Four reasons why today's revenue management systems are failing hoteliers

The leading hotel revenue management systems (RMSs) essentially use a hotel’s own past data to predict the future. This technology must evolve in order to help hotels better manage the complexities of distribution and marketing tomorrow.

NB: This is a viewpoint by Rich Maradik, founder of nSight for Travel.

RMS tools fall short in four areas that are essential to hotelier profitability -- from providing views beyond proprietary data to delivering correlations between demand and rate.

The good news is that since most transient consumers shop for hotel purchases online across thousands of third-party and branded websites, a massive amount of data exists showing how hotels stack up against their competition.

With transient business being so competitive and most of it materializing well inside 30 days of the stay, this data is invaluable to hotels as they make all-important pricing and marketing decisions in order to gain share versus competitive hotels – and the OTAs.

The challenge is accessing this fragmented data and integrating it with a hotel’s own historic data that populates RMS tools. In addition, that data must be presented in a way that makes current revenue management practices smarter and existing marketing programs better.

1) No View of “Unconstrained Demand”

Today’s RMS tools help hotels forecast overall occupancy and rate for future arrival days largely based on historical data from previous years.

That’s where current tools come up short. They don’t go beyond the hotel to see the bigger picture of market opportunity. Right now, many RMSs provide no insight regarding true demand available from the significant transient segment, including both leisure and unmanaged business travel.

"Unconstrained demand" is a revenue management term, which means the total demand for rooms on a specific date if you could in fact provide rooms for all of that demand.

Obviously, the concept cannot be taken too literally as GMs and revenue managers have to put some reasonable boundaries around what is possible, and even desirable, with constraints such as number of available rooms.

RMSs do a good job of constructing this historical view of opportunity costs from the past data on various demand channels:

Group
Wholesale
Negotiated corporate business
GDS
OTA and third parties
Online Direct
Call Center

Additionally, RMS platforms account for factors such as on-the-books production by channel, destination-specific demand drivers and changes in supply as additional inputs.

But what if this year is different than last year? What if there is new political/economic unrest in the market? Or new competitors, such as Airbnb, that change the market dynamics?

Then hotels need revenue management solutions that look at what’s happening in the market right now to capture the broader opportunity inherent in unconstrained demand:

Hotel demand for future arrival dates – unbooked
Competitive set demand for future arrival dates – unbooked
Overall market demand for future arrival dates – unbooked
Hotel share of overall consumer demand – unbooked and booked
Consumer response to prices for the hotel and comp set for future dates, e.g., comp set pricing is generating higher volumes of search and bookings for future arrival dates

Having this type of information helps hotels make smarter rate and distribution decisions for future dates.

Example: if a hotel knows from forward-looking shopping data that market demand is strong – even higher than last year or last month – and competition is lowering rate in a panic because lead times are shorter than in the past, the hotel can opt to hold rate and ultimately increase ADR in the long run.

Insight into unconstrained demand helps hoteliers increase profitability based on the following advantages:

Improved forecasting: unconstrained demand data shows consumer shopping peaks and valleys for future arrival dates, based on specific hotel and comp set rates.
Optimize ADR: an integrated view of future rate and demand tells hoteliers when to hold, raise or lower rates based on consumer behavior.
Increased certainty: actual demand available for future patterns is important because it gives a level of certainty in uncertain situations.

In a new environment, hotels have to make decisions in new ways. No more relying on trends based on historic data, but putting unconstrained demand – or your forward-looking opportunity -- into the mix.

2) No Link to Marketing

A big opportunity for RMSs is to provide marketing teams with the information they can use to do a better job of capturing demand. Enhancing marketing information has massive potential for RMS providers to yield properties at an even higher level.

Indeed, revenue management and marketing need to do a better job of working together. One way they can do this is not only evaluating booking pace to forecast together but also observing future demand trends. That includes a full range of forward-looking insights on the market and hotel level such as:

Demographic types of transient consumers showing the highest level of interest and booking activity
Top geographic sources of travel consumer activity
Booking lead times as they vary by source markets and demographics
Responsiveness of consumers to future rates by property and competitors

When it’s easy for marketing to tweak the targeting criteria with this information in existing marketing programs such as Google PPC, OTA and TripAdvisor Display, retargeting, email marketing, Facebook and content marketing, then the hotel truly can do a better job beating its competitors to available demand.

3) No Connection Between Price and Demand

Currently, RMS tools provide their hotel customers a two-dimensional view of price versus demand. One dimension is the difference in a hotel’s best available rate (BAR) price versus a series of competitive hotels for future patterns; the other is observing rate of bookings for future dates by transient channels.

But, data exists today allowing an added perspective, providing a more powerful three-dimensional view of the relationship between price and demand. A hotel can now understand, for any future check-in day, the level of interest it’s achieving from transient consumers versus its competitive hotels. This interest is defined by searches and bookings across thousands of third-party websites.

Example: With the current two-dimensional view for a check-in day, if a hotel’s BAR rate is in line with the competition and it’s on target for the daily rate of bookings for transient direct and third-party channels, that’s a signal to maintain the current strategy.

But the three-dimensional view might show on that same check-in day, that your hotel is achieving a much higher share of both searches and bookings on travel websites than the competition. Armed with that knowledge, the hotel may want to actually push rate higher, allowing it to beat forecasted room revenue.

4) No View on Alternative Lodging Products

How do RMS providers account for transient demand to Airbnb, vacation rental or service apartment products? They don’t, even though this is the fastest growth category in the hotel and lodging segment today.

Ask any hotelier in resort markets where vacation rentals are big or in urban markets such as New York or London where Airbnb has significant supply, and they know “in their gut” that these competitors are stealing share and hurting RevPAR growth. Yet no real comparative analytics currently exists to help hotels understand how to better price and market versus alternative lodging products.

This is the most blatant missing link for RMSs today – consideration of the sharing economy.

Where is innovation in RMS technology heading?

What was once a sleepy industry is suddenly a platform for innovation.

All of the major RMS providers are innovating and seeking ways to accelerate their growth rates. The most tenured player in the field, IDeaS (a SAS company), continues to grow well on a global basis, as does Infor. Rainmaker is investing in growth and has a strong client portfolio; Duetto, backed by healthy levels of venture investment, is shaking things up for sure, and Priceline’s recent purchase of PriceMatch for its BookingSuite platform is a huge deal with big implications for the industry going forward.

Clearly, innovation will not be in perfecting the use of historic data in budgeting and forecasting. That day is gone. Innovation will come from using consumer shopping data related to what’s happening now to improve predictive analytics. It will be about dynamic views of rate elasticity and pricing practices in a post-rate-parity world.

As a revenue manager of a boutique hotel explained to me recently:

"The future is about marrying past data with forward-looking data beyond my website because using just my own historic data is obviously not enough.”

There has been some movement in the right direction. At least one RMS is forecasting forward-looking trends from basic analytics of a hotel’s website and putting those metrics into their RMS algorithm. Keep in mind, this approach still only offers a small, incomplete view of unconstrained demand.

RMS providers are well positioned to help hotels navigate the increasingly complex distribution landscape since the intelligent use of a hotel’s historic data is a foundational component of smarter yield practices.

The RMS providers who embrace big data opportunities with predictive consumer shopping analytics will grow very quickly. Those that do not adapt will become increasingly irrelevant.