Finance & DevelopmentFinanceTaking an Economic Downturn in Stride: How Effective Revenue Management Can Help

Taking an Economic Downturn in Stride: How Effective Revenue Management Can Help

While the U.S. hotel industry experienced yet another strong year in 2018, economists and experts agree it may be time to tighten our belts and prepare for a potential reduction in overall net operating income. Recent gyrations in the stock market, weakening economic trends, and uncertainty created by political dynamics suggest they may be right. After more than 100 months of uninterrupted growth, RevPAR has recently declined, begging the question: how long can we keep the good times rolling?

The second longest RevPAR growth cycle in history came to an end with the recent decline of RevPAR growth, and some analysts predict GDP growth could come to a grinding halt by 2020. At last year’s annual Hotel Data Conference in Nashville, STR highlighted the fact that we are nearing a time where the U.S. hotel industry will beat the 111-month record set in the decade from 1990 to 2000. Through all this, the industry has changed dramatically in the last eight years, and it is a testament to its resiliency to see this 100-month milestone approaching.

Time to Celebrate—or Hunker Down

When it comes to economic projections, it’s a guessing game. For example, at HSMAI’s 2018 Revenue Optimization Conference (ROC) in Houston, Texas, Bernard Baumohl of the Economic Outlook Group provided a more cautious look at our unpredictable environment.

“For all practical purposes, we’re now in a trade war, and that will obviously have an impact on the economy,” said Baumohl. “If consumers decide at some point to reduce indebtedness, by definition that means there is less money available for spending. That’s something to watch carefully.”

In a subsequent Q&A session at HSMAI’s Chief Revenue Officer Roundtable, Baumohl was asked just how painful this recession might be on a scale of one to ten. He anticipated a “mild seven.”

Stories on this topic have appeared over the past several months. Interestingly enough, the numbers across the board were consistently positive; however, analysts are cautious, stating that stock market volatility, shifts in the political landscape, and trade tensions could upset the apple cart over the coming quarters.

How a Broad View of Revenue Can Help

Regardless of economic conditions, understanding how to effectively manage revenue at hotel properties can provide shelter and profit in the midst of deteriorating conditions.

Here are some ways to think about managing the revenue process:

Automate systems.

Revenue management and pricing technology have advanced to the point that manual, rules-based systems (or Excel) can no longer help maximize a property’s potential. With hundreds of thousands of decisions required on a daily basis, revenue leaders must be ready to let their systems do the grunt work of pricing decisions autonomously, and be ready to step in when exceptional circumstances require it. Machine learning and artificial intelligence may seem like overused buzzwords today, but revenue managers must learn to trust technology to price correctly and focus on the strategic aspects of their jobs.

Don’t interfere with the system.

Let the machine do its job so humans can focus on revenue strategy instead of revenue management. With systems ready to take over the daily pricing decisions, the revenue strategists of tomorrow must increasingly look toward the trifecta for hoteliers: loyalty, distribution, and revenue. As rate parity becomes a thing of the past, and the hotel industry is still “in an absolute war for who owns the customer,” informed, strategic decisions about what product to make available to whom (loyalty or non-loyalty guests), through which channel (direct or indirect), are increasingly the essence of revenue management.

Expand focus beyond traditional boundaries.

Revenue managers must keep pace with the changing expectations to stay relevant. Putting their egos (and love for numbers, charts, and graphs) aside, revenue managers must expand their role to think strategically. To do this, they must utilize the tools at their disposal to free up time from mundane operational tasks. They must establish a voice at the table with owners and operators as commercial strategists and must look at the changing industry landscape to expand their focus beyond the traditional boundaries of revenue management.

Don’t panic.

Some say the good times will continue in 2019, but with businesses like Apple and Delta Airlines struggling to meet their numbers amidst increasing volatility, demand, and uncertainty in the stock market, the most reasonable way to approach the issue in the coming months is to rely on rational thinking and not to overreact.

The last time we faced an economic downturn was 10 years ago, but that was a very different type of recession, spawned in part by the investment debacle of overleveraging in the housing industry and an imbalanced financial system. Today, we have better technology and an increase in our ability to manage, monitor, and stay ahead of downward trends. It will be important to check assumptions and take a rational view of the environment.

Klaus Kohlmayr
Klaus Kohlmayr
Klaus Kohlmayr is chief evangelist at IDeaS.