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Starting Down the Road to Total Revenue Management

publication date: Nov 7, 2012
 | 
author/source: Bonnie Buckhiester
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So to begin, what exactly is total revenue management?  The concept of Total RM is not a new notion; hotels have always endeavored to maximize the entire asset. The difference today is the desire by hotels and resorts to sophisticate their approach to profit maximization. In essence, Total RM is simply about optimizing revenues and profits from all revenue streams (rooms, F&B, parking, spa, golf, retail, other activities, etc.). It is about finding the most profitable mix of business for the entire hotel asset. More often metrics such as GOPPAR (Gross Operating Profit Per Available Room) and POGR (Profit Per Occupied Group Room) are being tracked.

There are a number of characteristics that define the Total RM phenomena and hotels that take charge of these components will discover a distinct competitive advantage in otherwise fiercely competitive markets. In 2012 the extent that a hotel is practicing Total Revenue Management will define bottom line successes.

A recent landmark study published by the HSMAI Foundation (Distribution Channel Analysis: A Guide for Hotels - January 2012) describes a “mature U.S. lodging market” that has seen demand growth of hotel rooms over the last 20 years average only 1.6% a year; and predicts there are “indications that this pattern is likely to continue for the foreseeable future.”  The study also states that …“When ADR growth was examined over time, the U.S. industry wide ADR in 2010 was approximately $10 below the inflation-adjusted rate charged in 2000.” 

Taking these realities into consideration, where else but with a total revenue management approach will hotels see improvement in profitability?

There are many elements that make up Total RM as it is evolving today. The more obvious ones include tracking contribution (profitability) by market segment from a “total spend” perspective, and more involvement by the revenue manager in optimizing all revenue streams – in other words moving from a rooms-centric revenue management effort.

 Starting Down the Road to Total Revenue Management

 By Bonnie Buckheister, Principal,  Buckhiester Management USA, and member of HSMAI’s Revenue Management Advisory Board

Here are some of the characteristics of a total RM effort and the extent to which hotels are incorporating these practices into their overall revenue management programs:

Profitability by Market Segment - As mentioned above, tracking contribution (profitability) by market segment from a “total spend” perspective is a key element of total revenue management. Hoteliers believe they know instinctively what segments produce better flow through, but often this information is anecdotal in nature and at best is confined to the Rooms and/or Food & Beverage divisions, not ancillary revenues. Whereas most hotels track costs per occupied room in aggregate, few typically track costs/profits on a segment basis. And from the F&B perspective, although outlets are tracked separately from catering, aggregated data is typical, not data by segment. While some hotels are inventing their own methods to track individual market segment profitability, what a total revenue management effort requires is an industry-wide consensus on permanent changes to the Uniform System of Accounts; changes that enable hotels to drill down into accurate market segment contribution. In this regard, annual budgets will be built by manipulating business mix to drive profitability.

Expanded Role for the Revenue Manager - Another obvious component of a total revenue management program is increased involvement by the revenue manager in optimizing all revenue streams – in other words having both tactical and strategic influence on other revenue centers. At present most revenue managers spend the majority of time on rooms revenue management. Although there’s communication with the F&B division and there’s more technology available to optimize group business, in terms of sheer hours, Rooms Division takes the lion’s share of most RM efforts. For total revenue management to become a reality, the role of director, demand management is needed that manages demand and profitability in tandem for every revenue stream in the hotel.

Identify “Net-net” Rate Levels - Another element of Total RM lies in identifying “net-net” rate levels by extracting associated costs unique to that rate. These costs are typically divided into 2 categories – internal and external. Examples of an external cost would be GDS fees and travel agent commissions. An example of an internal cost would be the F&B costs associated with a package or the costs of special benefits associated with a frequent guest program or consortia contract. More often now, hotels focus on “acquisition costs,” identified especially when comparing OTA bookings to brand.com bookings. But still internal costs are less likely to be identified by market segment. The obvious advantage of knowing the “net-net” rate is being able to identify the most profitable rates as well as segments, room types, etc. Lower rates often become “second class citizens” to revenue managers, front desk teams and sales personnel, whereas higher rates appear better, but don’t take into consideration all the associated costs.

Track RevPAR by Room Type - Tracking RevPAR by room type by month to more clearly identify sub-optimal value propositions is another element of a Total RM approach. Although most property management systems provide this data, rarely is it put to good use as reliable business intelligence. It is amazing how much strategic information can be gained by looking at room type RevPAR’s by month. Lower RevPAR’s mean that either volume or rate is out of alignment to demand realities, and small adjustments can be made to correct this.

Drill-down Displacement Analysis - Another important component of Total RM is a greater reliance on detailed, drill-down displacement analysis to strategically select/deny business, including calculations on spend by revenue center. Hotels are generally taking much more time to conduct proper displacement analysis, but not always to the “total spend” and “total profits generated” level. There are certainly good group modules available in some of the revenue management software systems (RMS), but for those hotels that operate without an RMS, properties should at least use the profit profile functionality in the sales/catering system or create a spreadsheet that takes all the revenue streams and profit ratios into account.

New Performance Metrics - Another element of a good Total RM program is the systematic use of new metrics – an example is the metric ROGR (Catering Revenue per Occupied Group Room). Most hotels already track F&B covers per group room and establish minimum F&B levels in contracts, but creating metrics that track revenue and profit per occupied group room is a good start. Other metrics include: RevPSF (Revenue per Square Foot), ProPSF (profit per square foot), and RevPASH (Revenue per Available Seat Hour). In a Total RM environment these metrics would appear on the monthly P&L. And once new performance metrics become a routine part of weekly revenue meetings, there’s typically much more focus on selecting business from a Total RM perspective.

Track Upgrades – For Total RM it’s important to track upgrades methodically so that lost revenue opportunities are identified, monitored and mitigated. In most hotels this is not done routinely, and in this case the old adage holds true…you can’t manage what you don’t measure.

Dynamic Transient Baseline - More often than not hotels establish static baselines with exceptions managed manually. A dynamic baseline approach is much more effective in optimizing demand. When the hotel updates the sales/catering system on a daily basis for close-in dates and weekly basis for medium and longer-term dates, sales managers have the added advantage of selling with the most up-to-date data. This is especially important as booking windows shrink for all market segments.

Dynamic Pricing of Catering Menus - This is a trend that is becoming more and more evident in the industry and goes way beyond “holiday” pricing concepts or F&B minimums. Conference planning guides provide price ranges for banquet menus facilitating demand based pricing. Meeting room rental prices also transition from static pricing to demand pricing. For example, if one period of the day is in greater demand than another (either by day of week or month) then the price reflects the demand level accordingly.

Unconstrained Demand Forecasting for Catering – This concept is based on tracking pace and turndowns to determine total demand in as detailed a manner as is done for the Rooms side of the business (e.g., based on availability, space not released, minimums not met, price resistance, etc.).

Advanced Menu Engineering – In a Total RM environment, advanced menu engineering is conducted whereby price elasticity is tested menu item by menu item.

Emerging Participation in F&B Benchmark Reports – Although Occupancy, ADR and RevPAR are the primary metrics tracked in benchmark reports, Food & Beverage statistics are emerging. This trend may be driven faster than expected due to the impact of Asia-Pacific hotels where F&B revenue and profit levels can exceed Rooms Division performance. At least for North America, hotels can submit performance data to Smith Travel Research and track metrics like F&B revenue per room sold. As Total RM emerges, this practice will become more widespread, providing hotels with an added measure of performance against the market.

This certainly is not a definitive list of the elements driving the Total RM trend. Suffice to say that if any hotel is going to move to the very highest level in its revenue management effort, these types of initiatives must be considered. Regardless of the point at which your hotel may be in starting down the road to total revenue management, it will take serious commitment to finish the journey and benefit from a more sophisticated approach to profit optimization.

 



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