Time for Hotel Revenue Management to be Profit-Oriented

Right (from left) Anders Johansson, Brandon Chan and Detlev Remy attending HSMAI Revenue Optimization Conference Asia 2023. Photo: HSMAI. Above, photo by Klim Musalimov on Unsplash

By Detlev Remy and team, 04 Aug 2024

Traditional revenue management concepts in the hospitality industry have evolved significantly in recent years due to technological changes, consumer behavior and market dynamics. Where revenue management used to focus on maximizing room revenue alone, profit-oriented revenue management shifted the focus to ancillary revenue streams like food and beverage, spa services, events and other on-site amenities.

Instead of static pricing models that were used in the past, hotels can now rely on dynamic pricing models that adjust rates in real time based on demand, competition and market conditions using advanced algorithms and AI. Whereas revenue management teams used to operate in silos, profit-oriented revenue management entails collaboration with other departments such as marketing, sales and operations to create cohesive strategies that enhance overall profitability.

Instead of relying on historical booking data and basic metrics such as occupancy rates and RevPAR for pricing decisions, leveraging data analytics enables hotels to deep-dive into real-time booking patterns, change customer behavior and respond to market changes in a fast-changing competitive landscape.

Nuanced strategy

Today’s landscape requires a nuanced strategy focused on profitability, not just revenue. Here are 10 actions towards this:

1. Understanding Marginal Profit: The commercial team’s understanding of the marginal profit for every product and service is crucial. This knowledge informs decision-makers on what to sell and how to price, which can significantly impact profitability.
2. Developing Profitable Products and Services: Focusing on developing and promoting highly profitable products and services that appeal to the target audience can increase marginal profit substantially. A hotel with a spa operation, for example, can leverage on the range of wellness experiences and spa-related products to drive incremental revenues.
3. Flexible and Creative Packages: Offering packages that combine various services can increase overall guest spend and improve profit margins. For example, leisure packages can include a late checkout, welcome beverage in the bar, 30-minute neck and shoulder massage in the spa, or a hotel commemorative gift/memento, so as to enhance perceived value.
4. Pricing Strategies: Implementing dynamic pricing strategies that consider demand, competition and market conditions can optimize revenues and profits.
5. Productive Marketing and Sales: Investing in effective marketing strategies and sales training can attract more guests and close more sales, leading to higher revenues and profits.
6. Optimizing Distribution Channels: Actively managing distribution channels to promote the most cost-effective ones can reduce customer acquisition costs and increase profitability.
7. Upselling and Cross-selling: Training staff to effectively upsell and cross-sell can increase revenue per guest and improve overall profitability.
8. Enhancing Guest Experience: Ensuring a positive guest experience can lead to repeat business and positive reviews, increasing revenues and profits.
9. Investing in Technology: Using RMS, CRM and PMS can increase efficiency, provide valuable insights and help optimize pricing, all contributing to improved profitability.
10. Leveraging Data and Analytics: Using data-driven insight to make informed decisions can lead to more effective strategies and higher profitability.

These actions, when effectively implemented and managed, contribute to significant improvements in a hotel’s profitability.

Implementation

Here’s a three-step approach to optimize profit from every revenue source:

1. Brainstorm Implementation

• Clearly define all the roles and stakeholders within your organization who will have an impact on or will be impacted by the shift to profit-oriented revenue management.
• Set Clear Objectives: Outline the primary objectives of implementing the shift. These objectives should be measurable and aligned with your hotel’s financial goals.
• Develop Transition Plan: Draft a detailed plan outlining how your hotel will transition from the traditional revenue management practices, considering aspects like technology adaptation, training needs and changes to the existing processes and SOPs.

1. Understand Cost Structure

• Define and Analyze Costs: Break down and understand all the costs associated with each revenue stream, including the customer acquisition costs and cost of goods sold
• Calculate Customer Acquisition Costs: Determine the costs associated with acquiring customers, including marketing and sales costs, commissions and third-party fees.
• Evaluate Marginal Profits: Analyze the marginal profits for each product or service, consider the revenues generated and the variable costs associated with serving an additional unit.
• Analyze Profitability: Use the information on costs and marginal profits to analyze the profitability of each revenue stream and customer segment.

1. Allocate Responsibilities

• Assign Profit Responsibilities: Depending on the profit levels in the P&L statement, allocate profit responsibility to the corresponding stakeholders.
• Define KPIs: Establish clear key performance indicators for each stakeholder to measure their contribution to the hotel’s profitability.
• Establishing Cross-Functional Collaboration: Encourage collaboration between operations and the commercial team to promote the most profitable products and services, accurately forecast revenues and manage scheduling and planning.
• Monitoring and Evaluating: Establish regular checkpoints to evaluate progress against the defined metrics and adjust strategies as and when needed.

By following these steps, hotels can implement profit-oriented revenue management successfully, with each stakeholder playing a critical role in maximizing the hotel’s profitability. It is a collaborative approach that improves the bottomline and enhances the overall operational efficiency of the hotel.

Read the full whitepaper here

About the Experts

Associate Professor Detlev Remy teaches at the Singapore Institute of Technology. His research interests lie in revenue management metrics and developments, its alignment with digital marketing, and data analytics.

Senior Lecturer Brandon Chan teaches at the Singapore Institute of Technology, sharing industry best practices gleaned from his 30-plus years of work experience in various sales and marketing and hotel management roles with leading hotel brands.

Anders Johansson is the CEO of Demand Calendar and brings over 35 years of hospitality leadership experience. Over the past decade, he has provided consultancy to help industry businesses develop their business models to enhance their revenue streams.

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