What VR Managers Can Learn from the History of Revenue Management in the Hotel Industry

Douglas Kennedy
11/6/2019

In my 30-year career of providing training for the lodging industry, I have had the unique opportunity to work with leading companies in both the VR and hotel space. It always has been interesting to see how each sector evolves its processes and practices. I have seen the VR industry evolve faster in some areas, such as digital marketing. I watched as VR companies evolved website distribution much faster than many hotels, mastering paid and organic search. VRs also outpaced hotels by adding virtual room tours, 360° imaging and 3D floor plans. However, by no fault of its own as explained herein, when it comes to the practice of revenue management, the VR space has been much slower to evolve.

When I started my first training company in 1989, the hotel industry had just embraced a new concept used by the airlines, which at the time was known as “yield management.” Up until then, pricing of hotel rooms was a function of marketing, based largely on “gut feeling” and anecdotal evidence of market trends such as speaking with competitors at tourism events or doing “call around” reports. Some marketing directors were biased toward a “heads in beds” strategy and focused mostly on building occupancy, while others were biased toward maximizing rates and increasing average daily rate (ADR.)

Then one day a guy named Erik Orkin, who was the founder of an early revenue management automation system called OPUS 2 Revenue Technologies, introduced the hotel industry to a new metric known as RevPAR which was short for revenue per available room, thus truly revolutionizing hotel pricing. Now there was one metric that showed how to optimize revenue by focusing on both rate AND occupancy. (Note: The easiest formula for hotels to calculate RevPAR is: ADR x occupancy rate.)

Around the same time, another industry legend named Randy Smith founded a company called Smith Travel Research, which later became known as STR. Randy had worked for the most prominent lodging industry financial consulting company called Laventhol and Horwath. Having established trusted relationships with the leaders of most of the major hotel brands, Randy was somehow able to do what had been unthinkable, which was convince brands to truthfully share their actual performance data – specifically ADR and occupancy percentage.

Being a true visionary, Randy came up with the idea of blending this data and reporting it back to the participating hotels as opaque data. Each subscribing hotel would self-select its “comp-set,” which was a list of five hotels it believed to be its main competitors. Put simply, if you managed a Hilton, you might pick as your comp-set the nearby Marriott, Sheraton, Radisson, Westin and Holiday Inn. STR would then report monthly how your RevPAR compared with the blended results of your comp-set, while maintaining the confidentiality of any hotel’s individual results. Over time, STR developed advanced metrics, such as RevPAR Index, for a deeper dive into the data.

Armed with accurate data and a new formula for calculating financial success, a whole new profession evolved right before my eyes in the early 1990s. Suddenly a new job title emerged as the yield manager, which soon became revenue manager. Marriott was the first chain I remember to create this new position on a system-wide level, a move that other brands quickly copied.

A short time later, companies such as Phaser and TIMS began reporting booking pace data that looked ahead, by scraping availability from the GDS systems which powered travel agencies and eventually online travel agencies (OTAs), giving these new yield or revenue managers even more data points to factor in. (Today, TravelClick offers Hotelligence 360®.)

It didn’t take tech companies long to recognize the opportunity to crunch all this data, and automated revenue management systems rapidly evolved to predictively offer the best rate to charge for any given date, based on pacing of current demand and historical trends.

Simultaneously, hotel property management systems (PMS) began to simplify the methods for adjusting rates on a macro level vs. unit type.

How interesting it has been to see the once rudimentary methodologies of hotel pricing evolve into a brand new hotel career path and simultaneously, a whole new industry of revenue management automation companies, all running parallel to my own evolution as an entrepreneur in the training business.

The Move to the VR Space

For over two decades now, myself and many others have envisioned a similar revolution in revenue management taking place in the VR space. I have advocated personally behind the scenes for STR to branch out and provide RevPAR related data to the VR space, which is a move they have yet to make, perhaps in recognition of the unique challenges such as an extremely diverse inventory and also the lack of enough density of competitors to aggregate “opaque” data. I’ve encouraged the revenue management automation systems developers to address the needs of VR companies, while also encouraging revenue management consulting companies to enter this niche too.

Finally, in just the past three to five years, there has been significant movement. Several new providers are working hard to aggregate the data needed for VR leaders to practice revenue management, such as blended results for rate, occupancy and booking pace. PMS providers are adding yielding features, allowing for rates to be adjusted system-wide vs. by unit type. Now we see revenue management automation taking root in the VR space. 

On the surface, all of this seems like good news. Theoretically, the VR niche of lodging can finally evolve from pricing based on gut feeling, anecdotal evidence and the arduous process of manually tracking booking pace based on the availability of a sampling shown at the competition’s website.

As a trainer and consultant, I encourage vacation rental managers to embrace these changes, subscribe to new data reports, look into revenue management automation and to push PMS companies to continue to evolve the tech needed for frequent pricing adjustments. These are all “good things.”

That being said, I also encourage everyone to be highly skeptical of data, systems and recommendations from self-proclaimed outside experts. It makes me a bit nervous when I talk to some VRMs who seem to be buying into these concepts with blind trust, often based on the personal connections with those doing the selling.

Ask the Tough Questions

First and foremost, to find the best fit for your company, speak to all of the providers who are now offering revenue trend reporting services and ask each of them some pointed questions such as:

• How many companies are reporting data used for the blended trend reporting? How many of these are in your geographic region?
• How is that data being reported? Is it self-reported or pulled directly from an API connection to PMS systems? Is it simply scraped only from availably that shows at OTAs and Airbnb?
• How is the inventory of the companies that are reporting categorized? Trends might vary greatly for companies in the same region when one focuses mostly on condos and the other private homes.
• How does their reporting deal with unit ratings within the same VR company (such as same-size units that might vary greatly in furnishings and décor)?
• How does their occupancy reporting factor in owner use? Do the algorithms treat this as “occupied” or do owner-use homes simply reduce the available inventory?
• How does their reporting system deal with unit types? (Example, the booking pace for larger homes might trend significantly differently than for smaller ones.)

When the time comes to shop for a new PMS system, I would ask a lot of questions about what it takes to adjust prices up or down for all accommodations in order to react to demand trends.

When considering a consultant, I would be careful not to be overly impressed by someone who simply has an extensive, strong background in hotel revenue management. Instead, ask questions as to what types of hotels they have worked with. Is their background mostly in homogenous lodging inventory such as traditional hotels? Or do they have experience managing revenue at properties with a highly diverse inventory of accommodation types? It is much easier to manage revenue in a “big box” hotel where the majority of the rooms are relatively similar in size and style. On the other hand, many destination type resorts mirror the VR space as they have very diverse inventory such as inn rooms, villas, cottages, condos and sometimes private homes.

In summary, it is overall good news for the VR niche of lodging that the data needed to manage revenue is becoming available and that tech companies are taking on the seemingly impossible task of automating revenue management decisions. VRMs should attend every educational breakout session at conferences, speak with all the vendor partners, talk with (and perhaps hire) consultants and work hard to evolve their company’s practices. However, in doing so, being cautious and being downright suspicious will serve your company well.

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