You Need Smarter Rate/Profit Management
In revenue management we have seen significant changes in approach in the last decade, from a relatively rigid set of yield management rules to a much more dynamic approach to rate and distribution in the longer tail. In parallel we have seen the development of systems and technology that can help with the management of rate strategy.
It’s rapid-upskill time for hoteliers. But unfortunately, many hotels have not really made the key transition from a shorter-term tactical approach to this longer-term more strategic view of their rates that is necessary today. In our experience in Bookassist, hotels are still not focusing on the essence of the problem – how to sell the right-priced product to the right person on the right channel at exactly the right time. If they are doing so, then they are typically focused on one or at most two months ahead. Discuss what’s happening to rate or yielding with many hotels for 6 months’ time and it is often a relative unknown. Just keep the rate high and worry about it later is often the tactical approach.
OTAs And The Long Tail
What is clear is that online travel agents (OTA) are now shifting their battle for business to the long tail, and therein lies very real danger for unprepared hotels. With the short booking window already dominated online by the OTAs, there is little room for their growth on a per hotel basis unless OTAs push their effective booking window out even further. But when they do, there are rich pickings for OTAs because many hotels are relatively blind to the long tail of their own business.
With hotels largely concerned with the red herrings of “rate parity” and “last available room” in the short term, their long term bookings are increasingly being swallowed up before they even see it happening.
OTAs are now actively encouraging hotels to give them more availability for the future months. At the Irish Hotels’ Federation AGM in February of this year, I shared the stage for a discussion panel with a Booking.com representative whose parting advice for hotels was to load more and more availability for 6 to 12 months out so that Booking.com could “help hotels to sell more”. (My advice was exactly the opposite – don’t load onto OTAs that far out unless you have to!). While hotels will of course get more bookings because of this strategy, the hotels’ opportunity to maximise profit and reduce dependence on OTA will be rapidly eroded just as it was in the short tail.
As we all know, there is nothing glorious about discovering you are fully booked for 6 months out. That’s just a wasted opportunity to yield appropriately and generate higher profit per room. But this is precisely what OTAs are now manoeuvring to achieve to their advantage. Don’t say you haven’t been warned.
Drivers For Revenue Planning
Hotels have to move from tactical short term views to an overall strategic approach. The real strategic view is to look at rate in the context of cost of acquisition so that you are really in a position to develop more of a long-term profit strategy than just a rate strategy for your hotel. In the ideal case, an optimum rate should be determined for every channel for every day of the year.
The ability to maximise rate and simultaneously yield appropriately to distribution channels is the new challenge. This can be quite a difficult to get right, but it pays very real dividends.
In working out a plan, the primary factors that should strongly influence your rate strategy on any given date are
- Length of stay
- Lead time
- Day of the week
- Sales channel
Most of us would be familiar with the above, but in typical RM approaches the Sales channel would not have been considered a primary influencer. But it’s important to realise that revenue management is not just about getting the highest price on the day. The price elasticity curve is more complex than that these days since the customer has access to multiple sales channels for the same product (or more accurately, the hotel through its distribution policy has given the customer access to multiple sales channels for the same product).
In the drive towards maximising profit, which is the ultimate aim, there is often much more to be gained by reducing your effective cost of sale than by raising your rate. Redirecting your business away from costly online travel agencies and towards direct sale on your website can net you more profit even when accompanied by a rate reduction. Which is why, at Bookassist, we consider the sales channel as a primary factor in rate strategy. Concurrently, the direct sale gives you the best customer data of course, which you can leverage for pre-stay monetisation and post-stay marketing.
What’s interesting about these primary factors is that it is quite practical to automate a rate strategy around these parameters as most can be measured or assessed in software on a continual basis. Making decisions based on facts and figures is the aim here, as intuition is not always reliable in the long tail. We’ve seen a number of tools in the market in recent years which aim to help the hotel get a handle on this data that already sits in their PMS and is updated daily.
Secondary factors that moderate a rate strategy include (among others)
- Hotel historical performance
- Competitive set
- Pickup pace
- Political issues
- Segment specifics
In the case of these factors, they are much more hotel-specific and location-specific, and are not always entirely practical to automate. Their relative influence also can change very rapidly. Clear data on these should be used to influence the overall strategy that is determined by the primary factors in the first place, and the local knowledge of staff is a big advantage here. Think of these as manual tweaks to the overall plan which present more opportunities to maximise profit.
Putting A Plan In Place
Here are some steps you can take to ensure you are moving to strategic management of your profit.
- Accept that rate and profit planning should be a scientific data-led discipline and is not best served by intuition.
- Ensure you have the right person to lead rate strategy, trained in the discipline, up to date with the fast-moving distribution space, focused on improving direct business and capable of communicating the strategy to your organisation.
- Adopt technology interfaced to your PMS to help you plan rate adjustments systematically based on the Primary factors, but retain manual override so that local knowledge can use Secondary factors to optimise your outcome on key dates. Systems that spit out rates without telling you the why and how are ultimately not going to help you understand and develop your strategy.
- The focus should more strictly be on profit planning rather than rate planning alone, so rate per distribution channel must be considered.
- Work to identify total cost of acquisition on a channel basis. Without real cost of acquisition knowledge, you cannot determine if a rate you set per channel is ultimately profit-optimised or not.
- Remember that redirecting when possible your business away from costly online travel agencies and towards direct sale on your website can net you more profit even when accompanied by a rate reduction. Proper profit planning should push for redistribution towards direct where possible.
- Aim to know what your ideal rate should be for every day of the coming year on each distribution channel, and why. Build a combination of short and long term strategies into your plan and review on an ongoing basis to ensure you always have a well-planned year-long window ahead of you.
Most of all, ensure you communicate the entire rate strategy to everyone in the organisation so that the reasons behind channel choice and rate are well known and are supported. If your plan requires changes in distribution strategy, such as shifting more towards direct, it is critical that everyone in the organisation is aligned with that aim and knows that the strategy will ultimately benefit the entire organisation through higher profit and more working capital.
This is particularly important if other individuals in your organisation are responsible for distribution channels that your new strategy intends to reduce – rather than seeing such moves as a threat to “their area”, clear communication of the overall strategy picture should help justify the changes and get people on board with the change. Indeed, incentivising those managing other distribution areas so that they can work with you to find ways to reduce their business and switch it to direct should be a stated (and incentivised) aim of your organisation.
Dr Des O’Mahony is CEO and Founder at Bookassist (http://www.bookassist.com), the multi-award-winning technology and digital strategy partner for hotels worldwide, and is a HSMAI “Top 20 Extraordinary Minds” recipient.