Five years ago, Dan Ariely, a professor and director of the Center for Advanced Hindsight at Duke University, compared Big Data to teenage sex for several funny reasons. I’d like to begin this post by modifying his quote for the hotel business by replacing ‘Big Data’ with ‘Total Revenue Management.’
Total Revenue Management is like teenage sex:
everyone talks about it,
nobody really knows how to do it,
everyone thinks everyone else is doing it,
so everyone claims they are doing it…
There is a common misconception that Total Revenue Management is the application of revenue management concepts to revenue streams other than rooms, such as F&B, Spa, Golf, etc that make up the total hotel revenue. Based on this definition you could conceivably have the Revenue Manager set prices and discount tiers for each outlet or service. Better yet, in larger hotel companies you could have a separate RM for each line of business. Imagine a Rooms Revenue Manager and an F&B Revenue Manager, like you now have a Rooms Controller and and F&B Controller at many properties. Each manager would look for opportunities to manipulate pricing in order to find the most profitable balance between demand and capacity utilization (i.e. occupancy). Each line of business could also have their own Revenue Management System and they could have competitor’s price shopping tools or even their own “STAR” report. Furthermore, instead of having a Rooms Comp Set, you could also have a Restaurant and Spa comp set. Imagine comparing Revenue Per Available Seat to benchmark your hotel’s main restaurant versus your competition. Sounds brilliant, except for one thing – that is not Total Revenue Management.
True Total Revenue Management is about unleashing the power of RM on all revenue streams, but it is also about designing pricing tactics that optimize the total performance of the hotel even if that means that some of the revenue streams are not optimized. Let’s take the easiest example to explain – the casino guest. Smart casinos don’t care about any one individual revenue stream. They care about each guests total spend, and thus they regularly comp room nights to hotel guests that spend on gaming and outlets. These casinos sacrifice rooms profit for total profit. This is Total Revenue Management, when the interconnected relationships across revenue streams is considered simultaneously in order to create a bundle of prices that optimizes the hotel’s total bottom line. In other words, Total Revenue Management is not about looking at each line of business individually, but as a collective package of experiences to forecast and optimally price.
This vision of Total Revenue Management is a lot more challenging to achieve than the first, which is part of the reason why we have not seen it widely deployed yet. For one thing, most revenue center managers are conditioned to think about the performance of their “silo” rather than think about the entire hotel performance. You can’t blame them, hotel performance bonuses are based on the individual performance of each department. Imagine asking the Spa Director at your property to accept a 10% price decrease on all services because the numbers prove that it would increase total guest profit. I have been part of those conversations and they are not pretty. Another challenge, is the math. Analyzing supply and demand for rooms is considerably less complex than analyzing multiple revenue streams simultaneously. Modelling Total Revenue Management requires advanced data mining algorithms with a layer of optimization mathematics on top.
