Distribution and Channel Management: Revenue Managers as Agents of Change

Revenue management in its present day format did not exist until the mid 90′s. Propagated as the ultimate tool to optimize seating capacity and revenue in the airline industry it found its way gradually into the hotel industry. Skeptics prevailed for the first couple of year’s as they did not realize the potential strategic approach to managing room inventory and rates had – but they were quickly converted with new measurements, benchmarks and the quantifiable growth patterns of RevPAR. In the past the distribution platform was managed by Reservation Managers under the tutelage of sales and Marketing Directors whose priority was to achieve budgeted sales volume and rates. Until 15 years ago Yield Managers (as they were called during those days) did not exist in hotels, they were viewed highly skeptical as an additional expense item on payroll with no clear functional responsibility, an ambiguous job description and no clearly defined authority. The underlying assumption of revenue management rested on the notion of (a) distressed inventory, (b) unconstrained demand and (c) a perishable product (rooms). Thus the credo of revenue management was born under the umbrella of selling the right product to the right customers at the right time for the right price. It also heralded the end of static pricing and ushered in the age of dynamic and seasonal pricing. Revenue Managers in conjunction with their sales counterparts identified the right target market and their segments, they identified consumer behaviors of these micro segments, determined corresponding price points, understood demand patterns and off they went selling their products.

The reporting lines of revenue managers were vaguely defined and consequently resulted in unnecessary frictions as their skill set was subject to further arguments. Target incongruence between sales and revenue managers was the norm and the question had to be asked who is responsible for forecasting and rate setting? Consequently, revenue management, in its present scope was born out of necessity to increase room sales margins and ultimately it became an intelligent solution to identify incremental revenue streams. The transition of revenue management lasted more than a decade from maximizing seating capacity on airplanes to obtaining higher yields in hotels to determine dynamic pricing depending on peak times on golf courses. There were no limits where strategic pricing did not play a major role.

As revenue management and knowledge progressed in tandem to its present form, dedicated software companies developed yield management programs that promised the perfect rate irrespective of market conditions, supply and demand and the dynamics of the competitive landscape. Their function was primarily to make the life of Revenue Managers easier and deliver “scientifically” accurate forecasts. These revenue specific softwares had complicated algorithms built in that forecasted future demand based on historical data. What this software’s cannot forecast is the fallibility of humans and the emotional, irrational and often unpredictable decision making by the consumer. Rigid price points (a result of static pricing), whether in the corporate segment or wholesale segment, were relegated to history as dynamic and seasonal pricing replaced the unyielding rate structures of the past.

Going Forward: Managing Content and Pricing Online

Whilst 15 years ago distribution channels were one dimensional they became with the emergence of the internet two and three dimensional. For many Revenue Managers, in particular in unbranded, not chain affiliated hotels, managing the distribution channels is still business as usual with limited possibilities. It is not anymore about fencing / restricting rates, managing walk-in rates and competitive rate shopping and rate parity. The next level of responsibility in this transition process was for Revenue Managers to provide market intelligence to senior management and analyze market performance such as market share analysis, market penetration, and rate and occupancy indexes. In the aftermath of the economic crisis that plagued the travel and tourism industry for the past two years, revenue and hotel managers show less resistance to receive business from distribution channels that were, conventionally, not on their radar screen three years ago. But with supply outstripping demand hoteliers could not be too choosy where the business came from – even thought yields were lower than through corporate negotiated rates.

With the increasing prominence of the Internet and Online Travel Agencies (OTA’s) complete new revenue dimension AND sales opportunities were created. With the increasing diversification and complexity of distribution channels available, the question inevitably arises where does the responsibility rest to manage distribution without neglecting, respective compromising traditional booking methods? Consequently excellent commercial acumen and solid knowledge of distribution channels remains a critical component of managing market segments profitably. Customers increased their internet knowledge, “rate shopping” became normal customer behavior; they knew exactly where and how to find the best deals available – on-line or through traditional booking channels. So the question inevitably arises is the skill set of the Revenue Manager as we know it still pertinent to cope with this new dimension? Who is managing the on-line component’s strategic direction and tactical promotions? Is it the Revenue Manager as part of his (increased) responsibility or is it a separate function reporting to Marketing Directors? This metamorphosis leads into a new role of revenue and distribution management. With hotels generating bookings in excess of 20% from on-line channels management has to determine who has oversight; where does the ultimate responsibility lie? Inevitably we have created by changing market conditions and default a new position: The Online Distribution Manager. This manager is given the manifold task to accelerate on-line growth, drive booking conversion ratios, improve Search Engine Optimization to ensure hotels capture their fair share of the business, monitoring pertinent internet traffic on hotel’s social websites, managing the cyber marketing mix and is responsible for internet content management. No small accomplishment for a job that ten years ago did not even exist.

The online business was traditionally a clearing house for distressed inventory turned into a last minute demand channel. The approximate booking request falls within two to three weeks of the day of arrival, where as previously it was four weeks. In order to remain competitive hotel executives realized that they have to examine where to spend their marketing dollars and get the biggest return on their investment. Instead of spending marketing dollars on traditional print media focus shifted to obtain more exposure on third party websites. In addition, they also improved content of their own internal websites; a distribution channel they still have firmly control over.

As a consequence, the commercial battles for business take place amongst third party operators (OTA’s) and the hotel’s branded websites. It is in the best interest of hotels to make their cyber portals as attractive as possible, notwithstanding guaranteeing rate parity, to capture a larger share of the online business whilst simultaneously reducing commission payment.

In the age of on-line bookings how do marketers create loyalty? Can loyalty be created in this environment? Initial customer surveys indicate that consumers / customers who utilize on-line channels have less brand preferences than those who book via traditional booking channels. Market forces and the basic economic laws of supply and demand dictated pricing decisions. A corporate head office induced price increase of, let’s say, 12% will fail to materialize the expected gains when competitors increase prices only by 8% and the same room can be booked through on-line channels even cheaper. The notion that OTA’s and third party distributer provide “merely” incremental revenue has do be strongly discounted based on the premise that their growth patterns are very consistent. How will the big five OTA’s Expedia, Asiawebdirect, Orbitz, Travelocity, Wotif and Razorfish leverage their purchasing power further on the distressed travel industry? Will the industry be forced to go beyond their traditional business model and increase commission payment and de facto outsourcing (some of) its sales capabilities? OTA’s are here to stay, they will not disappear – so are we at a crossroad of a major seismic shift the way we generate bookings and allocate our marketing dollars.