Total Revenue Management / The journey from capacity to profit management

It is a fact that over the last years, we have seen a growing need for traditional revenue management (RM) to evolve from having sole emphasis in maximising revenue mainly from rooms, towards adopting a more holistic view and focusing on achieving profit maximisation across the whole organisation.

The latest developments in technology and added pressure in the market have advanced RM to acquire a strategic and proactive planning role with emphasis in maximising all components of the customer journey, instead of being utilised as a short-term reactive solution. This gave birth to the idea of Total Revenue Management which should be implemented as a business philosophy and strategy as its principles take into account the entire operation.

Total Revenue Management, (TRM), comprises both strategical and tactical procedures and aims to identify & optimise the customer journey. For this customer-focused role to be effective it is imperative to understand consumer behaviour and patterns before, during purchase as well as throughout the product utilisation in order to accurately identify and map demand forces with profit potential. TRM has remarkable potential and the main benefit of its application as a business strategy, is the formation of a mutual and clear vision that enables everyone to work towards adopting the right attitude and commercial approach while expanding knowledge and insights on factors that influence profit. Installing a Revenue culture, right from the start, is of outmost importance for successfully deploying TRM.

A Revenue culture implies that all stakeholders have a common vision of what needs to be achieved, why, and how. By having a clear understanding of what the organisation stands for and the strategies & tactics used to reach set targets, it is easier to define standards of performance and establish expectations.  Whilst not everyone will ultimately be responsible for achieving what is required, it is essential that relevant stakeholders will participate in the discussions and everyone is aware of decisions taken. This will improve cross-departmental communication, while having an overall view of the business will motivate and incite involvement that will give the team a sense of ownership. The implementation of a rigorous training program is mandatory to shape and instil the right mentality and guarantee a long term success. This will create an environment that celebrates opportunities, transparency and diversity.

Moreover, the role of Revenue Manager and its position in the organisational structure will need to be re-examined and expanded to include additional responsibilities. Beyond the analytical skills, the modern RM will also need to possess character traits such as impeccable communication, influential and leadership skills.  As requirements will include focus on overall profitability, current metrics will need to be re-evaluated to reflect that. While RevPAR (Revenue Per Available Room) will still play an important role, TrevPAR (Total Revenue Per Available Room) will need to be established to measure overall performance, while GOPPAR (Gross Operating Profit Per Available Room) should be adopted to measure profit. Calculating GOPPAR could prove challenging as different organizations place different cost elements before or after GOP. Therefore, a universal repositioning in financial statements will be required for the adoption of this fundamental metric.

Furthermore, to increase benefits from a TRM system, it is vital to optimise the buying process and measure total spend, consider different type of customers, their purchasing power, needs and habits. For optimum results the process of segmenting customers will need to take into account the contribution of each segment in all revenue streams as well as the cost of sale. This will provide a detailed view and understanding of who the customers are while having the knowledge of which segment is more profitable, will offer a clear insight and enable the development of the Optimum Business mix. In fact, while examining only rooms may classify a segment secondary due to less booked revenue, the contribution in ancillary products combined with how they book can make it more profitable.

To facilitate the above a seamless system that enables cross-departmental sharing of data will be a key element. While the benefits of technology are undeniable, the variety of systems used in different departments may present a challenge for implementing a TRM process. System integration is required to ensure that cross departmental data processing necessities are met and total spend can be accurately mapped. A seamless system will ensure constant communication between all outlets and provide with accurate, timely and complete information for successful optimisation while enabling and supporting better management forecasts.

Additionally, to proactively RM the business not only by price point but also by cost of acquisition & contribution by revenue source, it is essential to understand the unconstrained market demand. Forecasting is an essential business-planning tool that allows a view of how business is likely to perform in the future and it determines the fine-tuning of long term strategies and the deployment of short term tactics. It is one of the building blocks of Revenue Management and offers a way to plot business activities so that future demand will be met.

It involves the analysis of past booking and spending patterns combined with the current and future trading in order to project a detailed outlook and in a TRM system this needs to be performed not only by market segment but also by revenue stream. Moreover, knowledge of the market and the forces that drive competition is necessary as forecasts should not only be based upon what is happening within the establishment, but needs to include external factors that can influence demand as well as the perceived value of the product.

Obviously, a forecast is only as reliable as the information on which it is based and therefore a well-designed system will incorporate all the required procedures to guarantee the quality of data collection. The accuracy of forecasts will determine key decisions on strategies to adopt for revenue maximisation throughout the organisation, while the ability to anticipate demand patterns and preference requirements will facilitate the design and availability of services and products.

Optimisation, another key element, compliments the forecast outcome and is the ongoing process of controlling product availability and price to ensure revenue and profit growth. In a constantly changing market place, having a thorough understanding of booking patterns, lead times and cost of distribution will enable managing demand not only by price but also by cost of acquisition & contribution by revenue centre.  With demand fluctuating, optimisation aims to highlight deviations from the strategies in place and suggests corrective measures. It takes into consideration the profit elements that influence performance in all revenue streams in order to decide potential reformulation of adopted strategies. Having the right revenue culture makes optimisation easier to implement as there will be times where a sacrifice in price will need to be made for a product in one department in order to secure a piece of business that has significant profit value in another. Looking at business displacement plays an important part in the optimisation process when deciding which pieces of business to consider or decline. The process of calculating displacement will need to include cost of sale, overall revenue contribution, contribution margins for different revenue centres, past performance over considered dates as well as forecast and external factors that might be influencing demand. When considering pricing it is important to keep in mind the perceived value for money and have a thorough view of the value the market places on the product. To achieve this, it is essential to incorporate ranking and review scores in different sources as it can be a critical decision factor for potential customers.

Total Revenue Management

 

Even though the components emphasised in this article are by no means a definitive list for a TRM system they highlight some key focus areas. And while there are still challenges in the adoption of such a business practice it is an exciting time for Revenue management. Technological advances have led to systems with enormous potential for handling the complexities of managing revenue streams due to their abilities in advanced problem solving, reasoning and perception. This will elevate the role of RM and empower it to reach its full potential whilst allowing the whole organisation to benefit from its concepts.

 

 

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