Gral x RM chk.fw

Revenue Management for Tour Operators: a Darwinian trait

In the late nineties, I was able to persuade a handful of Caribbean hoteliers to adopt my ludicrously simple and cheap online booking engine. Among those pioneers, the GM of Couples Tower Isle: He even went to suggest to check website users’ behaviour and diversify rates! That visionary was the one and only Mr Paul Pennycook who, somewhat unsurprisingly, became Jamaica’s Director of Tourism years later.
Unfortunately, for every Pennycook there were ten thousand hoteliers who believed online bookings would never be a thing, so they missed the bus. It is my belief that this lack of vision defines today’s accommodation global distribution through OTAs, leaving behind its legitimate holders. The tragic side of the story are scores of small, independent hotels that went out of business or were sold out to large chains because of their apathy towards new technologies. The morale of the story, of course, is that reticence to change in this day and age might mean the end of the road for businesses not willing to at least explore new things, alternative procedures.

My intention with this article, then, is to help operators learn from the accommodation industry’s mistakes, rather than present a pseudo-academic text, full of encyclopedic definitions. I’ll try to make my point on why revenue (or yield) management is an evolutionary trait that would oppose extinction in a harshly competitive environment.

What RM is NOT

RM is not just a single technological solution, nor it’s only a marketing tool, or just changing prices depending on several factors (as many people still think).

RM is not easy to implement, as it requires a company-wide culture shift (we’ll see why in a moment). More to the point, it entails applying means that most small wholesalers and DMCs are not familiar with, like dynamic pricing (see here >>).
RM does not bring immediate results, being a process that require some time to be really profitable.
RM is not a magical solution to business problems, although it still may appear magic to many people.

What is this RM anyway?

Actually, it is science (light data science, I’d say). By its simplest definition, it is just optimizing financial performance in every market condition. It is a combination of disciplines and knowledge which general purpose is to lift income up, while stomping costs down. It is a phenomenal time-saving, money-saving generator. It is a long-term strategy that involves management, sales, marketing and operations…All departments, actually. It’s a true philosophy, aiming to defeat the rooted compartmentalization of companies’ information in “silos”, therefore an organization must slowly but steadily undergo a procedural alteration to implement proper RM strategies. The bigger the company, the largest and more isolated its silos are, the heavier that culture-shift should be.
RM implies to sell all available services/products to the right customer segment, at the best possible price, at the right time.

Sounds too complicated?

Nah, I only have a few bookings per day, thanks but no thanks”, you might argue…
That’s exactly what small hotel owners objected when I introduced them my humble booking solution two decades ago. Although they trusted me (I presume), instead of investing a couple hundred bucks that would have been cashed back with a handful of direct bookings at no extra effort, they suspected this internet mumbo-jumbo was too complicated to waste time and money in. Or maybe they thought that, since big chains had similar systems worth thousands of dollars, my proposition was a scam. Whatever the case, guess where those conservative hoteliers are today…
I am not trying sell anything here, and I’ll never sugarcoat this for you, dear reader. In truth, RM is no easy task, but it should suffice to say that you don’t need to take quantum physics courses either to profit from it. Nor you have to fork out half a season’s net income to afford it.

Why do you need RM, then?

When hoteliers finally decided to adopt online booking engines, they needed not know about PHP, HTML and so on. Later, when they established first contact with off-the-shelf revenue management tools, it wasn’t necessary for them to master all the intricacies of data collection, booking curves, linear regression, etc. SMB owners and managers are too busy with daily operations to learn concepts that would only have marginal benefits for them. They just need decisional support, in the form of reports, dashboards, advice… whatever they see fit to avoid hunches and reduce mistakes as humanly possible. To that end, there have been ready-made RM tools in the accommodation marketplace for quite some time; now also tour operators can access such tools. RM is still uncharted territory in the wholesale and incoming planets, just as it was over a decade ago in the hotel galaxy… except for vertically integrated behemoths that saw the importance of RM years ago and heavily invested on it, gaining even more competitive advantage. But as much as airlines, hotels and big wholesalers, you need to sell all your perishable “inventory”, right? Likewise, your margins shrink more and more, even if sales are still acceptable… Sounds familiar? The instrument to fix this stalemate is at arm’s length now: even if you’re swamped with daily chores, that’s not a good excuse for evading procedural improvements (or so one of my prospect recently claimed). Quite the opposite!
As cryptic as it might sound to you, RM is a very hands-on, practical approach to address the following issues:

·        Accurately segment customers (B2C and B2B), to establish killer dynamic pricing strategies, design laser-targeted marketing campaigns, etc
·        Predict demand by product/market/etc., for better resource allocations… even to CREATE demand (yes, I said create! This item deserves a full article)
·        With accurate predictions, it will be easier to optimize budgets (operative, sales, etc.), in order to reduce costs
·        Automatize and improve product management

As you surely realized, solving the above would carry enhancements in all areas. Isn’t it beautiful?

Essential conditions to apply revenue management techniques are:
1.      Fixed inventory available for sales at any time
2.      Perishable inventory
3.      Different customer segments willing to pay different prices
4.      Ability to somehow predict demand
For outgoing tour operators, “inventories” are of course allotments, which are perishable: anything not sold is money’s lost anyway (within or without release), segmentation is a must -usually not capitalized, deserving a whole article- and it is absolutely possible to predict demand, although for generations it was done by the “hunch” method or at the very best, with the help of spreadsheets. We don’t have any allotment, you said? With RM tools you’ll be in the position to acquire allotments with minimal risk. And even if you don’t intend to do it, just the segmentation, dynamic pricing and forecasting aspects should be enough reason to adopt RM.
After all, your packages, your tours, your transfers…is your inventory!

Incoming operators are definitely prone to benefit from RM too. I wrote a specific article a while ago: find it here >>

Rent-a-cars, Bedbanks, Tour&Activity providers, Casinos, Events organizers, Ferry and Bus operators, Restaurants, Golf clubs… All those organizations exhibit the common essential conditions to benefit from RM too. Make no mistake: they ARE already cashing in on their particular RM flavour!
Bottom line:

You need RM because it is an darwinian trait akin to peripheral vision; moreover, it’s affordable and easier to implement these days.
There are more than enough predators in our industry’s ecosystem: either you adapt fast as a mammal or… be extinct as a dodo.

Revenue management demo - REVVA
A demand forecast model (excerpt)


 This is the third on a series of interrelated articles: if you read the previous two, you’ll notice that I scaled up in complexity from rate comparison systems >> to dynamic pricing strategies >> in which the DIY option was proposed as feasible. Yes, it is possible to perform such feats manually, although extremely hard without an analytics tool. Now, picture how difficult it would be to add up those two with the other components of the RM recipe! If you feel you could make it with brains and pencil go ahead, but you’ll be missing the point I’ve been trying to convey during these three articles:

·        There are automated, affordable systems to capitalize RM strategies
·        It takes quite some time to see results even with computer-aided RM
·        Mastering many new skills with steep learning curves is mandatory to perform manual RM

So why bother? If you’re a newbie just starting operations or an extremely rare niche specialist, I’ll sympathize, but probably RM is not for you (yet). Otherwise, perhaps you’ll want to reconsider your entrepreneurship mindset.

I love when the underdogs win; it comes naturally to be cheering them. During the past two decades I’ve been (often uncompensated) helping small to medium businesses, because early on in my career I detested seeing the big players made a clean sweep with their vertically integrated fancy buses, shiny airplanes and deluxe resorts; afterwards because I was a small businessman myself (still am) enduring an unfair fight. If you read this far, we surely have at least a common interest: your business’ growth.

I’m not saying “hey, you’ll be a hotshot in a year” with RM, I’m just pointing out that you’ll have the chance to get the same weapons used by Skift headlines dwellers, risking just a small investment in time and money that will bring you a year-over-year increase in total revenue of about 7-8% (worst case scenario).
Either you sit back and let the robot work for you, while diverting your attention to pleasant (profitable) activities… or join the ranks of those forgotten hoteliers (and TO managers) who once upon a time thought online sales were nonsensical.

Thanks for reading!

Marcello Bresin

Want to know more? Here’s Wikipedia’s entry for RM >> , a study about adoption of revenue management systems reportedly increased on average up to 7% net profits on first year (Cornell University’s paper >>). and an interesting article about seemingly small revenue improvements that actually mean huge business impact >>