In 1943, psychologist Abraham Maslow proposed a model that organized human needs in a hierarchy according to their importance. This model, which has gained considerable recognition, is applicable to both business and our hospitality industry. We can apply this concept by placing the essential needs at the base and, as they are satisfied, we can address the next needs. However, either due to lack of time or work habits, we sometimes neglect the most basic needs of our business.
After the dissemination of my previous article, entitled "The Revenue Management Iceberg", in which I compared the large number of tasks with the depth of an iceberg, I received many related comments and questions. The most common question was about how to prioritize among so many activities. Therefore, guided by Maslow's pyramid of needs, I have decided to summarize in 5 levels the essential fundamentals that I consider important, which I will detail below.
I want to stress the relevance of this fundamental aspect, which is often overlooked, as it organizes our sales strategy. I believe it is a mistake to focus solely on inventory or revenue optimization tactics without a solid foundation. Ignoring this essential need is like building a house starting with the roof. I am referring to establishing control that will determine the future profitability of the company. This is a sensitive issue, as it conflicts with the commercial mindset, where the main objective should not be simply to sell and sign contracts under the false notion that the more we sign, the more we will sell. At this point, it is crucial to understand that a mess in contractual agreements can compromise our pricing strategy, direct channels and, consequently, the profitability of the business.
I would like to share a personal experience I had in 2007, when I participated in a study evaluating the possibility of no longer working with a specific bed bank. The discussion was intense. From the commercial area, it was seen as a big risk and they were strongly against this decision, especially because of the large amount of production they generated (and that is what really should have been questioned). They were not willing to give up such an important customer. On the other hand, from the Revenue department, we demonstrated, after a thorough analysis of each booking, that this production was the result of cannibalization of other segments with higher prices, including the corporate area in urban hotels and other channels. Moreover, more seriously, this affected our direct channel strategy, diminishing its potential and hindering our control over distribution. In the end, the contract was not renewed, which led to unprecedented commercial pressure, as we had to justify the decrease in production of that account on a monthly basis with the increase in other segments that had higher prices.
After its first year, the hotel managed to significantly improve its RevPAR and increased ADR by double digits, far exceeding the industry average at the time. This increase in ADR directly benefited the GOP, as expected. Subsequently, this strategy was implemented throughout the company, which at the time had more than 1,100 hotels around the world. This experience shows us that sometimes, out of fear or because of a habit of doing things a certain way, we fail to exercise full control over the business. Therefore, I believe that the fundamental element in the Revenue Management pyramid is distribution management, which allows us to make sales in an organized and controlled manner. Subsequently, we will be able to identify opportunities in a clean environment to optimize results, but on solid foundations. In fact, most of the optimization opportunities come from a correct distribution, while only a small part is related to inventory management.
Strategic need: direct channel, pace, positioning and revenue optimization
Once we have organized the sale, we move to the next need in our hierarchy, which allows us to structure the pricing strategy and minimize the risk of cannibalization. With greater autonomy and control, we now implement our pricing strategy focusing on the direct channel, market positioning, online marketing campaigns, group strategies, among other aspects. When distribution is properly structured, the pricing strategy takes on its full meaning. We get down to the nitty-gritty, preparing for the decisive moment, where we monitor the pace of sales and the evolution of bookings to validate our tactics. We evaluate the optimal mix per segment, based on organized distribution and actual market positioning (where demand places us). It is crucial that the strategy is clear and precise, with progressive revenue optimization, thus avoiding abrupt last-minute changes due to lack of business (which usually implies higher losses). We prevent hasty decisions that ignore data, as this helps to mitigate risks by not adopting a global perspective of business control. This is why I always consider opportunities, as they require deeper analysis and understanding, and not all of them, after being evaluated, turn out to be valid opportunities. Although it may seem basic, in practice this is not always the case.
In my experience, it is crucial at this time to adopt a clear and simple strategy, backed by a firm structure. This simplicity tends to be more effective than a myriad of complicated micro-strategies that often contradict each other over time. There is a mistaken belief that the more exceptions to the overall strategy, the better the outcome. While it is true that we implement many changes on a daily basis, they must be consistent, avoiding unusual combinations that can get out of control and leave us disoriented among so many exceptions.
Unfortunately, this second need often represents the starting point for the work of hotel revenue departments, without having adequate control over the fundamental need for distribution. This is because it is often handled externally by the hotel chain. Although there should be a comprehensive distribution strategy, the reality is that what works for a hotel in one city is not applicable to a tourist resort; even among different hotels there can be significant variations. As a result, general agreements can be detrimental to the individual interests of each establishment. It is crucial to move forward and adapt the distribution according to the needs of each hotel in an effort to continuously improve results. Our goal is to move away from inventory management to a more proactive approach that allows us to take full control of the business.
Total Income Requirement: Food and Beverage, spa, secondary income...
We move on to the next need. Now that we have ensured proper distribution and a coherent strategy, it is time to diversify the hotel's revenues. We must think big, taking a broad view that leads us to adopt a creative approach. Specifically, we are looking to maximize total revenue per occupied room. It is crucial to create a catalog of experiences that goes beyond simple room rentals, integrating gastronomic and wellness options to offer more alternatives. This culminates in a defined upselling and cross-selling strategy, with a focus on secondary revenues. Virtually everything in the hotel can generate additional revenue. Therefore, it is essential to establish clear tactics for each revenue source, seeking to maximize results at all stages: at booking, pre-arrival and during the stay.
From an initial unsettled demand, we developed and refined RevPAR, which contributes to increasing GOPPAR through an integrated strategy in Total Revenues. This will lead us to improve our financial results. Although it is a rhetorical question, there is no specific optimization percentage that relates room revenue to other sources of revenue in a hotel, as this varies according to the services offered in each establishment. The profit margin in lodging management is usually significantly higher than in food and beverage (F&B), where proper management is critical to ensure a correct profit and loss statement. In addition, it is possible that during periods of lower demand the GOP may be affected if the structure and cost management are not adequate, due to high fixed costs and the constant increase in the cost of food.
Importance of evaluating results and KPIs
We have reached the point of evaluating and contrasting the hotel's performance. In this aspect, I strive to focus on the most relevant KPIs, as there are a large number of them. There are even professionals in the field of Revenue Management who create new indicators. However, the key thing is to focus on the KPIs. Our goal is to monitor our performance against the targets set after implementing the strategies and compare them with those of the market and the competition.
The usual question is: did we do it right? We may or may not have met our goals, but this does not mean that we have not managed the hotel efficiently. Let me clarify: if we did not meet our targets, but our RPI (Revenue Performance Index) or RGI (Revenue Generation Index) is higher than our comparison group, this indicates that we have optimized the hotel better. This also suggests that our targets were too high given the level of demand available. On the other hand, if we have reached the targets and are satisfied, we should note that if the increase in RPI or RGI is less than that of the competitive group, we have missed opportunities to maximize profits despite having achieved the targets, reflecting a more conservative approach. In Revenue, we always say that projections are only valid at the time they are made, as market conditions and competition are constantly changing, making it difficult to anticipate long-term variations in demand and competition.
Among the most relevant KPIs, I highlight RevPAR (which focuses on channel optimization, as well as the relationship between occupancy and ADR) and TRevPAR (which includes additional revenues). Also important are RPI or RGI, which measures RevPAR penetration compared to the competition, analyzing MPI (Market Penetration Index) and ARI (Average Rate Index), with a focus on our year-over-year variations relative to the competitive group. It is interesting to mention the TRevPOR, which evaluates the total optimization per occupied room, and to break down which part of the revenue comes from ADR and which from external strategies, such as food and beverage or spa services. It is also essential to take into account KPIs affected by sales through various channels, as well as business strategy and management, such as GOP (Gross Operating Profit) and GOPPAR (per available room). The latter sit at the bottom of the USALI (Standard System of Hotel Accounting), and further down is EBITDA, which is the main focus for owners. Although there are many specific KPIs for F&B or Spa that I have already addressed in previous articles, I consider these to be the most basic for evaluating hotel performance, avoiding distractions from complex indicators that we only review occasionally.
The top: Need for control
At the top of the pyramid, the optimization cycle is completed and the different strategies implemented are adjusted to increase the most essential: the GOP. We should reflect on the following questions: How has demand responded to price changes? What is the cost per channel and the impact on distribution? Which digital marketing campaigns have performed best? Have we achieved increases in RGI or changes in RPI that outperform our competitors? Are the increases coming from occupancy or average daily rate (ADR)? What aspects can we improve?
So far, we have not mentioned ADR because it should not be our primary goal. In reality, excessive increases in ADR often have an adverse effect on the hotel's GOP. ADR is simply the result of doing our jobs properly, taking advantage of real opportunities in the channels, maximizing direct sales and managing distribution (costs per channel) and inventory. All of this will help ADR reach its full potential. As I always emphasize, the real driver of ADR is demand!
By focusing on what is truly important, it is clear that continuously achieving the perfect balance in the marketplace represents one of the greatest challenges in our daily work. As Abraham Maslow noted, "The most effective way to approach a problem is to give oneself completely to it, to examine its essence and find the solution within the problem itself." This suggests that, in order to face challenges, it is essential to first understand them.
