lightbulb with image of a brain inside reflecting the possible need for hoteliers to overhaul the definition of revenue management

The hotel industry buzzes with talk of “modern” revenue management, but are we truly innovating? Many discussions focus on familiar strategies like dynamic pricing, personalized offers, and the use of revenue management systems, already widely used in big cities. While technology gaps are closing between urban and rural hotels, a crucial question remains: are we simply repackaging old approaches with new labels?

NB: This is an article from Untapped Revenue

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This article delves deeper, exploring the fundamental differences between traditional and modern revenue management primarily focusing on city hotels, and proposing a vision for the future of the field.

The Myth of the Static Pie:

Traditional revenue management views demand as a fixed entity, with each hotel vying for a slice. This belief implies that demand is inelastic; In other words, a group of hotels will receive their collective share of demand and results, regardless of their individual actions. This theory in my view might have held true ten years ago when the booking journey was far more complex than today’s one-click approach. Back then, guests stayed at specific hotels out of necessity, driven mainly by location.

This approach argues that hotels in a location will get the same demand regardless of the perceived value of their selling price, which suggests that rates should only increase or remain. As a result, discounts are frowned upon during off peak season and deemed as pointless and undervaluing the product. During peak season, the theory favours manual restrictions over pricing as it calls for ethical pricing, emphasizing the balance between profitability and fair value rather than supply and demand.

The theory focuses on occupancy and ADR in isolation, disregard market insights and online positioning, relying heavily on historical trends. Pricing is either static, “hurdle-based” or dynamic with fixed “intuitively based” thresholds. Rate adjustments are infrequent, typically reacting only to positive pick up, rates are reluctantly repositioned 30-60 days prior based on pace.

Hotels following this theory often define optimal performance as achieving budgeted production by segment, regardless of market or macroeconomics. Segments were seen as isolated revenue sources, with restrictions implemented if any segment (except direct) reaches its budget. Underperformance is usually blamed on underperforming segments, neglecting missed opportunities, poor online visibility, and distribution issues.

Revenue managers spend significant time on administrative tasks due to manual demand management through restrictions. The isolated segmentation-oriented model encourages trading with all segments, regardless of business needs, leading to partnerships with partners lacking automated booking delivery, and poor rate parity records, neglecting the time and labour cost implications.

The Dawn of Demand Elasticity:

The rise of online booking platforms, the evolving customer journey, and the consolidation of travel search (flights, hotels, packages) have fundamentally changed the landscape.

Demand is now elastic, meaning guests are responsive to price and alternatives. If hotels in a city like London are overpriced, potential “undecided” guests or guests with a set budget will explore other destinations. Conversely, under-pricing will lead to low rated compression. Furthermore, the online booking environment has dissolved geographical boundaries within cities. By optimizing their online ranking and visibility, hotels can now elevate themselves from their local area online and attract guests from different areas within the city, not just their immediate submarket.

Modern revenue management views demand as funnels representing diverse search patterns. For instance, there is a funnel for one-night stays in London, another for three-night stays in a specific submarket, and another for five-night stays in a local area within that submarket. The same hotel can appear in all three searches. This means the competitive landscape is no longer the hotels within a mile radius with comparable facilities; It is all hotels appearing on the same search page and with the same applicable search filters. This necessitates constant evolution in understanding the hotels you compete with for revenue.

As a result, pricing requires a complete overhaul. Instead of focusing on one-night stays based on a static local comp set, the goal should be capturing the biggest and most profitable demand funnels. This requires identifying key demand funnels, implementing an optimal price ranking within an evolving competitive set for each targeted funnel, and utilizing pricing rather than restrictions to manage demand. Pricing is fully elastic based on supply and demand, with no artificial maximums, and the break even rate serving as a baseline. Content and marketing plans become crucial, as online presence and details significantly impact success.

This complexity demands more focus from revenue managers, making pricing their top priority. To elevate the pressure and Boost revenue team effectiveness, channels optimization and unnecessary administrative work must be automated.

Pricing alone is not enough. Today, optimal revenue lies in channel optimization rather than segmentation. Hotels need to understand the reach, rate parity implications, and cost of acquisition (including labour, rebates, and booking delivery cost, not just commission) for each partner. This leads to a comprehensive distribution plan with a consistent profit-based selling strategy across all chosen channels, that will protect rate parity and lead to an automated maximum return on acquisition cost. Improved online visibility should lead to increased ADR, offsetting some acquisition costs.

Defining the unnecessary administrative work requires analysing revenue workflows and reshaping revenue manager tasks to reveal the optimal solution, whether it is process improvement, strategic shift, enhanced system utilization, or a custom AI solution.

While transitioning from the traditional to the modern approach requires collaboration between owners, management companies, and operators, it is crucial to acknowledge the short-term challenges involved. This includes investment, adaptation, and patience. However, these initial hurdles pave the way for guaranteed long-term rewards as hotels unlock the full potential of the modern revenue management strategy.

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