Revenue Rules

Just last year, Geib, national travel and meeting manager at Grant Thornton, Oakbrook Terrace, Ill., was informed days before a meeting that she had to walk 150 attendees because the hotel was oversold. That had happened, she learned, because the revenue manager at the property had counted on 10 percent of her attendees not showing up. Geib was furious.

“This was a hotel chain we had a history with, and less than 1 percent didn’t show,” she explains. “The global sales manager was as stupefied as I was.”

Geib’s experience reinforces many meeting planners’ perception of hotel revenue managers as back-room power brokers focused solely on the bottom line. “I think of the revenue manager as the Wizard of Oz,” says Teri Tonioli, senior vice president, central region at Experient, Chicago, “the person behind the screen that you never see.” In many ways, she says, revenue managers are to sales managers what procurement officers are to planners — they set the parameters by which sales managers must perform. And just like the relationship between planners and procurement, the one between hotel sales and revenue management can get sticky.

But the relationship is evolving. As this discipline is incorporated into the sales culture, revenue managers are starting to understand that the value of corporate group business goes far beyond room rates.

“Meeting planners might think that revenue managers are people who sit in a room, disconnected, with a calculator — but that’s not the way it is,” says Barbara Bowden, corporate director of revenue management, Peabody Hotels, with properties in Orlando, Fla.; Memphis, Tenn.; and Little Rock, Ark. “They definitely recognize the overall value of the group business and the importance of building relationships and keeping clients happy.”

Managing High Demand

Revenue management is nothing new. It’s been around the hotel industry for several years, with the goal of maximizing profits based on projected demand. (The airline industry has employed revenue management since the early 1980s.) What is new is how important hotel revenue managers have become.

“Huge,” says David Scypinski, senior vice president of industry relations at Starwood Hotels and Resorts, describing the influence of revenue management within hotels. “Absolutely huge.”

Why? For starters, the hotel market is hot. Rooms are in high demand, and properties are flooded with inquiries. Using sophisticated technology systems, revenue managers evaluate and compare the pieces of business that inquire about a given time period and then forecast the projected demand. Then it’s a question of which groups to book. If demand is expected to be high and a group isn’t willing to pay the standard rates, hotels may wait for a better offer.

This a far cry from the days when hotels strove to get as much long-term business on the books as possible, even if it was discounted, says Scypinski. “If you didn’t get that [long-term business] on your books quickly — and often — you got a little uncomfortable,” he says. Now, it’s the other way around — many hotels are uncomfortable filling their calendars further out with lower-rate business.

Geib has had her meetings passed on because she was told they were less than market value. Whether she was bested by another group or just flatly rejected, she doesn’t know. “No one has said outright that they didn’t want the business,” she says. “But maybe we’ve been rejected without knowing it.”

New Owners, New Pressures

The other factor driving the growth of hotel revenue management is ownership changes. There has been a seismic shift in hotel ownership during the past five years, with many hotel chains selling off real estate to focus on management.

“We don’t own the hotels,” says Charlie Cahill, vice president, sales development and marketing, The Americas, InterContinental Hotels Group. “We have owners with high expectations as to what they want to yield, and we made commitments in striking deals to measure up against these expectations. So we have a strong incentive to perform on their behalf.”

InterContinental owns very few of the properties it manages, which is par for the course among the major chains, particularly publicly traded companies such as Starwood, Marriott, and Hilton. Each owns fewer than 25 percent of the properties they manage (some, like Marriott, much less). For example, of the 861 hotels in the Starwood portfolio, the company owns just 87. In 2006 alone, the company sold the real estate assets of 38 Starwood properties to Host Hotels and Resorts.

“We really reshaped our business model around managing and franchising,” says Cahill. Just five years ago, InterContinental owned most of its properties, but in 2002, when parent company Six Continents PLC, which is based in the U.K., “de-merged” and sold off its hotel unit to create InterContinental Hotels Group, the strategic decision was made to divest. “It became smarter for us to release the capital that we had tied up in hotels that we owned, put it back in the hands of our shareholders, and grow our business.” For managing the properties, the hotel company gets paid an annual fee.

The new owners — private equity companies, private hotel companies backed by private equity companies, or real estate investment trusts — are sophisticated buyers focused sharply on profits. “You have to squeeze out every penny you can,” says Scypinski. “There’s never been more pressure on us.”

Enter revenue managers. Most hotel managers, under pressure to perform, have hired revenue managers, if they didn’t have them already. And if they did have them already, those managers have become much more influential. Some say they have the owners’ ears more than ever before. “In some cases, I’ve heard, more than the GM,” says Tonioli.

One of the biggest frustrations for planners is when salespeople say, “I have to check with my revenue manager.”

It’s a phrase that makes it clear who is giving the orders. “It’s obvious to anyone who has planned an event at a major property in New York City lately that the revenue manager is really reporting to the owners and running the show,” contends Michael Schron, manager, new business development at Robert P. Schron Associates, a New York-based meeting and incentive planning company. “This is a position whose importance is surpassing that of any of the customer-facing management positions and contributing to the lack of hospitality in the hospitality industry.”

Experient’s Tonioli believes the rise of revenue management has resulted in a “loss of empowerment” of sales managers to make decisions and negotiate with planners. That can harm salesperson-planner relationships.

Geib can attest to that. “I’ve counted on my solid relationships with salespeople to take care of my one-off exceptions.” But last year, she discovered that her relationship with a sales manager didn’t help much when she asked to accommodate five people who had arrived to her meeting early. There was no block for that night, but the hotel had availability, so Geib asked if they could pay the negotiated rate. She was told that the revenue manager was not allowing an extension of the room rate.

The more integrated that revenue management and sales become, the more they are becoming aligned. “There used to be a huge conflict between revenue management and sales,” says Carol Verret, a Greenwood Village, Colo.-based hotel consultant, “with revenue managers thinking sales wants to give it away and sales getting a little prickly about the fact that the revenue manager can’t take a piece of business because it doesn’t fit the strategy.” But that tension is mostly gone at the major hotels, she says.

At Peabody Hotels, for example, revenue management permeates the entire sales culture. Sales managers’ goals are aligned with revenue management’s, and sales managers are trained in revenue management strategies so that they can make decisions on the spot. “We’ve tried to make it as seamless as possible for our sales team as well as our clients,” explains Bowden. “We don’t want to leave the meeting planner waiting.”

But the parameters are not set in stone. “Revenue management is a business intelligence tool,” she says, “not the final word.” For example, Peabody evaluates not only the overall value of a group, including ancillary spending, but also the lifetime value of groups and the cost of acquiring a new customer. Salespeople, armed with data from revenue management, will often favor a good customer with whom they have history over a more lucrative one with whom they do not.

“If we had to make a decision between two groups, one that has a long-term relationship with the hotel and one that has a little bit more value, more times than not we’ll take the one we had the relationship with — and that is consistent throughout the entire staff, including our revenue management team,” says David Adelson, director of sales and marketing at the Peabody Orlando.

In cases where a piece of meeting business is questionable, the sales manager will consult the revenue team, which consists of the general manager, director of revenue, director of sales and marketing, director of food and beverage, director of catering, and director of rooms. If there is no consensus, then the final decision rests with the general manager.

At InterContinental, revenue management and sales fall under the same umbrella, reporting to Cahill. “That enhances our ability to create the collaboration we need to help us make good business decisions,” he says. Each hotel has revenue-generation teams — consisting of sales, revenue management, the controller, and the general manager — that set the strategies and parameters to which sales managers must adhere.

Revenue Management=Relationship Management

As revenue management has evolved from a single person at a reservations desk to an integral part of the sales process, hotels have become more comfortable pulling back the curtain on their strategies and practices.

Recently, Tonioli has come across more revenue managers than ever at meetings-industry conferences. “You see a lot more revenue managers out there,” she says. “Meeting professionals want to understand why decisions are being made and why rates are being quoted the way they are.” She says planners should request to meet with revenue managers during site visits to get a better understanding of them.

Meeting clients is something that Peabody’s Bowden regularly does, whether on site visits, familiarization trips, or at trade shows. She is one of the most visible revenue managers in the industry, sitting on Hotel Sales and Marketing Association International’s revenue management advisory board as well as speaking at industry conferences. Just recently, she addressed a delegation of meeting planners at a Meeting Professionals International chapter event. She is out there because she wants to know what customers need and expect. Because, even though revenue management may be changing the dynamics between hotels and planners, it is still a relationship business.

“Revenue management can help strengthen relationships,” she says. “Because it puts a value — dollars and cents — on loyalty and lifetime value. And that can work to the advantage of meeting planners.”

Negotiating Muscle

It’s a simple equation: The more spend that planners track, the more power they have at the negotiating table. Beyond the basics — room nights, meeting space, and food and beverage requirements — planners should chart ancillary spending in restaurants, bars, and gift shops, as well as on recreation (golf course or spa), audiovisual, and any other hotel services in order to improve their bargaining position. Loyalty is also important, so if a group has a history with a hotel and plans to return, the planner should highlight that and attach a dollar cost to it, if possible.

Most sales managers are up front with clients about how and why decisions are made. “We make them aware as to why it’s not a desirable piece of business,” says David Adelson, director of sales and marketing at the Peabody Orlando. “But we give the meeting planner some options.”

Flexibility in patterns, dates, meeting space requirements, destination, even meeting space setup (theater-style as opposed to classroom) can all help. Booking multiple meetings at once is another way to get rate concessions, particularly if future business is booked in a low season. “We come off of our aggressive rate expectations when there’s ability to fill holes in our business,” says Charlie Cahill, vice president, sales development and marketing, The Americas, InterContinental Hotels Group.

Digging a little deeper into how hotels prioritize the different areas of spend can give planners additional leverage. Hotels derive about 70 percent of their profits from rooms, compared to about 30 percent from F&B and ancillary charges, experts say. So, hotels are reluctant to discount room rates. In high-occupancy cities such as New York, forget it.

That’s what Cheryl Geib, national travel and meeting manager at Grant Thornton, has found. “If I can get more concessions from nuisance charges and F&B, I’ll leave the room rate alone.” It usually works for the hotel and it helps her, too, because she can get a 100 percent tax write-off on rooms but only a 50 percent write-off on F&B.

“We just finished up with a huge event where we spent more than $400,000 in F&B and only $325,000 on rooms,” she says. “Our F&B without the negotiated discount would have been close to $575,000, but another $5 on my room rate was only going to save me $20,000. Do the math.” In this market, she says, planners need to pick their battles. “Pay a little bit more for your room rate, but fight the F&B, fight the AV, fight the nuisance charges [resort fees, bellhop charges, etc.], because that’s where the savings are.” In fact, she requests a meeting with all involved — sales, catering, engineering, rooms, AV — to negotiate them away, one by one.

Another strategy she has used was to strike a deal based on a total revenue minimum. It’s basically an attrition penalty based on total revenue. She still takes out a room block, but she has the flexibility to meet the revenue minimum in other ways if she falls short on the block. “The bottom line is: You [the hotel] want to know how much you are going to make on me, and I want to know how much I’m going to spend with you. So, let’s talk about money and forget about the room block.”

Irrational Exuberance?

Part of the upsurge in revenue management is because of the huge increase in hotels’ profitability. Revenue management does not have nearly the same impact when the market is soft.

“The dominance of revenue management occurs when demand is high,” says hotel consultant Carol Verret, Greenwood Village, Colo. “The balance shifts toward sales when demand begins to decline.”

That shift may be occurring soon, as projections indicate a softening of the market this year and beyond. Nonetheless, many hotels are not heeding the signs. Verret accuses hotels of “irrational exuberance” in their revenue projections for the coming years. Some hotels are boosting their revenue projections by 7 percent to 9 percent for this year, which, she says, is too optimistic.

Verret says that hotels basing their revenue strategies on demand that occurred in the peak years of 2005 and 2006 should think again. If they push too hard for higher rates, they might find that corporate groups will go elsewhere.