The Problem with Revenue Management
In the hotel industry we are constantly evaluated and bench-marked, possibly more than any other business. You can see it in all our public reviews, our private surveys and in our revenue performance. In most hotels, revenue calls and meetings are now a weekly norm. These calls are of course essential to the financial success of a hotel, however, sometimes the need for weekly wins can lead to a long-term loss of profitability.
It seems that weekly Smith Travel Reports (STR) are the best and worst thing to happen to us. On the positive side, they allow us to benchmark and measure our team’s performance. They allow us to see if our hotel is performing well financially compared to our competitive set, which can give us substantial peace of mind or an extreme case of anxiety. However, the need to continually beat the competition at whatever cost can quickly lead to rate corrosion of the overall market.
Many of us believe, whether we admit it or not, that lowering rate will increase our occupancy. There’s no denying this is true, but it only works for a VERY short period of time, the time before the other hotels notice. The next thing you know, your competitors are at your new lower rate and your advantage is gone. Now, you know you made a mistake and you try to raise your rate back up, but you are quickly discouraged by your next weeks STR that says you didn’t penetrate the way you should…. And the cycle repeats. A year goes by and your market ADR has dropped by 7% meaning your profit has dropped substantially more. Then the next year and the next year. Well it just gets worse.
You’re reading this saying, tell me something I don’t know. True, you know, but you keep falling into the same trap. So what do we do about it?
1. Invest in, measure and constantly adapt your sales effort. It’s the only real way to get ahead of your competition, all else being equal.
2. Don’t narrow your sights too much, a bad week or a bad month relative to your comp set is no need to panic.
3. Be a voice of reason in your market. No, you of course cannot talk about rates with your competitors, but you can still talk to your competitors. Talking to your competitors builds trust and credibility. It stabilizes the market. You get the idea.
4. Make sure you and your competitors know where your value proposition places you in the market.
Hey we are all for using some sneaky tricks to get ahead week to week in your revenue management goals, but don’t let this be your new strategy. Sometimes you need to remember, it’s better to run 100% RGI in a $100 RevPar market than it is to run 110 RGI in a $90 RevPar market. ADR is your profit, don’t ever forget it.