The Evolution of Revenue Management

In the early 1990’s revenue management in hospitality was in its infancy. Managing demand was largely manual, few hotels operated with revenue management software systems, and the industry gleaned what it could from other sectors such as airlines. The position of revenue manager did not exist. Sales did their thing; reservations and front desk did their thing; and central reservations did their thing. Somehow it all worked and revenue optimization was believed to be achieved. Of course, data benchmarking too was in its infancy, so there were more limited ways to measure success.

    Then along came the Internet. Although researchers had begun in the 1980’s to assemble a “network of networks”, the modern Internet really emerged in 1990 when the computer scientist Tim Berners-Lee invented the World Wide Web (WWW). A year later, in August 1991, the WWW became publicly available and by 1995 the Internet was fully available to the public and subsequently commercialized.

    So, you may ask what’s this have to do with revenue management and generations of revenue managers? Well, at the risk of over simplifying the progression of events, the dawn of yield management (I won’t call it revenue management just yet), at least in North America, came on the heels of the Internet revolution. Suddenly, hotel room inventory started appearing online and prices that used to be opaque, accessed only by a phone call, a formal proposal, or a visit to a hotel…became totally transparent. In fact, hotel teams were constantly surprised (and in some cases horrified) to find their inventory all over the Internet, on websites they didn’t even recognize, much less authorize.

    Hotels began to realize that managing inventory was precipitously far more complex. This level of complexity required dedicated time to manage and thus the role of revenue manager emerged. In many cases a property level Reservations Manager or Supervisor was unceremoniously given the title of Revenue Manager and told to go “figure it out”. This first generation of revenue managers was largely self-taught, still expected to run Reservations, and in many cases ill-equipped to handle the tasks of the intricate and complicated world of online distribution.

    By this I simply mean that the traits of a good reservationist and those of a good revenue manager were inherently different. In my experience, good reservations personnel thrived on the people part of the job; high on empathy and extremely service-oriented. They were not necessarily highly analytical, numbers-oriented, somewhat dispassionate individuals…often seen as good traits for a successful revenue manager. Now, I appreciate that I’m taking the liberty of generalizing these job traits, but the truth is many of these individuals did not succeed as revenue managers. Of course, some did and in fact it is these people who form the backbone of the second generation of revenue directors.

    Those who survived the steep learning curve that the Internet presented became important players in their respective hotels. These self-taught online distribution pioneers made it their business to tame the World Wide Web, constantly opening and closing rates and dates and stays; learning how to manage an online environment that was evolving so rapidly it was like trying to shoe a horse on a dead run.

    This second generation of revenue management professionals had to become accomplished tacticians. Reporting lines were generally to the Director of Sales Marketing (DOSM) and the “last say” was usually the DOSM, not the revenue manager. Remuneration was not classically commensurate with the value the role was playing in the organization. But at the same time, the industry will never know the extent to which revenue opportunities were squandered simply because a stay control was misused or missed altogether.

    As the second generation matured, the discipline branched out…moving beyond inventory/yield management and morphing into revenue management. More attention was paid to optimizing all room types; more importance was placed on a hotel’s relative positioning and performance in the market place. Strategic pricing initiatives became far more convoluted in the online world and forecasting skills became paramount. The nuances of business mix management and the ever-expanding world of online travel agencies (OTA’s) brought new challenges. Particularly as forecasting methodologies evolved, the role of the revenue manager as master forecaster began to elevate the profile of the position. Hotels relied on the revenue manager to produce topline room revenue budgets and 30/60/90-day forecasts.

    As revenue management took hold as a distinct industry discipline, there was more and more demand for the role and the expertise. Whereas the position surfaced initially in larger, more sophisticated hotels it became clear the task work of a revenue manager was needed by pretty much all hotels. Major brands developed extensive corporate-level resources to offer optional revenue management services for hire and cluster revenue managers were trained and organized to look after multiple hotels. And of course, revenue management software systems (RMS’s), either off the shelf or proprietary, became far more common. Still, the percentage of hotels worldwide that deploy RMS’s is surprisingly small. I don’t know the exact ratio, but I would be surprised if it was more than 10%. Certainly, the RMS vendors know very well the extent of the market potential.

    And that brings us to present day and the extreme need for a 3rd generation of revenue managers. As need periods are identified (often with less than desirable lead time) GM’s turn to the Director of Revenue and say “do something”! Although revenue management is meant to be more about managing demand, not creating demand…what can the revenue manager do at that point? Often, it’s a matter of going out to the OTA’s, offering specials, paying for better placement and using price as the primary weapon. All tactics that escalate acquisition costs, destroy flow-through, and attack profitability which in turn erodes asset value.

    But 3rd generation revenue managers know that this practice can be halted if the revenue manager and the digital marketer are “joined at the hip”. The digital marketer can deploy precision strikes to connect with those markets and specific people who are most likely to travel to your hotel during those very need periods and more likely to pay better rates to stay there. All that micro-data is now available. Fish where the fish are. Revenue managers do not have to use a shot-gun approach to creating demand. They do not have to succumb to price as the weapon of choice. And more often now, 3rd generation Directors of Revenue are using sophisticated business intelligence tools to slice and dice the data, and applying much needed data visualization to decision making.

    But don’t forget that some hotels (even as 2018 rapidly evaporates and 2019 approaches) still appear to be rushing into the 21st century with their revenue management efforts and expertise. Believe it or not, there are still skeptics that think a hotel can be operated successfully without or with limited revenue management. In fact, the disparity today between more and less sophisticated hotels is shocking. And when old, restrictive 2nd generation tactics are deployed by the competition, a hotel is only as good as its worst competitor. So, when the next downturn occurs, and surely it will since history tells us that our beloved industry is cyclical, will the erosion of rate be the first casualty?

    Marketing used to be distant from the RM effort. Even the title of Director of Sales Marketing is a misnomer when Sales is typically 90% of the job and marketing 10%. And in the major brands, a great deal of marketing is global not local in nature. The convergence of digital marketing and revenue management is an imperative. And those revenue managers and directors who strive to understand the world of digital marketing will become 3rd generation revenue management professionals. But like most monumental shifts, success will depend on strong senior leadership who recognize how resources must be trained and utilized, and curious, resourceful revenue managers who are unafraid of change. Those who don’t embrace this inevitable transition will not have jobs going forward. Some will go the way of Blockbuster.

    Yes, we have a lot to learn from the challenges of the first and second generation of revenue management professionals. Be very aware of the traits needed to be successful. Streamline and eliminate tactical tasks that do not bring sufficient value to the organization any more. And realize that the position now must be more strategic than tactical. Maybe that’s why titles today have morphed into monikers like Director of Revenue Strategy. Now if we could just get that word “profit” in the title!

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