Revenue Management’s Renaissance

I’ve written about Robert G. Cross, of Revenue Analytics, in the past. He’s a giant in the pricing world, responsible for implementing Yield Management at Delta Airlines.

His book, Revenue Management, is a must-have for any one serious about pricing.

Cross, along with his colleague, Jon A Higbie, and his son, David Q. (Dax) Cross, has written a fascinating article, published in the February 2009 issue of the Cornell Hospitality Quarterly: “Revenue Management’s Renaissance: A Rebirth of the Art and Science of Profitable Revenue Generation.”

There’s much that is interesting in this article, but I’d only recommend you read it if you are interested in pricing beyond professional knowledge firms, our main focus on this site.

The article is based on interviews with sixteen revenue management leaders from some of the largest organizations in the hospitality industry.

Here are some of the interesting insights from this article.

…Hotels will need to consider price elasticity and not simply match competitors’ prices, with a goal of optimizing prices.

From Yield Management to Revenue Management

A brief history of Yield Management in airlines is discussed, along with this statement by Robert Crandall, then CEO of American Airlines (circa mid-1980s):

Yield management is the single most important technical development in transportation management since we entered the era of airline deregulation…We estimate that yield management has generated $1.4 billion in incremental revenue in the last three years.

Once again, management ideas and innovation are more valuable than their mere execution.

Because of the differences between hotels and airlines, the hospitality industry began to call its systems Revenue Management (RM) around the mid-1990s.

The article also discusses how J.W. “Bill” Marriott began to implement Yield Management based on a chance conversation with Robert Crandall in the mid-1980s.

This allowed Marriott International to add between $150 and $200 million to its top line. Other hotels have experienced anywhere between 2 and 5 percent increases in top line, with some reporting even higher returns from RM.

Even better, because pricing is all about profitability, Disney has named its department “Revenue and Profit Management.” Excellent!

From tactical pricing to strategic pricing

RM is moving beyond just managing demand to actually joining with sales to create demand. It’s transforming from short-term tactical thinking to long-term strategic thinking.

It is also changing focus from revenue to profitability.

It’s all about understanding the elasticity of demand of different customer segments, and the value you are creating for them.

Rather than answering “Is it a good business decision to take the group at the requested rate?” the new focus is “What is the best rate for this group if we do decide to accept?”

To illustrate how sensitive profits are to price, the article points out:

A $1 reduction in average daily rate (ADR) in a five-hundred-room hotel with 70 percent occupancy would decrease annual room revenue by $127,750.

This is why so many companies are beginning to invest in the pricing function.

Marriott has pioneered a Revenue Opportunity Model (ROM) where they compare “optimal revenue that could have been achieved” divided by “actual revenue” to compute a “revenue opportunity index.”

As the RM manager at Marriott says, “It’s Monday morning quarterbacking.” It helps to answer “If I knew then what I know now, what decisions would I have made differently?”

Another interesting idea from John Q. Hammons is identifying “holes in the basket”:

This concept has evolved from retailers who analyze customer purchase patterns to identify certain customers who may, for example, buy baby food at their store, but not diapers.

This is similar to the Value Gap that we advocate for PKFs—potential revenue from each customer less actual revenue. Closing that gap should be a priority for everyone in the firm, which is why it’s such an excellent Key Predictive Indicator.

For example, hotels may analyze why they have a large percentage of a business customers’ hotel spend, but not their leisure spend. Targeted RM programs, such as those used by Harrah’s Casinos, can help capture a larger share of customer wallet.

Growth in pricing personnel

The article also points out that RM is one of the most rapidly growing disciplines in the hospitality industry. Leading hotel chains have hundreds of team members devoted to RM.

Hilton has 50 RM employees at its corporate office alone, along with a RM employee on-site at a lot of its properties. Marriott has RM managers on every property.

Along with these increased numbers, RM is now sitting at the table when major strategic decisions are being made.

Also discussed was identifying the right people for RM.

It’s a necessity that they find pricing interesting, and that’s not an easy hurdle to overcome. Omni launched a program to allow candidates to test drive working in RM for six months to see if it was right for them.

RM = Revenue Music?

But here’s the most interesting correlation in identifying talent for RM, from Jim Rozell at Carlson Hotels:

The people who are really good at revenue management have the mathematical and data skills, and they also have a little of the artist in them. They say, ‘These two things sound good together, but if I did this, it might sound better.’ I’ve found that the people who are really successful at revenue management are also passionate about music. There seems to be a correlation between musical aptitude and revenue management.

I’ve never seen this before. In my book, Pricing on Purpose, I laid out the following criteria for a successful Chief Value Officer, the LACEY criteria:

  • Leadership skills
  • Attitude—curious, open-minded, and is moving through the five levels of learning: awareness, awkwardness, application, assimilation, and art.
  • Commitment
  • Experimentation
  • Youth—the fact that those below 40 are responsible for most innovations.

I talked with Ed Kless about this morning. Ed does have musical talent, sings and plays the piano. My older brother is an excellent piano player who also grasps pricing.

I, on the other hand, can only play my iPod, and our late VeraSage colleague, Paul O’Byrne, couldn’t carry a tune or hear lyrics of songs very well.

So we remain skeptical of this specific correlation. But, it may be that those who understand the theory of music—those who move from liking music to true appreciation of music—do so because they understand a theory of music.

We’ve concluded its folks who like theory who are most likely to be the best pricers. This may explain why CPAs are lousy at it, since accounting is not a theory.

We’d love to hear your thoughts on the correlation between musical aptitude and pricing.

In any event, a fascinating article detailing the evolving nature of pricing and its importance to profitability.

Hopefully, I’ve tempted you to read it, and if not, go buy Robert Cross’ book and read it instead.

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