Stop Dangling the Wrong Carrots: How Revenue Incentive Plans Hurt Profits

Occupancy is high. You’re crushing your RevPar Index. And, you’re on pace to surpass your quarterly revenue targets as well as last year’s revenue.

NB: This is an article from Tambourine

From the look of things, your revenue team (this includes marketing and revenue management) is blazing to success and should be credited and applauded for driving huge profits to your property.

But, wait.

Look closer. It’s NOT increased profits your revenue team produced. It was increased revenue.

Right now, most revenue teams aren’t driven to optimize profitability at their properties. Instead, they are incentivized to boost revenue – profit margins and rising costs be damned.

The fault doesn’t lie entirely with your marketing and revenue team, however. Perhaps it’s time to critically examine your RM incentive plan structure instead?

The Hidden Risk of Current Revenue Management Incentives

To achieve a bonus today, most revenue managers are only tasked with exceeding top-line targets, like revenue variance to budget and variance to last year’s revenue. Plus, a favorite metric that hotels use is RevPar index, suggesting most owners want to see performance relative to the compset, instead of internal benchmarks.

“However, by incentivizing revenue managers to work on boosting revenues only, they’re essentially taking their eyes off of high expenses and any rising costs,” said Jeff Spaccio, Corporate Director of Sales and Marketing In Residence at Tambourine. “Revenue doesn’t equate to profit.”

While revenue managers are ultimately responsible for delivering profits to their properties, current incentive programs motivate RM teams to prioritize driving up revenues over the bottom line.

Take an Honest Look at Channel Costs

Revenue managers must be cognizant of, and accountable for, costs and how they impact the bottom line, Spaccio said.

One of the biggest missteps under current incentive plans is that revenue managers aren’t motivated to pay close attention to which channels are costing the hotel the most and on the other end, which channels offer the most value.

Hotels should champion all efforts to drive direct bookings from their lowest cost channel – their own brand website, Spaccio recommends. This also means investing in hotel social media marketing, hotel search engine marketing and hotel PPC campaigns to drive traffic to the site.

Plus, don’t be hypnotized by the seemingly high revenues that OTA bookings can deliver. With commissions of 15 – 30%, third party websites are by far a hotel’s most expensive distribution channel.

In the end, driving bookings through your own website will have the greatest impact on optimizing profits.

The Vital Bottomline: Revenue Managers Should Impact Profits, Not Just Revenue

It’s time for hotels to maximize their profits by restructuring their revenue management incentive plans.

“After all, owners can only take profits to the bank,” Spaccio said.

First, motivate revenue managers to get well-acquainted with costs and learn where to reduce wasteful spending. They should be well aware of the cost per booking and your hotel should establish how much those reservations should cost.

Then, at the minimum, a revenue manager should meet or exceed your gross operating profit projections BEFORE being paid a bonus off the top-line incentive.

Continue to reward revenue managers for generating revenues beyond the forecasted targets, but in the end, incentives should be driven by the ability to exceed profitability.

It’s only with the proper incentives in place that revenue managers will pay more attention to the true net of any booking and prioritize boosting your bottom line.

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