The Consultancy's Guest bloggers | N°1: Thibault Catala
How basic Revenue Management can help level up your business — by Thibault Catala
Have you ever heard of revenue management? Well, if you
are working in the hospitality or airlines industry most probably yes. However,
if this is the first time you hear of it, that’s your lucky day!
To summarize what revenue management is about: it is a technique to optimize revenue from a fixed, but perishable inventory. Its main challenge is to sell the right products to the right customers at the right time for the right price and via the right distribution channel (that’s a lot of “rights”, right?)
To summarize what revenue management is about: it is a technique to optimize revenue from a fixed, but perishable inventory. Its main challenge is to sell the right products to the right customers at the right time for the right price and via the right distribution channel (that’s a lot of “rights”, right?)
It has been launched in the airline's industry in the 1980s and step-by-step was introduced in the hotel industry. Today, revenue management is a common practice in these two industries and is now extended towards other fields such as Retail, Food & Beverage and a lot of other industries.
Have you ever wondered why the price changes when you
look for a flight ticket one month before departure and when you look two days
before departure, there is a totally, very often a more expensive price? Well,
here you go that’s revenue management.
Yes, there may be a lot of extended analytics,
algorithms and science behind all of this, but let’s learn to crawl before we
can run. And actually, anyone can apply basics techniques in any businesses.
HERE’S HOW WE
DO IT:
1. Monitor
and collect data
As basic as it seems, this is the very first step in any
“revenue optimization” strategy and most probably the most efficient. Monitor
your performance. Not only track your income revenue but track your expenses,
the dates, customer satisfaction, even the weather if you can! Track and
collect as much data as you can, it will help you later draw
some correlations between the different sources of data or
anticipate your performance more accurately.
Sources of information can come from anywhere: your POS
(Point Of Sales), PMS (Property Management System) but also from your website
(Google Analytics) or any sources online that you have access to.
Again the more information you are collecting on an
hourly, daily, monthly and/or annual basis, the better prepared you will be to
understand what’s going on, adjust quickly and increase your performance.
2. Forecast
your performance
Many advanced techniques could come into play here, such
as the one below:
Qualitative methods
Delphi, Market research, panel consensus, visionary forecast, historical analogy.
Time Series Analysis & Projection
Moving Average, Exponential Smoothing, Box-Jenkins, X-11, Trend Projections.
Causal methods
Regression model, Econometric Model,
Intention-to-Buy & Anticipations Surveys, Input-Output Model.
Each of these models could be the topic of one full
article and we could debate the accuracy and efficiency of each model in great
length. But here again, let’s keep it as simple as possible. I will recommend
looking at 2 models in specific: the Regression model (relationships
between variables) and the easy (but efficient) Moving Average.
We will not go in details of how to calculate both of
these models here, but the main idea is to ask yourself what your performance
will be in a few days, weeks, months ahead, in order to anticipate movements,
adjust strategies/pricing accordingly, as well as plan accordingly (staff,
supply, cash flow, marketing expenses…).
For example this basic situation: Mr Ong has an
ice cream business, We have seen historically that a 1 degree Celsius increase
in temperature, increases the sales of ice cream by 10%. Therefore if the base
revenue performance per day is around 10’000$ for a temperature of 20 degrees,
Mr Ong can expect to sell around 11’000$ if next Monday’s temperature reaches
21 degrees.
You get the idea.
3. Price
dynamically
Now that you are collecting data, monitoring your
performance and forecasting your future activities more (or less) accurately,
it’s time for actions!
You have seen and recognized in your data some patterns
that are coming back at a regular interval (seasons and/or demand
fluctuations). Let’s take this insight as an opportunity to adjust your rates
and drive more revenue. In the hotel industry, we are aiming to increase the
RevPAR (revenue per available room), which is a combination of ADR (average
rate) and occupancy (the number of rooms sold versus the total number of rooms
available at the hotel).
By understanding the relationship between these two
elements (RevPAR = ADR x OCC%), as well as remembering your economics 101 from
high school (Demand / Price / Supply), you can easily understand that you must
decrease your rate to increase the demand, therefore:
- Anticipating a high demand day ->
focus on ADR (increase rates to control demand and drive more revenue)
- Anticipating a medium demand day
-> focus on balancing both ADR/Occ% (maintain your usual rates)
- Anticipating a low demand day ->
focus on Occ% (decrease rates to increase demand and drive more revenue)
A practical example: Mr Ong has seen historically that
his weekends (Fridays + Saturdays) are busier than his weekdays; therefore he
has decided to increase his price by +10% on Fridays and Saturdays and decrease
by -5% on weekdays to drive more business. This way Mr Ong drives more revenue
in an entire week without any increase in expenditures or staff.
4. Create
the right Revenue culture
To achieve long-term success with revenue management,
you need to have all your teams on board. Revenue managers behind their
computer are not the one selling the hotel rooms, neither the one cleaning the
rooms or servicing the guests in the hotel. Therefore, having a revenue manager
who goes out there, talks to everyone and makes it fun for colleagues to try
new approaches, experiments to drive a better performance is definitely key and
a competitive edge for any organizations.
Make sure everyone in the organization participates in
the revenue management movement (ask everyone to brainstorm new ideas to
generate more revenue, reward staff upselling and make it fun for everyone!)
For the moment any computers systems, Artificial
intelligence or machine learning can do that. Yes, all the hard skills
(algorithms, pricing, forecast, …) can be replaced by machines but the
soft skills (staff training, experiments, marketing decisions,…) of an
experienced (and human) revenue manager cannot be replaced.
And you know what? Revenue management is actually
fun ;)
Revenue
Management in luxury hotels
Revenue management is very important in any industry or at
any hotel level and must be used to capture revenue opportunities on a daily
basis. When it comes to revenue management in luxury hotels, the approach is
slightly different.
There is an important factor that we didn’t discuss
previously and we call it the price sensitivity of our customers or the level
of importance buyers place on price relative to purchasing their criteria. While
in upscale and lower rated hotels customers tend to have higher price
sensitivity and will choose where they stay depending on the price, in luxury
hotels customers are less price sensitive.
The focus has now become on providing the best
experience possible and matching guests’ expectations. Price becomes an
indicator of quality and luxury.
Based on this, price dynamics shouldn’t be heavily fluctuating
but should be rather consistent and in line with the brand it represents. For
example: you wouldn’t see a Four Seasons selling for 50$ a night, you will
think there was a technical problem behind this low price or the hotel is very
(very) desperate to sell and there must be something wrong.
The approach to revenue management explained previously
remains the same for luxury hotels however; guests services, creating the best
experience and keeping rates consistent with the brands should be in the middle
of all your decisions.
—
About the author: Thibault Catala is
the Managing Director of Catala Consulting , a firm specializing in revenue
solutions for hospitality businesses big and small. Thibault is a former
director of revenue for international hotel chains such as InterContinental
Hotels Group in Europe and Four Seasons Hotels & Resorts in Asia. He has
managed more than 100 millions in hotel annual turnover, and has overseen
revenue management operations for multiple large properties.
Strategic hotel repositioning, revenue management
consulting and interim, staff trainings and coaching have been numbered among
his works.
—
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