Measuring Your Success in Revenue Management

While the revenue management community spends a significant amount of effort devising strategies and deploying tactics to optimize revenues, many revenue managers still lag when it comes to establishing and measuring agreed upon success criteria, often leaving revenue management professionals to defend their actions with insufficient means to a skeptical audience.

To be truly effective in the job, devising, implementing and agreeing on “what success looks like” is, in many cases, as important as the activities themselves and will go a long way to support a revenue manager’s success story.

What are some of the challenges?

     1.    Information Overload
    

external

Social

Gone are the times when a business manager had to scramble to get their hands on data. With the ever increasing amount of data available, a revenue manager can easily become overwhelmed and unfocused when looking at what to measure and—more importantly—what not to measure.

     2.    Analysis Paralysis
     With huge amounts of information available—and with revenue managers being naturally inclined to love charts and tables—too many revenue managers attempt to understand, analyze and measure every bit of data available and in the process lose focus on the critical success factors for the business. Often “Analysis Paralysis” results with a revenue manager rattling off an overwhelming amount of data, tables and charts to a non-data driven and potentially tuned-out audience.

     3.    Unclear or Conflicting Objectives
     While many sophisticated hoteliers set clear objectives and critical success criteria, a surprisingly large number of businesses measure success based on criteria which are unclear, or, in the worst case, conflicting across different business lines. A typical example is the desire by a hotel to drive performance as measured in RevPAR or profitability; while at the same time setting corporate sales objectives, which are purely focused on volume and do not take into account profitability and displacement. Often a big (roomnight) volume account is considered a “good” account, even though it might ultimately not be the optimal business to support the overall goals of the hotel.

What are the benefits of a good “measurement strategy”?

There are a number of benefits and key criteria to implement an aligned measurement strategy with mutually supporting objectives across the business:

     •    Focus: Having a common understanding about what is critical to the business, how it is being measured and how everyone’s personal performance will be measured in accordance with the goals allows everyone in the organization to focus on the key issues that are important to the overall business, instead of becoming side-tracked into non-critical areas.

     •    Alignment: Mutually supportive instead of conflicting measurements across different parts of the business (i.e. sales, revenue and finance) ensures everyone is pulling into the same overall direction, instead of pursuing individual goals.

     •    Transparency and culture of results orientation: Working towards a common objective and creating a transparent environment of achievement vs. plan provides everyone with a clear picture of where the business is going and how individual actions can affect the overall performance either positively or negatively.

     •    Clearly defined success and failure: Having agreed-upon goals makes it easy to define and measure what constitutes success and failure for everyone involved. Of course, there are always reasons for over performance and excuses for under performance against a particular performance goal. However, sound measurement criteria—agreed upon by everyone at the beginning—makes it easy to identify any potential shortcomings early enough in the cycle so that they can be rectified before it is too late.

Where to start?

RevPAR index
From a revenue management perspective, there are a number of key performance indicators which are critical. At the minimum and highest level, every hotel should at least look at RevPAR Index performance, which in many cases still is the best indication of how a hotel is performing against its competitive set. Although widely used in the industry, many revenue management professionals fall short by not drilling deep enough to fully understand what good (100 and more) or bad (below 100) signifies. Sophisticated revenue managers should ask: what are the trends (by day of week and segment); what are the reasons (rate or occupancy driven); what is the change versus my competitive set over time in index or rank –even if the index is above 100. If everyone improves their Revenue Generation Index and our hotel doesn’t, we should still be worried.

Looking at the Revenue per Available Room Index is always a good starting point before drilling down deeper to get a more concise picture about opportunities to improve.

Efficiency indicators
To perform a more sophisticated and micro view of the business, efficiency indicators are usually very useful to measure how well individual parts of the business are performing. Each indicator provides an indication of performance against either an actual or optimal benchmark. The most commonly used are rate, room type, sell out, and channel efficiency.

     •    Rate Efficiency: Indication of average daily rate achieved against a benchmark (i.e., transient ADR vs. best available rate ADR) which can be either measured against specific segments or an aggregate of segments depending on the needs of the business.

     •    Room Type Efficiency: Indication of specific room type ADR vs. either total room ADR or vs. an “optimal” benchmark set by the revenue team.

     •    Sell Out Efficiency: An indicator of how many times the hotel was sold out in periods over 95%. This indicates if the business is managed correctly in high demand periods (i.e., through management of overbooking, no-shows, guaranteed reservations, etc.).

     •    Channel Efficiency: Indication of the relation between the rates achieved from our distribution channels vs. the overall average rate. Again, this can be measured either by channel vs. overall distribution rates or against a broader spectrum of rates.

Forecast accuracy vs. forecast performance
A robust and reliable forecasting process lies at the heart of every successful hotel revenue management operation. Regardless of the economic climate, certain portions of hotel demand will always be more volatile than others, and the forecasting process should anticipate and account for this volatility.

While measuring the accuracy of a forecast is valuable, it is a solely retrospective measure.  Forecast accuracy is only one measure among many that can be used to determine how well the forecast performed, in respect to the role that it plays in the overall forecasting and revenue management process. In order to drive better revenue and improve the process of forecasting, hotels may benefit from shifting the focus from forecast accuracy to forecast performance.

Looking back on forecasts with a focus solely on outputs can result in limited insight into what happened and why it happened. Knowing that a forecast for a month in the past deviated by X percent from an expectation set prior to the start of the month is useful, but not as useful as being able to identify that the inputs to the forecast are changing and this is likely to cause the final output to change as well. It can benefit revenue managers to place equal importance on measuring the quality and volatility of the inputs for a number of reasons, some of which include setting realistic forecast performance expectations and examining whether an error in the input has a natural effect on the output. 

Forecast performance, on the other hand, brings together a number of different measures made against the inputs and outputs to reveal how well the forecasting process as a whole is working.  This approach also considers the conditions under which the hotel forecast process is operating.  A variety of measures taken individually and then combined will allow the revenue manager to achieve a more holistic and ongoing evaluation of the overall performance of the hotel.

Tactical measurements of impacts
While any of the above indicators provide good insight into how the business is performing or improving over time, many times revenue managers need to understand in more detail how a particular–often major–change in business practices might change results. For example, this might have been a change in pricing practices or price levels. While there are a number of scientific ways to determine the impact and potential benefits to the business, a simple comparison of the pre- and post-implementation periods vs. equivalent control periods can provide a reasonably accurate indication of the impact in which the change has resulted. The outcomes of such impact measurements are often used to demonstrate the successes of a particular revenue management initiative to secure support and endorsement from stakeholders for additional initiatives or funding.

We have too much information in too many places, how do I bring the information together?

Strategic business scorecard
Many hotels have too much information in too many different places, making it hard for everyone to understand a) what the really important key performance indicators are, and b) how the business is stacking up against these KPIs. To bring all the information into one place and build a performance measurement culture at the most strategic level, if nothing else is in place, every hotel should have at least an over-arching “Business Scorecard,” a highly visual indication of the key success criteria on one page or slide that are important for the business. In its simplest format, the scorecard can be a simple four-box model, with each box representing one business indicator that is most relevant for the business. Within each box, both absolute numbers for each KPI (i.e. for the month or year to date) and trend (improvement, decline vs. previous period, performance vs. budget) should be indicated.

For revenue management related areas, KPIs might include:

The scorecard should be shared with everyone in the organization to provide a performance summary. While simple in design, it will go a long way to establish the crucial alignment, focus, and transparency across the various stakeholders responsible for managing and improving performance.

There are a number of—and in fact often too many—additional criteria hotel managers and operators look at during the course of normal business. As more and more hotels embrace total hotel revenue management and revenue managers expand into more profitability-related areas, new success criteria, such as gross operating profit per available room, become more and more mainstream. No matter how many measurements of success a hotel has, it is important to remember that the value of any success criteria does not come from the absolute number alone, but the underlying factors and longtime trends which impact the final number (index, score). By understanding what drives the end result, short and long term trends, how to positively impact the KPIs and clearly communicating results to key stakeholders, revenue managers will be able to increase their value to the business, generating higher levels of support and buy-in.