up etc. Such information helps in price and inventory optimization. System will highlight those problem areas that come outside the pre-assigned limits for management action.
It is important to note that the RM systems do not make marketing decisions. The system will try to achieve the goals based on pre-defined parameters that are set in. Setting Marketing goals and defining strategies has to be done by the management. It must be borne in mind that the size of the hotel is not so much a factor. Successful implementations can be achieved in properties from 40 rooms to 1000 rooms. Greater the complexity of the market place, more the mix of market segments, greater the peaks and valleys in occupancy, greater will be the benefit to the hotelier.
Most RM systems are configured to work with the Internet as a distribution channel. The system helps Hotels to exploit this valuable channel without diluting sales from traditional sources. The net is a distribution channel that the hotelier can use to capitalize on hidden demand and revenue opportunities. Today the likes of agoda.com/Sri_Lanka fulfills this need and bypass tour operators to reach the customer. Name your own price-reverse auctions, auctions, aggregate buying power are some of the strategies that can be used in net marketing.
In Sri Lanka most hotels (resort hotels in particular) depend to a large extent on annual bulk contracts with major Tour Operators. Given the fact that these contracts involve large volumes of inventory, often the hoteliers gets locked in with few tour operators. Therefore the property must achieve optimal benefits from these contracts. Due to the pre-negotiation of rates the contract optimization (price) must happen prior to execution of the contract. Defining potential pricing scenarios, forecasting the various scenario outcomes, choosing the right scenario based on optimal expected outcome must happen in the pre-execution stage.
Most RM systems provide group Forecasting & Management and Group & Contract evaluation modules. With good historical data and current market information hotels would be able to ultimately maximize revenue. Automated solutions provide the necessary tools for a property to objectively measure financial impact, potential (pre-contract) and actual (post-contract).
Future of Hospitality RM
Even though RevPAR is the measure used currently worldwide, increasingly there are concerns with regard to focus on other profit centers in a hotel and overall profitability. It now appears, come 2013 TrevPAR (Total revenue per available room) will be the key focus in HRM (hospitality revenue management). TrevPAR will take into account not only the room revenue, but the restaurant, spa, conference space, meeting rooms etc
Brands and Touch Points
Touch points are the points at which consumers come in to touch with the brand. In the buying pattern, these touch points would be happenings in the sequence of steps leading to the purchase by the consumer. In the current marketing policies of the hospitality plant, some of the touch points are shrouded by the tour operator’s brand and hence the brand power of the hotel plant could be expected to under perform.
The web and cyber marketing strategies are means of drawing the brand away from this umbrella influence and impact positively the price and thus revenue optimization. Currently available software use forecasting and optimization methods with emphasis on the perceived consumer behavior, having no recourse to their actual behavior. Future developments would need to take this in to consideration.
Criteria for success
There are certain criteria that must be met for successful RM implementation.
Firm Commitment of an Entire Organization
Good historical data
Organization’s firm commitment
The enthusiasm, desire and direction must come from the top with goals top down and the planning bottom up from the market place. To get the benefit, it must
have the commitment of the entire organization. What is important is to work with the system, and not against it. Marketing and Sales must accept that it is a tool to be made use of. Ideally there should be a RM head who keeps the system parameters updated, works closely with Marketing and Sales to maximize revenue.
The property management system must come first, for without past and current data it is not possible for a RM system to function. The wealth of reservation data captured in the PMS such as property history, current booking and stay activity in real time needs automated transfer to the RM system. Most RM systems are capable of full integration with PMS.
Good historical data
The accuracy of good advance forecasts of any RM system is directly related to the detail and size of the database. Ideally a year’s worth of data is needed as the basis for forecasting. Properties with high percentage of Charter/Contract group business will be better placed if the PMS is able to track changes to the group blocks with date and time they occurred. Vendors are known to capture live data for at least three months before cutover.
In good times and bad times RM is known to have enabled properties with RM and good RM practices to outperform those without, and even in times of declining demand. Properties with RM are known to have increased their revenue in excess of 6-8% and profits by as much as 20-30%. Automated RM solutions provide strategic competitive advantages and quantifiable benefits.
(The writer is a Science graduate from the Peradeniya University. He has worked in SriLankan Airlines, Mihin Lanka and GMG Airlines Bangladesh. Currently works as Consultant to Air India GSA in Sri Lanka)
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