Profit Optimization

Rising Above Revenue Restraints Toward Total Profit Optimization

Even before the pandemic, hotel revenue leaders faced significant challenges and a high bar for total profit optimization.

The COVID-19 pandemic has upended the hospitality industry and the basic operations of hotels. But even before the shake-up, the way industry leaders thought about strategic revenue management was beginning to shift.

Over the years, hotels have started to recognize the benefits of achieving “total profit optimization,” or leveraging all hotel functions and maximizing their profits in unison. Instead of just seeing hotel revenue through a lens of guest room rates, this holistic approach takes other revenue streams—such as food & beverage, meetings & events (M&E), and spa & wellness, among others—into account, with a goal of coordinating the property’s mix of revenue and profit centers more strategically.

No matter the situation, hotel revenue managers need to figure out how to stack the right building blocks to forecast accurately, price with confidence, and maximize profitability. Taking small steps toward a more holistic approach to revenue planning and strategy is a smart—yet realistic—way to make this happen.

Skift recently spoke to Sherri Kimes, revenue management expert and professor emeritus at Cornell University, about why small steps are key and how the coronavirus pandemic might offer an opportunity for hotels to take a step back and refresh their revenue operations. Read the full interview here.

Five Areas to Take Action

While achieving total profit optimization might seem a lofty goal, especially now, it’s not impossible. There are very tangible ways to start this change and to help transition your hotel to enable optimization across your major revenue streams and actually achieve total profit optimization.

A crucial first step is moving your property toward total revenue forecasting. Beyond that, profit optimization and whole property optimality can be compared to the pieces of a five-part puzzle of profit: room revenue, ancillary spend, servicing costs, channel costs and other inventory.

This can be a deceiving puzzle because each piece has the ability to stand on its own, but the great thing about it is you can combine the pieces together in many different ways. In doing so, we create a picture that will optimize your hotel. So, let’s break down what you can do to start putting this puzzle together.

  1. Room Revenue

Room revenue is the most advanced in the realm of total revenue management. Here it is critical you take into consideration the interdependency of what drives room demand and the demand to other aspects of your hotels, such as selling M&E spaces based upon a minimum group block.

Start with taking stock of the net revenues and profit values from each of your revenue management segments. This will allow you to begin to optimize your business mix by room class, while considering total profit by available demand. This step also enables you to create overall guest spend hurdles outside of just the room night alone and helps you make a decision on who to give the last room to—a known guest who spends $250 more across the hotel or an infrequent business traveler who will be spending no time on the property.

  1. Ancillary Spend

Ancillary spend across the hotel can be one of the trickiest areas to prepare for but can drive an absolute boon for your net operating profit. It can also be a game changer across your total hotel operations in general decision-making, amenities determination, floor design and licensing agreements, to name a few.

The simplest way is to start gathering data across the “ecosystem” of the guests’ time on the property. A tried-and-true option is to continue to drive the guest to assign any and all spends to their guest folio. This not only helps you gather the spend patterns but can also help you reduce the credit card processing costs associated with retail, food service, spa services, guest rooms, gift shop and more.

By consolidating this data, you can set ancillary revenue hurdle rates to ensure you take the most profitable business and manage revenue across discrete revenue sources.

  1. Managing & Optimizing Channels

The next piece of this puzzle is understanding, managing and optimizing your channels, which has been on the radar of hoteliers for years. The difference between now and then is that we are in an environment where we can take direct action.

The first step is to take action with your data. Here, you need to understand and streamline your channel and source codes. You’ll want to reduce or eliminate using channel and source codes interchangeably. This will clean up your data and allow you to separate each booking endpoint while isolating the differences in demand and cost and ultimately enabling you to build better forecasts.

Once you have clean data from which you can isolate your channel costs, you can make the decision to take more or less of the available demand across the various channels on the basis of the cost when taking one additional reservation through that channel. This improves profit performance by controlling costs on a channel-by-channel basis and can help you better negotiate with online travel agencies.

  1. Servicing Costs

Profit is a hot topic in the industry, so we can’t go without one of the largest areas of cost in a hotel-servicing costs. While this is typically outside of the purview of the revenue management team, in a world of optimizing across silos, servicing costs is an area of tremendous opportunity.

Here, you should take a broad look at the data you assemble on your targeted guest segments, including their spend profile and total propensity for usage of an amenity. The key area to start your investigation is in the non-room revenue hurdles.

Applying that to crucial elements of the guest usage patterns, and creating metrics that will provide visibility across the guest’s length of stay, will open up key areas such as house staffing allocation and costs across rooms, restaurant, golf, spa, and other spend areas.

  1. Other Inventory

The final piece to the profit optimization puzzle is other inventory (e.g., cabanas, chair rentals, and excursions). While this type of inventory is more applicable in resorts and casinos, the principles are important to ensure global optimization of revenues and impact to the total guest experience.

The key initial step, outside of transactional data aggregation across the property, is to determine guest segmentation, such as casino player guest versus non-casino player guest. By isolating these segments, you can start to identify the corollary values and metrics to monitor, thus allowing you to measure and manage your non-room-based, guest-spending hurdles.

No Time Like the Present

Total profit optimization may not be a new topic, but the circumstances that warrant it have never been more pressing. To thrive in this new reality, hotels must be prepared to break down silos, think in radical new ways about guest value and take bold, strategic action.

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