Three More 'Busted' Revenue Management Myths

Caroline Potter, Contributing Editor

6/8/2010

The practice of revenue management is rife with misconceptions about best practices and what roles technology and personnel ought to play. A few months ago, the article, "Busted: The Truth behind Five Revenue Management System Misconceptions," discussed five myths about revenue management and revenue management systems that are both widespread and wildly untrue:

Some revenue management functions are so crucial they cannot be left to automated systems.
RMS systems will one day render revenue managers obsolete.
Average daily rate and occupancy percentage were the best metrics to evaluate revenue managers and RMS systems.
All revenue management systems are created equal.
RMS systems are really only useful in managing online sales channels and inventory distribution.

This last myth is also busted; RMS systems are indeed adept at these functions, but that's not all they do. It is a myth that is intriguing enough to prompt another round of mythbusting. With all of aforementioned myths having something to do with automation, there are bound to be a few more 'automated' myths making the rounds of American hotels that are prime for busting.

Each of these myths is really a variant of the myth, "revenue management functions just can't be left to an automated system." The truth is that many revenue management functions ought to be automated, in fact need to be automated, in order to maximize RevPAR. The fact that some revenue management systems cannot adequately control inventory levels, or booking pace, or don't allow for real-time rate optimization is not an argument against automation in a RMS system; it's simply an argument against those RMS systems. Automation is a key aspect of any effective inventory and booking pace management, particularly in an age of 24/7 room bookings, and should be a part of every good RMS system.

Myth #1: There is no such thing as automated sales channel management; channel management must, by definition, be done manually.
The reasoning behind this myth is if online travel agents and Internet bookings are a primary component of revenue management, then determining which channels are allocated what amount of inventory must be a job for a revenue manager. While it may be ludicrous to suggest that a revenue manager take no part in the selection of sales channels or the allocation of inventory to those channels, it is equally ludicrous to suggest that that be their only task. And in effect, that is what this myth suggests.

Clearly, guidelines as to which sales channels should be preferred and how much inventory should be allocated to them are set by upper management, revenue managers included. But just as other strategies and missions are set forth by upper management and then left to department heads and line supervisors to carry out, so should channel management be delegated. Determining which channel is selling through inventory fastest is usually a minute-to-minute decision, and that determination is best left to an automated system. Moreover, an automated RMS system of the appropriate sophistication can make those decisions with ostensibly less information than a flesh-and-blood revenue manager. An algorithm-based computer program can recognize, by combing through data faster and by extrapolating trends and tendencies with less raw input, which channel is performing best, and allocate inventory there. This can and should happen automatically.

Myth #2: Automated RMS systems cannot account for booking pace, with respect to inventory control.
This is simply untrue. In the scenario above debunking myth #1, the hypothetical RMS system relied exclusively on its interpretation of booking pace to make appropriate allocations of room inventory.

The fact is that most RMS systems can recognize booking pace better, perhaps, than a revenue manager could, and can act accordingly. The fundamental fear underpinning this myth is that an automated system calibrated to maximize occupancy might allow too fast a booking pace, and leave money on the table in the form of too-low rates. A corollary to this fear is that an automated system may not recognize the effect a high booking pace may have on bookings in the immediate future.

An interesting aspect of booking pace is that it is consumer behavior that often acts as a self-fulfilling phenomenon; a faster booking pace often induces more bookings. Even a sophisticated automated system, the reasoning goes, will shut off this lucrative channel with either poor inventory management or overzealous rate increases. This is partially justified; only a select few revenue management systems can effectively balance these nuances of booking pace (the RevPar Guru system is one of those RMSs).

Myth #3: Automated RMS systems put a hotel at a disadvantage relative to its compset.
This myth is based on the fallacy that an automated RMS system is a static pricing system. Automation, the myth reasons, means that a competitor can easily monitor a hotel's automatically-generated rates, and set theirs just below to undercut that hotel's occupancy. Or, more diabolically, that competing hotel may deliberately drive rates into a death spiral to undercut a hotel's RevPAR, knowing that the automated system will respond by cutting rates at the same pace.

The first counter to this line of thought is that hotel managers and owners tend to be rational actors in a competitive marketplace, and either of these hypothetical competitor's attacks would be unlikely. The second is that if such a competitor wished to devote their revenue management staff's time and effort to obsessively monitoring another hotel's price fluctuations across all online sales channels, then the object of their obsession will trounce them on efficiency. Moreover, an automated RMS allows a hotel to market outside of its compset, nullifying the vulnerability.

Clearly, there are still plenty of myths out there about revenue management and revenue management systems. And clearly, the industry seems reluctant to move toward automation in its revenue management strategies. There are some legitimate reasons for this, but none that outweigh the tremendous RevPAR advantage an automated RMS system can deliver. With the ability to modify rates in real-time, in response to vital fluctuations in supply and demand, provides a hotel with a significant revenue producing edge, through optimized rates or boosted occupancy, as the situation demands.

Accepting automation is imperative to gaining these advantages. And that's no myth.

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