Hotel Owners Should be More Involved in Pricing

Revenue management has come a long way since its inception in the early ’80s. Initially about collecting, compiling and analyzing market data in Excel spreadsheets to determine hotel rates, revenue management has exploded to involve a series of high-speed, complex algorithms that automatically assess hotel performance to optimize demand and increase revenue.

Given the sheer impact it has on hotel performance, it’s no wonder that the art and science of revenue management is gaining greater traction among those who have the biggest vested interest in hotel performance—hotel owners.

Hotel owners are realizing that when their senior executives lead the way in revenue management they can extract optimal value from their assets, resulting in a number of flow-on benefits for owners, including a greater ability to service debt, obtain higher loans or re-invest funds into other business ventures. All of which keeps investors happy.

How it works
In the past, many investors and hotel owners viewed revenue management as a discipline on the micro-level, and therefore not of their time and concern. However, rapid advancements in technology and a growing number of booking channels caused hoteliers to re-think the way they view revenue management. Advanced analytics built into today’s best revenue management systems use a hotel’s data for predictive price-sensitivity demand modeling.

When used effectively to form strategic decisions, this leads to increased profitability and better risk management associated with uncertain demand.

In mature markets, many savvy hotel owners and investors are realizing considerable returns by cooperating more closely with their revenue management departments to ensure their hotel’s value is continually enhanced over its lifetime. This is particularly common among hotel owners with multi-brand portfolios.

However, many hoteliers still aren’t realizing the full benefits of revenue management, and many times the level of understanding varies greatly across departments and even regions. In many emerging markets, revenue management is still viewed as an additional cost rather than a strategic tool for increasing returns.

While hotel owners don’t need to get involved in the day-to-day micro operations of a hotel, it’s important they play a role in setting the overall goals and direction of the hotel. For example, it may be the owner’s intention to turn the hotel into a long-term profit generator or an investment company diversifying their portfolio. If the hotel is a newly opened asset, an owner’s objective could be to realize a quick return on investment by selling the asset after a few years of successful operations. These differences in goals need to be shared with the revenue management department and worked into the hotel’s overall strategy in order to help reach these objectives.

Maintaining a proactive approach
Accurate demand forecasting lies at the heart of every successful revenue management strategy. It allows a hotel to respond to changing market conditions proactively instead of reactively. For example, without accurate demand forecasting, during a sudden downturn in demand, many hoteliers will use blanket promotions or slash rates, and then they’ll wait and hope the reduced rates drive sufficient demand to make up for the gap. Often, this situation can lead to price wars with competitors, which can damage a hotel’s ability to increase its price in the future.

Instead of putting in place reactive blanket promotions, a much more strategic approach for the hotelier would be to target specific promotions to specific market segments that will be most responsive to them. If demand is accurately forecasted from each segment, hoteliers can begin to make better decisions about which guest should receive that last available room, free or discounted breakfast options, or complimentary spa treatments for a limited time to help drive demand in low periods.

One key point hoteliers should keep in mind about revenue management is that not all business is good business, and that revenue management analytics can help determine which customers can provide the greatest long-term value to the business. Too often, hotels fall into the habit of selling out rooms to lower-rated business, causing them to lose out on higher-rated business—and essentially throwing money away. Although it seems counterproductive to turn down business, if hoteliers trust their forecasts and market pricing, over time they will see that turning down the wrong business can lead to increases in revenue.

Tying it all together
Ideally, hotel owners should invest in revenue management from the beginning versus calling on it for help during periods of low demand. By ensuring that effective revenue management strategies are in place early on in a hotel’s lifecycle—during the investment stage through feasibility studies and revenue projections and the resulting flow-through—owners can help ensure their entire team has the right information about where the hotel is going and how to get there.

In the current hotel climate, hotel owners who want to maximize returns and improve the value of their asset should take an interest in revenue management and ensure its effective implementation at their organization. This way, even in times of a downturn, successful strategies can be put in place to increase the value of a hotel across its lifetime.