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Five Common Fallacies about Hotel Revenue Management
By Taoufik Haraketi
Revenue management is one of the most exciting and challenging disciplines in the hospitality and travel management these days. Since its application for the first time in the early 80's within the Airline industry, the concept — first dubbed as yield management – has taken great strides; it was nonetheless implemented and developed by hotel industry professionals worldwide. Today in the lodging industry, revenue management is an overarching approach that considers rooms, food and beverage, Spa as well as other areas like Golf to name just a few.
If you are a frequent web surfer, and if you enjoy digging into the news and articles about hotel management like I do, then you probably came across an overwhelming amount of information about the application of revenue management in the hotel industry. From RMS marketers to revenue optimization firms, everybody has an input on how to increase revenues! Sadly, some revenue management specialists describe it as a means of making more money through the usage of price optimization techniques and costs control.
Before introducing what I reckon are the 5 most common fallacies about Hotel Revenue Management, let’s take a closer look at some of the world’s top hotel brands visions and mission statements.
Obviously, all of the above adopted visions emphasize the importance of customers which are the only reason a business exists. Hence, properties that work only for making more money through the utilization of revenue management probably will not succeed. When interviewed about how Apple was doing during the economic downturn, Steve Jobs said that ''A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets.'' This is a very good example of policy that places consumers in the heart of revenue management.
Although it seems logical to presume that the purpose of a business is to make profit; this statement is absolutely wrong! In fact, as David K. Hayes stated in his book Revenue Management for the Hospitality Industry, the only legitimate purpose of a business is to increase the wealth of its customers. From a revenue management perspective however, shrewd RMs recognize that their role is to help their business thrive by ensuring that its patrons receive true value in every transaction made with the hotel, but they never would claim that their mission is to make more money!
RM fallacy # 1: The ultimate purpose of revenue management is to increase profit.
This is the most common oversight of some revenue managers and hoteliers alike. These managers are most likely focusing predominantly on maximizing their companies’ profit levels. That is, their main concern is the immediate profit added through the business’s transactions with its customers. Peter Drucker the well-knowing management consultant and writer suggests that ‘’the purpose of a business is to create and keep a customer’’. The second part of this statement is crucial to apprehend! Needless to say, that in the hospitality industry, not only do managers need to win customers, but they must make those customers repeat their purchase of the company’s products and services. Thus, focusing on operating profits is a short-sighted business strategy.
RM fallacy # 2: Revenue management is about number crushing and heavy Excel work
A fundamental truth that effective revenue managers must understand about pricing is that the term price should not be viewed merely as a number but as a concept. It is a series of strategies designed to identify and communicate the true value of what they sell to each of their customers. Indeed, effective revenue managers must be able to collect, analyze, and use to their advantage data that comes from internal and external sources. Revenue management professionals must also apprise what Kahlil Gibran the writer stated ‘’ Progress lies not in enhancing what is, but in advancing toward what will be’’ That is, RMs must also learn how to use their own insight and experience when deciding what to charge for the products and services sold by their organizations.
RM fallacy # 3: Consumers will always book with the lowest price possible
Understanding how auctions work illustrates well that potential buyers do not necessarily place the same value for the products and services offered for sale by hoteliers. In a given auction session, while the majority of bidders would drop out when the price of the product they wish to purchase exceeds the value they will receive in exchange — some other bidders will continue bidding, this is because that same product is still of higher value for them! To make a long story short, effective revenue managers must recognize that different people, with identical information, about identical products, but under different buying circumstances, assign different personal values to the same product. RMs must therefore identify the customers who are willing to pay the highest prices their property offers and not only keep focusing on decreasing prices in order to maximize revenues. Still, decreasing rates does not necessarily means selling more; effective pricing strategies that successful revenue managers use are those that eventually consider the value given up versus the value gained.
RM fallacy # 4: Hotel rates are function of demand and supply
A pricing strategy that relies heavily on demand and supply levels is probably a defective one. The truth is, demand for the hospitality products and services is fairly not easy to measure or to predict for the average revenue manager. This is because demand is continually changing, it contains varied components, and furthermore, it is affected by different factors. That is, the role of supply and demand in pricing in not to dictate rates but to serve as a pricing guide.
RM fallacy # 5: Hotel rates are function of production costs
Readers of managerial accounting books will learn that selling price is determined by the below formula:
Selling price = Expenses + Desired profit
It is important to recognize though that from a revenue management perspective using this formula to determine rates is an out-of-date approach. The rationale for using such formula to set rates is the belief of some managers that if they wanted to increase their profit, the answer is in their operational costs — Hey! You cannot shrink a hospitality business to greatness! — In fact, a singular focus on cost reduction is typically not the most creative strategy to use in the hotel business. Above and beyond, as all accountants will agree variable costs will change with volume, therefore, it is practically impossible to determine costs before determining prices to charge for the organization’s products and services.
To sum up, savvy revenue managers will agree that pricing in the hospitality industry depends on three factors, costs, demand and supply levels as well as the value of the organization’s products and services. Pricing is the most important element in the marketing mix; it should therefore drive the hotel’s entire business strategy and carefully communicates to customers its overall business philosophy.
About Taoufik Haraketi
Taoufik Haraketi is a room reservations manager and blogger heavily involved in Hotel rooms revenue management and hotel online marketing. He holds a BBA Hotel & International tourism management from the American University of London. He is currently employed as a reservation manager at Caribbean World Hotels and Resorts in Tunisia.
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