With your revenue team in place, it’s time to focus on the distribution infrastructure of your property. Successfully selling a product requires a well-designed infrastructure that enables customers to access and purchase it. This infrastructure consists of systems, manual processes, or a combination of both.
In many cases, establishing this setup is relatively straightforward. Typically, an efficient infrastructure includes a property-level system connected to a central system that links to various distribution channels, such as Online Travel Agents (OTAs), Global Distribution Systems (GDS), and Central Reservations Offices (CRO). Each channel presents your product to potential buyers, and maximizing revenue from each of these channels is essential—provided you have chosen the right infrastructure components.
Revenue Management Levers
To fully optimize revenue for a property with limited inventory and a perishable product, you need to focus on two key areas:
Pricing Strategies: Various pricing strategies can be implemented, including:
Length of Stay Pricing: Rates based on arrival day and length of stay.
Daily Pricing: Different rates for each night of the stay.
Continuous Pricing: A dynamic pricing model that allows any price to be sold within specified lower and upper rate boundaries.
Inventory Management: This involves two critical factors:
Length of Stay Controls: These may be applied at the property level or for specific room types and rates.
Overbooking Practices: This should be managed not only at the property and room type levels, but also at the rate level for optimal revenue potential.
Choosing Infrastructure Components
The next step in establishing your infrastructure is to analyze booking statistics and data. Consider the percentage of bookings coming from OTAs, GDS, or CRO, alongside direct bookings to your property. Understanding how business reaches you is crucial for optimizing revenue.
For instance, if a significant portion of your bookings comes directly through reservations, you should ensure that your Property Management System (PMS) can effectively manage revenue levers. Conversely, if a notable percentage of your business is generated through OTAs, selecting a channel manager capable of integrating with your revenue management system is vital.
Investing in infrastructure components can represent a significant expenditure, so it’s crucial to evaluate all available options. Assess factors such as the ability to manage revenue controls, user-friendliness, and the quality of available interfaces. The various components need to function harmoniously, and as you plan to implement a revenue management system, it is important to ensure your infrastructure can support that integration seamlessly. You want to avoid having to reconfigure your distribution structure later on.
Evaluating Opportunity Cost
After considering the functionality of different infrastructure components, it’s essential to reassess your pricing strategy. A common reason cited by property General Managers or corporate revenue managers for choosing a specific component is budget limitations—often stemming from an owner's reluctance to invest more. However, it's crucial to consider whether the opportunity cost was taken into account when making that choice.
So, what exactly is opportunity cost? Let’s break it down with an example. Suppose you run a hotel with 100 rooms, achieving 80% occupancy and an Average Daily Rate (ADR) of $100. If 40% of your business comes through OTAs, the revenue generated via OTAs can be calculated as follows:
Rooms sold per day: 100 x 80% = 80 rooms
Rooms sold via OTA: 80 rooms x 40% = 32 rooms
Revenue generated via OTA: 32 x $100 = $3,200
When implementing a revenue management system, typical revenue uplift ranges from 5% to 15%, depending on pre-existing manual revenue management efforts. For a conservative estimate, we’ll assume a 5% uplift. This means if OTA revenues cannot be effectively managed, that additional revenue potential is lost, which is termed the opportunity cost. In this example, the opportunity cost can be calculated as follows:
Opportunity Cost: $3,200 x 5% = $160 per day
Monthly Opportunity Cost: $160 x 30 days = $4,800
Continuing with our example, let’s say the property is evaluating two channel managers: Option A, which doesn’t integrate with a revenue management system, at a flat fee of $500 per month; and Option B, which offers full integration at a rate of $2 per booking. Based on the current booking volume, Option B costs:
Cost for Option B: 32 rooms x 30 days x $2 = $1,920
At first glance, Option B appears to be more expensive than Option A. However, when factoring in the opportunity cost of $4,800, it becomes clear that Option B is the more advantageous choice.
Summary of Infrastructure Considerations
Assembling your distribution infrastructure requires careful thought. Choose components that can effectively handle revenue management controls and integrate seamlessly with other systems through robust interfaces.
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