The Marketplace Is More Transparent Than Ever – Hotels Must Look Beyond Revenue Management
The hotel industry is increasingly transparent and efficient. In fact, the marketplace now resembles a reverse-auction, where hotels compete by offering the lowest price. As a result, revenue management has taken much of the control of profitability out of hoteliers’ hands. But there is a way to gain it back.
Revenue management—originally called yield management—had its big breakthrough in 1985. That year, American Airlines, under Robert Crandall’s leadership, launched DINAMO, then the most advanced yield management software. The aim was to counter the recession and compete with low-cost airlines like PEOPLExpress.
Within a year, American Airlines reported a revenue increase of more than 14% and a profit increase of 48%. Crandall later shared this success story with Bill Marriott, CEO of Marriott International. By the mid-90s, Marriott also reported similar impressive gains.
These examples demonstrate how revenue management can significantly boost the top line and profit. Revenue management literature often highlights these early successes, sometimes implying that the practice alone is the key to profitability. Some even call today’s solutions the most important initiative for hotel profitability.
However, such beliefs are misleading. Revenue management gave first movers like American Airlines and Marriott a major advantage. Yet, this advantage quickly disappeared as competitors adopted the same practice. Today, revenue management has evolved into a necessary tool to maintain—rather than improve—market position. In oversupplied markets, it often creates a zero-sum game, where no one gains.
Furthermore, with the rise of internet and mobile technologies, customers now enjoy near real-time access to price information. The result is a marketplace that is transparent and efficient, where hotels compete by lowering rates. In such an environment, differentiation becomes harder, and profitability suffers.
Norway Case Study: Structural Improvements Have Yielded Economies of Scale
In Norway, revenue management practices became widespread more than a decade ago. According to Statistics Norway (SSB), the average achieved room rate between 2008 and 2012 was NOK 53 ($9.30) lower than it should have been if it had kept pace with inflation. During the same period, data from Horwath HTL’s 2012 Norwegian Hotel Industry report shows that the average number of room nights per yearly full-time employee (FTE) increased significantly.
The positive fact is clear: fewer FTEs are now serving more room nights. However, this cannot be credited to improved RevPAR—the main purpose of revenue management. Instead, efficiency has come from structural improvements, particularly in purchasing, marketing, and support functions. These changes have delivered economies of scale.
In the hotel industry, a common rule of thumb is that for every dollar in cost, you must sell ten dollars to achieve the same contribution margin at net operating profit. Yet, revenue management often drives further price pressure, with rates fluctuating in line with demand while operating costs steadily increase. This raises a key question: What should hotels focus on to achieve sustainable profitability?
The answer is that revenue management, as practiced today, is a necessary tool but not enough to ensure long-term success. Tomorrow’s winners will be those who expand beyond traditional revenue management by embracing two critical areas:
- Resource management: Dynamic resource management must be fully integrated with daily forecasting. By aligning staffing and purchasing with activity levels, hotels can prevent productivity loss. This requires a deep understanding of cost behavior and proactive planning—conventional post-event budget control is no longer sufficient.
- Total revenue management: Profit optimization must go beyond room rates. Hotels should maximize contribution margin from a guest’s total spending, including upselling across conferences, banquets, spas, food and beverage, and more. This ensures higher profit per available unit, not just per room.
Ultimately, this article seeks to spark a more nuanced conversation about both the possibilities and the limits of current revenue management practices. It also highlights the opportunities that disruptive technology and new organizational models offer to hoteliers willing to think and act differently.
By Young N. Nguyen
CEO & Founder
d2o
YOUNG N. NGUYEN is CEO & Founder of d2o (www.d2o.com), the provider of innovative performance management methods and software for hotels, resorts, and catering companies. d2o currently has over 600 customers in over 40 countries, as well as mentoring relationships with hotel management colleges and universities worldwide.
- Click here to get a Norwegian version of this article.
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