IN-DEPTH: Revenue management in hotels is constantly evaluating several issues at this juncture - dynamically measuring the responsiveness of guests to price changes, RM tools and ancillary revenue streams, and automated systems

Published: 09 May 2011

IN-DEPTH: Revenue management in hotels is constantly evaluating several issues at this juncture - dynamically measuring the responsiveness of guests to price changes, RM tools and ancillary revenue streams, and automated systems

By Ritesh Gupta

Late last year, in one of its analysis pertaining to what sort of revenue management innovations are on the horizon over the next few years, EyeforTravel highlighted that the hotel industry expects improvements in the capability to quantify price elasticity and use that output to generate optimal prices directly.

Bringing publicly available competitor pricing data into the heart of the RM system and forecasting how customers will respond to changes in price—it’s a totally different approach.

The most advanced hotels are moving in this direction.

InterContinental Hotels Group (IHG) has made steady progress in this arena. The group has a price optimisation module that integrates local market demand forecasting, publicly available competitive data analysis and price sensitivity modeling to drive optimal revenue decisions for its hotels.

IHG’s module features a price sensitive modeling process that allows the system to continuously balance rates, occupancy and guest pricing preferences in a way that increases revenue opportunities regardless of demand.

“We have been on the forefront of this technology,” Brian Hicks, VP Revenue Management, EMEA, IHG, told EyeforTravel’s Ritesh Gupta. He added, “It has proven to be very successful and we will continue to move in this direction combining technology and the art of Revenue Management.”

Last year, in an interview with EyeforTravel, Bill Kotrba, senior director of Industry Strategy for JDA’s Pricing and Revenue Management Group, mentioned that traditional RM systems have focused on the question, “How much demand am I expecting at my current prices and how much inventory should I protect for my highest price points?”

This approach works very well for hotels or flights that run consistently full, as a means of “yielding out” the low value demand, Kotrba said. He added, “Future systems will focus on the question, “At what price will I generate the most revenue or profit?”

This approach is attractive because it offers upside even for hotels and flights that are not expected to be full. It also addresses destructive price wars amid increasing price transparency, according to Kotrba. In some markets it may be deemed unnecessary to match a competitor that is slashing prices, based on estimates of customer price elasticity relative to that competitor.

RM tools and ancillary revenue streams

Revenue management tools can most certainly be applied to any ancillary revenue streams which have the same features of limited inventory, variable demand and pricing.

However, the key challenge in other revenue streams lies in the capture and organisation of data that is ‘revenue management-friendly’. For example, in restaurant revenue management one needs to look at RevPASH as a key performance indicator. In order for that to happen, data needs to be captured in real-time for each hour and not only at the end of a meal.

Hicks says the gaming industry is at the forefront of total Revenue Management and looking at the total revenue opportunity of a customer.

“In traditional hotel management models outlets are viewed and revenue (is) managed independently, this is an opportunity in this area for improvement,” he said.

The measurement of Price Elasticity is critical in optimising revenues. Is it used on a wholesale basis, probably not. This is an example of how RM is continuing to become more and more complex. One needs to get RM systems to build in this capability, with the data they have they should be able to give better data around price point suitability and the impact a price change would have on demand.

It is being highlighted that price elasticity measurement is something relatively new in RM and will likely find an application in the ancillary revenues.

Rooms revenue management is still operating with competitive pricing and not price elasticity. This is primarily due to the fact that airlines have more opportunity to use price elasticity to influence the size of demand/market, while hotels typically are not able to change the market size, and is more preoccupied with market share, says Jeannette Ho, VP - Revenue Management and Distribution, Fairmont Raffles Hotels International.

“However, as consumers move towards more luxury and differentiated experiences (eg. only limited to 10 F1 trackside packages), price elasticity becomes a more significant revenue management factor as we want to charge each of the 10 guests the highest that each is willing to pay for these limited edition experiences,” added Ho. “Price elasticity has found much easier usage in restaurant business for example in menu engineering, where the most popular dishes should not be priced as cost plus or competitive, but rather using price elasticity to see what the market can bear.”

Managing non-rooms revenue

The challenge with managing non-rooms revenue is data. For the vast majority of revenue streams, RM specialists say they do not have the data to do complex revenue management, so the tools used in Room Revenue Management for the most part cannot be used.

“With lower profit margins on non-rooms revenue there is less attention and investment from a Revenue Management perspective,” said Hicks.

If profit margins change and higher revenue opportunities are available then the availability of tools will increase, said Hicks.

Automated systems

RM specialists have been talking about the introduction of automated systems to give revenue managers more time for strategic thinking.

With the advancement of technology, the best methods for optimising hotel revenue management now include much more than the traditional practices of hotels in the past. In a survey undertaken by RevPar Guru last year, just over 30 percent of hoteliers indicated most of their business came from direct/phone reservations and just over 27 percent reported most of their business came from OTAs and online channels. This shows how the Internet is becoming an increasingly important channel when it comes to hotel bookings, which was not the case several decades ago.

According to RevPar Guru, because of this, using a combination of traditional hotel revenue strategies combined with practices that involve sophisticated automated software, allows hoteliers to strategically use up-to-the-minute information to give their property a competitive edge among other hotels and resorts.

“We definitely believe in the use of automated systems, as one key component in our revenue management practices. Automated systems handle the data crunching in order to derive key trends from which we drive our revenue and marketing decisions. It frees time and allows our revenue managers to focus on the strategic analysis. In the FRHI environment, our automated RM system is seamlessly connected to rate allocators and CRS thus providing efficiencies and speed in effective rate distribution across a wide plethora of electronic channels,” said Ho.

Hicks said, “The more science we are able to apply to the practice of revenue management I believe it elevates the importance of Revenue Management and highlights the need to have sufficient resources around Revenue Management.”