As demand continues to return to the Indian hotel market in 2010 rates are still catching up and, with new supply opening in many cities, pressure on pricing and margins will remain. As a result, it is critical for hotels and especially resorts, to move beyond a traditional revenue management approach focussing on room rate and RevPAR, toward a more holistic approach that encompasses total customer value. This entails optimising the entire spend of customers as opposed to only maximising room revenue.
Historically, there have been many reasons why hoteliers tend to focus on room revenue and rate; room revenue tends to be the largest contributor to total revenues, and the profit margin on this can exceed margins from other revenue streams. Other reasons range from following performance metrics such as RevPAR which ignores other revenues completely, to technology and data issues.
When you take a total customer value approach, the decisions one makes may be significantly different to those taken if one only looked at room revenue. For instance, let’s say on one hand you have a customer who is willing to pay a room rate of US$220 and spend US$50 on F&B, while on the other you have a customer who is willing to pay a room rate of US$180, spend US$100 on F&B, and US$200 at the spa. Assuming there is only one room left to sell, a hotel practicing traditional revenue management would give preference to the first customer, based on the fact that his room rate is considerably higher. The second customer’s additional spend would not be forecast, causing significant revenues and profits to be left on the table. More sophisticated practitioners of revenue management will calculate additional spend when making large corporate contract decisions, but this tends to be both inconsistent and imprecise. For most resorts, wholesale contracting decisions tend to be volume-based as opposed to value-based; as a result, hotels and resorts are leaving profits on the table.
In order to benefit from a total customer value approach in revenue management, hotels and resorts need to consider areas such as moving strategically towards a Total Revenue Per Available Room (TotalPAR) metric approach, which in essence, will encapsulate the total value of the customer. This can then be followed by looking at profit per available room, as opposed to the RevPAR approach of today. Many hotels have GOP as a performance measure, but in the incentive schemes for GM/executive teams, this is insufficient. Without a daily focus on TotalPAR, as there is a focus on RevPAR today, a true change in mindset and business practice is unlikely.
Secondly, there need to be standard processes in place. This could have several manifestations: from replacing the traditional RevPAR focussed hotel yield meeting with a total revenue focussed meeting, to business rules governing banqueting business, to modifying sales and marketing strategies to grow the share of business from corporate and leisure accounts, whose total revenue per available room is highest. Thirdly, hotels and resorts should invest in standard PMS technology, which makes it easy to track and collate information on additional spend. Additionally, they should look at both the most basic technology as well as advanced software, for a total customer value focus. At a basic level, hotels and resorts can track total spend by market segment and by account, and create some basic analytics to strategically determine who is driving the most total asset profitability amongst the customer base. Hotels can also invest in revenue management technologies that cater to optimising total customer value. For example, our solution maximises a resort or hotel’s profitability by forecasting the demand of different market segments, and optimises their value to ensure availability for your most profitable customers. Through the use of the software, a hotel can see gains of five-to-ten percent on total revenues.
Lastly, given the mindset and culture change which the progress towards total customer value requires, clearly demonstrated senior management commitment to the process, decision making, and measurement of results is critical for success. Three basic steps which can be taken right now to kick start the above points are: adding TotalPAR to your standard reporting, and determining if you currently have processes or policies that discourage a total revenue focus, that is, incentives for a sales department based on volume of rooms versus revenue or profit. Also, meeting with senior executives to perform a gap analysis between current operations, which may be room revenue focussed, and where you would like to be with a Total Customer Value Focus.The next stage in evolution is a total customer value mindset, which will only enhance revenues and profits.
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