Swiss Hospitality Solutions

Revenue Management

Jasmin, Julia, Sina and Gabriel

In this blog article the topic of revenue management will be treated from the perspective of Swiss Hospitality Solutions (SHS). It is a consultancy firm specialized in helping hotels to maximize their revenues. Revenue Management defined by Hospitality Professionals Association: “Revenue Management (RM) is the art and science of maximising revenue under variable conditions. It is a management tool that has the objective of increasing sales revenues by manipulating the prices at which fixed products (i.e. hotel rooms and airline seats) are made available for sale in relation to the current and forecasted demand.” Revenue management exists since far back in history when humans started to trade. Merchants have always acted according to supply and demand, and adjusted the prices accordingly. However, in the digital age, revenue management has started to become easier with the help of technology because demand can be tracked instantly. This blog post will cover the processes of SHS consultancy, the concept of Revenue per Available Room (RevPAR) and finally the practical implications of Revenue Management.

Swiss Hospitality Solutions

When consulting a hotel, SHS will firstly assess the hotel’s position in the market. Questions such as “what kind of hotel is it?”, “What makes it unique” and “where in the competitor set is the hotel positioned” must be answered. Answers will usually come from the location, the customer segments and the type of products and services. In order to assess and present these criteria from different hotels at once, they use a smart matrix: X-axis represents the review ratings and the Y-axis the prices. The client’s hotel will be positioned at the intersection of both axis (right in the middle) and its competitors around it according to their results. For the matrix to be accurate, the results have to be standardized. Therefore, the prices and rankings of the hotels are searched and sorted through only one date, type of room and number of guests only. The standard variables will then be changed, hence the process repeated. However, a matrix will be created for each variable change i.e. one matrix for a single occupancy in a double room on a given date, a second time for a double occupancy in a double room on a given date. Depending on these, the matrix can change completely. It might be that the hotel had the best price and best ratings for a category and at the same time have the opposite results for another category. A competitor that is cheaper but has better ratings is the one that the hotel must be afraid of. It cannot be forgotten though, that a price can justify a high quality in a superb location. The hotel just needs to communicate it appropriately so that customers are aware of it. In addition, so that the matrix does not get misinterpreted, the consultant has to get a sense of the customer's hotel and never lose track of the changes. The goal of this analysis is to see how the hotel interacts with the prices compared to the competition. Based on that, they can develop a strategy and a better positioning. (Küchler, 2018)

Revenue per available Room (RevPAR)

The RevPAR (Revenue per available room) shows how much revenue is generated per available room. It is one of the most crucial KPIs in hotel revenue management. It is calculated by dividing the room revenue by the available rooms. The result shows the trade-off between the ADR (average daily rate) and the occupancy rate as well as the performance of the revenue manager. The figure can be compared to other hotels (Xotels, n.d.). The goal of every hotel should be to maximise the RevPAR and not to maximise the occupancy rate. If the goal is to reach 80% occupancy, the manager will sell the rooms to a low price just to reach the 80% rate and as a result the RevPAR will be low.

Characteristics of Service Industry

To be successful in revenue management some factors need to be given. Two of these factors are described in this part of the blog entry. Firstly, a relatively fixed capacity is needed. If there is no fixed capacity, customers do not feel the urge to book. Secondly, a segmented market with a predictable demand per segment has to exist. The hotel industry for example has a predictable demand since it is every year similar with peak times during school holidays. Further the industry can attract different segments such as families, business travellers, leisure travellers, early bookers etc. Every segment is willing to pay a different price. Business travellers are less flexible with dates and mostly the company pays the bill and therefore they are less price sensitive, whereas families are more flexible and more price sensitive (Kimes, 1997).

Examples for Revenue Management:

-       Uber (higher price at peak times or from airports)

-       SBB (Sparbillete, 1. and 2. class-system, Gleis 7)

-       Sports games (seat categories, early bird tickets)

Revenue Management in Practice

This part of the article includes smart insights into some applied areas of revenue management. To begin with, the demand will be addressed through the perspective of consultants. Following, the offer and room structures will be detailed as how to advertise best on OTAs. Thirdly, the rate structures and their potentials will be assessed. Finally, we will have a look into different possible pricing strategies.

The Demand

The demand for hotels usually fluctuates over the same factors industry-wide, which are events, seasonality, holidays and the weather. Therefore, it is up to the hoteliers to make smart use of these factors to answer the demand best and maximize their revenues. When talking about maximizing revenues, dynamic pricing has proven itself very efficient. Dynamic pricing, also called real-time pricing, is an approach to setting the cost for a product or service that is highly flexible. The goal of dynamic pricing is to allow a company that sells goods or services over the Internet to adjust prices on the fly in response to market demands (Margaret Rouse, Whatis.com, 2015). The concept is basically offering rooms at a low price when demand is low and aligning them to the rising bookings curve or rising the prices according to forecasts. Within this idea, the factors influencing the demand have to be taken into consideration as well. Practically, one of the tasks of a revenue manager is to analyse a hotel’s year-round demand and build up a rate structure of prices, from which to regularly pick in order to adapt to the demand. The use of yield management softwares or pricing bots can also achieve this task, however in a less personalised way.

Implementing Dynamic Pricing through Structures

A rate structure and a room structure need to be developed in order for a Revenue Manager to implement dynamic pricing. From a broad perspective, it simply consists of creating a grid sorting the hotel rooms through their rate categories over the months of the year. A room structure is a table that categorizes the rooms through OTAs adapted criteria. Since nowadays hotels mostly sell on the internet, the rooms have to fit to the game and hence optimized to be sold on OTAs. How to create the room structure:

1.     Sort them by occupancy (Single, Double, Twin, etc.), adjective (Modern, Economy, Deluxe, etc.) and room types (Room, Suite, Apartment, etc.).

2.     No proper names such as “The Warren Buffet suite” since the categories on OTAs are pre-defined

3.     Use small, medium and large principle. That is something anybody can relate to and understand, it helps guests picturing the room.

4.     Offer non-refundable rates because it sells, it creates direct liquidity and it helps forecasting the bookings.

When creating this room structure for OTAs it is important to give the hotel a little margin by not providing extensive details to the OTAs. That enables to generate conversions on the property website by giving incentives related to the quality or additional services exclusively when customers use the hotel’s booking engine. Also, it allows the booking manager to be flexible when allocating the rooms and still be faithful to the customers.

Figure 1

Once the room structure is created, a price structure has to be developed over it. That basically means creating a forecast of prices according to different analyses of the demand and offer. These include the competitors, the holidays, the events etc. Such a matrix would look as follows (figure 1 and 2)

Figure 1 represents the rate scales by colour and Figure 2 the months and dates coloured by the according rate.

Figure 2

Pricing Strategies

There exist two pricing strategies: progressive or regressive. Progressive means starting the prices of a room for a pre-set date at a low base and increasing this price as we are getting closer to the date. Regressive is the exact contrary, the price decreases as the date is approaching. In the first case the customers have incentives to book in advance whereas in the second case it is better for them to book last minute. In other words, it is up to the hotel to decide how to educate their customers. However, SHS has the policy of never advising a regressive strategy for the sake of the progressive strategy’s benefits, which are forecasting and maximizing revenues.

References

M. Rouse, “What is dynamic pricing? - Definition from WhatIs.com,” 2015. [Online]. Available: https://whatis.techtarget.com/definition/dynamic-pricing. [Accessed: 11-May-2018].

Kimes, S. (1997). Yield Management: Strategies for the Service Industries. Cassell, London; Herndon, VA

Xotels. (n.d.) RevPAR. Retrieved from www.xotels.com/en/glossary/revpar

Küchler, S. (2018, May 1). Swiss Hospitality Solutions - Revenue Management. Revenue Management. Chur, Grisons, Switzerland.