Tourism Tattler Issue 1 of 2018

BUSINESS & FINANCE
The
REVENUE
Journey
Part 4
Now that the revenue team is in place it is time to look at the distribution infrastructure of the property. Selling a
product requires an infrastructure to put that product on a shelf so customers can buy it. This infrastructure can be
made up of systems, manual processes or a combination of the two.
In many cases infrastructure setup is not complicated. Typically it includes
a system on property, linked to a Central Management System (CMS)
that connects to different channels like Online Travel Agents (OTA),
Global Distribution System (GDS) or Central Reservations Offices (CRO).
Each of these channels puts the product in front of the buyer, thus
creating an opportunity to ‘revenue manage’ the business. That is, if you
have chosen the components of your infrastructure carefully!
Revenue Management Levers
Fully optimising revenues for a property with limited inventory and a
perishable product consists of two key areas. Firstly, setting the price for
the product, and secondly, managing the inventory. Both of these have
further detailed elements that need to be considered. Pricing strategies
can be implemented in different formats. For example, there is length
of stay based pricing where a price is quoted based on the arrival day
and the length of stay of the booking. If daily pricing is used then a
different price is quoted for each day of the stay. Finally, if the property
chooses continuous pricing then any price can be sold between a lower
and upper rate boundary.
Inventory management includes two key areas, one is length of stay and
the second is overbooking. The chosen infrastructure needs to be able to
handle both of these controls. Length of stay controls may be used at the
total property level or the room type level. They may also be used at the
rate level. Overbooking is typically implemented at the house level and
room type levels, but for optimal revenue management it should also be
applied at the rate level.
Choosing Infrastructure Components
The next step in setting up the infrastructure is to look at booking
statistics and data. What percentage of bookings come in via OTA, GDS
or CRO and what goes directly to the property? You want to optimise as
much of your business as possible, so understanding how the business
reaches your property is critical.
For example if most of the business comes directly to your hotel via the
reservations offices, then you want to have a Property Management
System that can handle the revenue management levers mentioned
earlier. If half of your business comes via OTAs, then you definitely want
to make sure you can revenue manage that channel effectively and
choose a channel manager that can handle the revenue controls that a
revenue management system puts in place.
By Derek Martin.
Infrastructure components can be a significant investment and you
should carefully evaluate the options available.
Infrastructure Opportunity Cost
After evaluating the functionality of the different infrastructure
components, pricing has to be reviewed. Often when asking property
GMs or corporate revenue managers why a certain component was
chosen, the answer is that there was a budget limitation or the owner
did not want to spend more money. The question that needs to be asked
is whether opportunity cost was considered when making the decision
to go with a certain system.
What is this opportunity cost? Let’s look at an example. You run a hotel
with 100 rooms running at 80% occupancy with an ADR of $100.
OTAs bring 40% of your business. The revenue generated via OTAs is
calculated as follows:
• Rooms sold per day: 100 x 80% = 80 rooms
• Rooms sold via OTA: 80 rooms x 40% = 32 rooms
• Revenue sold via OTA: 32 x $100 = $ 3,200
Typical revenue uplift when installing a revenue management system
is between 5-15 percent. I will use 5% uplift to be conservative. This
means that if the revenues via OTA cannot be revenue managed, this
5% uplift on those revenues cannot be achieved. This additional revenue
that cannot be achieved is called opportunity cost. In the example given
here the opportunity cost is $3,200 x 5% = $ 160 per day. Per month this
would be 30 x $160 = $ 4,800.
To finish our example, the property is evaluating two channel managers,
Option A which does not integrate with a revenue management system
and Option B, which integrates fully with a revenue management system.
Option A is quoted at $ 500 per month flat fee and option B is quoted
at a transaction cost of $2 per booking. The price for option B, based on
current booking volume is: 32 rooms x 30 days x $2 = $ 1,920. At first
glance this makes option B much more costly than option A. After taking
the opportunity cost into consideration of $ 4,800 it is clear that option
B is by far the best choice.
Going for cheap can be a very costly choice!
About the Author: Derek Martin is the founder and CEO of TrevPAR
World – a hospitality data analytics company that specialises in revenue
management. For more information visit www.trevparworld.com
Jan/Feb/Mar Quarter 1 2018
Tourism Tattler Trade Journal
11