Total Revenue Management, myth or truth

It was 2015 when, attending a Revenue Management conference in Amsterdam I first heard about the term “Total Revenue Management” and how it was going to be the standard of our industry in the years to come.

10 years later, many things have changed, we now have TikTok, a huge pandemic stroke the world and  Artificial Intelligence is the new hotness but not everything changes as fast; Total Revenue Management is still not the standard in the hotel industry and Mick Jagger is still alive (thankfully).

To me, the best description of the implementation of Total Revenue Management in the hotel industry is the sentence:

"Total Revenue Management is like sex when you are a teenager....everyone talks about it....nobody really knows how to do it...everyone thinks everyone else is doing it."

But, what is really Total Revenue Management about?

The only way to explain to a non hotelier what Total Revenue Management is about is by first explaining what Revenue Management is today.

Today, Revenue Management is about getting the most revenue out of the room inventory of a hotel (oversimplifying the description though).

But hotels are not selling just rooms.

An average full service hotel will have approximately 60% of their annual turnover coming from their room inventory while the remaining 40% will be coming from other sources (M&E, Breakfast, Restaurant, Bar, Spa, Parking, etc…)

That is exactly what Total Revenue Management is about, about not just looking at ways to get the most out of your room inventory (60%) but rather getting the most out of every revenue stream in the hotel (one could wonder; wouldn’t it be simpler if we called them “Room Revenue Management” and “Revenue Management” respectively? Well….probably 😊)

So, what can we do to really start applying Total Revenue Management.

We first need to prioritize where we should start since every hotel has different revenue streams (apart from rooms of course).

For example a resort will most likely have a big piece of its revenue coming from its restaurant, SPA and other amenities while a B2B hotel will most likely have a big part of its revenue coming from M&E and breakfast.

Therefore, the first step is to identify the kind of hotel we are operating, since every revenue stream will have different levers to be applied and we should prioritize those revenue streams that will have the biggest impact (EG: if room service only represents 5% of the revenue of the hotel, it might be best to start optimizing other revenue streams that might be more relevant).

However, a key revenue stream for most hotels is F&B and so we are going to deep dive in that concrete area.

F&B outlets in a hotel

A full service hotel will typically have the following F&B revenue streams:

·      Restaurant.

·      Bar.

·      Room Service.

·      Breakfast.

What is important to understand is that we should apply different levers and strategies to each of these different outlets.

Levers to optimize restaurant revenue

Traditionally hoteliers have not paid too much attention to their restaurant space, but more and more the mindset is changing and hoteliers are doing a great job at building amazing restaurant concepts.

On this regards, I love the quote from the brilliant Federico J. González mentioning that

"Radisson Hotel Group is not just one of the largest hotel operators in the world, but also one of the largest restaurant operators in the world."

This shows the relevance that this hotel group is allocating into to their F&B outlets, which is huge.

From a Revenue Management perspective, we could get the most out of our restaurant by applying the following levers:

Pricing

Most restaurants base the price of the different items in the menu purely on cost (if the cost of the dish is 3€ and I want to get 70% gross margin then I need to sell it at 10€) but the reality is that customers don’t care about how much you are paying for your raw materials at your restaurant. Customers care about value. Customers care about enjoying a nice dish on a great atmosphere and with a great service. 

Why should the tenderloin be more expensive than the chicken? If the reason is just “cost of raw materials” then maybe the pricing strategy should be revisited.

Understand how much your potential customers are willing to pay for every dish and price accordingly.

We could even move a step farther to apply Dynamic Pricing. Dynamic pricing enables restaurants and F&B to adjust their pricing based on the demand to either capture demand, or optimize peak demand periods. 

Menu engineer

The menu is the catalog of the restaurant. Its going a have a huge impact on what customers order, how long they take to order, how many dishes, etc. 

Nevertheless, many restaurants don't put a lot of effort in designing the right menu and the right offer.

For example, a large menu containing 70 different dishes might seem like a good idea to provide customers different choices and therefore have them order more but In reality, with a large menu, customers run into the paradox of choice and, by having difficulties to choose, they end up ordering much less than with a shorter menu.

When building the menu of your restaurant, think about factors like; what is the maximum dishes I want to have? Which dishes do I really want to sell? How do I design the menu in order to provide better visibility to those items?

Also, in the same way that digital menus now enable restaurants to dynamically change prices, they also enable for menus that change depending on the demand and operational needs of the restaurant.

If there is a long queue of customers waiting to be seated, the last thing a restauranteur wants is to have a very large menu that takes very long to read and with many dishes that take long to be prepared by the kitchen. If we are able to anticipate the demand and adjust the menu dynamically we will not only make more revenue but also have customers more satisfied.

Inventory management

We have to bear in mind that space is in reality the most limited resource a restaurant has.

If a restaurant is running low on meat, fish or Coke, they can always order more or even offer customers a different drink or dish, but if they run out of seats they will not be able to offer their product anymore (at least for some time until another table finishes).

Also, any seat during any hour that is not occupied at the restaurant is like an empty room at a hotel. It is a piece of inventory that just perishes.

Therefore, it is crucial for restaurants to build a demand forecast and design a table strategy to optimize their space.

For example, if the restaurant is projected to have excess demand on a Saturday night, it might be wise to have a cancellation policy in place so that if a customer is not showing up, the restaurant is not losing that opportunity cost.

So what's next?

The hotel industry has been applying Room Revenue Management for the past 40 years and, even though there is still much to be done, the discipline is already very mature with a huge implementation in most hotel companies.

Now, it is the era of Total Revenue Management, it is the time for hoteliers to look into the huge potential benefits it offers and grab this huge opportunity to optimize every revenue stream in the hotel.

I am sure that in the upcoming years we will see more and more hotel companies embrace it.