Ian Graham, Hotel Solutions Partnership
Optimising room revenue generation index (RGI) – the relative share of the market for room revenue that the subject hotel enjoys compared to its competitive set - is a good way to maximise profitability.
Recent consulting assignments have served to remind us that most of the branded operators encourage a near-religious regard for RGI. General and revenue managers spend inordinate amounts of time seeking to hone improvements through monitoring day-by-day fluctuations in RGI.
While we applaud the focus on the real world as described by objective data, there is a risk that fundamentalism in revenue management obscures the real prize.
So let’s just stand back for five minutes and consider. Hospitality consultants TRI report European RevPAR up almost 28% in Moscow in 2007, but also report a decline of more than 5% in both Hamburg and Prague.
In all three cities, and others, hotel management teams have invested considerable resources (time, people, and money) in monitoring and managing RGI, yet as we can see the markets in which they trade can be very different. Can one set of management processes deal with such radically different trading conditions?
At one level, we too are messianic in our support of RGI – but you can’t put an index in the bank nor even an improved penetration of an index. We encourage our clients to recognise that and take note of the following points.
- The market shown in these reports is at best a self-selecting sample of the market and there may well be much valuable demand accommodated in hotels that don’t contribute to such surveys.
The apparently invisible hotels need to be considered, even if they are in different price categories, situated in different locations, using different distribution channels, either independent and/or unbranded. There is a real risk that focusing on beating a very small number of directly competing branded hotels obscures the prize that exists from competing against some or all of these invisible hotels.
- Even within our own competitive set, without understanding the trends in each of the many and different segments, we are left trying to analyse a composite set of numbers that can hide as much as they reveal.
A recent assignment concerned a market that has been in free fall for many years - yet even here we could identify and value segments that had grown, and could be expected to continue to grow, which our client was advised to address.
- The data released for analysis is summarised and averaged. We have warned elsewhere of the dangers of tracking ‘average’ performance. A recent assignment suggested to us that a client was ignoring some very fundamental pricing opportunities by believing that the goal was to beat the ADR (average daily rate).
- Each customer comes with a different cost of sales, thus rooms management ought to be as much focused on driving upwards segment profitability as it is in improving room revenue. Many is the time that we have seen improvements in RGI or in room revenue itself eaten away by the costs associated with the distribution channel cost implications of such revenue growth.
- In those hotels where rooms’ income is the vast majority of income, management should focus on room revenue (e.g. budget hotels). In more complex hotels, full service, with spa and conference hotels, attention needs to be paid to the non-rooms income streams.
Some types of customers have a much higher propensity to spend on food and beverage or the spa than others, so a simple belief in RGI for RGI’s sake can be detrimental to profit. Note though that it is the profit contribution that needs to be maximised - one should not be chasing total spend for the sake of total spend.
- One of the ‘known unknowns’ in any business decision is the competitor reaction. If you close a channel, will your competitor leave theirs open or will they close it too? If you increase a price, will they increase theirs, decrease theirs or leave theirs alone? We don’t know, but we do know that the competitor will react.
- Finally, it is worth remembering that all such data is historic - and, while the past is often a good predictor of the future, the opportunity to make real profit progress is by changing the nature of the future.
The recent availability of daily RGI data better enables hotel management teams to shape the future by both identifying day-of-week strengths and weaknesses and enabling rapid feedback on experimental channel, package and price management. Our experience is that hotel management teams are often insufficiently brave or lack sufficient entrepreneurial flair to seek to change the shape of the competitive environment in their favour in the future.
We encourage our clients to remember that it is room revenue and not RGI that is the platform from which profitability is derived. Maximising room revenue comes from both a gain in the share of the current market and, critically, growing your business through attracting new segments, remembering that developing new segments can be very costly.
Maximising revenue may come at a sacrifice of RGI if the segments have attracted spend in the spa, the bar or the restaurant. Maximising profit may come from a below- average RGI if the segments attracted have a low cost of acquisition and if they spend elsewhere in the hotel.
As a tool, RGI is potentially very powerful – but, as with any tool, it’s the way the tool is used that separates the craftsman from the apprentice.