Hotel Revenue Management Best Practice, Shifting From Revenue Management to Profit Management

Good revenue management defines a property’s bottom line. … A profit management strategy determines a property’s net revenue, Revenue management in hotels is a practice that has evolved significantly in its relatively short history, demonstrated great success using inventory, capacity and pricing to ‘manage’ revenue and probability, although hotel revenue management doesn’t evolve fast, strategies aimed at improving it develop in tandem with modern business and technological trends.

What is the Revenue and Profit Management Role?

Revenue management revolves around measurement of what customers from different segments are willing to pay, and this can only be done by measuring and monitoring the supply and demand of your hotel rooms.

Hoteliers believe that they can drive increased profitability using RM tools and techniques, but revenue management is more complex than ever and potentially more rewarding, too. The entire hotel organization must pull together to make revenue management successful, but the right RM implementation can positively drive results, creating not only revenues but also profits.

Most hotel owners or hoteliers accept and believe that implementing revenue management in a hotel can increase revenues 3 to 6 percent. Many have won much greater increases.

Ideally, the ultimate goal for any hotel is to increase the top line (sales and revenue) and decrease the expenses (variable and sometimes fixed costs) to get the biggest increase in the hotel’s bottom-line profit without touching the guest and staff satisfaction. When a hotel’s occupancy rates and RevPAR rise, it is usually a good indication that management is executing well, and to achieve such a goal the focus needs to be on both revenues and costs. Hotels can boost their bottom line by increasing revenues or decreasing costs, this is why running a successful hotel is an ongoing challenge that requires the combined forces of both management and staff and I would add the hotel customers.

What is Revenue Manager and Profit Manager Role?

When revenue management was called yield management, in those not-so-distant days the primary role of the revenue manager was just yielding rates, by moving rates up and down with demand along with an ongoing battle that was occupancy versus rate.

As expected, a revenue manager would need excellent analytical, communication, customer service and organizational skills in order to be effective in his role, where he can focus on the following tasks: –

• Developing pricing strategies, including building rates for rooms and packages and determining discounts and specialty rates.
• Forecasting pricing and revenue based on demand and market trends.
• Evaluating trends in the economy and hospitality industry.
• Creating promotional plans to increase revenue.
• Understanding inventory management processes.
• Generating revenue reports.

But nowadays the role has been changing to maximize the businesses’ opportunity for revenue and profits. In order to do that, the revenue manager is in charge of compiling and analyzing data to make decisions regarding pricing. The revenue manager compiles data on the business as well as the competition. They keep up with market changes and identify trends by looking differently to the revenue management pillars i.e.: –

Segments and Sources: A Profit Manager will understand guests/ segments who for example stay multiple nights and include days of high and low demand.  These guests will have differing impact on costs to those who stay purely on days of high demand. Even simple metrics like late check-outs and early arrivals should be factored into overall profitability.  And consider perhaps a residential group in-house with less house-keeping costs and some meeting room spend.

Pricing: A Profit Manager understands how to react to pricing using dozens of internal and external metrics, then to understand the cost of acquisition; then equate that to the rate that was paid; then add incremental spend that this source or segment brought.

Channels Mix: A Profit Manager understands which channels book and when they book. They can track booking curves and plot this against rate. They know when to hold out for profitable business and when that business simply isn’t there. In revenue terms this is price elasticity.

Shifting for Profit Management

The hallmark of a successful hospitality business is the revenue. Hotels employ various revenue management techniques and strategies aimed at increasing the bottom line and profitability.

What is Revenue:

• It is the total amount of income generated by the sale of rooms, F&B, …. etc. or other services related to the hotel primary operations i.e., ancillary revenue.
• Revenue does not deduct any costs or expenses associated with operating the business.

What is Profit:

• It is the net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.
• Operating profit is gross profit minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll.
• Profit can be broken down further into three different categories:

1. Gross profit: Hotel total sales minus the cost of services sold i.e., Rooms, F&B etc.
2. Operating profit Hotel gross profit minus your operating expenses.
3. Net profit Hotel remaining income after all expenses.

When most people refer to a hotel profit, they are not referring to gross or operating profit, but rather net income. This is what’s left over after expenses or the net profit. Keep in mind that it is possible for a hotel to generate revenue but have a net loss at the same time.

Shift from Revenue to Profit Management

Today’s RM practice is evolving from the traditional rooms-revenue model towards a total revenue management approach, Under the traditional model, hotel revenue management has focused largely on rooms. However, revenue management principles can be applied to operational areas beyond just rooms. At its core, total hotel revenue management brings together and optimizes all revenue streams, as opposed to thinking of each department separately. Thus, a more holistic approach to revenue management is needed to identify revenue-generating opportunities, and optimize revenue and profit generation, Hotel revenue management is moving towards strategic profit management.

The move to total revenue management involves a shift from a tactical, short-term focus to a more strategic, long-term view. Total revenue management relates to capturing mostly untapped revenue and profit potential, associated with hotels’ non-room revenue-generating centers. Some hotel chains are already expanding revenue management practices to F&B outlets and/or the function rooms.

KPIs and Metrics

For a long time, Occupancy rate, ADR, RevPAR, and NRevPAR were the most important KPIs in hotel revenue management. They measured business success and were compared to the same metrics of competitors, but today’s paradigm is different.

Revenue managers today are taking a much broader view on the business and not just solely on accommodation revenue.  Average room rate, occupancy and RevPAR may still be key measurements of a hotel’s revenue management strategy, however, additional metrics, such a TrevPAR and GOPPAR provide a much more holistic view of the business and the associated costs.

Whilst RevPAR will measure the performance of accommodation revenue, by taking the net rooms revenue divided by the total rooms available, but is this enough to measure the hotel’s performance?

Although RevPAR is useful, but it is lacking because it does not measure the profitability of your hotel, and not taking into consideration cost, it only considers the top-line performance, If you look at RevPAR from a revenue point of view you could think you are doing really well, but if you are ignoring cost of acquisition then you are just driving the asset into the ground. When analyzing a hotel investment, the priorities should be on net cash flow generated and ROI (return on investment), which stems from profitability and RevPAR only captures half of the equation.

Recently, profitability measures have been picking up steam as useful tools to evaluate hotel performance.

One key to profitability is getting everyone on the same page with your most important hotel KPIs and metrics. There may not be one Holy Grail KPI, but TRevPAR and GOPPAR are two metrics that should be on every hotelier’s radar when it comes to driving revenue and profitability.

TRevPAR (Total Revenue Per Available Room) measures the property’s ability to generate revenue across all operating departments and provides insight into the overall revenue story, where TRevPAR focuses on revenues.

TRevPAR is calculated by dividing the total net revenues of a property include room revenue, food, and beverage (F&B) revenue, and other revenue divided by the total available rooms.

GOPPAR (Gross Operating Profit per Available Room) measures the operation’s ability to convert revenues to operating profit. It gives greater insight into the actual performance of a hotel than the most commonly used RevPAR, as it not only considers revenues generated but also factors in operational costs related to such revenues. It is a particularly useful metric for hotel owners because it gives them an idea of the bigger picture in terms of how valuable their hotel is as an asset.

The formula For GOPPAR is Gross Operating Profit / Available Rooms

NRevPAR (Net revenue per available room), is another revenue management KPI that looks at the amount of revenue generated on a per available room basis. However, NRevPAR focuses on net revenue, which means distribution costs associated with selling a room are deducted from room revenue first before the number of available rooms in the hotel divides that figure. This metric is similar to RevPAR, except that it factors in the net revenues (meaning that it accounts for distribution costs, transaction fees and travel agency commissions).

NRevPAR = (Room Revenue – Distribution Costs) / Number of Available Rooms.

EBITDA (Earnings before interest, taxes, depreciation, and amortization), is an increasingly important KPI used to demonstrate the day-to-day operating profitability of a hotel, after removing variables cost.

By tracking trends in both TRevPAR and GOPPAR, hoteliers can develop strategies based on top- and bottom-line performance measures, which can improve overall profitability, it is important to have an understanding of how the cost of acquisition is measured. This comes back to using analytics tools that encompass different profit centers, hence Hoteliers need to be focused on both the top line — occupancy, ADR, RevPAR, and TrevPAR — as well as the bottom line — GOP, GOPPAR, and EBITDA. Having an understanding of all of these metrics is vital to understand your performance as well as your position in the market.

“Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com”