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How Revenue Management Can Help You Prepare For Downturn

by Jason Q. Freed, Managing Editor |

It’s no secret that hotel operating costs are on the rise, in many cases at an even higher clip than revenue. Hoteliers are pointing to inflated digital marketing costs, and with the emergence of new distribution channels like Google, TripAdvisor and Facebook, the cost of acquiring guests is higher than ever before.

Fortunately, the rapid rise in guest acquisition costs — which include OTA and GDS commissions as well as brand fees, sales and marketing budgets, and e-commerce costs — has been somewhat sustainable to this point. Thanks to increased demand and subsequent pricing power, hoteliers have been able to offset rising costs with higher revenue and profit.

But the rubber is about to meet the road. Third quarter results from STR show a continued slowing in the U.S. lodging industry, with flat year-over-year occupancy and the smallest revenue per available room growth in years, driven solely by rate. The pace of new bookings in the business sector also continues to decline, according to TravelClick.

Hotel companies are aggressively lowering their RevPAR projections, with Hilton Worldwide, for example, cutting its forecast for the third time this year as it struggles with weak business travel demand in a slowing global economy. Some experts are predicting RevPAR growth — which has been positive for more than seven straight years — to halt by as early as July 2017. And more headwinds are expected, namely the possibility of rising interest rates, the volatility of overseas economies and the threat of Airbnb supply in different markets.

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On the flipside, there are no prognosticators predicting a slowdown in distribution costs.

So, when your revenue growth slows, reaches a plateau or, at worst, turns negative — when your revenues are headed in one direction and the cost of acquiring guests is going in the other — how will you react?

In previous downturns, hoteliers cut rate and turned to OTAs to spur demand. Expedia and Priceline will be there waiting this time around, too. But is that your most effective strategy? And what are your alternatives?

Here are four strategic initiatives that revenue managers can use to better position their hotels for a demand slowdown:

1. Broaden your strategy

Revenue management is much more than raising rates on high-demand dates and lowering them when you’re forecasting low demand. The idea of moving from revenue management to Revenue Strategy means instilling a new mindset that all employees must share, bringing the revenue management focus that’s been on the rooms department for the past 20 years to all the revenue streams on property.

Too often the marketing team is developing promotions to spur demand on already compressed dates, for example, or creating packages and promotions with static discounts that don’t fit into the hotel’s overall Revenue Strategy. When every department is using the same data to make decisions and is focused on achieving the same revenue goals, it’s easier for operators to work in tandem to create a path for profitability.

Another strategic shift to get in front of the downturn is moving to an Open Pricing model that allows you to yield each day, room, channel and segment independently. Rather than closing off booking channels or blacking out promotions as the hotel fills up, Open Pricing allows you to keep everything open and yield individual rates up or down incrementally based on real-time demand shifts.

Shoring up your loyalty program before demand plummets is also critical to sustaining profitability. While many hotel brands roll out significant discounts for direct bookings, a better strategy is to personalize a rate for each individual guest based on demand and customer worth. This ensures you’re not over-discounting or eroding ADR, and it gives loyal guests instant gratification.

Lastly, reconsider the most important performance metrics to gauge success. When market demand is down as a whole, revenue managers must focus on stealing share from their competitors. By tracking your hotel’s RevPAR Index, you can get a good sense of how to grow profits even when the market’s revenues are shrinking.

2. Trust the data

Big data is adding a new dimension to hotel demand forecasting. New consumer data sets —competitor pricing, events and macroeconomic factors, airlift data, social reviews and ratings, web shopping data, etc. — can help hotels better understand the scope of their upcoming demand. By building a better forecast, hotels can make profitable rate adjustments earlier in the booking window and fill more inventory at optimal rates.

When you can see indicators earlier in the cycle, you can take action before your competitors. So it’s not about nailing a forecast far in advance, it’s about continually optimizing your pricing strategy and sounding the alarm when necessary. The earlier you get indication of change, the more time you have to put a plan in place.

The most important thing hotels gain from having bigger and better data is the confidence to capitalize on competitors’ mistakes, such as holding rates steady when every other hotel is slashing prices or yielding rates up when your comp set is too hesitant.

To ensure they’re filling rooms at the right price, hoteliers must also take a closer look at their loyalty strategies. To be effective, pricing for loyalty guests needs to be personalized around the lifetime value of customers, their reasons for travel and your hotel’s value proposition. Every guest is different, so it’s important to understand what rewards or recognition each one wants. With the ability to tailor a rate for each guest, new technology allow loyalty rates to be yielded up and down based on customer worth, as well as supply and demand.

3. Get your tech in place

The easiest way to increase profitability during a downturn is by cutting staff and operating with leaner resources. But this has detrimental effects on several areas of operations, most notably guest satisfaction. So the hoteliers who will remain profitable and even grow market share over the next few years are the ones who are allocating today’s profits to strategic initiatives that will better position them for the future.

Perhaps most needed is the understanding of and adaptability to predictive analytics. New hotel systems can take many forms of data, both internal and external, to provide a real-time, dynamic version of what future demand will look like.  

There are also new and better ways to visualize your hotel’s demand data so you can share it with other key stakeholders and make more knowledgeable pricing decisions. While spreadsheets have been extremely valuable in housing and accessing data to this point, new tools eliminate the need to sift through cells and perform manual keystroking. Now your key performance metrics can be shared with decision makers in real-time so they’ve got the newest data at their fingertips for setting critical future rate strategies.

4. Stand your ground

Clearly there is going to be pressure to drop rate sometime in the near future. But if there’s one thing hoteliers learned from the past few downturns, it’s that slashing rate and turning to discounted third-party channels is definitely not the right reaction.

In 2008, these moves did little to improve hotel demand. With no pricing power, hotels’ revenue streams eroded. And this time around, hoteliers will be facing a far more complex distribution landscape.

When overall RevPAR is falling, revenue managers will have to be even smarter about managing distribution channels, optimizing business mix and yielding room rates higher whenever they can. The best time to adopt these strategies is right now.

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Jason Q. Freed, Managing Editor

Jason Q. Freed, Managing Editor

Managing Editor at Duetto
Jason joined Duetto as Managing Editor in June 2015 after reporting, writing and editing hotel industry news for a decade at both print and online publications. He’s passionate about content marketing and hotel technology, which leads to unique perspectives on hotel distribution and revenue management best practices.
Jason Q. Freed, Managing Editor
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Jason Q. Freed, Managing Editor

Jason joined Duetto as Managing Editor in June 2015 after reporting, writing and editing hotel industry news for a decade at both print and online publications. He’s passionate about content marketing and hotel technology, which leads to unique perspectives on hotel distribution and revenue management best practices.