Revenue Management in a downturn

Declining demand usually means lower room revenues for hotels, caused by lower occupancy combined with lower average rates. Revenue Management itself does not generate additional demand in the market, but it does help to manage the existing demand in the best possible way and achieve the highest possible revenue share among competitors. Revenue Management alone cannot avert a crisis, but it is an important component in obtaining a realistic assessment of market developments. A well thought through revenue management strategy can mitigate the impact of negative macro-economic developments on the operating result of the hotel.

The following areas should be examined more closely in preparation for a crisis:

  • Public rate strategy and pricing
  • Segmentation and contracted rates
  • Inventory management and category sales
  • Competitor analysis and benchmarking
  • Cost control and adjusted expectations
Public rate strategy and pricing

The first reaction to lower demand is often to reduce public rates in order to channel the maximum of the remaining market demand into your own hotel. However, this only works until competitors react with a rate reduction themselves. The result is often a downward spiral of rates with unchanged demand. For the individual hotels, this primarily means lower revenues. All hotels lose in this scenario, while the winner is the customer who benefits from the lowered prices. This situation has been observed increasingly in the price wars of airlines in recent years and has led to a large number of insolvencies.

Maintaining pricing power

Studies conducted by the renowned American Cornell University on the last major financial crisis of 2008/2009 have shown that even additional occupancy, which was bought at reduced rates, generally did not lead to the desired RevPar increase. Hotels that reduced their public rates significantly also had greater difficulty in returning to their desired price level after the crisis, as their image and perception was permanently damaged. Talks with hoteliers in the German-speaking countries confirm this.

One way to gain market share with less risk through public rate products is to work with restricted offers that are not visible to or less interesting for the remaining solvent customers. These could be packaged discounts, offers limited to certain feeder markets or user groups, such as members of customer loyalty programs, or non-cancellable rates with long advance booking periods.

Segmentation and contracted rates

When the economic situation deteriorates, close cooperation between the sales department and revenue management becomes increasingly important. During an economic crisis, hoteliers should focus on those market segments and distribution channels that still have high demand potential for the hotel.

A recession can mean a major reduction in some guest segments. Reasons could be the insolvency of travel agencies (see Thomas Cook), the reduced willingness to travel to entire countries due to economic uncertainty (e.g. the danger of Brexit) or the reduction of corporate customers’ travel budgets. A sustainable segmentation strategy combined with the right pricing is therefore critical for success in difficult times.

Analysis of contracted business

While the contracted business is usually reduced by revenue management in economically strong years due to the lower rates, it can build an important base occupancy for hotels in times of weaker demand. The hotel becomes less dependent on weakened public business and therefore less susceptible to price wars.

In preparation for a possible crisis, existing contracts should be analysed in detail together with the sales department in order to find ways to increase the volume of profitable customers and bind them to the hotel. This can include less restrictive handling of allotments, close-outs, extending contracts to 2 years or refraining from rate increases as long as this fits into the long-term business strategy.

In addition, group business, both in the business and leisure context, can bring base occupancy into the segment mix and replace declining public demand. Close coordination between the sales department and revenue management is important to ensure that requests are sold with the pricing flexibility needed to achieve higher conversion.

The great advantage of these segments is the opaque nature of these prices to the outside world, which do not impact public price perception negatively.

Inventory management and category yielding

The correct division of hotel rooms into categories with comprehensible supplements, as well as the correct management, restriction and overbooking of these, is a major instrument regarding the optimization of room sales, regardless of demand.

Especially in times of stagnating demand and lower willingness of customers to pay, this area should be critically analysed. The targeted overbooking of cheaper categories is a possibility to keep rates attractive without lowering the actual prices. High-paying customers will continue to pay high prices for the better room categories.

 Competitor analysis and benchmarking

A constant analysis of competitors and a comparison of your own results with those of benchmarking providers such as STR or Fairmas is essential for successful revenue management. In difficult times, it is even more important to compare results, which may fall short of internal expectations, with the market. This ensures that your own results do not develop worse than ones in the market. The competitor analysis allows the hotelier to identify the need to counteract.

Cost control and adjusted expectations

In an economic crisis, declining revenues are often unavoidable. Therefore, it is critical to optimize cost management prematurely in order to keep the GOP at the highest possible level. The revenue management can support this with realistic, detailed and regular forecasts.

Only with a realistic assessment of stagnating or declining demand and revenues it is possible to implement the above-mentioned actions in time in order to secure the operating result and control costs in advance.

Concluding remarks

The task of revenue management changes in times of lower demand but is still just as important for the success of a hotel as it is in economically strong periods. Above all, detailed forecasts, close cooperation with the various departments, an expedient segment and room category strategy and the wise creation of restricted offers become the main tasks of revenue managers.

It is an equally important ability to keep a cool head and not to negatively influence the market with price changes. In addition, revenue managers must be able to adapt flexibly to the new situation, because even in times of weak demand, existing peaks continue to exist, for example due to trade fairs or events, which must not be ignored and have to be sold restrictively and at high rates.

Although leading institutions expect the global situation to ease slightly in the upcoming year, the effects of the current economic and political challenges remain uncertain. Therefore, hoteliers should actively review the strategies above in order to be well prepared for the future.