director of revenue management

director of revenue management

The Role and Impact of Revenue Management in Hospitality Industry

1. Introduction to Revenue Management

Considering the rapid growth of average fare revenues and the introduction of new RM capabilities, the achievement of incremental RM-enabled income gains may be expected. However, neither companies nor traditional PMS models reflect these huge performance gains. Despite many small gains, RM performance gains are not noticed and the expectation of greatly improved results appears to be overestimated. In fact, RM performance increase is dismal. Even with dramatically improved RM capabilities, companies have not experienced a disproportionately large growth in RM-contributed profits and RM-contributed income growth. In fact, estimates indicate management reviewers are able to improve profit by merely unknown imperceptible, statistically insignificant percentage units, which makes one wonder about the real potential for income differentials. Future developments will be geared toward closing the income-making capabilities performance gap. The RM of tomorrow is going several steps further. It will strive to provide a seamless performance and economic dimension context covering the three important dimensions: customer, product, and company.

The roots of revenue management (RM) can be traced back to the determination of the optimal price for classical product-market combinations. As the RM practices evolved, RM has shifted from a single product-market revenue maximization problem to the identification of multi-tiered price points at various points in time, management of multiple processes accommodating customers with varying degrees of willingness to pay, serving different customers with common interest schedules and economic expectations, securing RM discipline throughout the entire organization, concerned with the total value creation process, rather than simply with financial and revenue performance. Finally, managing internal business operations to secure external revenue improvement. While RM is recognizing an urgency for managing customer intake time use, a similar type of urgency does not seem to be emerging in influencing customer demand for products and services. The need for using and developing accounting models going beyond traditional Performance Measurement Systems (PMS) in order to provide superior support for RM objectives seems to have been recognized only to a limited extent.

1. Introduction

2. Key Concepts and Strategies in Revenue Management

The first and most important concept in the understanding of hotel revenue management is lost human revenue. Nearly 150% of net profit is lost to unproductive time in the hotel business. The costs are usually fixed, which results in lost revenue that could have been produced from guaranteed business (as a percent of revenue). These costs are each hour during pre-established times that cannot be adjusted. Therefore, smarter allocation of human resources can significantly impact hotel performance. A proactive front office strategy can help reduce these costs, enabling staff to maximize touches with guests and optimize rate and occupancy. The result is an increase in overall hotel revenue. Confidence and belief in front office staff streamline the check-in and check-out processes. The front desk should have the capability to authorize any adjustment to rate. With a guarantee from the guest, there is no downside to rate adjustments.

This section will explain the key concepts of revenue management with a focus on the specifics of revenue management in the hotel industry. The focus is also on reviewing the various strategies followed for effective revenue management in the hotel business. The concepts of revenue management discussed here include lost human revenue, as well as the differences between revenue management and pricing, hotel revenue management with the front office, back and front office optimization, best available rate, inventory management, length-of-stay control, overbooking, and business mix. Important hotel revenue management strategies included here are channel effectiveness, proactive customer relationship management, dynamic packaging, push rates, and upselling strategies.

3. Technological Advancements in Revenue Management

Numerous technological advances have allowed hotels to communicate with their potential guests in increasingly precise, measured ways and have allowed the hotel companies to more effectively coordinate their marketing efforts. Revenue management itself is, or should be, an application of technology, but even beyond that, broad technological advances within the field have transformed and professionalized the practice beyond any measure. Having technologies in place allows a business to more effectively create a product that delivers real value to its customers while facilitating planning as well as operations on the highest possible efficiency level.

Technological advancements have enabled the integration of diverse functions within the hospitality product. The guest is no longer just purchasing a room, but instead is purchasing a range of experiences that may also include meals, recreational activities, business services, and others. In response to this change in guest demand, many hotels have integrated services such as room service or “entertainment-on demand,” which only a few years ago were based on separate systems. Many hotels have also integrated sales functions with centralized databases of guest preferences and purchasing history, so that future marketed promotions can be more effectively targeted.

4. Challenges and Future Trends in Revenue Management

Future trends of RM could also be oriented to hotels adapting RM strategies to hotels’ sustainable strategies. Hotels should look for a more eco-friendly approach to sustainability, which should be perceived as an alternative or integrated goal among other business and financial objectives. Finally, the increasing use of the Internet and the importance of electronic intermediaries, such as tour operators and online travel agencies, could lead to a synergy of demand-generation opportunities between hotels and these intermediaries. Although RM originated in the airline industry, it is the hotel industry that RM is today most frequently associated with.

One of the main challenges of RM systems is the unpredictability of customer behavior. RM systems forecast demand and the willingness of customers to pay, and make inventory controls based on past behavior. However, customers are not “obedient” to RM systems, and they could change their behavior following various external phenomena (social, personal, and life cycle). A further challenge that could impact RM in the future is caused by increased competition in the market. Competition is one of the most impactful interventions in RM, since it could change the level of customer willingness to pay but also require different strategic actions. Fierce competition could lead to the necessity for hotels to invest significantly higher fees in RM. This is due to the cost increase that could be linked to be necessary to improve forecasting model performances, employ better skilled personnel, or implement IT technology and thus meet or exceed competitors’ RM strategies. Fierce competition could make RM unable to increase room revenue, and at the same time RM costs are increasing.