10 reasons why science-based revenue management trumps rules-based methods

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10 reasons why science-based revenue management trumps rules-based methods

At its core, revenue management is an art, as well as a data science discipline. In the past, hotel revenue managers relied on manual methods and rules-based systems to handle revenue management tasks.

A rules-based system involved establishing a set of “rules” to generate revenue strategies for forecasting, inventory control, and rate setting. However, today’s complex hospitality market includes an ever-increasing abundance of big data and advanced technology, and this legacy approach leads to subpar pricing and missed revenue opportunities.

Not only is a rigid rules-based system incapable of factoring in essential data such as pricing elasticity, seasonality, and competitive rates, but it also lacks the crucial agility required to adapt to what’s happening in the marketplace.

To drive the highest achievable revenue results, hoteliers must turn to the capabilities of a science-based revenue management system (RMS). Here we examine 10 reasons why science-based revenue management trumps rules-based methods.

  • Accuracy & higher margins

Rather than relying on human error-prone manual methods, a scientific approach uses statistical algorithms to effortlessly perform the computations necessary to develop optimal pricing and revenue management decisions. An advanced RMS incorporates wide-ranging factors, swiftly processing data to improve decision-making and produce more profitable results.

  • Supply and demand

A key function of a science-based RMS is its ability to forecast unconstrained transient demand– rooms that could be sold with unlimited inventory available – at a highly granular level, i.e. customer segment, arrival and departure date, day of week, room category, length of stay, etc. This is crucial for true profit optimization. As an example, a 200-room hotel with demand for 500 rooms would require a very different pricing strategy than if there was demand for only 100 rooms on a given stay night.

  • Precise forecasting

When it comes to optimizing pricing decisions, research findings from the Q2 2019 survey on Hospitality Revenue Management revealed that 93 percent of hoteliers consider an accurate forecasting model to be critical.” For maximum total profit, in addition to forecasting transient demand, you must forecast unconstrained group demand by day, by segment as well, along with group materialization – considering cancellations, no shows, and group wash.

  • Tailored to your hotel’s DNA

A scientific model offers a highly configurable solution that meets the unique needs of your hotel. It draws from multiple historic and real-time, internal and external data points, including seasonality, special events, and the unique relationship between guest segments and their booking patterns. And because end users have differing needs, advanced solutions offer the ability to customize reporting and dashboard views based on your hotel’s priorities.

  • Cut the noise

Advanced science-based revenue management avoids unreliable “noisy” data that dilutes demand forecast reliability, like weather and lost business, providing the most accurate forecast by day, by segment, and defining strategies that will truly maximize revenue. A state-of-the-art solution also detects trends, outliers, and anomalies, helping revenue managers transform data into accurate and actionable revenue-enhancing strategies.

  • Built for the future

A scientific approach powered with artificial intelligence (AI) utilizes robust analytics, machine learning, and dynamic decision models that swiftly adapt to the ever-changing realities of your market and business. Furthermore, a robust AI-powered system can predict a customer’s purchase behavior in advance, allowing hotels to ensure that at any given time there are rooms available for their most profitable guests.

  • Pricing for profits

To maximize room rates, sophisticated science-based solutions integrate new and real-time sources of data to drive smarter pricing decisions. Advanced systems factor in competitive rate data, special event dates, day-of-week differences, room type, overbooking, length of stay, and more. Science-based systems increase hotel profitability by making the most effective use of guest data, like elasticity of demand and booking patterns. Rates are derived from potential values that offer the greatest opportunity to capture demand at each point along the bell curve of customer price sensitivity – with even small rate variations making a big difference in profitability.

Consider that a mere $2 increase in average daily rate (ADR) of a 500-room hotel with a 70 percent occupancy rate will generate more than a quarter million dollars in additional profit in a single year.

  • Space exploration

According to The 2019 Global Meetings and Events Forecast, published by American Express, demand for function space is expected to grow by 3.2 percent by the end of this year. And for some hotels, function space now accounts for nearly half of their total revenue. A group-focused RMS allows you to maximize profits for groups by not only accounting for guest room rates, but function space as well. It also considers the potential displacement costs of a proposed group displacing transients as well as other forecasted group business.

  • The whole kit & caboodle

There’s a growing trend toward total hotel revenue management. A Cornell University survey of about 400 hotel revenue managers worldwide revealed that 63 percent of them expect “total hotel revenue management” to become commonplace in the near future. Total revenue management takes into account all of a guest’s potential spend when making pricing decisions, including non-room products and services like restaurants, bars, spas, recreational facilities, etc. Next-generation revenue management solutions allow hoteliers to consider the contribution margins and capacity constraints of every asset on property, optimizing profits across all revenue streams, and adjusting rates on both rooms and ancillaries in accordance with a segment’s willingness to pay.

  • And the walls come tumbling down

With a legacy rules-based system, revenue management operates in its own world, separate from other departments within the hotel. The cloud-based platform of a scientific RMS breaks down walls  between marketing, sales, and operational activities. It provides a single source of truth with systems like CRM that allows every team to work with the same data, toward the same goal. By connecting and sharing data in real time, you create alignment among all employees with regard to RM. Marketing can use revenue management forecasts to determine when to implement promotional activities that spur demand. Sales will be able to see the big picture and quote group rates with confidence. And your operations team will know when to increase or decrease staffing based on projected occupancy levels.

The bottom line:

In today’s dynamic hospitality environment, attempting to manually change rules as things change on your property is simply not practical. A science-based RMS improves data integrity and predictive analytics, generating optimal pricing strategies and better informing your revenue management decision-making. When large hotels transition to scientific solutions, they see their revenue numbers increase by millions of dollars per year. And smaller properties see substantial gains as well, in some cases driving incremental sales lift of more than 15 percent. By implementing a science-based RMS, you can take advantage of deep ML and AI to deliver transformational change to your own company’s bottom line.

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About the Author

Casey Munck is the Director of Marketing, Americas at Cendyn. In her role at Cendyn, Casey manages content marketing, lead generation, communications, social media, corporate social responsibility and thought leadership. She resides in the heart of Silicon Valley in the San Francisco Bay area. 

About Cendyn

Cendyn is the leading innovative cloud software and services provider for the hospitality industry. With a focus on integrated hotel CRM, hotel sales, and revenue strategy technology platforms, Cendyn drives sales, marketing and revenue performance for tens of thousands of hotels across the globe. The Cendyn Hospitality Cloud offers a complete set of software services for the industry, aligning marketing, sales and revenue teams to optimize their strategies and drive performance and loyalty across their business units. With offices in Boca Raton, Atlanta, Boston, San Diego, London, Munich, Singapore, Sydney, Bangkok and Tokyo, Cendyn proudly serves clients in 143 countries, delivering over 1.5 billion data-driven, personalized communications on behalf of their customers every year. For more information on Cendyn, visit www.cendyn.com.