| by Kirby D. Payne, CHA , October, 1997
Kirby D. Payne, CHA is
President of Minneapolis based American Hospitality Management
Company, a growing hotel investment, management and consulting firm.
Payne is also Secretary Elect of the American Hotel & Motel Association,
and Chair of the AH&MA's International Council of Hotel-Hotel
Management Companies. Additional articles can be found on the
internet at www.American-Hospitality.com.
In the Friday, May 30, 1997 issue of the Minneapolis
Star Tribune's business section I happened to see a book review
by Michael Pellechia. He was reviewing "Revenue Management: Hard-Core
Tactics for Market Domination" by Robert G. Cross (Broadway Books,
$27.50). The title of the review was, " ' Revenue management' is
the way to build profits".
Any hotelier who has been around more than a half hour knows that revenue
management (a.k.a. yield management) is the only way to make a significant
profit in rooms and when applied to other operating departments it
is an important contributor to profits, as well. When
I saw the headline I thought it would be an opportunity to
see how businesses other than hotels undertake yield management.
Being your basic lazy reader I quickly scanned the boxed off column
to see if there were any lists. Sure enough, there
it was, "seven core concepts of revenue management".
Here they are:
-
Focus on price rather than costs when balancing supply and
demand.
-
Replace cost-based pricing with market-based pricing.
-
Sell to segment micro-markets, not to mass markets.
-
Save your products for your most valuable customers.
-
Make decisions based on knowledge, not supposition.
-
Exploit each product's value cycle.
-
Continually reevaluate your revenue opportunities.
After reading the list I went back and started reading the
review. It began with, "It is a new holy
Grail that means selling the right product to the right customers at the
right time for the right price." Clearly I was about to learn
something!
The next paragraph, to my astonishment, began, "Successful
practitioners have included Marriott International, Southwest
Airlines, Hilton Hotels Corp., American Airlines and
many other hospitality and aviation businesses with a large percentage
of fixed costs."
Finally, somebody was subtly recognizing the
hotel industry for doing something first and right.
Remember, we did yield management before the airlines.
Airlines didn't do it until they were deregulated. We've
probably done it since we put up tents on the newly opened camel trail
from what is now Cairo, Egypt to Amman, Jordan 200 generations
ago! Just think of the peak rates hotels were getting
about 2,000 years ago when we blew that reservation in Bethlehem and walked
that couple to the barn next door during the Roman census!
The review was excellent in that it used examples from the book
of both large businesses such as airlines and car rental companies
but also small businesses like barbershops. A barber
shop example was interesting in that it suggested discounting
on Tuesdays to attract customers who might want to avoid the
Saturday crowds and save money.
A word of caution might be in order. I
don't care how much one discounts Christmas night
you cannot develop a sell-out in most hotels! I believe
that during off times you need to combine a positive
reason to come along with a price which is perceived to be a value while
not degrading the hotel's image. Friends of mine market their upscale
resort during the slow times as being "quiet time" but they
don't discount off its low season rates to do it. In fact his
quiet time is so successful that they're raising the rates for that period
each year.
I'll relate my interpretation of Mr. Cross' list to some hotel concepts
with words you and I use. I think you'll find you're very familiar
with each item.
| 1. When demand for rooms exceeds available rooms in the area,
raise your rates. If you know what you're doing you can even
try to be one of the last to sell out when people are really desperate
for rooms and are willing to pay an extra premium. |
| 2. Pricing should be based on the market situation
rather than costs. While seemingly the same as
the first, there are some subtle differences. For instance
during normal demand periods evaluate the features of
your hotel relative to the direct competition and their prices
and position your rates accordingly. If they include a continental
breakfast in their rate and you don't have one, consider
pricing just below them. Then market into
the situation in a positive way by pointing out to guests who
comment about the lack of that feature, that you charge slightly
less and for the price difference there are numerous breakfast
alternatives in the area where they will get something
better than a doughnut and warm coffee!
Another example of this pricing concept is applicable to beer.
If, under cost based pricing, you're satisfied with a dollar
profit on your highest volume beer why not do the same with
your premium beers? Think what a great value they'll be
as a result and what the resulting increase
in consumption might do to your bottom line. |
3. None of us has enough money to mass market and it is
inefficient. Even in your target geographic markets,
no matter how small a part of a larger area, only a very infinitesimal
percentage are your potential guest. within that geographical
area, marketing must be targeted to the most likely decision
maker. What media are best to reach them,
what will catch their eye or ear, what will attract them to your
destination, if they weren't planning on
going there already, and your hotel specifically? What
about socio-economic subsegments or life style groupings or demographic
niches? When we target families we only show one adult with children
in our photos. This way we don't inadvertently alienate single parent
families. |
4. Saving your rooms for your most valuable guests is obvious
especially when you remember value is not just a function
of how high a rate they'll pay. For instance a guest
who stays both Friday and Saturday night is more valuable than one guest
for each of those nights as you have less
front office and housekeeping effort associated
with the former. If your peak weekend night is
Saturday save some rooms that night for Friday -
Saturday reservations and walk-ins. After all, if Saturday
is that good you'll sell out Saturday at the last minute to same
day reservations and walk-ins. It is simply a matter of knowing
what last day demand is. |
| 5. As the previous item implies, making decisions
based on knowledge is critical. Keeping tallies of how
people heard of you or examining reservation lead time are examples of
critical research to develop real knowledge. Supposition comes from
accidents, coincidences and prejudices. If you come to
work early each morning and visit with guests checking-out
at that time their comments will begin to out way information
you might receive on a second hand basis from some of the staff.
If one staff member who is more vocal than
others has an opinion it will also begin
to stand out. Gather information both formally and informally.
Make ads and coupons traceable whenever possible and tally the information.
In our hotels we try to ask every person inquiring about availability how
they heard of us. |
| 6. I'm not sure what the author means by "exploit each product's value
cycle." While the phrase seems obvious I can't
seem to apply it to a specific hotel example. I
would imagine it means that a package which
relates to a season or an event should
be marketed on a timely basis or it could mean to be aware
of consumer trends and always be ready
to adjust your hotel's image or amenities
offered (priced accordingly) to accommodate market developments. |
| 7. Continually reevaluating revenue opportunities
takes many forms. At one
extreme are systems like Holiday Inn Worldwide's HIRO system which constantly
adjusts a hotel's discount programs and rate ranges. The other extreme,
other than ignoring the subject, are hotels that have revenue
management meetings daily in order to adjust rates and give the front
office staff selling guidelines.
One of the best stories I heard on this subject was about
a very ritzy hotel on the southeast Florida coast.
The hotel's staff was forced to follow the results
of a yield management computer system even though
they knew the previous year's data was an anomaly.
The corporate office kept telling them to, "trust the computer."
As a result they over priced and missed out on a lot of revenue opportunities
during the peak season. According to the book review,
American Airlines, due to a software glitch in 1988, lost $50 million
in possible revenue! |
Revenue or yield management is critical to maximizing a
hotel's profitability. The concept applies to every
revenue department and across departments. Saving banquet space
to sell in conjunction with group guest rooms is a classic example
of this concept. Early bird specials in restaurants is
another example which happens to tie right to the barber shop example the
author used.
The review closes by remarking that the book is, "a good stab
at describing market forces from the revenue perspective.
The marriage of marketing and operations research is a definite
strength of the revenue management model."
Of all the points made, the one I think is most
important is, "make decisions based on knowledge,
not supposition." Gather information in a methodical,
formal way. Analyze it and make decisions based on that rather
than gut feeling. |
