Revenue Management - the science of ultimate hotel success

AltexSoft

17 Jun 202007:30

Summary

TLDRIn 2016, Marriott's acquisition of Starwood Hotels made it the world's largest hotel company, challenging traditional loyalty programs. The video discusses revenue management, a crucial strategy for hotels to maximize profits by matching supply and demand. It explains how Marriott and other hotels use revenue management to compete with OTAs by encouraging direct bookings and managing room pricing dynamically based on customer data and market conditions. Despite technological advancements, many hotels still rely on manual processes, highlighting a need for a shift in mindset towards more efficient revenue management practices.

Takeaways

🏨 Marriott became the world's largest hotel company in 2016 after acquiring Starwood Hotels, which had a loyal customer base and a more approachable rewards program.
💔 The acquisition was met with disappointment by Starwood's loyal customers, particularly those in the Starwood Preferred Guest program, due to differences in rewards exclusivity and room availability for redemption.
📈 Marriott aimed to compete with online travel agencies by increasing its size and loyal customer base, encouraging direct bookings to avoid commissions.
🧠 Revenue management is crucial for hotels to match supply and demand, selling the right room at the right price, time, and distribution channel to maximize profits.
🗓 Revenue management involves predicting room demand based on historical data, market conditions, and external factors like holidays and weather, to set dynamic pricing.
🚫 The perishable nature of hotel rooms means that unsold rooms for a night result in lost potential value, emphasizing the importance of accurate demand forecasting.
💸 High fixed costs in the hotel industry, such as salaries and utility bills, mean that maximizing the value of each room, restaurant seat, and amenity is essential.
🔍 Customer segmentation allows hotels to apply dynamic pricing based on factors like age, marital status, and travel purpose, which can optimize revenue.
🤖 Automation and machine learning can enhance revenue management by processing live data and adjusting pricing in response to demand changes.
📉 A survey by Cornell School of Hotel Administration found that revenue management practices had not significantly changed despite expectations for growth in technology and analytics.
🛠️ The adoption of revenue management technology is hindered by a silo mentality in hotels, with a reluctance to move away from manual processes and Excel spreadsheets.

Q & A

Why did Marriott acquire Starwood Hotels in 2016?
-Marriott acquired Starwood Hotels in 2016 to become the world's largest hotel company, thereby increasing its size and volume of loyal customers to compete with online travel agencies.
What was the reaction of Starwood Preferred Guest program members to the Marriott acquisition?
-The acquisition was heartbreaking to many loyal customers of the Starwood chains, specifically members of the Starwood Preferred Guest program, due to differences in rewards exclusivity and the value of their points.
How does Marriott's rewards program compare to Starwood's in terms of exclusivity and value?
-Starwood Rewards were more approachable, requiring less spending to earn a stay at upscale hotels compared to Marriott's program, which required twice the amount. Additionally, Starwood had no limit on the number of rooms available for rewards redemption.
What is revenue management and why is it crucial for hotels?
-Revenue management is the science of matching supply and demand by selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission. It's crucial for hotels to maximize profit and manage perishable inventory.
How does the perishability of hotel rooms affect pricing and revenue management?
-Rooms are perishable; if they remain vacant for a night, their potential value is lost. Revenue management helps prevent this by adjusting supply and demand to ensure rooms are sold at optimal prices or given to loyal members.
What are the challenges hotels face with fixed costs and limited capacity?
-Hotels have high fixed costs like salaries, utility bills, and marketing expenses that remain constant regardless of occupancy. They also have limited capacity for rooms, restaurant seats, and other amenities, necessitating efficient revenue management to maximize value.
How does revenue management help hotels predict and adjust to room demand?
-Revenue management uses historical data, external factors like holidays and economic conditions, and forecasts to predict demand and adjust pricing and availability accordingly to match supply and demand.
What was the outcome of the survey conducted by Cheryl Eke in 2010 and followed up in 2016 on revenue management practices?
-The survey results were underwhelming, showing that despite expectations for growth in technology and analytical skills, revenue management roles remained largely manual with limited technology support and no centralization of processes.
Why are hotels struggling to adopt revenue management systems despite their availability?
-The struggle to adopt revenue management systems is due to a mindset issue, often referred to as 'silo mentality,' which makes the adoption of technology more difficult than it should be, even though solutions are available even for small independent hotels.
What steps can hotels take to improve their revenue management practices?
-Hotels can improve their revenue management by segmenting customers, applying dynamic pricing, automating processes, and forecasting demand. They can also train teams and establish revenue management practices at every location.
How do online travel agencies (OTAs) like Expedia and Booking.com use revenue management?
-OTAs use revenue management by providing free toolkits to their members that offer insights on demand, share forecasts, and allow setting prices in the calendar, demonstrating their adoption of technology and data analytics.

Outlines

00:00

🏨 Marriott's Acquisition of Starwood and Customer Loyalty Impact

In 2016, Marriott became the world's largest hotel company by acquiring Starwood Hotels, a group with 11 brands. This move was upsetting for loyal Starwood Preferred Guest members, as Starwood offered more accessible rewards compared to Marriott. For instance, Starwood allowed members to earn stays by spending $10,000 with a branded credit card, while Marriott required twice that amount for less satisfying experiences. Starwood also had no restrictions on rooms available for reward redemption, whereas Marriott limited availability. Marriott’s acquisition was part of a larger strategy to compete with online travel agencies (OTAs) like Expedia and Booking.com. By driving customers to book directly on hotel websites, Marriott aimed to avoid paying commissions to OTAs. This approach is rooted in revenue management, a system designed to balance supply and demand to ensure hotel profitability.

05:01

💡 The Science of Revenue Management in Hotels

Revenue management is critical for hotel success, as it helps match supply with demand. Hotels face a unique challenge because rooms are perishable assets—if a room remains unsold for a night, its value is lost. By using revenue management, hotels can adjust prices to avoid giving away rooms cheaply or at a loss. Additionally, hotels have high fixed costs, like salaries and utilities, regardless of occupancy rates. Therefore, selling rooms at optimal prices becomes essential to cover these expenses. Revenue management involves setting prices based on factors like customer type, competitors, and distribution channels, ensuring hotels can maximize profits while maintaining full occupancy.

📈 Predicting Hotel Room Demand: Theory vs. Reality

Revenue management relies heavily on demand prediction. For example, a hotel in Barcelona may expect high tourist demand in summer, allowing it to raise prices. However, predictions can be inaccurate, as seen in 2014 when Latin American hotels overestimated demand during the World Cup and ended up with lower-than-expected occupancy. They raised prices, but the primary segment of travelers turned out to be domestic middle-class customers rather than luxury guests. This misalignment resulted in an imbalance between room supply and pricing, something that effective revenue management could have addressed by segmenting customers and applying dynamic pricing.

🌐 The Power of Dynamic Pricing and Automation

Dynamic pricing is a key component of revenue management. By collecting data about past travelers and segmenting customers (e.g., by age, marital status, or travel purpose), hotels can apply different pricing models for different types of guests. Automation and machine learning tools can process real-time data to adjust prices dynamically. However, predicting demand can be complex, especially in cases of unexpected events like public health crises. Despite these challenges, hotels can use historical data and factors like holidays, local events, and weather conditions to make more accurate forecasts, optimizing pricing and ensuring a better balance between supply and demand.

🚪 The Challenges of Adopting Revenue Management Systems

Despite advancements in technology, many hotels are slow to adopt revenue management systems (RMS). A 2010 survey of revenue managers by Cheryl Iams from Cornell University showed that while professionals expected more technology integration, little changed by 2016. Many hotels continue to use manual processes rather than embracing available technology, even though RMS solutions are widely accessible and free toolkits are offered by OTAs like Booking.com and Expedia. The issue isn't a lack of resources but a 'silo mentality' that makes technology adoption difficult. With better training and a more open mindset, hotels could benefit greatly from automated RMS solutions, leading to increased profitability.

Mindmap

Keywords

💡Marriott

Marriott is a leading global lodging company with more than 7,000 properties worldwide. In the context of the video, Marriott's acquisition of Starwood Hotels in 2016 made it the world's largest hotel company. This acquisition is significant as it highlights Marriott's strategy to increase its size and volume of loyal customers, which is crucial for competing with online travel agencies.

💡Starwood Preferred Guest

Starwood Preferred Guest (SPG) was a program by Starwood Hotels that rewarded loyal customers with points that could be redeemed for stays at upscale hotels. The video mentions that SPG was more approachable compared to Marriott's rewards program, requiring less spending to earn a stay. This is an example of how different hotel loyalty programs can impact customer loyalty and choice.

💡Revenue Management

Revenue Management is a system used by hotels to maximize revenue by optimizing room rates and availability. It involves matching supply and demand, selling the right room to the right client at the right price at the right time. The video emphasizes its importance in the hotel industry, as it helps hotels to survive in a competitive market by ensuring that rooms, which are perishable assets, are sold at their optimal value.

💡Perishable

In the context of the video, 'perishable' refers to the nature of hotel rooms. If a room remains unoccupied for a night, its potential revenue for that night is lost. This concept is crucial for understanding the urgency and strategy behind revenue management, as hotels must sell their rooms at the best possible price to avoid losing potential revenue.

💡Dynamic Pricing

Dynamic Pricing is a strategy used by businesses, including hotels, to adjust prices based on factors such as demand, competition, and customer segmentation. The video mentions that hotels can apply dynamic pricing by collecting data about past travelers and segmenting them. This allows for more flexibility in pricing and can help maximize revenue.

💡OTA (Online Travel Agency)

OTAs like Expedia and Booking.com are platforms that allow customers to book hotel rooms, flights, and other travel services. The video discusses how hotels need to compete with OTAs by encouraging direct bookings from their websites to avoid sharing commissions with these agencies. This highlights the competitive landscape in which hotels operate.

💡Customer Segmentation

Customer Segmentation is the process of dividing customers into groups based on certain characteristics to better understand and target them. In the video, it is mentioned that hotels can segment customers by age, marital status, spending habits, and whether they are business travelers. This helps in defining the optimal price for different customer groups and applying dynamic pricing.

💡Fixed Costs

Fixed Costs are expenses that do not change with the level of business activity, such as salaries, utility bills, and marketing expenses. The video explains that hotels have high fixed costs, which means they need to sell their rooms at a price that covers these costs, regardless of occupancy levels. This is a key factor that revenue management must consider.

💡Demand Forecasting

Demand Forecasting is the process of predicting future demand for a product or service. In the context of the video, it is used by hotels to anticipate room demand based on historical data, external factors, and current market conditions. Accurate demand forecasting is essential for effective revenue management, as it helps hotels to adjust their pricing and availability strategies.

💡Silo Mentality

Silo Mentality refers to the tendency of departments or individuals within an organization to operate independently and resist sharing information or collaborating. The video suggests that this mentality can hinder the adoption of revenue management technology in hotels, as it can lead to resistance to change and a preference for manual processes over more efficient, centralized solutions.

💡Property Management Tools

Property Management Tools are software solutions used by hotels to manage various aspects of their operations, including room bookings, rates, and customer data. The video mentions that many of these tools already have revenue management capabilities built-in, suggesting that the technology is accessible and could be leveraged by hotels to improve their revenue management practices.

Highlights

Marriott became the world's largest hotel company in 2016 after acquiring Starwood Hotels.

Starwood Preferred Guest program was more approachable than Marriott's rewards system.

Marriott needed to compete with online travel agencies like Expedia and Booking.com.

Revenue management is crucial for hotels to match supply and demand effectively.

Rooms are perishable; if vacant for a night, their potential value is lost.

Revenue management aims to prevent rooms from staying vacant by adjusting supply and demand.

Hotels have high fixed costs, so they need to maximize the value of their limited capacity.

Revenue management combines rooms and customers to sell at specific prices.

Hotel room demand can be predicted based on factors like season and location.

Revenue management can solve problems of imbalance between available rooms and customer willingness to pay.

Customers can be segmented based on factors like age, marital status, and travel purpose.

Dynamic pricing adjusts prices based on customer segments and market conditions.

Automation and machine learning can process live data to respond to demand changes.

Forecasts help prepare for future demand based on historical data and external factors.

Revenue management can be hindered by a silo mentality and resistance to adopting technology.

Many hotels still rely on manual processes despite the availability of revenue management solutions.

Adopting revenue management is not just about increasing transactions but finding a path in a dynamic market.