intro to revenue management sdsu
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Intro to Revenue Management
Presented by Carl WinstonDirector
L. Robert Payne School of Hospitality and Tourism Management
SDSU
Why are we here today?
Why are we here today?
Two perfect storms! 1. 2001 terror and tech bubble2. Web 2.0 and great recession
Lodging is a Cyclical Business…
Lodging Cycles
PKF Consulting
Why is Lodging Cyclical?
• Demand tends to reflect Regional and National changes in the economy (normally 2% to 4% growth annually)
• Supply changes are hotels best friend and worst enemy
What Do ATT & Microsoft have in common?
• Definition of “Anti-trust laws”• “Opposing or intended to regulate business
monopolies, such as trusts or cartels, especially in the interest of promoting competition”
• What does that mean?
Anti-trust…
• We are not here to:– Figure out ways to raise prices– Gouge customers during peak times– Collude in any way
• We are here to discuss the science and art of managing our revenue to improve the bottom line of your hotels and motels
Overview of Today’s Session
• Introduction• Role of next two sessions (12/10 and 12/17)• Brief history of revenue management • RM tactics• RM Strategy• 3rd Parties• Role of Revenue Manager• 3 Case studies
Case Study # 1
Textbook Says…
The act of skillfully, carefully, and tactfully managing, controlling, and directing capacity and sources of income, given the constraints of supply and demand
Art or Science?
• “I think we should”
• Vs.
• “We need to…”
Another Way to Put This…
• Demand creation is Marketing
• Demand capture is Sales
• Demand Mgmt is Revenue Mgmt
We are not here today to set prices!
Say that again…
• Fixed amount of rooms to sell • Rooms are “perishable”• Guests are willing to pay a different price for
the same room • Guests can buy through a variety of
“channels” that may or may not be “direct”• You want to master the science behind
revenue management
Major Historical Milestones…
Bartering– First method of trade– Merchants saved best goods for best customers– Worth determined by item’s scarcity (or)– Perceived value of materials and labor
Markets– Sprung up in villages to facilitate exchange– Merchants began to travel– Supply and demand dictated price– Inns quoted higher prices to later arriving guests– Last leg of lamb on the spit – most pricey!
Major Milestones…
Hotel Chains– Automobile travel facilitated need– Kemmons Wilson founded Holiday Inns
• Front desk asks guest about future travel plans– CRS– AAA
Air Travel– First commercial flights commissioned by postal service– 1927 – Lindbergh solo flight gets people thinking– 1958 – 1st Boeing 707 jets put into service– Jet age – interdependence among air, hotel, car rental– Airlines strictly regulated by federal government– 1978 – Airline Deregulation
Major Milestones…
• The Internet– Domain names– Third parties– Commoditization of information– Instant data available to consumers and hotels
alike…Web 2.0 put consumers in driver’s seat
• STR
Tactics…
Revenue Mgmt. Tactics
• Forecasting Demand:– Forecasts are not budgets…– 90, 28, 10, 7, 3, 1-day forecasts – really?– Keep records of this year for future years– Measurement of reservation demand is critical:• Pace• Regrets (decide to not book)• Denials• Conversion rate
Revenue Mgmt. Tactics
• Forecasting:– “Unconstrained demand” means you can
accommodate it all (slow times)
– “Constrained demand” means you can begin to drive revenue:• Capacity allocation• Rate thresholds• Duration control• More later…
Revenue Mgmt. Tactics
• Forecasting: (other factors)– Guest TOTAL spend– Lifetime spend (loyalty program)
Revenue Mgmt. Tactics
• Competitive intelligence– STR– Call arounds– Drive arounds– Walk arounds– Ask the guests
Booking Pace
Total Group Room Bookings, Cumulative by Month
January February March April May June July
2010 350 680 740 860 880 920 890
2011 360 690 700 750
Pace +10 +10 -40 -90
Revenue Mgmt. Tactics
• Pricing Models:– Guest perception of value– Inventory your inventory– Room types are not just bed types– See “Dynamic Pricing”
Revenue Mgmt. Tactics
• Pricing Models:– How many rates do you have?– How many room types?– Does it vary by time of year?– Time of week?– Time of day?
Revenue Mgmt. Tactics
• Pricing Models:– Rate Fences…(advance, last minute, non-refundable)
– Customer loyalty programs versus revenue management?
– Duration controls (first-come, first-served is not the only way to go)
–Minimum stay– Stay through– Close to arrival
Dynamic Pricing
A: Rate Group Rate $90 Transient Rate $130 Total
Rooms Sold 150 100 250
Revenue $13,500 $13,000 $26,500
Dynamic Pricing
B: Rate $90 $110 $130 $150 Total
Rooms Sold 80 60 60 50 250
Revenue $7,200 $6,600 $7,800 $7,500 $29,100
Dynamic Pricing
A: Rate Group Rate $90 Transient Rate $130 Total
Rooms Sold 150 100 250
Revenue $13,500 $13,000 $26,500
B: Rate $90 $110 $130 $150 Total
Rooms Sold 80 60 60 50 250
Revenue $7,200 $6,600 $7,800 $7,500 $29,100
Revenue Mgmt. Tactics
• Capacity Management:– Overbooking• Is 98% a good occupancy percentage?• Is overbooking worth it?
– Can a hotel rent out-of-order rooms?
Revenue Mgmt. Tactics
• Displacement Analysis:– What is it?– Key issues:
– What revenue is lost?– What profits would be lost?– Lifetime value of the group/client
– Case Study: “Small Group”– Case Study: Accept or Deny?”
Revenue Mgmt. Tactics
• Displacement Analysis
On to Strategy…
Strategic Revenue Mgmt.
• Differentiation: – If you find the right market for your hotel and sell
to it, you drive revenue…– Rate becomes less important…
Strategic Revenue Mgmt.
• Differentiation: – Unique features– Type of service– Leverage your location– Brand– Market segments served– Name? (The $23 Inn)
Strategic Revenue Mgmt.
• Revenue management and CRM:– Who are you best customers?– Why are they your best customers?– How do you keep them?– How do you find more like them?
Strategic Revenue Mgmt.
• Revenue management and guest loyalty issues:– Pricing fidelity– True “value” of a guest over time– Black out dates– Booking on a “first come, first served” basis or?
Strategic Revenue Mgmt.
• Other factors:– Market position– Bed mix and more– Know who you are and what you are not…
Strategic Revenue Mgmt.
• Role of pricing in achieving REVPAR:– No matter what, your price must offer value to the
guest…
Strategic Revenue Mgmt.
• HSMAI Survey on value:1. Property type/location2. Amenities3. Price
– Guests will pay a premium to feel safer– Guest put a premium on “true” service
Strategic Revenue Mgmt.
• Strategic packaging:– When do you want to package? (slow times?)– Who are you targeting? Why?– How will you promote the package?
– Internal packages– External packages
Strategic Revenue Mgmt.
• Distribution Channel Management:– We sometimes forget that there are more multiple
“channels” to manage:1. 3rd party2. CRS/GDS3. Website4. Telephone5. In the lobby
Strategic Revenue Mgmt.
• Distribution Channel Management:– Different channels have different gross and net
rates– Different guests– Need to manage inventory in each channel…
• Open & Closed to arrival• Minimum LOS
Strategic Revenue Mgmt.
• Distribution Channel Management:• You want:
1. Highest producers2. Most cost-effective3. Easiest to control
3rd Party Pitfalls
• “Monkey see, monkey do” pricing(do not just look at competitors pricing and adjust…)
• You need to:1. Forecast your demand2. Then, evaluate competitors strategy3. Determine which consumer (and channel) makes
sense to pursue. (Who are they? How and When do they buy? Who are they loyal to?)
Let’s look more closely at 3rd Parties
1. Retail model (Booking.com) They collect money from and get paid a commission
2. Merchant model (Hotels.com) They are “merchant of record” paying you a “net rate”
3. Opaque model (Priceline.com) Some part of the transaction is hidden from guest
4. Auction model (LuxuryLink or Priceline) 5. Referral model (TravelZoo) Hotel defines the
offer and pays an advertising or referral fee
What are the issues in choosing 3rd party partners?
• Costs vary wildly• Who is the guest? • Your brand and other guests profile• Stay patterns• Cannibalism• Ease to use• Marketing exposure• Seasonality• ETC. Net, net rates!
Table Discussion:
• Third Parties: Friend or Foe?
Who are your best customers?
• Loyal customers versus “one time wonders”• How are you “proving” your value to them?• Besides pricing, what else do frequent
travelers crave and value?• If you use 3rd parties, will that guest really
become loyal to your hotel?
The one’s with the most $ value to you!
Change of Gears…
What Does a Revenue Manager Do?
• Manage group blocks• Managing and monitoring Internet systems to ensure
rate integrity and parity• Managing the hotel’s web portal• Maintaining relationships with third-party market
managers• Analyzing financial statements and market data• Preparing accurate occupancy and revenue forecasts• Developing tactics and strategies to manage group and
transient market needs
What INTERPERSONAL Skills Do Revenue Managers Need to Have?
• Lead business review meetings• Develop and deliver effective presentations• Establish credibility with the management
team• Work closely with the DOS and FOM, where
appropriate• Articulate complex strategies and other topics
in oral and written form
Glossary of Revenue Management
• (See handout)
Glossary of Revenue Management
• TRANSIENT BOOKING• BRANDING• GROUP RATE• MARKET BASED PRICING• ADR• MARKET
SEGMENTATION• MARGINS• REVPAR• C.V.P.• COMPETITIVE SET
•BOOKING PACE•MERCHANT MODEL•OPAQUE MODEL•LOAD FACTOR•ANTI-TRUST LEGISLATION•BREAK EVEN•B2B, B2C, C2C•MENU MIX MANAGEMENT•MENU ITEM PENETRATION•PROTECTION LEVEL
Glossary of Revenue Management• UP-SELLING• PER-CAPITA• SEASONALITY OF
BUSINESS• BUNDLING• CONSTRAINED
OPTIMIZATION • DEMAND FORECASTING• CHANNEL OF
DISTRIBUTION• CHANNEL MANAGEMENT • RACK RATE
• REVENUE MANAGEMENT• VARIABLE COSTS• FIXED COSTS• MARGINS – GROSS AND
CONTRIBUTION• MARKET INTELLIGENCE• OCCUPANCY • OVERBOOKING • PRICE DIFFERENTIATION • VFR• SMERFE• PERISHABLE INVENTORY
Glossary of Revenue Management• AVERAGE CHECK• TURNOVER • YIELD• PROPERTY MANAGEMENT
SYSTEM• CAPACITY• CRS • SUPPLY AND DEMAND• INELASTICITY OF DEMAND• SMITH TRAVEL RESEARCH• AUCTION SITE• CANNIBALIZATION
•OPAQUE CHANNEL•RATE INTEGRITY•PRICE TRANSPARENCY•FLASH REPORT•MARGINAL COST •META SITE•CRM•SHOULDER, VALLEY, AND PEAK SEASONS•BEST RATE GUARANTEE PROGRAM
Almost finished…
The Top Ten Revenue Management Mistakes Hotels Make
10. Seeing revenue management as a job done only by the revenue manager.
9. Allowing Internet discounting agencies to sell guestrooms at prices of their choosing, then complaining about the erosion of rate integrity.
8. Claiming to differentiate the hotel based on service excellence, then promoting discounts, “value package” offererings, free frequent-guest points, and other freebies.
The Top Ten Revenue Management Mistakes Hotels Make
7. Thinking that the hotel’s weekday strategy and weekend strategy can be the same.
6. Expecting that the “flag” (brand) will fill the hotel without the hotel’s management team lifting a finger.
5. Counting revenue dollars as equal, regardless of the distribution channel they came through.
The Top Ten Revenue Management Mistakes Hotels Make
4. Thinking that short-term goals must always have priority over long-term goals.
3. Thinking that artificial intelligence – the revenue management software – is superior to human intelligence.
2. Believing that the right price to charge for a room night is established solely on the hotel’s costs and ROI expectations.
The Top Ten Revenue Management Mistakes Hotels Make
1. Believing that discounting is an effective way to increase revenue.
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