Revenue Management-5 Traps You Should Avoid

Are You Falling Into These Revenue Management Traps?

Losing market share and plummeting yield are two of the immediate consequences of revenue management strategy traps.

In this post pandemic era, these get aggravated even more.

Are you falling into these and other revenue management traps?

I will show you five ways you can beat revenue management challenges and traps and achieve peak profit.

And they can be achieved without any earth shattering strategies.

They just require a focused mind set on optimizing revenue management.

This blog post will cover the following 5 revenue management challenges and traps you must avoid:

Revenue Management Scenario

Consider this scenario.

You are the Revenue Manager of Paradise Hotel

You are frustrated.

For the past year, you have been following an ADR heavy market share strategy.

This revenue management approach worked for you in the peak months.

However, in lean months business volumes are dropping drastically.

The Covid-19 situation is an extreme form of that lean month scenario.

Price seems a major deterrent.

Customers are looking for cheaper alternatives.

Paradise Hotel revenue is hurting.

What do you do to get out of this situation?

Read on....

Loss of Market Share due to Faulty Price Positioning

Market Share is the holy grail of hotel revenue management.

What do I mean by that?

One of the most critical hotel KPIs (Key Performance Indicators) in revenue management is market share.

It literally is your share of the pie.

Every hotel operates in its own market.

This market is defined by what is known in the hotel business as the competitive set.

You look puzzled.

Let me explain.

It is impossible for a hotel to measure its own performance with all the other hotels in its market.

There will be too many of them.

It is not necessary too.

Why not you ask?

That is because you need to measure yourself with similar hotels.

In other words, you need to identify who are your direct competitors.

Direct competitors are those hotels which can take away business from you.

Aha, that got your attention didn’t it?

These direct competitors are the competitive set.

Coming back to our discussion, your market share is measured by this competitive set.

And you do not want to lose market share in your competitive set.

Not now, not ever!

How can you lose market share you ask?

Great question.

To begin with, if your price positioning is badly done, you will lose market share.

What is price positioning now you ask, impatiently?

Hang on, I am getting to that.

Price positioning is where (what level) you have pitched your hotel to be in your competitive set.

I know, I know. You look more confused.

Let me clarify

If you position your price too much above the perceived value for your product, your customers will look to your competitors for their business.

In other words if you are over priced in your market, you will lose market share.

What are some symptoms of over pricing?

Steady drop in business volume (occupancy) in one or more market segments.

Particularly when the market in general seems growth oriented.

So, what is the remedy, you ask in a resigned kind of way?

The remedy is quite simple (amazing how many hotels do not get it!).

Do not price yourself in a vacuum!

You are giving me a vacant look (pun intended)!

Let me explain.

Keep your price close to the value perception for your offering.

Ideally, keep it below the value perceived by your customer.

How do you do that?

Pay attention to what your customer is telling you about your product.

Are you seeking feedback from your customers?

Your survival depends on it!

No, I am not a doomsday merchant.

If you get regular feedback comments that your prices are too high, watch out!

That is a danger signal.

If it occurs with many customers, it is likely to result in loss of occupancy first and then market share.

Your price (average daily rate) might also show up as an outlier in the market share index.

Do not fall into this first of the 5 revenue management traps.

This is why regular surveys and feedback from your customers is priceless (pun intended!).

So, the moral of the story - lavish attention on your pricing.

Let us now move on to a related trap in revenue management.

Too Much ADR Focus - Take the RevPAR Route; Have a Lean Month Strategy

Often price positioning ends up being combined with an even more destructive trap.

This is the ADR (Average Daily Rate) obsession trap.

Hotel managements get ensnared by the attraction of higher average daily rates.

How does that happen?

Any revenue management strategy for a hotel depends on two foundational elements.

Business Volume and Price.

In other words, occupancy and average daily rate for room revenue.

In the quest for continuously higher revenue generation, a hotel has to make an important choice.

Between focusing on occupancy or average daily rate.

Of course, most times, it is the combination of occupancy and average daily rate that will produce room revenue.

Remember the price positioning trap you looked at earlier?

Well, that often also is combined with revenue management strategies that give price more importance than business volume.

Simply put, that means prioritizing average daily rate over occupancy.

How does that play out, you ask?

All in good time.

When a hotel pursues a revenue management strategy that is price obsessed, it often gives up pieces of business which do not offer higher price points.

This results in smaller business volume offers that are rejected.

That ends up having a negative effect on revenue growth over time.

Why do hotels pursue such a destructive strategy?

Well, it is to boast of higher average daily rates in a competitive set.

It however, as we saw earlier, impacts incremental revenue over time.

So, what is the way out of this trap?

The solution is to take a holistic approach to the revenue management strategy.

You look puzzled.

Let me clarify.

A broad based approach to revenue management takes the RevPAR route.

RevPAR is arguably the most powerful KPI in hotel revenue management.

RevPAR which stands for Revenue Per Available Room uses both occupancy and average daily rate as a revenue management strategy.

What is the big deal with that you ask?

Well, the big deal is that RevPAR uses the hotel rooms available or capacity to measure revenue management.

What does that achieve?

RevPAR takes revenue generation as a strategy as opposed to just occupancy or average daily rate.

It is thus multi dimensional.

You look completely baffled.

Hang on, I will clear the storm clouds right here.

With RevPAR, you use rooms available to measure revenue management.

That means you are getting a measure that also factors in revenue potential.

The standard revenue measure uses only business volume (occupancy).

It only tells you what level of business volume you are operating at.

It cannot tell you anything about potential revenue which RevPAR can.

So, the moral of the story is not to fall into an average daily rate obsessed strategy.

Now, on to the next trap and how to avoid it.

Short Sighted Market Segment Strategy

Digging a notch deeper is a trap which is related to hotel market segments.

A hotel’s revenue is contributed by one or more market segments.

Market segments are representative of your hotel’s target audience.

So, how could you be short sighted in this, you ask?

Market Segments are not just of one type.

There are short term segments and long term segments.

Short term segments are those that produce short lead business.

They are chunks of revenue that just plug in a small part of the occupancy.

They are also almost always one time pieces of business.

For example, a hotel package is often a typical short term segment.

On the other hand, long term segments sustain business over time.

These are based on contractual relationships that produce repeat business.

Repeat business helps sustain revenues over time.

Long term market segments are for example corporate agreements signed which span multiple years.

Even crew agreements can be long term although they tend to be smaller in volume than corporate business.

Hotels often fall into the short sighted trap of depending upon multiple short term market segments to procure their revenue.

The bread and butter of the hotel business is sustained over a period of time by the longer term market segments.

So, the moral of the story - build long term relationships which foster repeat business.

Use short term segments to supplement the longer term major revenue generation efforts.

Let us now move to the last two traps which are related.

Losing Sight of Cost of Your Hotel Bookings

In all of the market segments discussion thus far, we did not talk about the powerful impact of channels.

What are channels, you ask?

If market segments lay out your target audience, channels of distribution determine how to reach them.

You might have determined your target audience accurately.

However, if you do not adopt the right channels, you will not be achieving the revenue you should be.

And not surprisingly every type of channel carries its own cost.

Hotels often use global distribution system channels to increase occupancy volumes.

The cost that a channel carries is also known as the Cost of the Hotel Booking.

This cost is known to vary from 10% all the way to 25% or even more.

In other words, if you earned $1 of revenue, up to 25 cents or more will be the cost of the hotel booking or cost of earning that $1 of revenue.

Hotels often use channels to bump up occupancies and push up revenue.

And that is a deadly trap believe me.

They do not realize the dent that causes to the hotel bottom line!

That is enough to send the blood pressure of your hotel owners soaring.

Not to mention the blood pressure levels of your financial controller.

So, how do we avoid all that blood pumping, you ask in a totally resigned manner.

Enter the concept of the Net RevPAR.

Remember our discussion on RevPAR earlier?

If RevPAR takes into account revenue (as opposed to occupancy or average daily rate individually), Net RevPAR goes a step further.

It reduces the cost of the hotel bookings from every dollar of revenue generated.

In short, it gives you a hotel KPI that measures how much of take home revenue was generated.

Keep an eye on this KPI.

It may bridle indiscriminate use of channels to shore up occupancy.

So, what is an ideal situation of Net RevPAR.

Well, there is no such thing as ideal.

The goal is to keep the Net RevPAR as high as possible year on year.

So, the moral of the story is - watch the cost of your hotel bookings versus revenue generated.

And now on to the fifth and last trap in this blog post.

This trap is related to the one we just discussed.

Let us see how...

Ignoring Yield by Focusing On Actual Vs Potential Revenue

In the previous trap we discussed the principle of cost of hotel bookings.

That every dollar of revenue generated is at a cost and it is important to keep an eye on that.

That Net RevPAR apart from being one of the most powerful KPIs in the hotel business also represents a more big picture concept.

And that is the concept of yield.

Yield, unfortunately is like taxes.

Everybody needs it and yet avoids it.

And that brings us to the trap that many hotels (and other businesses too!) fall into.

The trap of ignoring yield.

You are giving me that questioning look!

Yes, I am going to clarify what yield means.

Simply put, yield deals with the concept of potential as opposed to performance.

For example, revenue is the actual performance expressed in dollar terms.

Revenue Yield or simply yield is the ratio of performance to potential.

In other words yield compares actual revenue performance with the potential or highest level that could be reached.

There are clear cut ways to determine room revenue potential using the concept of rack rates.

But that is a discussion for another day.

Now you will be beginning to see why ignoring yield is a perilous approach.

For example, Yield in room revenue is calculated as follows:

Actual Room Revenue / Potential Room Revenue X 100

So, if you achieved a room revenue of say, $10 Million in a month or year it does not tell you how well you did versus potential.

Only yield will tell you that.

And therein is the trap.

Hotels which like to give themselves a pat in the back for their revenue performance without determining where they are versus potential are really kidding themselves.

Mind you, their owners will not accept that.

Hotel owners are ingrained in how much yield is being delivered for their humongous investment.

So, the moral of the story - embrace yield and pre-empt what your hotel owners will already be looking at.

What Is Your Approach to Revenue Management?

Are you falling into the five traps?

How do you approach market share?

What is your way of looking at market segments?

Do you determine revenue yield at your hotel?

Steps You Can Take Right Now

STEP 1

Go back to your Hotel Marketing Plan and review your Pricing Strategy.

STEP 2

Identify your RevPAR goals in your hotel budgeting process. Have you allowed for peak, lean and standard months?

STEP 3

Identify Short & Long Term Market Segments in the hotel budget. Are you balancing these two?

STEP 4

Identify yield in your revenue management strategy. Are you analyzing yield thoroughly?

STEP 5

Ask yourself whether as a hotel manager your revenue management is not falling into the five traps.

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