New revenue strategy needed to stay profitable
 
New revenue strategy needed to stay profitable
01 APRIL 2014 7:34 AM

To regain competitiveness, hoteliers need to find ways to create value for consumers in the booking process. 


The hotel industry is at a crossroads. Commissions paid to distribution partners are growing at twice the pace of revenue, and the rebound of average daily rate has been low and slow. Traditional revenue management associated with best available rate pricing, managing to budgets and other antiquated approaches has benefitted intermediaries at the expense of hoteliers.
 
To tackle these distribution complexities and regain control of their bottom line, hoteliers must implement highly integrated and flexible pricing strategies. Sales, marketing, distribution, digital, revenue management and all others tasked with generating revenue need unified approaches using shared market intelligence to achieve the same goals. The ultimate goal should no longer be just revenue, but net revenue. 
 
To be clear, our partners have not stolen anything from us. We have failed to serve the needs of our customers when they are shopping for a hotel room, and we need to own that failure, understand it and devise ways to address it.
 
If hoteliers, the most important players in the hotel industry’s complex value chain, can’t rationalize the economics, there is a real risk the industry could face a similar fate to those in the airline, music and publishing industries.
 
Changing landscape
On top of an expanding slice of revenue paid to long-standing intermediaries like global distribution systems and online travel agencies, there now exist “meta-mediaries.” This new layer in the value chain has gained direct access to customers when they enter the travel distribution ecosystem. It’s now inevitable that even a hotel’s most profitable customers, those booking directly through the hotel website, are likely first visiting various other sites commanding a cut of the action. 
 
Little today constitutes truly “direct booking,” and tomorrow it will be even less. It’s clear technology behemoths such as Google, Apple and Facebook are rapidly becoming significant players in hospitality and will steadily scoop up more and more of hotels’ profits. 
 
Making matters worse, the industry’s booking ecosystem is a nightmare of distribution complexity and compressed booking windows—conditions that did not exist when traditional revenue management was devised. Yet, hoteliers still manage revenue in much the same way they did 30 years ago. 
 
As online distribution brought transparency, hoteliers started competing more on price. If everyone is chasing a heads-in-beds strategy with not enough heads to fill even close to all the beds, we are in trouble as an industry. This downward pressure played directly into the hands of OTAs, and antiquated revenue management practices have accelerated the race to the bottom.
 
Flexible pricing
Hoteliers must drop artificial constraints on pricing and align incentives. Budgets, for instance, can be useful guidelines, but many hoteliers make expensive mistakes because revenue strategists are hamstrung. By their nature, budgets are static, while customer demand is dynamic. Too many hoteliers fall into the trap of managing rates not to maximize revenue, but to meet budgets.
 
BAR pricing has been another common mistake. This fixed-tier revenue management approach sets one main public rate, and rates for all other channels and segments become a derivative of that. For example, if BAR is $100, some offers might be 10% less and the OTA opaque rates 30% less. This approach is easy for hoteliers to manage, but many customers are willing to pay more. It might be profitable to raise the price of one segment while leaving others unchanged. Dynamic and open pricing allows each segment to be priced independently without a predetermined and fixed connection to the BAR.
 
Hoteliers also need to track customer behavior as OTAs have been doing for years. Some of the more powerful insights a hotelier can have about prospective customers are easily obtained by tracking website booking inquiries. Doing so affords immediate feedback on price strategies.
 
By studying lost business, we can better approximate price elasticity. We can run price experiments that include not just the people who booked but also draw inferences from the shoppers who did not make a purchase. It is these tests that can help hotels figure out whether there is a higher optimal price even when the hotel is not forecasted to sellout. But it’s not enough to have good data; it’s only beneficial if the hotel can make it actionable quickly.
 
Revenue strategists need systems that automate data management and make information easily and quickly digestible. It’s no longer a realistic proposition to wade through a multitude of data on an Excel spreadsheet and expect to make timely and accurate pricing decisions. Systems facilitating this process need clear user interfaces that serve up complex information simply and quickly and enable flexible pricing strategies.
 
A new revenue strategy
Revenue directors are responsible for forecasting demand and pricing rooms to maximize revenue, but that can no longer be done in a vacuum, separate from the marketers who are creating much of that demand. These departments can no longer operate in silos. It is essential these functions collaborate closely with unified objectives, processes and data.
 
Intelligence gleaned from revenue management forecasts should serve as the starting point for proactive revenue strategies. For instance, digital marketers should know how many rooms are needed by day at a given acquisition cost. Loyalty marketers should know the same to drive campaigns.
 
When marketers can view predicted demand six months out, they still have time to target areas of need and pull back unnecessary offers. With the flexible pricing described above, these marketing campaigns can be left open by increasing discount rate plans to parity with public prevailing rates so the stimulated click to the booking engine does not result in turning away the business due to over reliance on availability restrictions. Through this tactic, the guest would pay full price on the peak night but would still get the full discount on the others.
 
Conclusion
To regain competitiveness, hoteliers need to find ways to create value for consumers in the booking process. The profitability that has eroded as our distribution partners continue to take share is in large part due to the inability of hoteliers to create a compelling experience and value proposition for guests.
 
Our partners are offering a streamlined booking process, rich content, choice, and low prices. There is no reason why hoteliers cannot offer an efficient booking experience, even more tailored with superior content, and clear value.
 
The clear value proposition should be simple and straightforward. Any known customer who books direct should always get a better deal. This is not a best rate guarantee; it would be a better rate. Travelers should know that no matter the season or day, if they book direct they will receive a lower price, value-added offer or enhanced service. As long as the customer is recognized, this does not break parity agreements.
 
Hotel loyalty programs have done a terrible job appealing to guests who have no hope of ever earning a free night or status. For them, we need to offer something of value, and with the changes in strategy discussed above and with greater collaboration between all of the stakeholders in revenue strategy it is possible to deliver for our guests.
 
About the Author
As co-founder and CEO, Patrick Bosworth drives vision and growth at Duetto. With over a decade spent in the hospitality, non-profit and government sectors, he has brought entrepreneurial insights to organizations and established them as industry leaders and innovators. Previously at Wynn Resorts, and with consulting clients, Patrick realigned strategic marketing functions to maximize profit. While in the public sector, he drove modernization of financial reporting standards, unchanged since the 1950s, making labor unions more accountable to their members. 
 
Patrick holds an MBA from Harvard Business School and a BA in Political Science from the University of San Diego. He serves on the Hospitality Sales & Marketing Association International (HSMAI) Revenue Management Advisory Board as well as the HSMAI Foundation Board, and recently as an advisor to the American Hotel & Lodging Educational Institute. He also advises Win-Win Entertainment, a non-profit connecting great causes with great entertainers … one show at a time.
 
About HSMAI’s Revenue Management Advisory Board
The Revenue Management Advisory Board leverages insights, emerging trends, and industry innovations to guide the development of products and programs that optimize revenue for hotels.
 
Members include: 
Chair: Kathleen Cullen, CRME, Vice President Revenue & Distribution, Commune Hotels & Resorts
Calvin Anderson, Director of Revenue, Lexington New York City/The
Chris K. Anderson, Professor, Cornell University
Veronica Andrews, Director of Active Data, STR
Vish Bhatia, Vice President Revenue Optimization, Aston Hotels & Resorts LLC
Patrick Bosworth, CRME, CEO & Co-Founder, Duetto
Bonnie E. Buckhiester, President & CEO, Buckhiester Management Limited
Tom Buoy, CRME, EVP Pricing and Revenue Optimization, Extended Stay Hotels
Janelle Cornett, Regional Director, Revenue Management, TPG Hospitality
Sloan Dean, CRME, Vice President of Revenue Optimization, Ashford Hospitality Trust
Jon Eliot, CRME, VP Of Revenue Management, Premier Hospitality Management
Neal Fegan, CRME, Executive Director of Revenue Management, Fairmont Raffles Hotels International
Nick Graham, VP, Hotel, Hotwire, Expedia
Linda Gulrajani, CRME, Corporate Director Of Revenue Management, Marcus Hotels & Resorts
Dev Koushik, VP, Global Revenue Optimization, IHG
Kelly McGuire, Executive Director, Hospitality and Travel Global Practice, SAS Institute Inc.
Karen McWilliams, Sr. Corp Director of Revenue Strategy, Concord Hospitality Enterprises
Mark Molinari, CRME, Corporate Vice President of Revenue Management and Distribution, Las Vegas Sands
Garth Peterson, CRME, Director Of Sales, Americas, IDeaS - A SAS COMPANY
Susan Spencer, Market Director - N. America, ChannelRUSH
Tim Wiersma, President And CEO, Revenue Generation LLC
Nicole Young, CRME, Corporate Director Revenue and Sales, SBE
 
Want to Learn More?
Many of the topics mentioned here will be addressed as part of the 10-part 2014 Revenue Management Webinar Series produced by the HSMAI Revenue Management Advisory Board and HSMAI University in partnership with Hotel News Now and STR. Each month a webinar covers one aspect of cutting edge revenue management in today's economy in conjunction with articles written by members of the HSMAI Revenue Management Advisory Board. If you’re not able to attend a live program, archives are available. 
 
Also, plan to attend HSMAI’s 2014 Revenue Optimization Conference (ROC) in Los Angeles on 23 June.
 
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.
 

4 Comments

  • skooshhotels April 7, 2014 1:07 AM

    Good points. How about this then - hotels drop rate parity and let OTAs compete against each other?

  • Poor Logic April 7, 2014 2:53 AM

    The author contradicts himself in this article. He starts off saying hotels need to do better revenue management by not lowering rates on the internet to chase that last customer that may not exist. A valid point. He then contradicts this statement by telling hotels to offer lower rates directly to customers in his last paragraph. Obviously, the story doesn't end there. If a hotel drops the rate, the OTA's will need the lower rate matched or they will stop selling the hotel. Once that happens a few times at several hotels following this revenue model rates in the city will begin to drop faster than ever before. This authors revenue experience is largely based around Las Vegas, a city that has 70% of its visitors coming from one state, California. It's also important to note a lot of Vegas Hotel/Casinos loose money on their rooms and make it up on F&B and gambling. Any hotel revenue manager who has worked in several different markets knows what might work in Vegas Hotel/Casino cannot be duplicated elsewhere.

  • craig.oneglobe April 8, 2014 2:08 AM

    Ancillary Revenue to offset OTA - 3rd party commission structures - Think beyond the walls. Agree - hotel owned touchpoints should provide a better, more authentic experience than OTAs. A better value offered can result in higher direct booking conversions BUT...the reality is hotel need new, revenue sources. Similar to the airlines, external revenue sources are available IF hoteliers are willing to create 'passive' retail stores in their digital networks and earn income from affiliate programs such as Amazon. W Hotels has W Stores and they sell bed linen, etc. Therefore hospitality customers are already exposed to select retail options. Tapping into existing affiliate programs whose services and products add value to the hotel guest's travel experience is the revenue sweet spot. Example - travel gadgets such as luggage digital tracking tags can be offered on a hotel's site + in pre-stay confirmations. Time to rethink revenue beyond pricing + the hotel walls.

  • Paul Patel December 26, 2014 10:47 AM

    It is true that (Net) revenue management became a science in itself. The biggest mistake done is by creating a rate parity among all OTAs. Another mistake is by agreeing to all OTAs to a set commission percentage. Just like any product and services, it should be based on the bookings delivered. The small franchises who are at the mercy of their franchisors are duped into the agreements negotiated by the hotel companies with OTAs.

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