Profit Optimization and All the Perils that Ensue

By Tim Wiersma, CRME, Founder and Principal, Revenue Generation LLC

Price adaptations have rapidly moved from being a profit optimization lever to an essential tool for commercial survival in times of massive cost turbulences. Yet, price increases are often implemented quickly and in an indistinguishable manner (e.g., same increase throughout multiple markets or across multiple market segments). In addition, sales is often not thoroughly trained to ensure success in rolling out new pricing approaches.

Lack of preparation, analysis, and system modifications could lead to a strategy falling short of expectations. So, what do we do about it? The HSMAI Revenue Optimization Advisory Board offered their recommendations and insights on this topic.

Barriers to Profit Optimization

One of the barriers we see today as it relates to profit optimization would be the mix of business we’re faced with. If you’re a group house, over the past couple years, you’ve really had to shift gears and go after a customer you traditionally wouldn’t pursue — and maybe that’s less profitable than your traditional group customer, where they have the ancillary spend associated with it.

Another barrier is lack of understanding of the variable and fixed cost components associated with rooms, food and beverage, etc. Is this critical information making it to the decision makers on a day-to-day basis? And are they taking this information into account when making decisions? These are areas we need to consider.

Other factors that can be barriers to profit optimization include contracts with various distribution partners or agencies that may not always benefit us in terms of profitability. Then there are other variable costs such as labor, utilities, in-room amenities, linens, toiletries, etc., that can — if you’re not careful — lead to a negative category in terms of profitability.

Initiatives to Prevent Acceptance of Low or Negative Profit Margin Business

When it comes to avoiding acceptance of low or negative profit margin business, one advisory board member said, “Anytime we have to do anything with a piece of contract business — whether that be project business, an airline crew or anything like that — we have a tool we run it through. The one item people seem to forget about is variable cost. Labor, cost of supplies, etc., have gone up, and we used to use a factor of 3% year over year. Well, 3% isn’t going to cut it, so when we’re looking at multi-year pieces of business, that is the one thing I ensure makes sense. A piece of business may be OK right now, but maybe not for this time next year. And those are hard conversations that I’ve had with hotels.”

Another member offered, “It’s important to have alignment between the sales goals and the overall hotel strategy. That’s where it starts. Also, since we use revenue systems in many of the hotels, we started to ask them to look at their booking window outside of this year and begin thinking about goal setting for where we want the group business to be next year based on what we know now. We’re talking through high-level expectations, and then making sure that whatever processes the hotels have in place for group yielding, that they match those expectations so we can catch stuff before it goes on the books if it doesn’t make sense.”

Communicating Cost Factors with Franchise Owners

One topic the advisory board discussed was how revenue managers can communicate cost factors with franchise owners. One member said that although she’s spent many years talking about cost of sales and commission levels and how that impacts profitability, she’s not sure the message has “100% landed, but we’re getting there.” She continued, “When we’re thinking about rates, we must think about the fact that returning to 2019 levels can’t be the goal because the cost of sale has gone up since then. Sometimes, it takes a little courage to put your rates at a level you’ve never been able to get before. Some of that courage can come from conversations with revenue managers, but sometimes, we also need everyone who is speaking with that hotel to have the same level of understanding.”

“We have a lot of technology and a ton of tools,” another advisory board member added, “and we’re analyzing above-property, but how do you get an individual franchisee to do that when they’re dealing with real-life staffing issues, and they need everything on mobile because they’re running around? It’s up to us to educate them on cost-per-channel so they don’t make easy mistakes. It’s difficult enough trying to train the salespeople on using and understanding our tools, and showing how it could help their job, but it’s even more difficult with the franchisees. So, it should be a priority to continue that education as our tools evolve.”

Educating the Industry About Strategically Targeting Profitable RevPAR

Another challenge revenue managers face is how to go about educating the industry about strategically targeting profitable RevPAR. One advisory board member suggested that it starts with our own teams.

“Making sure our own teams are really knowledgeable is a good starting place,” she said. “And then making sure our partners in sales are knowledgeable, too. Some sales teams are rewarded on room nights, not profitable business. Profitability as part of the sales incentive plans would be helpful, but I don’t think we’re there yet. The more it can be built into those incentive plans, the more successful we’re going to be. So, when it comes to educating our industry about this, our internal teams should be where we start.”

Categories: Revenue Management
Insight Type: Articles