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The revolution is coming

Revenue management is an amazing discipline. Your commercial impact is huge, across many different areas of the business. Your team uses bleeding-edge technology to discover revenue opportunities and capture them. Your work is strategic and you have a seat at the leadership table. Your career opportunities are ever-expanding – revenue management is a $20 billion industry, and your combination of commercial acumen and tactical experience is in short supply.

We’ve just described revenue management as we envisage it, and how we think it should be seen. By contrast, the day-to-day reality on the ground in hospitality is often more like the following description.

Your team spends half of their time pulling reports from different systems and combining them in Excel to get an overview of the business. Decisions are taken manually, reactively, and often based on imperfect information. You can invest in technology, but your options are limited to a small number of legacy technology vendors, and you are constrained by legacy infrastructure. The impact of your team’s work is hard to measure and you struggle to quantify your commercial impact.

“We wanted automated, real-time, total revenue optimization, instead we got open pricing and hurdle rates”

Structural challenges for hospitality revenue management

By contrast to hospitality, other industries invest significantly more in an area they would call revenue operations or commercial optimization. These functions are considered highly strategic, they deploy state-of-art technology, and their jobs are highly sought after.

What is holding hospitality, specifically revenue management, back from such a strategic position and valuation within hospitality? We believe that the below structural challenges play a large part in explaining the status quo today.

  1. Hospitality Revenue Management has a structural challenge
    Hospitality is an unusually fragmented industry. In what other industries are brand owners, equity owners, and operators separate companies? These different stakeholders often pull in different directions. Operators focus on their incentives, brand owners on fees, and equity owners on the profit and loss statements.
  2. Hospitality Revenue Management has a communication challenge
    Revenue management has historically done a poor job of quantifying its impact. The consequence is that revenue management is often perceived as a cost-centre, and an operational optional, rather than a commercial requirement.
  3. Hospitality Revenue Management has a people challenge
    Revenue management has historically been considered an operational role. Talent has been found in other operational areas, and career development within revenue management has been limited, with departures to other commercial functions. This makes it difficult to attract the best analytical commercial strategists into the discipline.
  4. Hospitality Revenue Management has a technology challenge
    The hospitality technology landscape is fragmented, and standards have been slow to emerge. This has created high barriers to entry for new entrants. Additionally, low levels of technology spend, and low access to capital for emerging technology innovators, have resulted in a small number of dominant legacy vendors and stifled innovation.

Unique opportunities are emerging

Our view is that a series of macro trends are converging in such a way that hospitality revenue management will undergo an inevitable revolution over the next decade. This will lead to unprecedented opportunities.

  1. Industry consolidation / professionalisation
    In Europe, 70% of the market remains independent brands, the majority in the hands of small owners. Capital markets, in their search for investment opportunities, have opened their eyes to the opportunities in the hospitality category. Increasingly these sources of capital take an active interest in operations, not just real estate. This has brought a trend of consolidation, and professionalisation, to the industry.
  2. Demand for growth but market competitive
    The last 20-30 years have seen a boom in tourism, with supply struggling to keep pace. Growth is still present, but slowing. Supply has been catching up. Together this produces a climate where return on capital is more challenging, and focus will turn from expansion to efficiency. How can more be extracted from the same assets, through lower cost structures, or stronger revenue growth?
  3. Cloud technology adoption reduce barriers to entry
    Hospitality on average invests less than 0.5% of its topline revenue into technology. The equivalent share for the retail industry is almost threefold. Cloud PMS penetration is currently at 10% across the industry, and estimated to be at 30% in 5 years. Today there are 700 different PMS vendors across the industry but this number is rapidly shrinking as cloud technology winners emerge. Common to all of these winners is that they have modern, open, connectivity interfaces.
  4. Machine learning (AI) has passed an inflection point
    ChatGPT is everywhere in the media. Self-driving cars have been slow to overcome regulatory hurdles but technological advancements have been phenomenal. In the world of finance, the majority of trading is today executed by algorithmic decision intelligence. The last 5-10 years in this space are similar to the 90s for the internet. A foundation is being laid, with some very strong applications emerging, but we are still to see the impact of the inevitable mainstream adoption.

“An estimated $50-100 billion of revenue in hospitality is left on the table every year. The winners will capture it. The losers will be bought or disappear.”

How we benefit from these opportunities

These converging trends generate a series of push and pull factors. More focus on hospitality operations, by owners and capital providers. More focus on efficiency and optimization. More focus on brand and operational differentiation. Greater availability of innovative technology to unlock these opportunities.

For revenue management specifically, we believe a small number of core principles are required to embrace the opportunities that will emerge. For those of us who want to succeed as individuals, teams and companies in hospitality, within revenue management, we need to embrace the following.

  1. Revenue optimization, not revenue management
    Revenue management requires the application of a rigorous analytical process to complex commercial challenges, thereby generating repeatable, and sustainable, performance improvement. Management concerns itself with tasks and projects. Optimization concerns itself with improving processes. In other industries, this field is also called revenue operations (RevOps).
  2. Commercial optimization, not revenue optimization
    We must think of the space as commercial optimization because it goes outside of traditional revenue in the following ways:

    1. Cross-functional, not siloed – Commercial optimization concerns itself with all commercial functions involved in revenue generation, from sales, to marketing, to reservations. We must promote our commercial optimization teams to strategize and optimize along the entire revenue generation space. In other words, breaking the silos
    2. Entire buying journey – Commercial optimization concerns itself with all revenue-generating products, and how they mutually influence each other. We must promote our commercial optimization teams to strategize and optimize along the entire product/business mix.
    3. Down to the bottom line – Commercial optimization is not limited to top-line financial metrics (revenue). We must promote our commercial optimization teams to strategize and optimize for bottom-line wherever, and however, possible.
  3. We must partner with technology for solutions
    We must give up the idea that experience is a relevant factor. We must give up the idea that proximity to guests and products determines performance. Commercial optimization in hospitality is a highly complex, real time, multi-variant, analytical optimization problem. Not very different from the challenges faced by Wall Street trading desk. As such, our success depends on the application of AI/ML. Our success will be determined by how well we select partners, evaluate their performance, configure them, and overlay our strategic context.

“Revenue management is a thing of the past. We’re now talking about our field of work as commercial optimization or profit operations.”

Outsized returns for early adopters

We have described above the confluence of four macro trends:

  • Industry consolidation / professionalisation
  • Demand for growth but market competitive
  • Cloud technology adoption is exploding
  • Machine learning (AI) has passed an inflection point

These trends are inarguable, their progress unstoppable, and their outcomes inevitable. We will see a transition from “revenue management” to “commercial optimization”. From manual, reactive, people-focused, decision support, to automated, proactive, data-driven, decision intelligence.

The early adopters of the above principles will generate outsized returns, which will accelerate adoption, and increase pressure on the late adopters. The question for hospitality businesses, and executives, today, is not whether this transformation will occur, but where in the adoption curve they want to be.

“You will not be replaced by AI/ML. But you will be replaced by those who adopt it”

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