Having touched upon the main challenges for the hospitality industry for the year ahead in my previous post "Creating value in a downturn: The challenges for the hospitality industry...", let’s dive deeper into revenue management (RM), as everyone is seeking to find answers to a fundamental question “how do we grow our business in these challenging times?”
The basics - revenue management was born out of airlines’ need to fill a minimum number of seats without selling every seat at discount prices; the idea is to sell enough seats to cover fixed operating expenses. Once fixed expenses are covered, with fewer remaining seats to sell, they can then sell the remaining seats at higher rates to maximize revenue and profits. So RM uses the basic principles of supply and demand economics, in a tactical way, to generate incremental revenues.
I have found that RM is of especially high relevance in cases where fixed costs are high as compared to variable costs. The fewer variable costs there are, the more additional revenue will contribute to overall profit. This makes revenue management perfect for the hotel industry.
Effective market segmentation is the key to successful revenue management for hotels. Market segmentation begins with seasonal demand. For years, hoteliers recognized that almost all hotels experience periods of high and lower demand. This is even more obvious in hotels, located in resort and attraction areas.
To ensure effective market segmentation several hotels are now turning to analytics, and in many cases leveraging outsourced analytics partners.
Let me share an example - One of the leading timeshare vacation companies has leveraged analytics to do exactly that. The company used to undertake several marketing campaigns targeting likely holidaymakers around the month of September each year when they would launch their new brochure for the forthcoming holiday year. By leveraging analytics and more specifically segmentation and propensity modeling, the company was able to save 30% of its marketing outlay, which was then deployed for more campaigns to members with higher likelihood of making transactions. This has helped increase the overall conversion rate by several percentage points.
By leveraging actionable analytics, hoteliers leave little room for guesswork when planning their sales strategy. Every hotel, irrespective of size can benefit from it and therefore build an efficient revenue management program.
In an article I was reading the other day, Neil Salerno of Hotel Marketing Coach made a very interesting observation, “Even in a poor economy, a good revenue management program will uncover opportunities to boost occupancy and rates. Committing to revenue management produces a stronger awareness of your hotel's marketplace and stimulates management creativity.”
