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Challenges stopping hotels from total revenue management

28 December 2021
Hotel revenue managers have refined revenue management for hotel rooms over the past twenty years and had up until the breakout of the pandemic knowledge and skills to optimize room revenue for any given day. So what prevents hotel revenue managers from taking a step towards total revenue management?
For at least the past five years, the hotel industry has discussed if total revenue management is the next step to become even more professional in optimizing revenue. Still, many obstacles are unsolved, and the adoption rate has been slow. Another discussion is that maybe it is all about optimizing the profit instead of the revenue. Therefore, a hotel that wants to take a step towards total revenue management needs to define the profit philosophy to plan how to work with total revenue management.

Maximize profits in each department

There are two philosophies in how to maximize profitability in hotels. One is to optimize the profits in all outlets and departments. Every outlet and department should focus on making the highest possible profit. If every part is profitable, the sum will be the maximal profit that the hotel could ever achieve. In this case, the revenue manager needs to help the department head forecast each outlet. The sum of all forecasts will be the total revenue forecast. Unfortunately, each department works in a silo and focuses on maximizing profitability, creating suboptimization and conflicts between departments. If an outlet is not profitable, it will be closed to eliminate a loss and increase the total profit. One example is that if the spa is not meeting the profitability requirements, it will be closed. Without the spa "attraction," guests will stay at competing hotels, which leads to lower room revenue and lower profitability. A strict, short-term profitability focus for each outlet might damage the long-term return on investment for the property.

Maximize total profit

The other philosophy is that the hotel rooms are the core business, and every other outlet and department supports the core business. A full-service hotel with many outlets will charge a higher room rate since it offers guests a variety of products and services. Meeting rooms will help the hotel sell more hotel rooms, and great restaurants will attract guests to the hotel instead of to the competition. In this case, the focus is on finding the most profitable revenue mix. Each department needs to understand how it contributes to the total guest experience and develop products and services the hotel's target groups would like to buy. If an outlet is not contributing to the overall guest experience, it will be closed to eliminate a loss and increase the total profit.
The pandemic has probably forced hotels towards a total perspective on revenue due to smaller teams and fewer resources. During the recovery, hotels need to evaluate which philosophy has the best possibilities for long-term profitability.

Three additional challenges

There are a few more challenges. One is how to measure market performance. The benchmarking standard is to compare occupancy, average rate, and RevPAR. However, very few compare Total Revenue Per Available Room (TrevPAR) or Gross Operating Profit Per Available Room (GOPPAR). Benchmarking needs to be updated to make sense for hotels working with total revenue management.
Another challenge is to understand the breakpoints in capacity costs. One example of capacity costs is the capacity to clean hotel rooms. If a specific number of maids can clean 100 rooms, it is optimal to sell 100 rooms. If the hotel sells 103 rooms, it needs one additional full-time maid (at least according to labor laws in many European countries). The profit might decrease since the capacity cost increase more than the additional room revenue.
A final challenge is a lack of system support for total revenue management. Most (if not all) revenue management and pricing systems try to sell as many rooms as possible to fill the hotel. The focus might be too narrow and foster departmental thinking instead of a total profit perspective.