A Focus on Revenue Management: What are hotels missing? - By Kathleen Cullen Partner, inspire resources / Apical Resource Group LLC

In today's environment revenue management is most often recognized as the central place for hotel operations' processes and best practices. Revenue management has many elements that 'touch' a hotel's revenue. Some elements have a direct impact on revenue such as accurate forecasting and a solid understanding of channel costs, while others have an indirect impact such as workflow, use of technology and process efficiencies. Regardless of direct or indirect impact, the hotels with the most confidence in their accuracy and workflow processes and those with the best efficiency level will realize the highest revenues.

Apical Resource Group Forecasting
Accurate forecasting is one of the most important aspects of a sound revenue management program.
Accurate forecasting is absolutely critical to successfully maximizing revenues. Many hoteliers do not realize the tremendous impact that an accurate forecast has on a hotel's revenue. A mere 10% increase in forecast accuracy can result in a 1%-2% increase in top line revenues. In other words, for an average mid-scale hotel with $20 million in top line revenue a 10% increase in forecast accuracy could add $400,000 of revenues annually.

This is because all rate and channel management availability decisions are made based on the forecast. Therefore, the more accurate the forecast is, the more appropriate the rates and availability will be.

Cost of Distribution
Analysis of channel cost provides a huge opportunity for hoteliers to increase profits.
Hoteliers typically lack a solid model that facilitates proper channel cost analysis. A result of this is that inventory tends to be allocated to whatever channel brings in the most volume, not necessarily the one that provides the most profitable business. It is vital to the hoteliers' success to establish a good baseline control capability with which to assess the existing channels - both online and offline. Once there is a good understanding of this baseline, hotels can move forward with promoting increased utilization of the most productive and cost effective channels.

The following is a list that provides a general industry guideline of distribution costs. The information originated from a 2003 Forrester Research study, and was updated by inspire resources in 2005. (This remains the most recent study completed)

(The above analysis does not include the call-in directly to hotels channel which is typically the most expensive. However, hoteliers tend not to consider this channel as having a 'fee' involved. Many hoteliers do not track expenses directly related to this channel such as the . most expensive element; the cost of staffing.)

Once there is a good understanding of the cost of each channel for your hotel or your company specifically, the revenue team members can work on one or both of the following strategies:

1. Shifting Channels
Focus on getting the appropriate business to shift to booking through the channels that are less expensive for your hotel.

To provide a simple but very realistic example of how to do this consider the hotel that receives incoming calls via a call center or directly to the hotel, from regular or repeat 'call-in' customers in order to book their reservations.

Preferred customers (those that use your hotel as their preferred hotel and typically stay with you) who call-in, may be an excellent group of customers to begin targeting as you might have the potential to 'shift' their bookings to another, less expensive channel such as the hotel's Web site.

Using the cost of sale from the cost analysis chart, the following cost savings is calculated:

Target Customer A
For purposes of this example, Customer A is an individual or group of individuals that book hotel accommodations for clients visiting their offices to attend training groups.

Based on 100 bookings per month

Simply changing this customer's booking preference from the Call Center to the Web Site would save the hotel $16,800 annually.

This cost savings example takes into consideration only one customer and one channel shift. Many hotels and hotel companies will find that they have significant cost saving opportunities if they target appropriate customers and get them to change the channel through which they book. If seriously considered and carefully analyzed, hotels will be amazed at the cost savings that they can achieve.

2. Profitable Channel Focus
Determine the proper amount of inventory and time that should be allocated to the most profitable channels. This requires breaking down the cost analysis further to include a cost and profitability analysis for each of the third-party channels in which the hotel participates.

Once a hotel or hotel company understands the true costs associated with each of their channels, it is possible to outline a strategy to allocate an appropriate amount

of time spent managing each channel, as well as an appropriate amount of inventory per channel.

For example, in today's landscape hotels are participating in various third party sites; most of which require manual management of inventory and rates. Many hoteliers find that they spend a tremendous amount of time managing these third party Web sites. And it varies, some require more time than others.

Part of the hotel's strategy should include deciding how much time should go into management of specific sites. Consider focusing the revenue director's time on the more profitable sites.

Profit Optimization Tools
Profit optimization tools are vital to a hotel's success in analyzing past, current and future business to ensure optimal revenues are being achieved.

Some hoteliers have the opportunity to utilize an automated revenue management system that provides sophisticated algorithms that will analyze potential business and determine the most profitable business to accept. Some may even help forecast and provide parameter guidelines such as the optimal rates to accept.

However, many revenue directors are still working in manual environments and do not have an automated system. Unfortunately, many of those that handle revenue management practices manually do not have tools that are sophisticated enough to allow true revenue optimization. There are varying levels of self-made tools that help with tasks such as forecasting. But very few have the proper self-made tools that allow more than tracking pickup pace, 'on the books' and future estimates.

It is truly vital that hoteliers elevate their level of sophistication to include the ability to conduct a detailed analysis. Although using automated systems is the ideal, it is also the most expensive and it is not the only option.

Using the right resources, hoteliers can create or purchase sophisticated tools that will allow them to optimize their profit manually.

If you are wondering whether or not you are in need of more sophisticated analysis, ask yourself the following questions:

1. How does my hotel put together a forecast?

2. What type of forecasting tool do we use? Does our tool include all of the important elements to producing a solid forecast?

3. Do we forecast by market segment?

4. Do we put together an operational forecast or a true demand forecast?

5. Do we know the true demand for our hotel?

6. How do we analyze volume accounts for both historical performance and future performance? How do we know if they are or will be profitable for our hotel?

7. How do we analyze groups? How do we know if they will be profitable for our hotel?

8. How do we decide whether or not to accept a group in lieu of transient business?

If you are unsure of whether or not you have the proper tools, chances are that you need to implement more sophisticated tools to help ensure you are optimizing your revenues.

More sophisticated tools should begin with detailed forecasting by market segment and include true unconstrained transient demand. Other tools should allow for understanding the stay patterns for volume accounts and analyze the profitability of the account based on the demand forecast information. Potential groups should be carefully analyzed to include all group elements and comparing them to the transient demand forecast and providing a determination of which is the most profitable. A tool to assist with channel cost analysis and channel profitability is important to further ensure cost savings and profits are optimized.

In summary, while it is best to have an automated Revenue Management System, if you do not, all is not lost. You can still create an effective forecast and analysis by using manual tools and having an efficient and effective procedure for analyzing your data.

However, before you can implement these tools, it is strongly recommended to assess your current revenue management processes, and appropriate processes surrounding revenue management, to ensure the most effective and efficient operations and best practices.

For more information about this topic please contact Kathleen Cullen directly.

About the author
Inspire Resources is a hospitality consulting firm partner with Apical Resource Group LLC. Kathleen Cullen, along with partner Caryl Helsel, lead the firm, which specializes in hospitality revenue and distribution management, profit maximization, distribution marketing, customer intimacy strategies, process and change management, technology analysis and selection, and education and training.
Kathleen Cullen
+1 847 864 1563

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