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Revenue managers struggle with Total Revenue Management

15 November 2022
Hotels have been believers in revenue management for more than thirty years. Today, hotels efficiently manage room revenue and continuously improve their knowledge and skills. No wonder revenue managers think their skills should be used to maximize all revenue streams, not just room revenue.

However, when assessing total revenue management, revenue managers take the same approach and think it is all about maximizing the utilization of the available capacity. Revenue managers have started talking about monetizing every corner of the operation to capture more revenue. Capacity thinking might not work for total revenue management.

One tool to solve all challenges

Abraham Maslow (Maslow's hierarchy of needs) wrote in 1966, "If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail." It is a cognitive bias that involves an over-reliance on a familiar tool. Revenue managers are used to thinking about how to maximize the use of the fixed capacity they have in their hotels. Capacity management is their hammer; they see nails wherever they look when they think about total revenue management. How about revenue per square foot for meeting spaces, RevPASH (revenue per available seat hour) in restaurants, RevPATH (revenue per available treatment hour) in spas, TrevPAR to measure total capacity utilization, or GOPPAR to use the same hammer again to measure profit per capacity?

Back in the same old tracks

Today, revenue management is only about maximizing the utilization of the available capacity on a day-by-day basis. Hotel revenue managers continuously try to invent new KPIs reflecting how well they use the available capacity. Inside-out thinking will lead in the wrong direction, just like it did for Kodak, Nokia, Blockbuster, and many other companies that did not understand what was happening outside the company. They all know best and refuse to change. Hotels have just experienced what it feels like when the customers and guests do not need accommodation, but the hotel industry does not take much notice. Everything seems to be back to normal, and the old capacity KPIs seem to be working again.
Maximizing one revenue source, such as room revenue, is easy based on matching available rooms with demand for overnight stays. Selling a hotel room is a take-it-or-leave-it attitude. If you do not buy and the demand is high, someone else will. The OTAs are masters in scaring people by using all sorts of messages, such as "someone just bought a room," "only 4 rooms left", "85 % of the rooms at the destination already booked", etc. The message is clear, buy the room now, or you might not have somewhere to sleep. Revenue managers use the same tactics when they adjust their rates depending on the strength of the demand. Again, revenue managers are masters in exploiting the predicament of the guest.

Total revenue management is a different story

Total revenue management is complex in hotels with many facilities and revenue streams. The complexity is a good reason why total revenue management has not taken off yet as an industry standard. Another reason is that the demand for other revenue sources does not follow the same patterns as for accommodation. A third reason is that total revenue management needs another business model. The big difference is that the hotel room is a must-have, while all other hotel products and services are nice but unnecessary.

Increased complexity

Handling one revenue source is easy because the product is clearly defined, the market is well understood, the competition sells the same product, and hotels understand why the guest needs a hotel room. Selling other products and services is almost the opposite. The products are not well defined and are more differentiated than hotel rooms. The market is more complex because the guests can easily find comparable products in the hotel's vicinity. The competition is more difficult to define, and hotels are not good at understanding guests' needs. Most hotels do not even collect all the data into one system to understand complex associations.

A different reason for buying

Total revenue management must be customer-centric instead of driven by capacity and measured by capacity utilization. The main difference is that necessity force people to buy accommodation since they cannot get back home to sleep while all other revenue sources compete with many possibilities about how the guests spend their time. The guest can go to the hotel spa or the local art museum. The guest can eat in a traditional hotel restaurant, fast-food outlet, food truck, fine dining restaurant, convenience store, or not at all. The options for meals are endless, and the competition is fierce.

Another business model

The same revenue methods (the same hammer) do not work for other revenue sources. For example, no potential guests would care if they got a message like "only one meal left at the food truck," "the convenience store will soon sell out," or "someone just booked a spa treatment." The reason is that guests have so many other options, so they can always find other products and services or refrain from buying anything and using their time in another way, such as watching a movie or taking a walk in the surroundings. So, for example, the spa treatment competes with Netflix, reading a book, or running. The endless options fundamentally differ from just selling a generic room, where the competition sells the same generic room, and the guest must buy a room.
Total revenue management is about the guest. Therefore, hotels must use guest-related KPIs, such as average revenue per guest or stay, Customer Lifetime Value, and guest satisfaction with other products and services.

The commercial team is key

The different way of managing total revenue means that it cannot succeed without several roles in the commercial team, such as marketing, sales, revenue management, and even people with deep knowledge of food & beverage, meetings, and spa treatments. Total revenue management is about attracting guests to buy, not just optimizing a given capacity.