In 1943, psychologist Abraham Maslow established a model describing the hierarchy of human needs, ordering them accordingly. This accurate and popular model fits perfectly into the business world and our hotel industry. We can extrapolate the same idea by placing the most important needs at the base, and once these are met, we can address the next need. Normally due to lack of time or work habits, we neglect the most fundamental pillars of our business.
After publishing my previous article, “The Revenue Management Iceberg,” where I drew a parallel between the abundance of tasks and the depth of an iceberg, I received numerous comments and questions on this topic. The most frequent question was how to prioritize among so many tasks. Inspired by Maslow’s pyramid of needs, I have summarized what I consider to be the essential pillars into five levels, which I will now describe:
The Foundation: Distribution Pillar – Who do we sell to? What do we sell, and why?
I reiterate the importance of this fundamental starting point, which dictates how we sell. In my opinion, it’s a mistake to focus on inventory or yield strategies without a solid foundation. Ignoring this basic need is like putting the cart before the horse. I’m talking about having the control that will determine the future profitability of the business. This is a delicate point because it clashes with the traditional business mindset, where the main focus shouldn’t be on selling and signing contracts with the false belief that signing more contracts leads to more sales. At this stage, we must be convinced that a disorganized contract structure jeopardizes the pricing strategy, the direct sales channel, and therefore the profitability of the business.
Sharing a personal experience, in 2007 I collaborated on a study evaluating the option of terminating a contract with a certain bed bank. The debate was heated. From the sales side, it was considered an enormous risk, and they expressed strong opposition due to the account’s high revenue (which is precisely what should raise concerns). They refused to consider ending the contract with such a significant account. From the revenue side, after analyzing each booking, we demonstrated that this revenue resulted from cannibalizing other, higher-priced segments, including corporate bookings in city hotels and other channels. But worst of all, it disrupted the direct segment strategy, reducing its potential and causing a loss of distribution control. Despite the sales pressure, the contract was ultimately not renewed, resulting in unprecedented sales pressure. We had to justify the account’s lost revenue on a monthly basis by highlighting the increase in other, higher-priced segments. Well, after the first year, the hotel managed to substantially improve its RevPAR and achieve double-digit ADR growth, well above the average contracted at that time. Furthermore, as expected, this additional ADR increase directly impacted GOP. This strategy was subsequently rolled out across the entire company, which at that time had over 1,100 hotels worldwide. This experience demonstrates that sometimes, due to fear or simply because things have always been done in a certain way, we fail to gain full control of the business. For this reason, I believe that the essential foundation in this Revenue Management pyramid is the proper distribution control. Only then can we seek opportunities (in a more streamlined environment) to optimize the bottom line, but always with a solid foundation.
Strategic Need: Direct Channel, Pace, Positioning, and Yielding
Once we’ve streamlined sales, we move on to the next need in the pyramid: pricing, which allows us to optimize our approach and reduce the risk of cannibalization. With greater freedom and control, we implement our pricing strategy, prioritizing the direct channel, monitoring market positioning, and employing online marketing, group strategies, and other effective strategies. When distribution is well-organized, the pricing strategy becomes meaningful. We enter the heart of the matter, where we monitor pace and pickup trends to validate our strategies. We verify the optimal product mix for each segment based on this streamlined distribution and our actual market positioning (where demand places us). It’s crucial that the strategy is clear and concise, with a yield structure developed gradually to avoid last-minute, drastic changes due to a lack of business (a strategy that always results in greater losses). We avoid making rash decisions by ignoring data, which can lead to risk when a holistic view of the business isn’t considered. For all these reasons, I always question opportunities, as they require deeper analysis and understanding, and even after analysis, they don’t always turn out to be genuine opportunities. This, which seems basic, isn’t always correctly in place.
In my experience, at this strategic juncture, it’s crucial to maintain a simple and well-organized strategy while upholding a solid structure. This simplicity is often more effective than many complicated micro-strategies that frequently contradict each other over time. There’s a misconception that the more exceptions we make to the overall strategy, the better we’re doing. While we make numerous changes daily, these must be consistent, avoiding strange combinations that cause us to lose control.
Unfortunately, this second need is often the starting point for hotel Revenue departments, which lack of control over the fundamental need for distribution. This is because it’s typically managed externally by the hotel chain. Although a general distribution strategy exists, what works for a city hotel doesn’t necessarily work for a Resort, or even between individual hotels. Therefore, global agreements can undermine the specific interests of a particular hotel. It’s crucial to take the next step and tailor distribution to the specific needs of each hotel in our ongoing pursuit of improved results. We aim to move beyond inventory management and towards a more proactive approach with complete control over the distribution and business.
Total Revenue Need: F&B, Spa, Ancillary…
We move on to the next need. Having addressed the need for proper distribution and a unified strategy, it’s time to broaden the hotel’s revenue streams. We reach the point where we must take a long-term view, adopting a “Blue Sky Thinking” approach. In other words, we aim to optimize Total Revenue per Occupied Room. It’s essential to establish a catalog of experiences that extends beyond room occupancy, combining gastronomic and wellness experiences, thus expanding the range of options. We culminate with a clear upselling and cross-selling strategy, focusing on Ancillary Revenue. Everything, absolutely everything in the hotel has the potential to generate additional revenue. It’s essential to establish clear strategies for each revenue generator.
Based on an initial, undeveloped demand, we build and optimize RevPAR, increasing GOPPAR thanks to the integrated Total Revenue strategy, which will drive us to improve the bottom line. Although it’s a common question in the classroom, there’s no specific optimization percentage that compares room revenue to other revenue streams within a hotel, as it varies from hotel to hotel depending on the services offered. The margin is always much higher for room management than for F&B, where good management is essential to ensure a positive profit. Furthermore, it’s possible that during off-peak seasons, GOP could suffer if the cost structure and scale aren’t well managed, due to high food and fixed costs.
The Need to Measure Results: KPIs
Now we’ve reached the point where we measure and compare hotel performance. Here, I always try to focus on the essential KPIs, because there are so many. In fact, some people in the Revenue Management world even invent new ones, but what’s truly important is focusing on the main indicators. We aim to monitor our performance against our objectives after implementing strategies and compare them to the market and competitors.
The question is always the same: Did we do well? Well, we may have exceeded our objectives or fallen short, but this doesn’t mean we haven’t optimized the hotel effectively. Let me explain myself. If we haven’t reached our objectives, however our RPI (Revenue Performance Index) or RGI (Revenue Generation Index) is higher than the competitor’s, we have optimized the hotel better, and this shows that the objectives were too optimistic based on existing demand. Conversely, even if we’ve exceeded our target, if our increase in RPI or RGI is less than that our competitors, despite having met our objectives, we’ve missed out on profits, revealing a conservative targeting scenario. As we always say at Revenue, estimates are only valid at the time they are made because market and competitive conditions are constantly changing, and we cannot anticipate long-term changes in demand and competition in our predictions.
Among the most noteworthy KPIs, I consider RevPAR (optimization across channels, modulation between occupancy and ADR), and TRevPAR (additional revenues come into play), RPI or RGI (RevPAR penetration compared to our competitors), focusing on MPI (Market Penetration Index) and ARI (Average Rate Index). It’s interesting to know the TRevPOR (total optimization per occupied room) and calculate the portion that comes from ADR and the portion that comes from strategies external to room revenue (F&B, Spa, etc.). Finally, it’s essential to consider the KPIs impacted by the channels, business strategy, and management, such as GOP (Gross Operating Profit) and GOPPAR (Gross Operating Profit Per Available Room). These latter metrics are at the bottom of the USALI (Standard System of Hotel Accounting), and further down getting the EBITDA, the primary focus for owners. While countless KPIs exist, specific to F&B or Spa, as I’ve discussed in previous articles, these are the ones I consider most fundamental for understanding hotel performance, without the distraction of complex KPIs that we only occasionally review.
The Pinnacle: The Need for Control
At the apex of the pyramid, the optimization cycle closes, and the strategies implemented to increase the most important factor. We must ask ourselves: How has demand responded to price variations? What is the cost per channel obtained after controlling distribution? Which online marketing campaigns have performed best? Have we achieved greater increases in RGI or RPI change than our competitors? Are these increases driven by occupancy or ADR? Where can we improve?
The truth is, we haven’t discussed ADR up to this point because ADR should never be the primary objective. In fact, aggressive price increases generally have a negative impact on a hotel’s GOP. ADR is the result of doing our job correctly, optimizing real opportunities across channels, maximizing the direct channel, and controlling distribution (cost per channel) and inventory. This will allow the ADR to reach the highest possible level. As I always say, demand is the only owner of the ADR!
Focusing on what’s truly essential, there’s no doubt that consistently achieving the optimal market equilibrium is the most challenging aspect of our daily work. As Abraham Maslow aptly stated, “The best way to analyze a problem is to give it your all, study its nature, and discover the answer to the problem within the problem itself,” which tells us that to overcome challenges, we must first understand them.