What is the next step for hotel revenue managers?
17 February 2023
Revenue managers have a considerable workload and have difficulty taking on any more assignments. However, what would be the next step for a revenue manager once the revenue manager has balanced the workload?
Over the years, many discussions have been about how revenue management would evolve over the next decade. In surveys, revenue managers answered that total revenue management and profit management were high on the list, apart from fixing the constant problem of integrating systems and keeping up data quality. However, the discussion about total revenue and profit optimization has been going on for at least ten years. Revenue managers cannot do everything simultaneously, so what is the next step?
Start with the highest impact
A hotel aims to increase long-term profit to reach sustainable financial success. Therefore, the first question for a revenue manager is which actions would positively impact profit. It is vital to analyze the effects of different activities both from a long-term and mid-term perspective. Short-term, the highest result is always to sell that extra room today. However, short-term thinking will not lead to long-term financial success.
Impact of total revenue management
For a hotel with several other revenue sources than room revenue, the next step for revenue managers would be to start optimizing each source of revenue. The philosophy is that optimizing each revenue source will increase the total revenue, which will positively impact profits. The revenue manager can take two different approaches. The easiest first step is a siloed approach where the revenue manager optimizes each revenue stream. The more difficult first step is a holistic approach where the revenue manager optimizes the average guest spend. The latter will have the highest long-term impact on revenue and profits.
Siloed approach
A siloed approach to Total Revenue Management (TRM), where each revenue stream is optimized separately, can hurt overall revenue and profit. In the siloed approach, optimizing one revenue stream may come at the expense of another, leading to suboptimal results. Here are three actions that hotels can take to maximize total revenue by optimizing each revenue source.
- Integrate data: Optimizing each revenue source in siloed systems is possible, but integrating data across systems would provide a more comprehensive and holistic view of demand and revenue. An overview can lead to more informed and effective decision-making and help hotels identify opportunities to optimize each revenue source and maximize overall revenue and profit. For example, suppose the hotel manages room and meeting space revenue in separate systems. In that case, it may be difficult to identify opportunities to cross-sell meeting space to room guests or to offer packages that bundle both room and meeting space. Integrating data from these systems would provide a complete picture of demand and revenue and allow hotels to identify and act on these cross-selling opportunities. In addition, integrating data can help to reduce data quality issues, ensure data security, and reduce the need for technical expertise to access and use data.
- Apply demand-driven pricing: Use demand-driven pricing strategies to optimize pricing for each revenue source based on demand, competition, seasonality, and other factors. In a siloed approach, demand-driven pricing can be applied to each revenue source separately, using data specific to that revenue source. For example, the revenue manager can use room revenue data to adjust room pricing, while meeting space data can be used to adjust meeting space pricing. This approach can effectively optimize each revenue source but may not consider the interplay between revenue sources, such as cross-selling opportunities. For example, the revenue manager can adjust food and beverage pricing based on demand, seasonality, and competition. For instance, the hotel can adjust breakfast, lunch, and dinner pricing based on demand and offer special promotions and packages to increase guest spending.
- Respond to customer feedback: Seek and respond to customer feedback to understand guests' needs and preferences and to make improvements to products and services that will increase revenue from each source. In a siloed approach, a hotel can respond to customer needs for each revenue source by using data specific to that revenue source. For example, understanding guests' food and beverage preferences can help hotels offer menus and promotions tailored to their particular needs. A hotel can provide special menus for dietary restrictions or promote specific menu items that are popular with guests. Responding to customer feedback in a siloed approach can effectively optimize each revenue source but may not consider the interplay between revenue sources, such as cross-selling opportunities.
By taking these actions, hotels can maximize total revenue by optimizing each revenue source while avoiding the negative impacts of a siloed approach to TRM. However, the estimated potential implications for profit depend on the possible increase of each revenue source and how much each revenue source can contribute. Therefore, revenue managers must analyze the potential impact before optimizing each revenue source.
Holistic approach
In a holistic approach, the guests and customers are the centers of attention. Therefore, revenue managers optimize the average guest spend to positively impact overall revenue and profit. Here are three actions that hotels can take to maximize total revenue by optimizing guest spend.
- Collecting and analyzing data: Collecting and analyzing data about guest spending is essential to take action to optimize guest spending and maximize revenue. Hotels can comprehensively understand guest behavior by collecting and analyzing data about guest spending, including spending patterns, preferences, and pain points. The insights can then inform pricing and product strategies and improve guest experiences to increase guest spending further. For example, by analyzing data about guest spending, hotels may identify opportunities to upsell or cross-sell products and services, such as room upgrades, meals, and activities. In addition, hotels can use this data to develop targeted sales and marketing campaigns that drive demand and increase guest spend.
- Personalize experiences during the guest journey: Offer personalized experiences and services based on guests' preferences and needs. Offer packages and promotions that target specific guest segments, such as weekend getaways, romantic packages, and family packages. In addition, train front-line staff to upsell and cross-sell products and services, such as room upgrades, meals, activities, and transportation. During the stay, enhance guest experiences by offering high-quality amenities, such as spas, gyms, and meeting spaces, and providing exceptional service. For the revenue manager to succeed with the holistic approach, many departments must be involved and contribute to the overall guest experience.
- Respond to customer feedback: Seek and respond to customer feedback from a holistic perspective to understand guests' needs and preferences and to make improvements to products and services that will increase guest spend. Continuously evaluate and optimize guest experiences and offerings to ensure that the hotel maximizes guest spending.
By taking these actions, hotels can maximize total revenue by optimizing guest spend and providing personalized experiences and high-quality offerings that drive demand and increase guest spend. This holistic approach to TRM can help hotels to maximize revenue and profitability. The estimated potential impact on profit depends on the possibility of monetizing the hotels' facilities, product range, and add-on services. Revenue managers must collaborate with all revenue-generating departments to find the optimal offering to attract the high-spending guests before it is possible to analyze the potential impact on profit. Focusing on the guest and customer always pays off in the long-term perspective.
Impact of profit optimization
The highest impact when thinking about profit optimization is increasing revenue. Until the hotel has reached its fair share of the market, there is less impact on focusing on costs and trying to optimize profit by managing costs. In a blog post titled "How can the revenue manager optimize profits," there are several cost categories that a revenue manager needs to understand to be able to deliver the right mix of revenue to make it easier for operations to maximize profit. The impact of managing displacement, which revenue managers already do, and customer acquisition cost, which fewer revenue managers work, have the most impact.
The way toward profit optimization
A hotel revenue manager should take action based on the order of impact.
Displacement
Displacement refers to the loss of revenue from turning away higher-paying guests or selling rooms at a lower rate than the guests are willing to pay. It's an essential aspect for hotels to manage to maximize profits. Take a deeper look at displacement and analyze how much the hotel loses by accepting bookings from guests paying lower rates than they are willing to pay. Replacing the guests who contribute less to profit with guests who contribute more will increase revenue and profits significantly. Here are five important actions a hotel can take to manage displacement better.
- Track requests that hotels deny: The hotel can collect valuable information for future decisions by registering all denied requests. Without knowledge about denials, hotels can never analyze displacement correctly. Therefore, revenue managers should set up a process that accurately collects the data.
- Prioritize displacement analysis: The revenue manager should prioritize displacement analysis to minimize the loss of revenue from displacement. Revenue managers need to take a deeper look at displacement to get insights so they take the right actions to reduce the loss of revenue.
- A good understanding of guests' willingness to pay: Revenue managers should understand guests' willingness to pay, as this can significantly impact profits. Willingness to pay is difficult to research and understand. Revenue managers should collaborate with marketing that tends to be more knowledgeable in understanding guest needs and which additional values guests appreciate. When the revenue manager has more insight into the willingness to pay, it is easier to set room rates.
- Offer package deals and promotions: Offering package deals and promotions can help attract guests and reduce the risk of displacement. In addition, willingness to pay directly relates to the offered products and services, so improving the value proposition would increase the willingness to pay and allow the hotel to capture a larger share of the guests' wallets.
- Monitor competitors' rate changes: Instead of blindly following competitors' rate changes, revenue managers should focus on their hotel's attractiveness and close the gap between the guest's willingness to pay and the selling rate.
By implementing these actions, hotels can better manage displacement to maximize profits. The estimated potential impact on profit is between 2 % and 7 % of room revenue.
Customer Acquisition Cost (CAC)
Customer acquisition cost refers to the costs associated with acquiring guests and customers. Hotels need to manage these costs effectively to maximize profits. A hotel can take five crucial actions to manage customer acquisition costs better.
- Collecting data is a crucial first step in understanding customer acquisition costs. Without accurate and comprehensive data, it can be difficult to fully understand the costs associated with acquiring guests and customers. In addition, once the data is collected, the hotel can analyze it to gain insights into the most cost-effective strategies for acquiring guests and customers.
- Fully understand and manage customer acquisition costs: The hotel should fully understand and manage customer acquisition costs, including commissions paid to OTAs, travel agents, and others, transaction costs, loyalty costs, and all other costs such as labor costs for direct bookings, costs for salespeople, and marketing. It is not just about looking at the commission invoice because some hidden commissions that guests pay are not in the hotel's accounting system.
- Analyze customer acquisition cost: The revenue manager should analyze the customer acquisition cost to understand the most profitable guest- and customer segments. The revenue manager needs to look at feeder markets, channels, length of stay, etc., to find the most profitable micro-segments with the highest potential return on marketing spend. The revenue manager must regularly monitor and adjust marketing spend based on how much business marketing campaigns produce to ensure that the hotel uses its budget effectively.
- Shift the channel mix to a more favorable mix from a profit perspective: Based on the analysis of customer acquisition costs, the revenue manager can shift the channel mix to a more favorable mix from a profit perspective. Regularly evaluating the channel mix can help ensure that the hotel uses the most cost-effective channels.
- Use digital marketing: Digital marketing can be a cost-effective way to reach potential guests and customers to drive bookings. Encouraging guests to book directly through the hotel's website can reduce the cost of customer acquisition. Still, the revenue manager might not know the actual cost for direct bookings if the hotel does not manage and track customer acquisition costs correctly.
By implementing these actions, hotels can better manage customer acquisition costs to maximize profits. The estimated potential impact on profit is between 1 % and 3 % on room revenue.
In conclusion
Revenue managers have many opportunities to increase revenue and profitability in hotels further. The potential in total revenue management and the first steps in profit optimization are significant in terms of revenue growth and profit maximization. However, there are challenges, and it will be demanding for revenue managers to take the next steps in refining revenue management. Owners, CEOs, and general managers have much to win by supporting revenue managers by providing the right resources to make it possible to reach long-term financial sustainability.