Home Revenue Management Back To Basics Revenue Management 101 5 easy steps to successful Revenue Management for midscale and limited service hotels Part II

Revenue Management 101 5 easy steps to successful Revenue Management for midscale and limited service hotels Part II

Mar 2, 2016  By 

In previous part of the article Ira Vouk, go through the concept of revenue management and how it could be implemented in the limited service hotels , started to put the 5 steps for successful implementation , here below we continue the other steps

STEP 3: Managing booking channelsImage result for revenue cycle management 101

There are various booking channels, through which the property does its pricing distribution (direct bookings, walk-ins, online travel sites, travel agencies, opaque channels, corporate contracts, etc). The purpose of booking channel management is to maximize revenue through restricting some distribution channels with different profitability margins.
The concept:

Different distribution channels are configured into a small number of groups, each managed simultaneously as a whole. As in the case with stay restrictions: when estimated sales flow is sufficient enough to reach high occupancy without the loss of revenue (and profit), it may be beneficial to close less profitable channels in order to maximize the resulting yield. This will slow down the booking pace but will increase the resulting room revenue via the ADR growth.

How it works:

Booking channels are reflected in a hotel’s PMS through Rate Plans. Many of these rate plans are manageable (i.e. can be closed or open at a specific point in time for a specific date range). For effective Revenue Management, it is important to have a full list of all rate plans with corresponding margins and discounts off of Rack (BAR), then to group them into 3 or 4 categories based on their profitability level (or, their “proximity” to Rack rate). After that, manage these by closing the more expensive (and least profitable) channels based on the demand level and booking pace. Then sit back and watch your ADR go up during the high demand periods, which leads to the proportional increase of your profits.

Example:
Let’s imagine that a hotel has 6 different rate plans (this is obviously simplified for the sake of the example, as we know that in real life this number can go up to 20-30 or even 50 in many cases). The rate plans are: RACK, AAA (5% off Rack), AP (15% off Rack promo), OTA (20% off Rack), OPAQUE (30% off Rack), LASTMIN (35% off Rack). Looking at these rate codes, one can see that they’re not equal in the size of contribution to the bottom line profits. Let’s group them into 3 different categories, based on their profitability level (from the least expensive and most profitable channels to the most expensive and least profitable):

RACK, AAA – group #1

AP, OTA – group #2

OPAQUE, LASTMIN – group #3

When this exercise is done, then you start managing your channels by closing groups 3 and 2 for those dates where you can sell your rooms via channel group #1 alone, without having to offer deeper discounts. If your weekends always sell out, you may try to restrict #3 from booking those dates and see how this affects your occupancy and resulting ADR. For higher demand dates (special events) you can close groups #3 and #2 together. Group #1 always remains open.

There’s one thing to keep in mind. In some cases you may be unwilling to close a particular rate code, due to contracts with different companies that require Last Room Availability, or brand policies, etc. Place those in category #1, which is not closeable. Everything else should be divided among other categories and managed as described above.

STEP 4: Overselling

Overselling (or overbooking) is a technique used in Revenue Management to offset anticipated cancellations and no-shows . In other words, if you expect 2 cancellations and 1 no-show – you oversell by 3. That’s the optimal behavior that maximizes revenue. Sounds, pretty simple, right?

Revenue Management 101
Revenue Management 101

 But nonetheless, it is still very common for most managers to close out availability on all channels before they reach 100% occupancy mark for a certain day. In most cases, this decision is dictated by the fear of dealing with walked guests.

However, correctly implemented overbooking practices will minimize the chance of a walk while leading to a noticeable increase in revenues (as well as profit).

Most popular mistake that leads to walks is picking the wrong time to overbook. As mentioned above, overbooking is designed to offset cancellations and no-shows.
Let’s ask ourselves: what is the main difference between those two occurrences? It is TIMING.

A- Cancellations can happen at any point in time, starting from 56 weeks before arrival (standard allowed lead time for transient bookings) until the end of the cancellation deadline

B- no-shows always happen on the last day

Thus, we need to separate 2 different overbooking techniques: those that address cancellations and those that address no-shows. The latter is easy: calculate the anticipated number of no-shows (based on your historic data) and overbook on the last day by that amount of rooms. There are a number of good articles written on this subject (for example, “Overbooking ratio step-by-step” by eCornell).
But! What do we do with cancellations? There are articles explaining how to calculate average anticipated number of cancellations but no one tells you WHEN to do this, at what point in time (a small but a very important detail).

So here’s the key:

- It is not enough to just calculate the total number of rooms to oversell. You need to build a curve describing the forecasted number of potential cancellations at any point in time, for different number of days before arrival (see example below for explanations).

And another trick:

- Overselling needs to happen at the peak of demand, in order to maximize your revenue to its highest potential. This will ensure that:

                                         * you sell those rooms at the highest possible price

                                       * and (in many cases) you will still have plenty of time to wait for those precious cancellations (assuming the peak of demand for that day doesn’t fall on the last day before arrival, which in most cases it does not)

Obviously, we’re talking about high demand days only (when you expect to sell out) so there’s only that many days that you would need to review for your property. You can use an excel spreadsheet to build this graph (or a table), if you don’t have any automated Revenue Management tool that would help you do this.
Proper overselling at the peak of demand helps hoteliers sell their rooms at the premium rate and not leave money on the table from empty rooms due to anticipated cancellations and no-shows. For more details on overselling techniques described above, please read this article.

Example:
This is an example of how you can build a curve of forecasted number of cancellations related to the number of days before arrival. If you don’t have any automated Revenue Management tool that would help you with this, you can use a simple excel spreadsheet. The forecasted number of potential cancellations can be manually calculated as an average of actual cancellations from similar days in the past. So your table would look like this:

Revenue Management 101 | By Ira Vouk

 The example above shows 1 to 10 days before arrival but you should extend yours to at least the number of days that is equal to your average booking window. As you can see in this example, you shouldn’t worry if you find yourself overbooked by 5 rooms 10 days out. However, if you’re looking at tomorrow’s occupancy (1 day out), you should allow no more than 1 (unless you also anticipate no-shows).

STEP 5: Managing group and corporate business

By “managing group and corporate business” we don’t mean the actual sales activities to draw demand through these booking channels (that is the responsibility of your sales department). What we mean is assessing the profitability of these booking channels and managing them to maximize revenue and bottom line profit for your hotel.
Evaluation of group and corporate business is performed via the comparison of 2 alternatives, so called displacement analysis. The first alternative being the potential of revenue generation from a group request or a corporate contract (immediate revenues through rooms sold at a specific negotiated price plus expected additional revenues generated from other departments), and the second – revenue generated from expected sales of the same amount of rooms to transient business (potentially, at a higher price). The breakeven price to be quoted to a group or a corporate contract is found at the point where the potential revenues from these 2 alternatives are equal, which means that the hotel won’t be at a loss by accepting the contract.

In order to improve profitability of a hotel, sometimes it is necessary to limit (or decline) group business. Every group or corporate request needs to be revised as described above, in order to assess its revenue potential and displacement of the future transient business. To do that, the manager needs to have a relatively clear picture of the future demand expectations.
Keep in mind though, that in some cases managers need to look at the broader picture and accept an unprofitable request. For example, in order to maintain good relationship with a returning client. But in other cases, it may be much more beneficial to sell the same amount of rooms to future transient business for the following reasons:

  1. this booking channel doesn’t assume such deep discounts that are normally offered to groups (which means higher resulting ADR)
  2. you free yourself from the risk of a potential cancellation of a large number of rooms (this risk still exists , even if you set strict group cancellation rules)

Number of days in a calendar year, for which it may be more beneficial to decline a group request or set blackouts for a corporate contract, depends on the type of a hotel property, its location, mix of business, as well as the overall market dynamics.
Example:

As always, for the purpose of the exercise, this is a simplified example. Imagine a 100-room hotel. A group is looking to book 30 rooms for 2 nights on the 4th of July weekend, which historically has been a high demand season. The hotel is already 60% occupied and current Rack price is $229 a night. 
Again, if you don’t have any automated tools to assist you with the displacement analysis, you need to calculate the breakeven price by comparing the potential total revenue generated by the group with the revenue flowing through the transient channel for the same amount of rooms. If you expect to sell all the remaining rooms at $229 Rack (minus commissions and discounts), then your resulting transient ADR maybe somewhere around $200.

Multiply that by the number of rooms and number of days: $200 x 30 x 2 = $12,000. This is your expected Total group value that would equally displace the transient business. 
Then, subtract the expected revenues generated by other department that will be applicable to this group, like meeting space or FAB (in this example, let’s use a $1,000 meeting space fee, total for 2 days), to derive pure room revenue that needs to be achieved: $12,000 – $1,000 = $11,000.

Divide that by the total number of room nights to come up with the breakeven price to quote, per room night: $11,000 / 60 = $183.33
If the group’s asking price is much lower, than most likely you will be at a loss by accepting this business and turning away your transient customers.

Another thing to consider when quoting group rates is the wash factor. As we know, in most cases groups only end up picking up a portion of their block, so make sure to have proper cancellation/cutoff policies in place and take that into account in your displacement calculations.

 Other tactics for increasing revenue

 Managing online reviews

New York–based travel-research firm Phocuswright reported that people who read online hotel reviews are 59% more likely to book (source). TripAdvisor is the undisputed leader in the world of online travel reviews. However, it is also important to keep an eye (and respond to) the reviews posted on your own website (if you have this functionality), all major OTA sites, as well as social media resources.
There are SEO benefits, too. Adding original content to websites, such as reviews, is a great way of making your website visible.

Upgrading

Upgrading is an effective way of increasing revenues. Make an attempt to sell additional services or amenities at the front desk, on your website or via email marketing campaigns. A caller/booker may be unaware of varying rates and amenities. Employees must be trained to listen to guests and make suggestions for an appropriate accommodation. There are various methods of upgrading: top-down, rate-category-alternatives, bottom-up. There are also software tools that help hoteliers maximize their revenues through proper upselling. Here is an example of a good article on this topic: click here.

Managing room Type differentials

Watch the booking pace of different room types during different demand seasons and increase (or decrease) the difference between them to maximize resulting revenue.
For example, during the summer season, 2-bedroom suites may be more popular if the hotel attracts family business, vs corporate clients (single-bed users) during winter. Analyze your booking patterns per room type before making decisions on the room type differentials.

Managing ancillary revenues

Many hotels have other revenue-generating departments, in addition to rooms. If those revenues are significant, it is also important to manage them to maximize overall profitability of the hotel, which sometimes may mean discounting (or even eliminating) the charge of one department to increase the revenue from another one, thus increasing the overall bottom line. Example: offering free parking or a restaurant discount as an incentive for booking a large group.

All of the above (and more), nicely organized in 2 strategic blocks

Revenue Management 101
Revenue Management 101

Strong demand tactics (work hard, capitalize on ADR!)

1. Increase Rack rate
2. Apply stay restrictions (CTAs and mlos)
3. Close or restrict discounted channels (analyze discounts and restrict them as necessary to maximize the average rate)
4. Oversell by necessary amount at the peak of demand
5. Reduce group room allocations
6. Reduce or eliminate 6 P.M. holds (reduce or eliminate the number of unpaid rooms that are being held until 6 pm, if any)
7. Tighten guarantee and cancellation policies
8. Apply full price to suites and executive rooms
9. Apply deposits and guarantees to the last night of stay (for longer lengths of stay, make sure the deposits and guarantees apply to the last night of the stay, minimizing early departures)

Weak demand tactics (work even harder, increase occupancy!)

Revenue Management 101
Revenue Management 101

 Sell value and benefits (rather than just quoting rates, make sure guests know you have the right product for them and the best value)

1. Remove any stay restrictions

2. Keep all discounted channels open

3. Offer packages (to increase room nights, one tactic is to combine accommodations with a number of desirable products and services into a single package with one price)

3. Remove any limits from group room allocations and release blackouts from corporate accounts

4. Encourage upgrades (move guests to a better accommodation or class of service to enhance their experience and encourage them to come back to the property again)

5. Involve your staff (create an incentive contest to increase occupancy and room nights)

6. Lower your rates

 Automation in Revenue Management

 All individual tasks of Revenue Management described above can be performed manually. However, the most efficient way to handle data and generate profits is through Revenue Management Software (RMS). That’s why many hoteliers choose to employ specialized computer programs dedicated to Revenue Management automation.

Today, thanks to the great achievements in computer technology and computer networks, affordable automated Revenue Management has become available for low- and middle-tier hotels, small hotel chains and independent properties. Applying computer programs to Revenue Management in hotel business is now widely spread in the US and European markets.

Benefits of an automated Revenue Management System:

Revenue Management 101
Revenue Management 101

 The effectiveness of revenue management actions (and dynamic pricing in particular) is greatly increased with an RMS. Using an automated Revenue Management System can lead to 10-15% revenue increase in general (or higher in many cases).

    1. For hotels that spend their time on “manual” management, an RMS system will allow to optimize labor (lower payroll expenses) and

    2. eliminate significant errors in pricing decisions, especially in the conditions of economic instability.

    3. Such systems also allow managers to save time on routine analytical tasks and concentrate on more important strategic decisions.

All of the above, along with increased revenues (and profits) as well as stabilization of results, makes managers’ lives easier, increases their productivity and helps grow revenues more significantly.

About Ira Vouk

Ira Vouk

Ira is the VP of Business Development at iRates , a successful Revenue Manager at multiple hotel properties. She was selected as Top 5 Revenue Managers in the country in 2013 by HSMAI. With a background in sociology and marketing

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