• 14 December 2018
Revenue Management - Hospitality’s Chicken and Egg Riddle

Revenue Management - Hospitality’s Chicken and Egg Riddle

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*This article is written by Zaki B. Baz, Hotelier, Advanced Finance & Advanced Revenue Management & Distribution Expert. *

Scientists claimed to have cracked the riddle of whether the chicken or the egg came first. The answer they say, is the chicken. Researchers found that the formation of eggshells relies on a protein found only in a chicken’s ovaries. Therefore, an egg can exist only if it has been inside a chicken.

Hoteliers are still in conflict and arguing whether or not ‘Revenue Management, Distribution Strategy and Financial Plan**’ **or ‘Service, Guest Experience and Products’ should come first – or should they come together?

Service and products affect guests’ experience, and can certainly negatively or positivity reflect on future business & bookings. Let’s stop drawing a circle around our arrows and instead accept the fact that circles have to be drawn before we hit our arrows!

For newly opened hotels, old hotels, renovated hotels, rebranded hotels, black label, white label etc., the need to just have guests comes first, let alone being able to adequately serve them. These properties need to be able to pay salaries, pay off bank loans, pay tax, and do anything that they can to keep the hotel or business lights on.

Some companies have had to fire thousands of staff and had to make redundant numerous leadership positions for these same reasons. This has recently happened in SE-Asia. Some five-star hotels in Bangkok have been making chronic continual losses from their F&B department for years!

All the above companies’ crises were caused by a deficient revenue management and distributions strategy, despite some of them providing ‘great service and experience’

An effective revenue management and distributions strategy should include creating and managing customer demands and establishing a marketing strategy built around rigorous control systems. Doing this better than the other players in the market will produce a clear, competitive revenue advantage, which helps to cover operational costs and provide better services in many areas.

My analysis of pricing, demand, and revenue dynamics for many hotels for the last 8 years, along with my same analysis to the industry in Bangkok for the period 2009 through 2015, made me realise how severe the negative consequences can be when attempting to maintain market share by offering prices below those of your direct competitors. The situation in Thailand was compounded as the lack of solid revenue management was coupled by several natural and political crises.

This seven year study examined the outcomes of revenue management strategies reflected in pricing behavior on total rooms revenue, and occupancy for hotels and their competitors in both bad and good times. The results are the same for both periods. Although hotels that offered average daily rates (ADR) above those of their direct competitors experienced lower occupancies compared to other hotels, they actually recorded a higher relative RevPAR.

Overall the results suggest that the best way to have better revenue performance than your competitors is to have higher average rates. How?  Solid revenue management and financial plans.

Between 1970 – 1980, Dubai had very limited numbers of rooms. It was so easy to maintain revenue or increase RevPAR, and create a new source for revenue by just opening new outlets, and / or increasing numbers of rooms, and for sure, provide good service and products.

But how about now? Could they do the same? Can just anyone open any old small or big hotel or business without Sales & Marketing, or a business development strategy or solid financial strategy? Can they build everything on just service or products?

At the bare minimum, properties and businesses need to have these plans in place to at least forecast the likelihood of them succeeding or even just surviving. After working through their plans, they might realise that they have to change their plan, or they even might decide not to open because it’s just not worth it!

You can’t run a successful business or hotel without a plan.  Some companies have tried without proper strategy and from studying these cases in the UAE, Thailand and other places around the globe, they on the whole performed devastatingly bad. In many cases, so much so that owners needed to rebrand their hotels and refinance again and again just in order to be able to survive and keep the doors open. Some just relied on the asset value increase, however that is a risky strategy that has a high potential of failing.

Thinking that revenue management is just a piece of magical software that can allow anybody to manage bookings and increase or decrease online rates only, is one of the biggest mistakes being made by hotel management these days.  This is happening, perhaps because of the sheer number of companies who call themselves ‘Revenue Management Software Providers’. To put it bluntly, THEY ARE NOT. Those companies are generally, just ‘Online-Rates ONLY Yielding Management’ tools.

When it comes to Revenue Management, you can’t solely rely on knee-jerk reactions to the present. In other words, when you are building your marketing strategy under the umbrella of ‘Revenue Management’, then you aren’t just thinking in the present. You need to read the past and learn from the past taking into consideration all the the different factors including social physiology, guest behaviour, marketing strategies, online and offline sales strategies and the overall final ‘end game’ strategy of the hotel. You are reading the past and planning for the future. There is no present. Only looking at your current Compset to drive your business is a WRONG strategy in today’s very dynamic business environment. We need to re-think, and understand what ‘Revenue Management’ actually is, and understand its profound positive or negative effect on our strategy which reflects on our day-to-day and long-term business.

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