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Why an RMS Is Not Enough: Hotels need a Profit-Oriented Approach

05 September 2023
Are you still relying solely on a Revenue Management System (RMS) to drive your hotel's profitability? If so, you may miss substantial revenue streams and opportunities for greater guest satisfaction. While RMS is crucial for optimizing room revenue, it's just the tip of the iceberg. In today's competitive landscape, full-service hotels and resorts must look beyond room bookings to become truly profitable.
While RMS has revolutionized how hotels manage room pricing, it's important to note that this system traditionally zeroes in on room revenue. For many hotels, especially those offering a range of additional products and services—such as restaurants, meeting spaces, banquets, spas, and parking—room revenue might make up less than 50% of the total revenue. This raises an essential question: Are you genuinely maximizing profitability if you only manage half (or less) of your revenue streams?
This blog post examines the limitations inherent in relying solely on an RMS. We'll explore why a more comprehensive, profit-oriented approach is critical for financial health. From managing diverse revenue streams to understanding Customer Acquisition Cost (CAC) and improving guest satisfaction, we will explore why focusing solely on room revenue is a one-dimensional strategy that can no longer meet the multifaceted demands of modern hotel management.

The Limitations of RMS

Designed Primarily for Room Revenue

An RMS is a powerful tool for optimizing room revenue, but that's precisely where its focus tends to be—on rooms. It uses algorithms to adjust room prices dynamically, but it rarely, if ever, considers other services or amenities that a hotel offers. While room revenue is undoubtedly significant, it is only one revenue stream in the multifaceted business that modern hotels have evolved into. Ignoring or underutilizing other revenue streams can lead to missed opportunities for enhancing overall profitability.

Short-term Perspective (Up to 90 Days Before Arrival)

Another constraint of most RMS platforms is their inherently short-term focus, often limited to about 90 days before a guest's expected arrival. This narrow window can be a severe limitation, especially for properties that host events, conferences, or seasonal activities, which often require planning and booking well in advance. A short-term focus can also make it difficult to strategize for long-term growth and profitability, as it limits the hotel's ability to take a more comprehensive view of its business cycle.

Doesn't Account for Other Significant Revenue Streams

If your hotel offers services like dining, spa treatments, meeting spaces, or even golf courses, a traditional RMS won't help you optimize those revenues. Many hotels derive a significant portion—sometimes more than half—of their revenue from these additional services. Ignoring these streams can result in a skewed understanding of your property’s revenue potential. A failure to optimize pricing and demand across all services can result in lost opportunities and, ultimately, reduced profitability.

No Focus on Customer Acquisition Cost (CAC)

One of the most glaring omissions in a traditional RMS is the lack of focus on Customer Acquisition Cost (CAC). While the RMS might be adept at setting the perfect price for a room to maximize revenue, it doesn't usually consider how much it costs to acquire that customer in the first place. Digital marketing, advertising, commissions to travel agencies—these are all costs that can eat into the revenue generated from room sales. Not considering CAC in your revenue management strategy could lead to misleading performance indicators and undermine profitability.
These limitations illustrate why a traditional RMS, though valuable, can be a somewhat blunt instrument in the complex orchestra that is modern hotel management. The following sections explore ways to go beyond these limitations for a more nuanced, profit-focused approach to running your hotel business.

The Importance of Diversified Revenue Streams in Full-Service Hotels and Resorts

Substantial Revenue Sources Beyond Rooms

Full-service hotels and resorts are more than just sleeping quarters; they are complex enterprises offering various services and amenities that significantly contribute to the guest experience. While room revenue remains a critical component, these establishments often generate a significant portion, sometimes even more than half, of their income from other sources. These may include:
  • Food & Beverage: On-site restaurants, bars, and room service offerings.
  • Meetings & Events: Facilities for conferences, weddings, and other significant gatherings.
  • Spa: Wellness and relaxation services.
  • Golf: Golf courses and related activities.
  • Parking: Managed parking facilities for guests and visitors.

The Holistic Perspective: Revenue Per Guest, Not Just Per Service

For full-service hotels and resorts, a fundamental shift in perspective is required. Instead of merely focusing on maximizing revenue for each separate service, adopting a holistic approach to maximize the revenue per guest is vital. This strategy acknowledges the interconnected nature of these services and leverages them for higher profitability.

The Synergy Between Revenue Streams

These diverse revenue streams do not exist in silos; they often interact in complex and sometimes subtle ways. For example, guests attending a business conference at your resort may also take advantage of the spa services and dine in your gourmet restaurant. This interconnectedness presents opportunities for value-added packages, up-selling, and cross-promotions, which can significantly elevate the total revenue garnered from each guest.

Why Cohesive Management is Crucial

Managing these multifaceted revenue streams cohesively is essential for several reasons:
  • Bundling Services: Offering attractive package deals that encourage guests to utilize multiple services enhances the overall revenue per guest.
  • Resource Allocation: Understanding how services are interrelated helps in effective resource planning. For instance, a wedding in the banquet hall could lead to increased room bookings and restaurant reservations.
  • Dynamic Pricing Across Services: Leveraging dynamic pricing strategies for various services can optimize revenue, especially when these strategies focus on the guest's total expenditure.
  • Data-Driven Strategy: A unified, holistic management system can offer valuable insights into guest behavior and spending patterns, which is crucial for long-term planning and revenue optimization.
By adopting a comprehensive, guest-centric approach, full-service hotels and resorts can not only gain a more accurate picture of their performance but can also employ strategies to enhance overall profitability, moving beyond the limitations of traditional Revenue Management Systems (RMS).

The Cost of Revenue: Understanding CAC in Full-Service Hotels and Resorts

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost, often called CAC, is the total cost of acquiring a guest/customer. In the context of full-service hotels and resorts, this includes not just the obvious expenses like advertising and promotions but also less visible costs such as commissions paid to booking platforms, costs associated with loyalty programs, and even the labor costs for staff involved in sales and marketing activities.

The Hidden Costs Behind Generating Room Revenue

While a Revenue Management System (RMS) might efficiently optimize room prices to maximize revenue, it rarely accounts for the costs incurred to secure those bookings. These hidden costs can significantly affect the net profitability of room sales. For example, heavy reliance on third-party booking platforms might quickly fill rooms at the expense of steep commission fees. Or, a successful advertising campaign might bring in guests but could also come with a high price tag that eats into the room revenue. Understanding and managing these hidden costs is essential for a more accurate profitability picture.

The Importance of Managing CAC to Improve Profitability

Managing CAC is crucial for several reasons:
  • Optimizing Marketing Spend: A clear understanding of CAC can help you allocate your marketing budget more efficiently, focusing on channels that offer the best return on investment.
  • Improving Profit Margins: By reducing CAC, you effectively increase the profit margin for each guest, thereby enhancing overall profitability.
  • Holistic Revenue Management: Understanding CAC adds another layer of sophistication to your revenue management strategy. It ensures that you're not just maximizing revenue but doing so cost-effectively, contributing positively to the bottom line.
  • Guest Retention: Often, retaining an existing customer is less costly than acquiring a new one. Knowing your CAC can guide strategies to improve guest loyalty, which is especially crucial for full-service hotels and resorts that offer a range of services beyond just rooms.
A focus on CAC not only helps in improving the bottom line but also in developing a more nuanced, comprehensive approach to revenue management. It complements the drive to diversify revenue streams and enhances guest satisfaction by facilitating more targeted, cost-effective services.

Enhanced Guest Satisfaction Through Diversified Revenue Streams: More Than Just a Financial Strategy

The Synergy Between Revenue Streams and Guest Satisfaction

For full-service hotels and resorts, diversified revenue streams such as Food and beverage, Spa, Golf, Meetings, and events do much more than contribute to the bottom line. They also offer a fuller, more enriching guest experience. The logic is simple yet compelling: the more touchpoints a guest has with your establishment, the more opportunities you have to impress them. This multi-faceted interaction often translates into a more satisfying overall experience for the guest.

The Direct Impact on Reviews and Recommendations

The guest who enjoys a comfortable room, a relaxing spa treatment, a round of golf, or a gourmet meal in your restaurant is more likely to feel truly satisfied. This comprehensive experience often culminates in more favorable online reviews and higher customer satisfaction scores. These factors significantly contribute to a hotel’s reputation, digital visibility, and, ultimately, its long-term success.

Revenue Diversification as a Reputation Builder

Beyond the immediate financial benefits, diversifying your revenue streams is a strategic approach to building and maintaining a strong, positive reputation in the competitive hospitality industry. Satisfied guests become ambassadors of your brand, more likely to recommend your hotel or resort to friends and family, and to return for future stays.

The Virtuous Cycle of Satisfaction and Profit

This creates a virtuous cycle: higher satisfaction levels lead to positive reviews and recommendations, reducing Customer Acquisition Costs (CAC) and increasing profitability. As guests share their positive experiences, new customers are more likely to choose your establishment, often at a lower acquisition cost than traditional advertising methods.

The Limitation of RMS in Guest-Centric Metrics

It’s worth noting that traditional Revenue Management Systems (RMS) are not engineered to capitalize on this multifaceted approach to guest satisfaction. While RMS can efficiently fill rooms by optimizing prices, it cannot measure or enhance the holistic guest experience. Thus, relying solely on RMS can be a limiting strategy for full-service hotels and resorts aspiring to build a strong brand and reputation.
By prioritizing guest satisfaction through diverse services and amenities, full-service hotels and resorts can achieve robust financial performance and a loyal and satisfied customer base, demonstrating that the human element should always be at the heart of any revenue management strategy.

The Need for Revenue Mix Optimization in Full-Service Hotels and Resorts

Different Guest Segments and Their Impact on Profitability

Hotels and resorts often cater to diverse guest segments: business travelers, leisure tourists, local staycationers, event attendees, and more. Each of these segments has a different value proposition and impact on profitability. For instance, business travelers might have higher spending power but are more cost-sensitive regarding amenities like spas or golf. On the other hand, leisure tourists may be more willing to splurge on extras that enhance their experience.

The Importance of Focusing on the Optimal Revenue Mix

It's not just about maximizing revenue from each segment; it's about achieving an optimal mix that minimizes Customer Acquisition Costs (CAC) and Cost of Goods Sold (COGS) to maximize profitability. For example, focusing solely on high-value business travelers may boost room revenue and escalate the CAC due to the need for specialized marketing campaigns. Similarly, targeting only leisure tourists might require a higher investment in amenities, thereby increasing the COGS.

The Complexity in Revenue Mix Optimization

Optimizing for the best mix of guest segments is a complex task that requires careful analysis of historical data, current trends, and predictive analytics. It also necessitates a deep understanding of the interplay between different revenue streams—from room bookings to Food & Beverage, Spa, Golf, Meetings & Events, and more. Traditional Revenue Management Systems (RMS), designed primarily for room revenue optimization, cannot effectively manage this intricate landscape.

Case for a Comprehensive System

As such, full-service hotels and resorts need a more comprehensive system to handle this complexity. Such a system would go beyond short-term room pricing strategies to include:
  • Data analytics that captures the entire guest experience and spending habits across different segments.
  • Real-time inventory management across all amenities and services, not just room bookings.
  • It has integrated cost analysis that considers both CAC and COGS for a more accurate measure of profitability.
  • Tools for measuring and enhancing guest satisfaction, which in turn feeds back into the revenue optimization cycle.
By investing in a more holistic approach to revenue management, full-service hotels and resorts can improve profitability and offer an enhanced guest experience, ensuring long-term success in a competitive market.

Augmenting RMS with a Holistic, Profit-Oriented Approach: The Best of Both Worlds

The Case for Keeping Your RMS

Revenue Management Systems (RMS) are invaluable for their primary function: maximizing room revenue through dynamic pricing and demand forecasting. They are specialized, proven tools for this specific revenue stream. The argument here isn't to replace your RMS but to supplement it with additional functionalities that offer a more comprehensive view of your full-service hotel or resort's profitability.

Features to Enhance Your Existing RMS

  1. Multi-Stream Revenue Forecasting: Integrate or add a system that can forecast revenues across all your offerings—not just rooms. This includes Food and beverage, Spa, Golf, Meetings and events, and Parking.
  2. Integrated Cost Analysis: Complement your RMS with tools to track Customer Acquisition Cost (CAC) and Cost of Goods Sold (COGS) across these multiple revenue streams, providing a fuller picture of your profitability.
  3. Guest Experience Analytics: Employ analytic tools that can measure guest satisfaction and experience and how these correlate with spending and profitability.
  4. Dynamic Pricing of Combined Revenue Streams: Look for functionalities allowing real-time pricing adjustments based on room demand and the demand for other services and amenities. This can help create bundled offerings that are attractive to guests and profitable for you.
  5. Predictive Analytics for Profit Forecasting: Use predictive analytics to understand the marginal profits from each revenue stream and guest segment. This lets you forecast revenue and future profits, helping you make more informed decisions.
You can achieve a nuanced understanding of your business's financial health by keeping your RMS and augmenting it with tools and functionalities that offer a more holistic, profit-oriented approach. This comprehensive view will allow you to improve profitability while enhancing the guest experience, ultimately leading to sustainable long-term success.

Conclusion: The Compelling Case for a Holistic, Profit-Oriented Approach in Full-Service Hotels and Resorts

The Limitations of a Sole Focus on RMS

While Revenue Management Systems (RMS) have revolutionized room revenue, their scope is limited. By focusing predominantly on room bookings, they offer a myopic view of your full-service hotel or resort's overall financial performance. They don’t consider the intricate interactions between different revenue streams, the importance of managing Customer Acquisition Costs (CAC), or the need for enhancing guest satisfaction for long-term profitability.

Embracing a More Comprehensive View

The future of the hospitality industry, particularly for full-service hotels and resorts, calls for a more integrated, holistic approach to revenue and profit management. Adding features or systems that offer multi-stream revenue forecasting, integrated cost analysis, guest experience analytics, dynamic pricing across all services, and predictive analytics for profit forecasting can transform your financial strategy.

Why This Matters

It’s not just about money; it’s about creating better guest experiences. Guests who engage with multiple amenities tend to have a more satisfying stay, leading to better reviews, repeat visits, and word-of-mouth recommendations. By adopting a profit-oriented approach, you’re not just improving your bottom line; you’re elevating your brand and fortifying your position in the competitive landscape.

Final Thoughts

In a world where consumer expectations and industry landscapes continually evolve, sticking to a single-dimension strategy like RMS for room revenue is insufficient. By embracing tools and systems that offer a broader, more comprehensive look at profitability and guest experience, full-service hotels and resorts can navigate the complexities of modern hospitality more effectively.
The aim is not to replace your RMS but to augment it with additional functionalities that offer a 360-degree view of your operations. In doing so, you'll be better equipped to maximize profitability, not just revenue, ensuring long-term sustainability and success in an increasingly competitive market.

Time to Elevate Your Revenue Management Strategy

You've made it this far, so you're committed to optimizing your full-service hotel or resort's revenue and profitability. It's time to take the next step and implement these insights.
  1. Assess Your Current Systems: Evaluate your existing RMS and identify the gaps that limit you from taking a more holistic, profit-oriented approach. Understand what you're missing in managing other revenue streams, guest satisfaction metrics, and CAC.
  2. Consult with Experts: Transitioning towards a more comprehensive approach is no small task. Speak to industry experts who can guide you through this transformative journey. This will help you better navigate the technical and operational complexities of implementing additional systems or functionalities.

Explore Demand Calendar

If you're serious about taking your revenue management to the next level, we highly recommend exploring Demand Calendar. This innovative platform includes forecasting for all revenue sources, comprehensive CAC calculations, and analysis of average guest spending across various services and amenities. With its profit-oriented business focus, it's designed to fill the gaps your RMS can't cover.
Don't Just Survive; Thrive. The hospitality industry is highly competitive. You don't have to settle for merely keeping pace; you can lead. Upgrade your approach today and begin a journey towards higher profitability, enhanced guest satisfaction, and sustainable growth.