sky scrapers rising up reflecting the value of revenue management to increase hotel valuation over time

Just as regional travel and accommodation markets have been disrupted over the past two years as a result of the pandemic, the hotel development and investment pipeline has been similarly impacted.

NB: This is an article from IDeaS

Developments that were planned have been delayed or scrapped and asset values have been surpressed. At the same time properties and hotel groups that had never been on the market before have become available in distressed sale conditions.

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It takes a lot of capital, thorough research and a healthy appetite for risk to acquire a hotel in normal operating conditions, let alone during a sustained downturn. Therefore, all hotel owners and investors should ensure they are doing everything they can to maximise revenues from the day they take ownership or start operations of their new asset.

It is no longer enough to build a great property, ensure the rooms are artfully decorated, and have staff in place to service potential guests. To ensure the long-term financial success of a property, owners and investors need to have the right pricing and inventory management strategies in place.

Attract the right business for your new asset

Many hotel owners and investors are only too well aware that revenue management’s ultimate goal is to price a room, or service, and manage their inventory in a way that will result in the most overall revenue and profitability. But it should also be remembered that a full hotel doesn’t always equal a profitable hotel.

Without revenue management strategies in place, hotels can easily fall into the trap of selling out to business with a lower value, resulting in an asset returning suboptimal results. To identify business that offers the greatest long-term revenue potential to a property, owners need revenue management strategies that take an overall view of business activities, not limited to the rooms portion of revenues and profits only. Attracting the business to your hotel with the highest value is what will make all the difference to your investment.

Improve asset or portfolio performance with revenue management 

The additional revenue that comes from revenue strategies, based on thorough data collection and analysis, immediately and directly impacts a new hotel’s top and bottom line. This makes it an invaluable exercise for increasing a hotel’s valuation over its lifetime—a key objective for any owner or asset manager, in particular at time of investment, refinancing, or sale.

Investing in a revenue management system early once acquiring ownership or during the build of a hotel should be included in the budget. Determining the right revenue management strategy and execution without the use of an intelligent tool is risky, especially after having spent millions on the asset itself.

Additionally, for those owners or group investors with multiple properties in development, or those looking to expand their portfolio, setting revenue management strategies and standards across a hotel group or chain from the outset will improve the performance of the overall portfolio. Running multiple properties allows for a focused approach and, with the right strategies and tools, can have significant impact on the value of the assets.

Though data collection and analysis is one of the many tasks of a revenue team, revenue management’s primary focus is driving top line revenue, profit and asset value. Understanding the market, trends and changes, anticipating the impact on business and taking strategic decision is part of the revenue management curriculum. Owners that allow their teams to focus on strategy and its execution rather than generation of reports and analysis will have the best long-term success.

Boost your bottom line

But how can revenue management actually help to increase the value of a new property or group? Deep analytical skills, familiarity with internal and external data sources, and the data-modelling capabilities should produce timely, detailed, and frequent forecasts—and reforecasts. Accuracy, speed, and agility are critical because forecasts guide sales and marketing strategies, as well as pricing and inventory decisions. 

Forecasts are used by operations to manage expenditures, staffing, and resources, and by the chief financial officer, management company, and owners to project future expenses and net income. All these functions help drive incremental revenue and reduce costs, thereby contributing directly to the bottom line and increasing asset value. On the other hand, errors and inefficiencies in forecasting can lead to bad decisions and missed targets, which could ultimately result in lower future asset valuations.

In recent years, revenue management has expanded its scope beyond tactical rate and room inventory management to become more strategic, more focused on total revenue, and more profit-orientated. This holistic approach is particularly relevant when operating in a disrupted market. With demand for rooms, food and beverage, and meetings and events changing more rapidly than ever, hotels must redefine target markets and find new sources of revenue. By optimising all revenue streams, operators can find incremental revenue and drive value in untapped areas.

The cost of not using an RMS

A typical hotel will make roughly five million pricing decisions every year, and it seems humanly impossible for anyone to get every decision right, every day, with the use of spreadsheets alone. The right tools, just like the right materials when building a hotel, are needed to define and execute revenue strategies that work. Investing in the right tools is part of the total investment into a business. It is still commonly thought that revenue management means managing revenues when the hotel sells out. However, winning revenue management strategies start working when the first rooms get booked and not only with the last few rooms.

Plan, test, adapt and succeed

In a competitive and disrupted operating environment, hotel owners and investors will be challenged to deliver a return on their investment. Hoteliers cannot simply open their doors and expect the right guest to walk in paying the right price. Today, more than ever, owners and investors need to thoroughly plan, test, and adapt their approach to pricing and revenue management to optimise their chances of long-term commercial success.

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