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Business Acumen will Lead Hotels to Total Hotel Profit Optimization

publication date: Jul 12, 2016
author/source: Neal Fegan

 Years ago, I was flying home from a business trip and got stuck in Raleigh, North Carolina due to bad weather. The management company I worked for at the time had a hotel nearby, so I decided to hole up there for the night. When I arrived, the front office employee informed me that the hotel was full. Through a little conversation I learned that the hotel did not have an oversell guideline in place, and advised the clerk most of their remaining arrivals would not be showing up due to the whole Northeast corridor being shut down due to the weather. This did not persuade the employee to change her mind, as she responded, “My computer says we are sold out.” Eventually the manager on duty checked me in, but despite my telling him repeatedly that I did not need a special rate as I was traveling on business, he did me a “favor” by extending the hotel’s employee rate. While I was grateful for not having to jump into a cab to find another hotel, I was also frustrated that the property wasn’t fully optimizing their revenue potential.

 The industry has come a long way in recent years, and while I am sure scenarios like this one still happen, the frequency has decreased. This is due in large part to the increased business acumen of positions throughout hotels, driven mostly by revenue management. To many, this has seemed to be a slow evolution.

 Business Acumen will Lead Hotels to Total Hotel Profit Optimization

 By Neal Fegan, CRME, Executive Director, Revenue Management, Fairmont Raffles Hotels International, and member of HSMAI’s Revenue Management Advisory Board

 Revenue management, as a discipline in hotels, has been around now for about 20 years. While this may seem like an eternity to the fresh young faces entering the industry today, it takes a long time for new disciplines to become ingrained within a culture. Think of it from the standpoint of hotel General Managers. Twenty years ago, General Managers were first being introduced to revenue management concepts, and these introductions were coming from low level managers in their hotels, mostly within reservations. These new ideas and concepts were foreign to most GMs. They either learned about things like RevPAR along with these entry level managers, or from them. The GMs’ only exposure to the discipline came during their tenure as a GM, so they had no hands-on knowledge of how it worked.

 Contrast this with other hotel disciplines such as Food and Beverage, Rooms, and Sales. Many times a GM’s last experience was with one of these disciplines, or he spent significant time working in one or more of these areas himself prior to becoming a GM. Given the fact that hotel General Managers work for 15-17 years in hotels prior to becoming a General Manager, we have just entered the point where hotel GMs have spent time learning about or even practicing revenue management prior to becoming a GM. This has brought us to what I consider to be a revenue management renaissance period.

 evenue management is now maturing in the industry, where many people who are a part of the revenue team at a hotel have been exposed to revenue management in many different positions within their hotel careers, and with that, it has become ingrained within the hotel’s overall culture. The culture of revenue management has finally taken hold, as multiple players have been exposed to the discipline throughout their careers, and there are finally more people in a hotel that understand the concepts and can apply them rationally. You would be hard-pressed to attend an industry conference these days that did not have at least one session dedicated to revenue management. This leaves the industry ripe for new advances within the field, and to expand upon the current role of revenue management that currently focuses mainly on rooms revenue.

 In order to make these advancements though, revenue management needs to come back to some basic building blocks. Metrics that are currently used on the rooms side of RM are insufficient to be used across multiple revenue streams. Take RevPAR as an example. If RevPAR were to be used across multiple revenue streams (i.e., using total hotel revenue versus using just room revenue as we do today) as a key performance indicator, it is easy to see how faulty decisions would be made. This is due to the dramatic differences in profit margins from one hotel revenue stream to another. If a director of revenue management maximized total hotel revenue per available room, decisions may be made to accept business with higher overall revenues, but lower overall profits.

 This has been discussed and written about ad nauseum, along with moving to new metrics such as Profit per Available Room, Gross Operating Profit per Available Room, etc., so I won’t rehash what measurement would be best here. The point is that, no matter the metric that is being used as a key performance indicator, a necessary element of reaching a common ground of applying revenue management across multiple revenue streams involves taking a 360° view of profits.

 Up to this point though, revenue management has been strictly focused above the line. This has been sufficient, as profit margins in the rooms department are fairly consistent. Making decisions regarding the right room, for the right price, at the right time, to the right person based purely on revenues usually works out pretty well. Profit margins are not exactly the same for each of these elements, but the variances are nominal, which makes basing room revenue management decisions on top line revenues a fairly safe venture. For example, a dollar earned in a king bedded sleeping room flows to the bottom line fairly consistently with a dollar earned in a double/double bedded room.

 This is not the case in other revenue streams. Not only are the profit margins for revenue streams such as function space, food and beverage, spa, golf, etc., disparate to rooms, but they are often disparate within each of the overall revenue streams themselves. For example, room rental fees from function space usually flow at 100% to the bottom line, while audio visual revenue is often outsourced, generating much slimmer profit margins in the form of nominal commissions. Both of these sources would fall under function space revenues, but their corresponding profit margins are completely different.

 Add to this the complexity of comparing these types of measurements across multiple hotel companies. As the industry moves forward in this arena, there will quickly be a need to compare these new metrics from one hotel to another, and a common metric will need to be used in order to achieve this, similar to how STR uses RevPAR Index for rooms.

 This causes hotel companies to hesitate to develop their own measurements, because if they do not align with how the industry decides to move forward, they may be stuck in spending time realigning their culture to how the new metrics are determined. While this hesitation is understandable, it should not be a reason to stop moving forward.

 Hotel companies need to take the lead on this and come up with rational metrics that make the most sense, and start building their cultures around them. It is much more difficult to start a new culture of total hotel revenue management from scratch. Those hotel companies that start this process now will have people in their organizations that understand the concepts needed to achieve the goal of total hotel revenue management. While it may be necessary to change some of these metrics, as companies similar to STR develop their own metrics to be shared from one company to the next, those organizations that have already built the culture will be poised for success and will be the market share leaders out of the gate.

 Another obstacle that gives companies pause to expand the RM discipline beyond rooms is the lack of qualified talent. While the revenue management culture has taken hold, it is still difficult to find leaders in revenue management. Many times vacancies will remain open at hotels for months at a time, even in the current economy where unemployment rates remain high. If the discipline were to expand, eventually so will the manpower needed to run it. If we have a shortage of this manpower now, we may be creating a bigger personnel pipeline problem.

 The personnel problem stems from a shortage of people in the industry with strong business acumen skills. Revenue management, as a discipline, has done a good job through the years gobbling up those that have this skill set in our hotels and hotel schools, but the hospitality industry as a whole does a poor job recruiting for these positions outside of these traditional talent pools. While it is difficult recruiting outside of the hotel industry due to lower pay scales and lack of awareness, it is possible to start before these candidates have chosen another field in which to work. This means farming for talent in non-hotel schools as well, before graduates have chosen to enter another field.

 Industry critics have said that non-hotel school candidates cannot be lured into hospitality, as we do not pay as much as other industries for entry-level managers, falling below the average pay of banking, real estate investment, etc. While this criticism is valid for capturing mature talent from other industries, it is much easier to lure young talent directly from universities. As proof, my company has instituted a revenue management internship program, geared specifically for young people with this skill set, and we have been successful at recruiting folks outside of hotel schools.


We need more of these programs to build the RM personnel pipeline, encouraging those who previously had not considered the hotel industry as a possibility. This will increase the supply of qualified RM talent in the industry, and prepare us with the number of people necessary to branch out into other hotel revenue streams, without sacrificing room revenue.

 Another stumbling block to getting started on this is the complexity of other revenue streams. In revenue management, we constantly strive to the forecast or model that will provide us with the optimal result. This is how the discipline has made such great strides in room revenue management through the years. Many hotel companies now use very sophisticated revenue management software systems, with forecast models generated by Ph.D. statisticians that predict room nights and revenue far into the future.

 This was not always the case. Rooms revenue management started with simple spreadsheets, and reservation managers going off of gut feel about what was going to happen in the future. Simple restrictions were then placed to help achieve a better result than just employing a first come, first served strategy for reservations. And guess what? It worked. Significant revenue gains were achieved by keeping it simple. Don’t misunderstand the point. I am not advocating sending rooms revenue management back to the days of simple spreadsheets. The sophisticated systems of today have better models for forecasting and optimizing demand and yield much better results. These results, though, have come incrementally throughout the years. We got where we are today by starting small.

 We must manage our expectation for revenue management in other revenue streams. People think that if it isn’t as perfect as the process now employed by rooms revenue management, it cannot, or should not, be done. This of course is hogwash. The same principles employed while rooms revenue management was in its infancy can be applied now to the other revenue streams. By starting small, and using simple models, significant gains can still be made. Then, through time and learning from mistakes, more sophisticated models will be built, and allow for even further increases in these areas.

 Finally, another roadblock holding up progress toward total hotel profit optimization is departmental silos. Much has been written and discussed about revenue management and marketing silos, and how they need to work hand-in-hand to provide optimal results. I agree, but these are not the silos that need to be broken down to take us forward in total hotel revenue management. Rather, the silos which must be addressed are those between RM and accounting.

 As stated earlier, no matter what metric the industry settles on to maximize total hotel revenue management, it is clear that the common element will need to be profit based. The accounting discipline has been working towards maximizing profits for much longer than RM has been maximizing top line room revenues. Therefore, it is necessary for revenue management to take advantage of the expertise in this area. Accounting has built extremely dynamic and sophisticated systems of their own, mostly focused on containing costs. This is only one side of the profit equation though, and in order to maximize profits, both revenue and costs must be managed in tandem.

 The needs here will become more obvious as revenue management embarks on the road to total hotel revenue management. More refined views of profit levels will become apparent, breaking down in ways of segmentation that perhaps we have not yet begun to uncover. But it is obvious that the needs are there, and starting to break down these silos will be an important first step in the process.

 While there are many obstacles in making these next strides for revenue management, ours is the discipline that is best poised to take them on. Relying on the people that we have acquired through the years who have skills in business acumen, coupled with the fact that the hotel revenue management culture has finally taken hold throughout the industry, the revenue management renaissance is upon us. It is incumbent upon leaders in revenue management to bring the industry to the next level of total hotel revenue management, thus leading us to total hotel profit optimization.

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