REPORT FROM THE U.S.—Revenue managers should consider total customer profit optimization in their operations, according to panelists on a webinar hosted by the Hospitality Sales and Marketing Association International University, Hotel News Now and STR.
Total customer profit optimization is the process of achieving the most profitable mix of customers across all of a hotel’s assets, said John Wallace, president of gaming and hospitality of The Rainmaker Group, during a webinar titled “Total segment profit optimization.” Those assets include guestrooms; function space and catering; bars and restaurants; and spa, golf, retail, etc.
Although the concept seems straightforward, Wallace said it is slow to implement because it is difficult. However, that doesn’t mean revenue managers should give up, he said. First, they must establish a strong foundation and start with the basics.
Wallace said before revenue managers go down the path of total customer profit optimization, they should ask themselves a few questions:
- Are you capturing and reporting on your mix of transient and group business based on room and non-room revenue?
- For each segment of business, do you understand booking pace, source of business,product type, ancillary spend and acquisition/retention costs?
- Are you optimizing your transient mix of business by forecasting unconstrained demand by segment? Are you optimizing revenue by length of stay, resulting in overbooking?
- Are you capturing won and lost group business and pricing your group rooms by considering the following: willingness to pay; margins associated with catering and other ancillary spend; and meeting-space utilization?
- After all of the above, is there enough business to fill the hotel on regular basis?
“If the answer is ‘no’ to any of the above, stop and go back and get the foundation built correctly first before you move on to total customer profit optimization,” Wallace said.
He said there are three lessons that can be learned from the gaming industry. First is understanding a guest or group’s value, with the goal of accurately forecasting the profit contribution to the next visit. However, everyone on the team must agree on what revenues are used to calculate that value.
Second, revenue managers should understand segmentation, Wallace said. Guests and groups should be categorized by similar preferences, booking behavior and value. These segments should provide the ability to quote rates based on a customer’s value and willingness to pay.
Finally, he said it’s important to recognize optimization. Revenue managers should factor in displacement of higher-value guests or groups; cancellations and no-shows; and forecast variability.
Behind the steering wheel
When it comes to driving the process, Wallace said it starts with the revenue manager.
“But at the same time, because you’re using multiple revenue streams and there are costs involved as well, you need to really involve other areas such as finance, sales and marketing,” he said. “It’s got to be an effort across a number of different departments in the hotel.”
Veronica Andrews, director of active data for STR—parent company of Hotel News Now—agreed other departments need to be involved.
“Marketing efforts … are converging with revenue management, and we work hand in hand to bring our business in,” she said. “Revenue leaders today really have to be on top of their game when it comes to working with other departments within the properties and using all resources available, internal and external, to get that business through the door.”
Creating demand
Andrews said revenue management should actually be called profit management.
“We’re going to create demand; we’re going to maximize our revenues; we’re going to get those phones to ring so that we have more clicks and confirm more reservations,” she said. “When word is out, we’re generating more demand and putting money in the bank.”
One way to put money in the bank is to provide “remarkable” service, Andrews said. This will generate more demand, which will translate into maximized revenue. To get there, it’s important to understand guests and know what brings them through the doors.
Thus, revenue managers need to make informed decisions, she said. “It’s all about data, data, data.”
Revenue managers can use the following to make informed decisions:
- Intellectual capital: There needs to be strong leadership to focus on different customer bases and revenue streams.
- Cohesive and aligned profit strategies: These are important to ensure focus on top-line revenues as well as how that is filtered down to the bottom line.
- Technology: Any technological support at the property level can help make informed decisions. Revenue managers should know their property management system, central reservation system, tech partnerships, etc., to get to the data.
- Competitive intelligence: There are resources available to benchmark and compare with the competition to determine what will make a compelling argument for guests to stay at the hotel.
“Technology and process may capture critical data; talent knows what to do with the data,” she said. “All three cogs in this wheel really control the data integrity.”
How to win
Paul Wood, VP of revenue management for Greenwood Hospitality Group, said revenue managers should focus on gross operating profit per available room.
One way to do this, he said, is to stop selling hotel rooms.
“It’s not so much that we want to stop selling,” he said. “It’s more that we need to change our perception on how we’re selling or why we’re selling.”
He pointed to the gaming industry, where hotel rooms are ancillary. The focus is on the total revenue from the guest.
“If you want someone to come into your hotel and gamble and spend $10,000, then it’s worth the cost of the room,” he said.
Wood offered a few takeaways on how to focus on gross operating profit per available room. First, adopt a holistic approach to channels. For instance, online travel agencies are still the largest marketing channel in the world and should not be ignored, he said.
“You can drop all the money you want on e-commerce; you can have the best website, but the average traveler today is still going to go to the OTA to shop first,” he said.
In addition, focus on the length of stay. The longer the guest stays, the less it costs the hotel in labor and transaction fees. Longer stays also translate into higher ancillary spend from guests.
And finally, ensure the sales team is profitable and producing.
“I’m not advocating laying off your sales people if they’re not producing,” he said. “What I am advocating is ensuring there’s a proper return on the way they’re segmented, the division in which they should be able to sell to and how your segments are happening in the hotel.”