Is the revenue manager the most critical role for maximizing a hotel’s profit?
NB: This is an article from Demand Calendar
There are a lot of discussions about how revenue managers can impact the bottom line. Some people argue that every single daily decision of Revenue Managers impacts the bottom line.
Subscribe to our weekly newsletter and stay up to date
There are only two ways a revenue manager can impact the profitability of a hotel. The first is to capture guests that need overnight accommodation at the destination, and the second is to sell more to each guest. The traditional KPI for capturing guests is occupancy. The traditional KPI for selling more to each guest is ADR. However, a better KPI reflecting selling more to each guest is average guest spend. The more revenue the revenue manager captures on the market, the higher the profit. Revenue is the primary driver of profit in the hotel industry.
Revenue managers should focus on the traditional KPIs as long as the hotel’s market share is lower than the fair share of the market. Then, a revenue manager would bring in more profit to the hotel’s bottom line for each additional room sold and for each extra dollar in ADR.
Profit maximization
For revenue managers with the luxury of a higher market share than the fair share of the market, it is time to start thinking about profit maximization. There are a few areas where profit maximization makes sense.
Displacement
Displacement is an extensive, invisible cost in all hotels. Hoteliers are happy that they sold many rooms and achieved a high occupancy. That thinking is the heads-in-beds philosophy, and very few think about if they captured the right guests at the right rate. There are two types of displacement. The most obvious one is that the hotel accepted a guest paying a lower rate and did not have any more rooms to sell to guests willing to pay a higher rate. If hotels register all requests they deny, they will collect valuable information they can use for future decisions. Revenue managers should prioritize displacement analysis, but few hotels cannot get this right. The loss of revenue in turning away higher-paying guests is substantial, so the impact on profits can be huge.
The other displacement type is when hotels sell rooms at a lower rate than the guests are willing to pay. Few revenue managers understand the guests’ willingness to pay, so many revenue managers trust that their comp sets understand and follow the competitors’ rate changes. Instead of trusting competitors, revenue managers should be proud of their hotels’ attractiveness and close the gap between the guest’s willingness to pay and the selling rate. It isn’t easy to track the willingness to pay, but revenue managers should increase their knowledge about this. Charging $10 less than the guest would be willing to pay substantially impacts profit. In a hotel selling 50,000 rooms per year, it would be half a million dollars.
Customer acquisition cost
Many hotels do not manage the customer acquisition cost or only partially. Hoteliers tend to complain about high commissions paid to the OTAs, but they do not measure the actual costs for direct bookings, including their labor costs. The only way to maximize the net revenue or contribution is to fully understand and manage customer acquisition costs. By focusing on net revenue instead of RevPAR, the revenue manager will contribute to maximizing profits.
