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Revenue Management – Choosing Infrastructure Components
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 the setup is not complicated. Typically an infrastructure includes a system on property, linked to a central system 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. Via each of these channels there is an opportunity to ‘revenue manage’ the business. That is, if you have chosen the components of your infrastructure carefully!
Revenue Management Levers
Fully optimizing revenues for a property with limited inventory and a perishable product consists of 2 key areas:
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 comes in via OTA, GDS or CRO and what goes directly to the property? You want to optimize 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.
Infrastructure components can be a significant investment and you should carefully evaluate the options available. Being able to handle revenue management controls, ease of use and quality of interfaces available should all be evaluated. The different components need to work well together and you always need to keep in mind that one of the next steps in the revenue journey is to add a revenue management system to help you manage your business. Infrastructure and revenue management system need to go hand in hand and work well together. Once ready for a revenue management system, you don’t want to have to change your distribution structure again.
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 of 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 us 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%, depending on how much revenue management is already being done manually. 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.
Summary Infrastructure Considerations
Putting your distribution infrastructure together needs to be done carefully. Choose components that firstly can handle all revenue management controls and secondly that integrate well with other parts of the infrastructure via robust interfaces. Finally when evaluating the price of the infrastructure component, it is necessary to take opportunity cost into consideration.
Going for cheap can in the end be a very costly choice!