As revenue management evolves in the industry, so does the way we measure our success. Today we have a tendency to evaluate achievements by the results we see on our weekly/monthly STR reports, along with other top-line measures, such as variances to budget and last year. We hope all this translates into excellent profit results and increases asset value, but there are many situations where revenue variance increases while the flow-through variance is either less or negative.
Today’s dilemma
“The rate of growth for business acquisition costs is growing at 1.5 to 2 times the rate of growth of revenue.” – Patrick Bosworth, Duetto, citing a study from the Hospitality Asset Managers Association
Outside of a few high-end full-service resorts, complex big-box hotels and casinos, a majority of the industry does not effectively operationalize profit calculations in the revenue management world. Historically, profit management fell in the hands of property level directors of finance. This certainly worked well back in the ‘90s when a majority of the customers called the hotel direct, booked through the global distribution system or came from a brand call center. It was easy then to predict and manage costs.
Today the reality of the distribution landscape has become so complex that it requires a much more thought-out strategy to ensure that both top-line revenues and profits move in the same direction. It is easy to be enticed by the lure of limited-time offers on the various online travel agencies or to give a really attractive rate within a 24-hour booking window when we know the demand is there. But the cost of acquiring this customer through these channels is high, and we are, in essence, training our customers to use a non-direct channel to look for better deals.
Adding to the complexity of the above equation, a majority of hoteliers do not understand the contribution a particular customer can bring to a hotel or resort. Even if you understand the cost of retaining a customer, do you understand how much that customer will spend in your hotel and how much profit he or she will generate outside of room profit? Do you understand the lifetime value of a particular customer?
In interviewing several hotel executives in preparation for writing this article, I asked them how much time they spend looking at profit by customer segment. The general consensus is, “Not enough.” The reasons they gave were primarily related to time, resources, and lack of data and/or software to translate this data.
Finding the right solution
As a hotel industry, we need to continue dialogue around profit optimization and develop measures that are meaningful for the industry, which will ultimately drive decisions and help restore profits to more advantageous levels. Because customers use different channels to book their rooms, the hotel uniform system of accounts is not a good solution in terms of measuring cost of acquisition. Utilizing source data or channel segments would likely be a much better solution. Channel segments can simply be defined as the channel the booking went through. Samples of channel segments would include OTAs, wholesalers, central reservations, hotel direct, brand or hotel website, third-party wholesalers, global distribution system, etc.
Additionally, we need to agree on the variable costs associated with acquiring that customer. Examples of such costs would include: GDS fees, central reservation system fees, credit card commissions, margins to OTAs, frequent guest program fees, travel agent commissions, etc. By doing so, we can measure net revenue by channel segment (before fixed costs).
It will take some time as an industry to agree on uniform criteria to measure net channel revenue, but that doesn’t mean you, as an individual hotel or portfolio of hotels, can’t begin by benchmarking your net channel revenues through the utilization of your own set of criteria.
Imagine having this dimension as a discussion point in your strategy meetings and how it could change the way you think about acquiring business today. If you knew, for example, that participating in an OTA mobile special inside a 24-hour booking window would only yield $20 in net channel revenue, would you think twice about where you spent your time and resources acquiring this business? Imagine that you produced one-third the number of rooms by having an attractive last-minute deal on your own website, but net channel revenue on each room was $60. Where would you put your efforts?
Now let’s take this to the next level. Imagine if hoteliers started to think more like casino operators. If you were able to measure profit by guest through the utilization of folio-level analytics and were able to yield each customer separately, based on forecasted demand, you might be able to redirect marketing efforts to entice your A-level customers to be more loyal. You might also find ways to encourage lower frequency customers to come back during need time periods by adding low-cost value-added amenities (e.g., food-and-beverage credit) to the offering. Perhaps you would find different ways to encourage third-party channel customers to book directly through your website. The possibilities are endless.
The bottom line
The industry continues to evolve—and at a very fast pace. This is not going to change anytime soon. The hotel companies that adapt to this change faster will be the profit winners. Through the utilization of better profit metrics, more robust analytics and increased conversation around customer segment profit optimization, the industry will find better ways of dealing with the ever-changing world of distribution.
Want to Learn More?
This topic will be addressed as part of the 10-part 2014 Revenue Management Webinar Series produced by the HSMAI Revenue Management Advisory Board and HSMAI University in partnership with Hotel News Now and STR. Each month a webinar covers one aspect of cutting edge revenue management in today's economy in conjunction with articles written by members of the HSMAI Revenue Management Advisory Board. If you’re not able to attend a live program, archives are available.
Also, plan to attend HSMAI’s 2014 Revenue Optimization Conference (ROC) in Los Angeles on June 23rd.
About the Author
Tim Wiersma is Vice President, Revenue Management for Red Roof Inns, Inc. With more than two decades of experience in the hospitality industry, Tim is recognized as a leader in revenue management, specializing in property and portfolio revenue management, channel management, sales, marketing, distressed-asset turnaround, and asset assessment.
About HSMAI’s Revenue Management Advisory Board
The Revenue Management Advisory Board leverages insights, emerging trends, and industry innovations to guide the development of products and programs that optimize revenue for hotels.
Members include:
• Chair: Kathleen Cullen, CRME, Vice President Revenue & Distribution, Commune Hotels & Resorts
• Calvin Anderson, Director of Revenue, Lexington New York City/The
• Chris K. Anderson, Professor, Cornell University
• Veronica Andrews, Director of Active Data, STR
• Vish Bhatia, Vice President Revenue Optimization, Aston Hotels & Resorts LLC
• Patrick Bosworth, CRME, CEO & Co-Founder, Duetto
• Bonnie E. Buckhiester, President & CEO, Buckhiester Management Limited
• Tom Buoy, CRME, EVP Pricing and Revenue Optimization, Extended Stay Hotels
• Janelle Cornett, Regional Director, Revenue Management, TPG Hospitality
• Sloan Dean, CRME, Vice President of Revenue Optimization, Ashford Hospitality Trust
• Jon Eliot, CRME, VP Of Revenue Management, Premier Hospitality Management
• Neal Fegan, CRME, Executive Director of Revenue Management, Fairmont Raffles Hotels International
• Nick Graham, VP, Hotel, Hotwire, Expedia
• Linda Gulrajani, CRME, Corporate Director Of Revenue Management, Marcus Hotels & Resorts
• Dev Koushik, VP, Global Revenue Optimization, IHG
• Kelly McGuire, Executive Director, Hospitality and Travel Global Practice, SAS Institute Inc.
• Karen McWilliams, Sr. Corp Director of Revenue Strategy, Concord Hospitality Enterprises
• Mark Molinari, CRME, Corporate Vice President of Revenue Management and Distribution, Las Vegas Sands
• Garth Peterson, CRME, Director Of Sales, Americas, IDeaS - A SAS COMPANY
• Susan Spencer, Market Director - N. America, ChannelRUSH
• Tim Wiersma, Vice President, Revenue Management, Red Roof Inns, Inc.
• Nicole Young, CRME, Corporate Director Revenue and Sales, SBE
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