In April 2013 I wrote an article for Hospitality Upgrade magazine about Total Revenue Management. My premise was that by the year 2020 the industry would be well-entrenched in total RM…that elusive goal of managing every revenue source at every guest touchpoint to its maximum profitability. In other words, an optimal, profit-centric mix of business to drive asset value.
My exact words were: “Certainly, as an industry we’ve always tried to choose the best pieces of business, but the difference today is the desire by hoteliers to sophisticate that process; to have the empirical data to identify that ideal business mix, and the investigative talent and strategic vision to deploy optimal selling guidelines at every time horizon – long, medium and short-term.”
Now, I have to tell you that in all my years as a revenue management consultant, and in that role as an author of innumerable articles, I have never quoted myself. This is a first. But 2020 is just around the corner and I’m afraid that if I asked a room full of hospitality executives if they could tell me categorically what their most profitable market segment was, there would be difficulty answering the question. With the exception of a greater focus on acquisition costs, I’m not convinced the industry is much further ahead than we were in 2013.
And yet, we have access to more data than ever before. We can deploy sophisticated business intelligence tools that are relatively easy to master, giving us the power to slice and dice information in a thousand different ways. Revenue management is a recognized discipline that most (if not all) hoteliers accept as a necessary hotel function. So why the slow progress? Why is the industry still moving at a glacial speed? There are no easy answers to these questions, but there are some glaring examples of the barriers that hold us back.
At the risk of over-simplifying, I see these barriers falling roughly into five categories: financial practices, organizational structure/resource allocation, cross-functional collaboration, technological infrastructure, and sheer willingness to change.
Let’s first address the financial practices barrier. The industry uses a Uniform System of Accounts. These guidelines serve many purposes, not the least of which is the ability to benchmark performance. However, nowhere on a typical profit and loss statement (P&L) is profitability by market segment or channel identified. In addition, profit centers are separated (rooms division, food & beverage, ancillary revenues, retail, etc.), and profitability ratios are expressed in aggregate. Expense factors vary by segment, distribution channel, room type, length of stay, loyalty program benefits, and day of week patterns. So many different attributes to take into consideration.
Although one can argue that in a comprehensive budget template, changing the mix of business has some impact on the bottom line, the full array of impact factors is not disaggregated. If the process incorporated changes in market mix that automatically revealed disaggregated changes in profitability, then that would be a step in the right direction. Imagine that room night production was more closely “connected” to all related revenue – including food, beverage, catering, meeting room rental, audio-visual, spa, and retail. Imagine that the corresponding profit margins of all these revenue centers were identified such that a hotel could more precisely target the most profitable mix of business.
Among other obstacles one prevailing and obvious issue is the fact that industry performance is often based on revenue, RevPAR and RevPAR growth. Just look at a typical franchise agreement or a third- party management agreement. Ask a revenue management professional what metrics they use to measure success and profit is not the answer you get, much less EBITDA (earnings before interest, taxes, depreciation & amortization). You get the idea.
An aggregated approach to profitability is simply insufficient for today’s complex markets and rapidly changing consumer buying behavior. At the same time, our current set of primary performance metrics isn’t suitably structured in such a manner as to move the industry towards a total RM mentality. But let’s move on – there’s more.
Consider corporate and hotel-level organizational structures and whether these truly support a profit-centric approach. In most instances today, a full-service hotel of reasonable size employs a full time Revenue Manager or Director of Revenue. In other iterations of the position, and depending on the size and type of hotel, a cluster revenue manager might be assigned, or a hotel may choose to use a brand or third party management company’s remote RM services. The fallacy here though is the belief that one person can optimally manage several hotels, much less take a profit-centric approach with those hotels.
Even the simplest property welcomes different segments of guests, each with their own inherent profit margin. The issue of resource allocation is also a barrier. Ask a Director of Revenue how they spend their time, and the answer is typically 95% on Rooms Division revenue – period. How does the industry expect to nurture a total RM mindset if optimizing revenue is the principal focus?
If organizational structure is in itself a barrier, what about cross-functional collaboration? We’ve certainly made progress in linking the Sales and Revenue Management functions, and more often than not incentive structures are now more fully aligned and not based solely on top-line revenues. But a direct link to digital marketing for example is sadly lacking. As well, the typical revenue manager is not generally involved with optimizing revenue and profit in areas like conferences, catering, spa, F&B outlets, activities, and retail. We often refer to this as “working in silos”.
But let’s, for the moment, just focus on the digital marketing link. The digital marketer has access to a gold-mine of information; website visit stats, searches by search date & arrival date, popular check-in dates, open rates, conversion rates, confirmed bookings, revenue, average revenue per reservation, etc. Dig a little deeper and much of this data can be sorted by zip code, reinforcing the idea that it makes sense to “fish where the fish are”.
The digital marketer knows the percentage of contribution by market channel (paid ads, direct, email, organic) and what it costs to drive that revenue. Beyond all of this, we haven’t even begun to talk about the impact of social media (Facebook, Instagram, Twitter, YouTube). More and more today, marketers talk about the life time value of a guest, looking way beyond a single overnight stay.
Interestingly, but not surprising, I see independent hotels doing a better job of “connecting the dots” between revenue management and digital marketing than branded hotels that rely so heavily on broad, umbrella-like brand oriented marketing. Bottom line is that this disconnect to digital marketing is a major barrier to moving forward with a profit-centric total revenue management approach. How would a revenue manager know what the most profitable mix of business is if they don’t seek to understand the value of the individual guest?
As the year 2020 approaches, the industry still struggles with technological limitations. In some instances it’s about integration issues, while at other times it’s deficiencies in functionality. It’s amazing that I still see technology infrastructures that are not fully interfaced. At the same time, we tend to short-change new recruits when it comes to systems training. How many times have you seen a new front desk agent trained on the property management system by another agent or supervisor, who in turn was trained by someone else? What results over time is a limit to how much the system functionality is actually being utilized.
Many technology experts believe that only a fraction of the power of a system is ever used. This kind of hand-me-down training is synonymous to making a photocopy of a photocopy of a photocopy. Eventually the image fades to nothing, it’s indiscernible.
Of course, the complex business structure of the industry also makes it difficult to gain consensus when it comes to investment in technology. A laymen walking by a Marriott hotel would likely assume the property was owned, managed, and branded by Marriott. We know the hotel could conceivably be branded by Marriott, managed by a third-party management company, overseen by an asset manager, and owned by a private equity fund. There are even situations where the land on which the building sits is owned by yet another entity.
When there are so many stakeholders, it’s difficult to illicit agreement. At the same time, there’s so much technology in a hotel, revenue team members typically only have knowledge of the systems they use. For example, I’ve not met many revenue managers who have a good working knowledge of the point of sale system or the spa software. All to say that if total revenue management is to become a reality, the technological knowledge base will have to expand.
The Willingness-to-Change Barrier
Finally, there’s the change-management piece. Arguably, this is the barrier that is most difficult to overcome. The hospitality industry tends to be very incestuous. People “grow up” in the hotel business working their way up through the ranks to more senior management positions. This can be a strength, but it can also be a weakness when as an industry we are unable to attract talented professionals from other sectors.
And so, we get set in our ways…less open to new ideas, new tools, and more innovative ways to tackle difficult problems. I can’t count the number of times I’ve spoken to someone who has come into the hospitality industry from another sector and is shocked at how far behind we are. I know…I know…the truth hurts.
So, What Next?
Revenue management is grudgingly evolving into revenue strategy, a term that is taking hold and being used to describe a more comprehensive view of a hotel asset. This is definitely a step forward. But the barriers are real and formidable and appear at times overwhelming. My advice is to start by tackling the financial barriers first. In the end we manage what we measure. And if the focus is on a revamped P&L, more comprehensive metrics to measure profitability, and of course financial will, the industry will eventually evolve to fully embrace a total revenue and profit strategy.