How to Move from Revenue Management to Revenue Science
Almost two decades after the big expansion of Revenue Management throughout the hotel industry, Directors of Revenue Management still make 20% less than Directors of Finance and Accounting (payscale.com).
NB: This is an article from Origin World Labs
That may seem unfair because RMs have as much, or maybe more, fiduciary responsibility to the bottom line of a hotel company as their counterparts in finance. Not only that, but RMs have to deal with more systems and more data than finance ever will. However, there is good reason for this discrepancy.
The hotel industry is the only industry that does not require its Revenue Planning professionals to have an analytical background. For the last two decades or so, after the internet exploded and hotels were frantically trying to get online, this lack of analytical skill was not a problem. In fact, it was a brilliant HR strategy. Just move as many heads as possible into Revenue Management as quickly as possible. Our research revealed that 92% of RMs came up through a service function, while those in finance came up through the function of finance and accounting. Therefore, you can understand why the industry generally defines RM as a less technical profession.
But now in 2018 that lack of analytical talent in the hotel industry IS a major problem which is not only affecting the industry, but more importantly, it is also affecting the career paths and growth potential of existing Revenue Managers. A lot more on this later, but let’s take a step back and talk about analytics.
From Myth to Math
By now you have probably used the term “analytics” and I know you’re probably already tired of hearing it used and misused. That’s because everything is now called analytics. I see job openings all the time under the category of analytics where the job’s main responsibility is just to print reports. THAT’S NOT ANALYTICS.
Analytics is the application of mathematical and algorithmic processes to data to extract insights that lead to better decisions.
By mathematical I mean statistics, probability or some derivative of those two. By algorithmic I mean a set of steps to arrive at a solution, like the process of deciding the optimal rates.
Analytics allows us to add value to the hotel business by creating new Key Performance Indicators that allow managers to track and think about their business in innovative ways. As you know, in business we typically only use totals and averages to monitor success. Analytics helps us come up with more interesting metrics. Analytics also helps us build decision models which allow us to improve our pricing, budgets, forecasts, marketing – just about anything that involves making a choice.
Ultimately, the application of analytics allows companies to take on a mindset of using data instead of gut feeling to make smarter decisions. I call that the transition from Myth to Math.
Now think about this, Revenue Management is by far the most analytics-intense function in the hotel business. I would add that, having done revenue planning for many industries, it is more analytics-intense than any function in many other industries. Therefore, it is clear, that Revenue Managers must have a strong grasp of the analytical aspects of their profession, right?
Well, many people, including existing RMs disagree. They believe that the math should be left to the PhDs who build pricing models or the companies that build RMS systems. But let’s explore that notion for a second.
Who would you rather have prepare your taxes, a bookkeeper or an accountant?
Both are legally allowed to do so, so what is the problem? I think most of you would say an accountant is better for many reasons. You may think that the accountant knows the tax rules better or is maybe less prone to make a mistake. But wait! Both probably use the same or similar software to complete your taxes, so again what’s the big deal?
Inherently we all know that the accountant knows more of the Science of Accounting and therefore has a clear advantage in crafting better tax strategies regardless of the software used. Can that idea also be true for Hotel Revenue Management?
Today, many owners and asset managers are awakening to the realization that RM systems are just not enough and that a Revenue Manager with an understanding of the Science of Revenue Management can add a lot more value than a Revenue Manager with only the clerical skills to run a system. In a recent survey by Fuel Marketing and Flip.to, less than 15% of hoteliers think that Revenue Management systems do a good job of addressing the RM challenges facing hotels today.
Solved! Hotel owners should just go out and hire more people with analytics backgrounds, teach them the hotel business, and put them in the RM Department. Not so fast! There’s a huge problem with that strategy. Welcome to the great talent drought!
You’re probably aware that the current economic expansion has led to a massive shortage in analytical talent across every industry. This talent drought was predicted in study after study done over the last 10 years. Companies around the world cannot find the people they need to fill positions that involve data, math, and analytics. Even worse, over the next decade, most professionals with those skills will go work for technology, manufacturing, and medical companies and the rest into some kind of finance role. That leaves virtually no candidates for the travel and hospitality industry.
Therefore, the analytics development of the entire hotel industry will probably stall and come to a crawl. In fact, it’s already happening.
To think that at one point, thirty years ago, the travel industry was ahead in analytics with the implementation of yield management in the airline industry. Now the same industry is about ten years behind other industries in its use of data to deliver value. So the hotel industry will probably be left to rely on a few vendors selling pricing systems with secret algorithms that most Revenue Managers will not understand and therefore will not be able to effectively manipulate. But hey, that’s fine, as long as growth continues, right?
Perhaps that’s the biggest issue. The value of rate distribution alone is slowing. We know that because OTAs are beginning to merge so that means this channel is contracting. SEO and SEM platforms are crowded and have leveled out in growth. Positioning schemes, such as Accelerator, sometimes work, often don’t. Therefore, hotel owners are now asking themselves, “where is the incremental value that I’m getting from my Revenue Management department?”
The Reset Button
If I were an asset manager or an owner I would be looking at the competitive pressures around me and would also be asking myself, “what do I have and what do I need?”
What the vast majority of hotel companies HAVE is a Clerical Revenue Management department, where most of the time is spent on rate distribution and reporting. Many of the entry-level, repetitive, clerical tasks, such as rate loading, which allowed those in the service function to quickly access RM jobs, still consume a large portion of an RMs time. Strategy is basically limited to looking at the comp set to see which way the wind is blowing. Forget Total Revenue Management, they can barely handle rooms revenue management. Under this scenario, the most efficient move would be to automate the RM function as much as possible and keep salaries as low as possible.
However, forward looking hotel companies will take another approach. They will say to themselves, “what I really need is to hit the reset button and get an Analytic RM department.” An RM team where the managers are skilled in doing the analysis that creates more revenue. That would involve creating models that test, suggest and validate pricing decisions, and not relying on an out-of-the-box solutions either. The models would have to capture the unique patterns of each property because each property is unique and then once we have that, we can start looking at the total profit picture for the entire hotel. The focus would change from Revenue Management to Revenue Discovery.
The Big Upgrade
What if we were to do just that? Hit the reset button and create a new type of RM for the hotel business. The problem again would be the talent.
In the hotel industry the vast majority of Revenue Management talent is well equipped to do the clerical side of RM. These Revenue Managers are available by the thousands (there are approximately 25,000 hotel RM profiles on Linkedin).
At the top of this talent pyramid are the PhDs in mathematics or programming, now called Data Scientists. The industry only has a few of those but luckily we don’t really need that many.
The Revenue Science Manager is in the middle of the pyramid and the industry only has a few dozen of those but needs a lot more. These are the people with the ability to approach a Revenue Management issue with a more sophisticated understanding of data and analysis. They don’t have to be mathematicians or programmers, they just have to be well-versed in the Science of Revenue Management. In fact if we look at the same pyramid in terms of demand, we see that the Analytic RM is the most in demand. even though they are fewer in quantity. The Clerical Revenue Managers are still in demand but improvements in technology will eventually render those services obsolete. They will stagnate in the current era of RM automation.
Because of the huge talent drought, the only real solution for the hotel industry is to upgrade the Clerical Revenue Managers to Analytic Revenue Managers through proper training.