Chocolate Pillow | The impact of poor revenue management (Part 2 – Selling rates)
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The impact of poor revenue management (Part 2 – Selling rates)

08 Sep The impact of poor revenue management (Part 2 – Selling rates)

So last time, I talked about special offers and how, when managed poorly, they can have a severely detrimental impact on your business, staff and guests; this time I want to talk some more on the subject of revenue management and how management of the daily rate can have a negative impact on sales, and actually cause you to alienate guests etc.

 

The main thing to remember when controlling any form of revenue stream is that you need to retain flexibility.  For example, the best Food and Beverage Managers will promote special offers when there are a lot of people in house not booked in for dinner; bar managers may do drinks offers and a spa might offer discounts or similar… the common theme here is that the flexibility of pricing is retained, so as to entice more custom during quiet periods.  And therein lies the first lesson really, that you need to be flexible on rates; I will come back to this a bit later on but there is something a bit more important before you begin playing around with your rates and changing them at will.  So here are my rules for successful profit in your hotel (bring on the backlash from revenue managers!)

 

KNOW WHO IS YOUR COMPETITION, AND WHO ISN’T!

No hotel can have a successful rate strategy without knowing what competition is nearby, and what they are charging for similar services or rooms to you.  It is important that you remember to only compare to the ‘real competition’ – the hotels that are similar to you.  They may be nearby, but they may be a totally different style, class or rating of hotel to you.  For example, you would not compare a Rocco Forte Hotel (High End Luxury), to a Travelodge (Budget) or vice versa – if you do, you seriously need to ask yourself why – the two are at entirely different price points and hold two entirely different positions in the market; pricing that is based on the two being in competition is disastrous.  The luxury hotel would undersell itself, leading to a drastic drop in room revenue, and the budget hotel would oversell itself, leading to no business as people would not necessarily book there – if both hotels had the same price, which would you go for?  Chances are the luxury hotel would fill, but the budget hotel would be empty.  This would be great for the luxury hotel but horrid for the budget hotel – leaving the budget hotel little choice but to drop their rates, in turn dropping their revenue and profit; this is something the luxury hotel would have also suffered from, however the luxury hotel actually had guests who potentially spent money in-house.

 

KNOW YOUR HOTEL

I am fed up of having worked in or with hundreds of hotels where the revenue manager actually knows nothing about a hotel.  I am much more akin to the revenue manager who takes time to visit the venue, or even work there for a day or two a week or month; this way they can get a feel for the venue and understand how it works, although usually just being there is not actually enough!

What I mean here is that any revenue manager worth their weight will spend time working with other departments, doing their job, learning the challenges they face and then working with these teams to increase potential revenue channels and provide assistance with achieving targets etc.  This also allows the revenue manager to really see the hotel in all its glory and ensure that marketing and sales are fully aware not only of the physical aspects of the building such as room capacities, restaurant diner ratio maximums etc, but allows them to feel the ethos and atmosphere of the building – spending a couple of days staying in the hotel and experiencing the service as a guest (so STRICTLY no working!) can really show how the hotel can truly shine.  Now as a revenue manager, you should be asking – what is this hotel actually worth now?  You may think the hotel is too expensive for the standards of bedroom, service and facilities; but you may think it is too cheap!  Ask yourself how much you would pay for a room at the hotel, or even spend time at check-out asking people why they chose the hotel and what they would pay if they had to volunteer a payment for their stay.

The other aspect of getting to know your hotel is about actually learning how your decisions impact on the individual teams – for example, continually changing rates or sudden announcements of offers to the front desk team will unravel a lot of the hard work you have done as no-one likes to be the last to know or to suddenly have something thrust upon them and this will result in resentment towards you!  It is also up to you to find out what is happening in your venue, not just dictate about revenue or send people spreadsheets every day – you need to get out from the office, go and meet the teams and spend time explaining strategies top them – work with them to come up with an upselling strategy or similar – simply telling people what to do and what targets to achieve without actually demonstrating an understanding of their job role, or any awareness of the challenges they face, will mean that the very people you need to be on your side, will be set against you and have little or no desire to help you out or actually be driven to achieve the goals – this makes a mangers job much harder than necessary.

It is important when shadowing others ion the hotel and spending time in other departments and working teams, that you ensure that you do not do the ultimate sign of disrespect – claim that the job is easy then turn up on the quietest day of the week at the quietest time of the day and then state you do not know why people complain or similar – always see the busy times such as your Friday night cocktails hour, or your Saturday wedding as this will give you a true idea of how the staff deal with busy times, and why they cannot upsell in certain ways because they do not have the time.

One top tip to anyone in revenue – if you are being told by a manager in the hotel to sell at a certain rate, do not contest it – the manager knows the business and the area; they know what rates can be achieved and what demand will be like – never, ever sit in an office hundreds of miles away and tell them that the rate they want is not achievable and the hotel is not a high enough standard to achieve a set rate – this not only offends the manager, but also says that you have no real idea of what the hotel can achieve.

 

OCCUPANCY IS NOT EVERYTHING

Over recent years, there has been a shift in the hospitality industry; whereas everything used to be about service and quality (hooray!), it has now become about money and bums in beds (grrr!) and the influence of a revenue manager has increased substantially – General Managers have become held at ransom to a spreadsheet and every person who comes through the door begs the question ‘how much can I get out of them?’.

Amongst all the analysis, net and gross rates, achievements and failed targets, lies a horrid little figure that annoys the hell out of me….. occupancy rate!

I have been lectured by several people about occupancy rates and ensuring we are always at 100% occupancy and blah…blah…blah!  The truth of the situation is this – your reception team and reservations team do not control peoples purchasing decisions, nor do they control the demand of the area – telling them to get 100% occupancy is pointless – they cannot achieve it unless there is a massive stroke of luck or fate intervenes!  Even worse is when they are berated for not achieving it – it is akin to being disciplined for not unlocking a door when no-one has the key!

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To demonstrate my point based on a very simple model of a 100 bedroom hotel –

  • 100 rooms sold at £10 – average room rate £10; gross revenue £1000
  • 50 rooms sold at £20 – average room rate £10, gross revenue £1000 – however less cleaning costs in the morning and possibly less staff requirement so a saving on wages.
  • £50 rooms sold at £25 – average room rate of £12.50, gross revenue £1250 – again less cleaning costs, however more revenue.
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Is my point clear yet or do you still need convincing?  The maths is simple:

(Higher Room Rate + Lower Occupancy) can be greater than (Lower Room Rate + Higher Occupancy)

However with all the up-side there is a down – the TREVPAR and REVPAR for the above model is a bit diabolical.  You effectively do need to double or triple your rate to achieve lower occupancy with higher rate to maintain TREVPAR, so if you are willing to forego (T)REVPAR (which is an invalid reflection of real revenues in my opinion), then you will be fine.

Remember that lower occupancy rates generally mean lower operating costs; the less it costs to run the place, the better as you can enjoy healthier budgets!  Many people believe that higher occupancy is better because then it costs less per room to operate the hotel, which is correct; however if you have fewer rooms to clean, and heat, and service, and maintain, then your costs will stay lower as a natural by-product of the decreased occupancy.

The elusive 100% occupancy also creates many operational issues – if something goes wrong, where can we move the guest to if all other rooms are occupied?  Say a ceiling collapses, the window breaks or the room has a leaking pipe that sprays the occupants with waste whenever a toilet is flushed (and yes, I have seen ALL of these events and more in my time in hospitality!).  In a nutshell, the 100% occupancy scenario is great on paper but actually leads to fewer upsell opportunities, extra pressure on other teams, higher costs, less flexibility operationally, potentially increased customer complaints and lower guest satisfaction scores.

 

KNOW WHAT THE HELL IS HAPPENING LOCALLY AND RATE ACCORDINGLY

I hate working a reception, seeing bookings for ridiculously low rates, and seeing the hotel get overbooked on people paying less than half the rack rate, then ringing around other hotels t find they too are full whilst they charged 3 times our rate for a room.

What happened is this – the hotel fills, hooray it is the 100% occupancy that really does not matter as outlined previously; but the revenue is low for the night.  Because the hotel has filled, it is likely that many people have had to be upgraded free of charge in order to give them a room – no receptionist enjoys doing this as it is a missed upsell opportunity, but how can you upsell if you have been left no other rooms to provide the guest?  You can’t tell them they are having a premium room so need to pay more!  I have seen people book a room for less than £20, yet be put up in a 2-room executive penthouse suite because there was no other option for anywhere to put them!  The problem now is that that guest will rebook and expect the same – imagine their face when we have to tell them it is a £100 upgrade charge because actually, the hotel is not full this time.

When local events are on, hotels fill quickly – usually it start with the cheapest hotels near the event and spreads out to the cheaper hotels within a 3-5 mile radius, then the more expensive ones start to fill more quickly (having already received around 25-40% of the bookings so far).  Being one of the cheap hotels is great; you will fill – particularly if you are the cheapest.  But if you are selling at £20 and everyone else is selling at £50, upping your rate to £49 will still make you the cheapest, but more than double your room revenue and average room rate!

Look online at event sites, speak to local business, know when school holidays are (for airport hotels and theme park hotels) – do not go Über-dramatic and triple or quadruple it – you still want to actually attract people, but be aware of how availability of rooms and rates will be affected – be flexible to everything as situations can change in a heartbeat.  I once managed rates very controversially in Blackpool.  We had a standard rate of £125 a room in the high season, but usually sold at less than that – average rate usually achieved was around £50 – I upped the rate to £199 per room.  I was told they would never sell – but they did! At the end of the day, we were one of the only places left with rooms on the illuminations opening night – we sold rooms at a higher rate than most others in the area, including ones more highly rated than us.  But I played the game well – if all else failed, we could rely on walk-ins for filling rooms, and we could even just drop the rate.

Normally what happens is the rate starts low, then increases as occupancy increases and demand increases – but if there is a high amount of events in the area, you need to juxtapose this slightly – start at a higher rate, keep it there, and then drop it around 3 days before the event to sell remaining rooms – to assist with filling, ring round local hotels that may need to book people out and offer to match the rate for them – there are hundreds of sources for rooms out there if you are novel – I have known hotels to take a minibus to the clubs and offer people a room for the night for £20 with a free taxi – the taxi cost is minimal and people usually pay cash in hand there and then – the hotel fills and people are happy with a nice warm bed for the night – you would also potentially get a good bar spend and breakfast upsells from something like this!

 

Do not under any circumstances allow your hotel to fill at your cheapest rate when there’s high demand – NEVER sell all your rooms for a pittance just to increase occupancy.

 

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So there is my rant and my tips to make things easier as a revenue manager or professional running a hotel’s rates – I talk from good and bad experiences and each hotel will need to take from this what they will.  I am not saying I am right in 100% of circumstances; for some hotels the information about may not be relevant, but in all cases, please take on board what is written as you will find you operate more efficiently, get along with staff better, and have a much happier time overall!

Matt Shiells-Jones
matt@chocolatepillow.com

Husband, Author, Hotel Manager and ambitious 'old cat lady'



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