PowerPoint presentation on Revenue Management

1. Intro to Revenue Management Presented by Carl Winston Director L. Robert Payne School of Hospitality and Tourism Management SDSU

2. Why are we here today?

3. Why are we here today? Two perfect storms! 2001 terror and tech bubble Web 2.0 and great recession

4. Lodging is a Cyclical Business…

5. Lodging Cycles PKF Consulting

6. Why is Lodging Cyclical? Demand tends to reflect Regional and National changes in the economy (normally 2% to 4% growth annually) Supply changes are hotels best friend and worst enemy

7. What Do ATT & Microsoft have in common? Definition of “Anti-trust laws” “Opposing or intended to regulate business monopolies, such as trusts or cartels, especially in the interest of promoting competition” What does that mean?

8. Anti-trust… We are not here to: Figure out ways to raise prices Gouge customers during peak times Collude in any way We are here to discuss the science and art of managing our revenue to improve the bottom line of your hotels and motels

9. Overview of Today’s Session Introduction Role of next two sessions (12/10 and 12/17) Brief history of revenue management RM tactics RM Strategy 3rd Parties Role of Revenue Manager 3 Case studies

10. Case Study # 1

11. Textbook Says… The act of skillfully, carefully, and tactfully managing, controlling, and directing capacity and sources of income, given the constraints of supply and demand

12. Art or Science? “I think we should” Vs. “We need to…”

13. Another Way to Put This… Demand creation is Marketing Demand capture is Sales Demand Mgmt is Revenue Mgmt We are not here today to set prices!

14. Say that again… Fixed amount of rooms to sell Rooms are “perishable” Guests are willing to pay a different price for the same room Guests can buy through a variety of “channels” that may or may not be “direct” You want to master the science behind revenue management

15. Major Historical Milestones… Bartering First method of trade Merchants saved best goods for best customers Worth determined by item’s scarcity (or) Perceived value of materials and labor Markets Sprung up in villages to facilitate exchange Merchants began to travel Supply and demand dictated price Inns quoted higher prices to later arriving guests Last leg of lamb on the spit – most pricey!

16. Major Milestones… Hotel Chains Automobile travel facilitated need Kemmons Wilson founded Holiday Inns Front desk asks guest about future travel plans CRS AAA Air Travel First commercial flights commissioned by postal service 1927 – Lindbergh solo flight gets people thinking 1958 – 1st Boeing 707 jets put into service Jet age – interdependence among air, hotel, car rental Airlines strictly regulated by federal government 1978 – Airline Deregulation

17. Major Milestones… The Internet Domain names Third parties Commoditization of information Instant data available to consumers and hotels alike…Web 2.0 put consumers in driver’s seat STR

18. Tactics…

19. Revenue Mgmt. Tactics Forecasting Demand: Forecasts are not budgets… 90, 28, 10, 7, 3, 1-day forecasts – really? Keep records of this year for future years Measurement of reservation demand is critical: Pace Regrets (decide to not book) Denials Conversion rate

20. Revenue Mgmt. Tactics Forecasting: “Unconstrained demand” means you can accommodate it all (slow times) “Constrained demand” means you can begin to drive revenue: Capacity allocation Rate thresholds Duration control More later…

21. Revenue Mgmt. Tactics Forecasting: (other factors) Guest TOTAL spend Lifetime spend (loyalty program)

22. Revenue Mgmt. Tactics Competitive intelligence STR Call arounds Drive arounds Walk arounds Ask the guests

23. Booking Pace

24. Revenue Mgmt. Tactics Pricing Models: Guest perception of value Inventory your inventory Room types are not just bed types See “Dynamic Pricing”

25. Revenue Mgmt. Tactics Pricing Models: How many rates do you have? How many room types? Does it vary by time of year? Time of week? Time of day?

26. Revenue Mgmt. Tactics Pricing Models: Rate Fences…(advance, last minute, non-refundable) Customer loyalty programs versus revenue management? Duration controls (first-come, first-servedis not the only way to go) Minimum stay Stay through Close to arrival

27. Dynamic Pricing

28. Dynamic Pricing

29. Dynamic Pricing

30. Revenue Mgmt. Tactics Capacity Management: Overbooking Is 98% a good occupancy percentage? Is overbooking worth it? Can a hotel rent out-of-order rooms?

31. Revenue Mgmt. Tactics Displacement Analysis: What is it? Key issues: What revenue is lost? What profits would be lost? Lifetime value of the group/client Case Study: “Small Group” Case Study: Accept or Deny?”

32. Revenue Mgmt. Tactics Displacement Analysis

33. On to Strategy…

34. Strategic Revenue Mgmt. Differentiation: If you find the right market for your hotel and sell to it, you drive revenue… Rate becomes less important…

35. Strategic Revenue Mgmt. Differentiation: Unique features Type of service Leverage your location Brand Market segments served Name? (The $23 Inn)

36. Strategic Revenue Mgmt. Revenue management and CRM: Who are you best customers? Why are they your best customers? How do you keep them? How do you find more like them?

37. Strategic Revenue Mgmt. Revenue management and guest loyalty issues: Pricing fidelity True “value” of a guest over time Black out dates Booking on a “first come, first served” basis or?

38. Strategic Revenue Mgmt. Other factors: Market position Bed mix and more Know who you are and what you are not…

39. Strategic Revenue Mgmt. Role of pricing in achieving REVPAR: No matter what, your price must offer value to the guest…

40. Strategic Revenue Mgmt. HSMAI Survey on value: Property type/location Amenities Price Guests will pay a premium to feel safer Guest put a premium on “true” service

41. Strategic Revenue Mgmt. Strategic packaging: When do you want to package? (slow times?) Who are you targeting? Why? How will you promote the package? Internal packages External packages

42. Strategic Revenue Mgmt. Distribution Channel Management: We sometimes forget that there are more multiple “channels” to manage: 3rd party CRS/GDS Website Telephone In the lobby

43. Strategic Revenue Mgmt. Distribution Channel Management: Different channels have different gross and net rates Different guests Need to manage inventory in each channel… Open & Closed to arrival Minimum LOS

44. Strategic Revenue Mgmt. Distribution Channel Management: You want: Highest producers Most cost-effective Easiest to control

45. 3rd Party Pitfalls “Monkey see, monkey do” pricing (do not just look at competitors pricing and adjust…) You need to: Forecast your demand Then, evaluate competitors strategy Determine which consumer (and channel) makes sense to pursue. (Who are they? How and When do they buy? Who are they loyal to?)

46. Let’s look more closely at 3rd Parties Retail model (Booking.com) They collect money from and get paid a commission Merchant model (Hotels.com) They are “merchant of record” paying you a “net rate” Opaque model (Priceline.com) Some part of the transaction is hidden from guest Auction model (LuxuryLink or Priceline) Referral model (TravelZoo) Hotel defines the offer and pays an advertising or referral fee

47. What are the issues in choosing 3rd party partners? Costs vary wildly Who is the guest? Your brand and other guests profile Stay patterns Cannibalism Ease to use Marketing exposure Seasonality ETC. Net, net rates!

48. Table Discussion: Third Parties: Friend or Foe?

49. Who are your best customers? Loyal customers versus “one time wonders” How are you “proving” your value to them? Besides pricing, what else do frequent travelers crave and value? If you use 3rd parties, will that guest really become loyal to your hotel? The one’s with the most $ value to you!

50. Change of Gears…

51. What Does a Revenue Manager Do? Manage group blocks Managing and monitoring Internet systems to ensure rate integrity and parity Managing the hotel’s web portal Maintaining relationships with third-party market managers Analyzing financial statements and market data Preparing accurate occupancy and revenue forecasts Developing tactics and strategies to manage group and transient market needs

52. What INTERPERSONAL Skills Do Revenue Managers Need to Have? Lead business review meetings Develop and deliver effective presentations Establish credibility with the management team Work closely with the DOS and FOM, where appropriate Articulate complex strategies and other topics in oral and written form

53. Glossary of Revenue Management (See handout)

55. Merchant Model

56. Opaque Model

57. LOAD FACTOR

58. Anti-Trust legislation

59. Break Even

60. b2b, b2c, c2c

61. Menu Mix Management

62. Menu Item Penetration

64. Variable costs

65. Fixed Costs

66. margins – gross and contribution

67. Market intelligence

68. Occupancy

69. Overbooking

70. Price Differentiation

71. vfr

72. smerfe

73. pERISHABLE INVENTORYUp-selling Per-capita Seasonality of Business BUNDLING Constrained Optimization Demand Forecasting Channel of Distribution Channel Management Rack Rate

75. RATE INTEGRITY

76. PRICE TRANSPARENCY

77. FLASH REPORT

78. marginal cost

79. META SITE

80. crm

81. SHOULDER, VALLEY, AND pEAK SEASONS

83. The Top Ten Revenue Management Mistakes Hotels Make 10. Seeing revenue management as a job done only by the revenue manager. 9. Allowing Internet discounting agencies to sell guestrooms at prices of their choosing, then complaining about the erosion of rate integrity. 8. Claiming to differentiate the hotel based on service excellence, then promoting discounts, “value package” offererings, free frequent-guest points, and other freebies.

84. The Top Ten Revenue Management Mistakes Hotels Make 7. Thinking that the hotel’s weekday strategy and weekend strategy can be the same. 6. Expecting that the “flag” (brand) will fill the hotel without the hotel’s management team lifting a finger. 5. Counting revenue dollars as equal, regardless of the distribution channel they came through.

85. The Top Ten Revenue Management Mistakes Hotels Make 4. Thinking that short-term goals must always have priority over long-term goals. 3. Thinking that artificial intelligence – the revenue management software – is superior to human intelligence. 2. Believing that the right price to charge for a room night is established solely on the hotel’s costs and ROI expectations.

86. The Top Ten Revenue Management Mistakes Hotels Make 1. Believing that discounting is an effective way to increase revenue.

87. Thank You and Q&A Carl Winston 619-594-4964 carl.winston@sdsu.edu