A Glance Into the Future of Revenue Management

by Ed Watkins, Contributing Editor | April 26, 2018

According to Cornell University professor Bill Carroll, a lot of hospitality students who focus on careers in hotel real estate are missing great opportunities in the field of revenue management.

“A lot of students want to go into real estate or own hotel property, but in many cases you can make more money by running an integrated, effective revenue management program than you can as an owner,” Carroll said. He is a retired clinical professor from the S.C. Johnson School of Hotel Administration at Cornell and one of the pioneers in the field of revenue management. “It’s an area that’s under-resourced and under-appreciated but has significant impact. It’s not just operations research on steroids.”

While Carroll values the role of revenue management in the hotel industry, he believes there is room for the discipline to grow and expand its focus while working to improve profitability for hotels.

We caught up with Carroll recently to discuss the future of hotel revenue management and distribution:

Q: While revenue management has come a long way, has it fallen behind in sophistication compared to OTAs and other intermediaries?

Carroll: The tenets of revenue management haven’t changed. You’re still performing the same thing — which is optimizing the availability of rooms inventory — and that hasn’t changed. What the OTAs optimize is conversions, while revenue management cares about optimizing revenue for the near term.

If revenue management were brought to bear to take the next step — which is probabilistic estimates of where am I going to get bookings, not only currently but in the future — then maybe you should focus on conversions, as well as near-term revenue.

Number two, revenue management looks at the OTA as if it is a distribution channel. They’re quasi search engines. If you revenue manage the OTAs as a distribution channel you make enormous errors because you discount or don’t recognize both the current and future advertising and promotional value of those sites.

Here are the headlines: Revenue management is a significant operations research tool, but what’s missing is that we forget that the distribution channel is more than just that; it’s an advertising channel, and the OTAs are as much search engines as is Google.

Q: What’s your take on Amazon and Google getting into the distribution business?

Carroll: If you were them, wouldn’t you go after the sharing economy and the Airbnbs? It might be easier, and you can serve as a more effective distribution device, and it certainly isn’t as complicated. The risks of moving into the market at the sharing end — the individual owners of properties, vacation rentals, etc. — would be logical place to start. You don’t have corporate business, sophisticated services, F&B, groups, etc.

Q: There’s been a lot of industry buzz over AI, Big Data, blockchain. Which will have most effect on the hotel business, especially in regard to distribution?

Carroll: The opportunity is for OTAs to use blockchain technology, which allows them the opportunity to hide what they need to hide and view what needs to be seen by groups and individuals. The core of blockchain technology is the ability to decipher and sift out and manage disparate databases and compile them together by having codes that are secure and sharable.

Artificial intelligence technology allows the OTAs in particular to have much richer information on price response, availability, impact of airline traffic and information on consumer choice. They have the ability to do a much better job than any chain or any individual hotel in being able to provide information. I see them executing that opportunity because in effect they make money for doing that.

Q: Do you believe Airbnb is more of a threat to the hotel industry or a potential asset as a distribution platform for independents and boutiques?

Carroll: It could be an opportunity for hotels, particularly the major chains. Airbnb inventory could become satellite inventory for hotel properties. If they’re within walking distance to the property, they can be an extension of availability of rooms and create the ability to brand it. The chains can become curators of Airbnb-quality places to stay.

The flip side is it is a chance for hotels to protect themselves from the Amazons, the Googles and OTAs who are going after inventory that is not chain-related.

Q: Brand companies have been trying to drive direct bookings. What will be the ultimate effectiveness of those programs?

Carroll: The jury is still out. You want to be successful with loyal guests, but the problem is thinking you can discount and offer value-added benefits and that will drive business to book direct. Two things against that: How many loyalty programs do you belong to? You’re either going to compete on price or on value adds. I call it being tentatively loyal.

Revenue management needs to go to understanding conversions better. It’s a combination of two things: a more discrete definition of who the customer is and second of all, where the customer is connecting to the enterprise. I might be a loyal guest and you might know who I am, but I might enter into an OTA metasearch for my favorite brands and find out who has the best rate and where.

If you go that route, it’s not just giving the right rate to the right person at the right time. It’s not just who the customer is; it’s where they’re looking and where they are booking.

Q: How do you value the relationship between the human element and technology when it comes to the revenue management function?

Carroll: There is a unique problem by not allowing human interaction. What’s missing is the strategic role of price in a marketplace. Understanding the impact of making a pricing decision that could have a strategic impact on pricing is problematic. That’s why you have to have a human interact on top of that pricing element.

Second is the role of price for any individual consumer and ultimately it’s impact on conversion at future periods of time. Screw me once, I’ll never go back again. I’ll never forget. It’s really easy to have an operational technology tool that cranks that number out and push the red button and it works. Wrong. Consumers are human beings.

Q: Are educational institutions preparing students adequately in the areas of revenue strategy, distribution, etc.?

Carroll: I’m concerned there is not sufficient focus on distribution channels, courses in distribution and its impact. And I’m also concerned that revenue management is taught in many places as an operations management tool and less a strategic tool.

What’s missing is that students don’t come away from a course understanding the dynamic nature of markets. I can teach you all the tenets of revenue management, but until you get into the game and see how it works, I don’t think we’re doing a good service to our students.

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Ed Watkins, Contributing Editor

Ed has been covering the hotel industry for more than 40 years. He was editor-in-chief of Lodging Hospitality from 1980 to 2012. He then joined Hotel News Now as an Editor at Large, until his retirement at the end of 2014. Ed still contributes to several publications and is a member of the advisory boards for the hotels schools at Michigan State and Penn State.

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