Why You Should Use Channel Forecasting To Drive Hotel Profits

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Distribution strategy in the hospitality industry is changing.

NB: This is an article from IDeaS

Traditionally, hotels listed their inventory across a variety of booking channels that may include online travel agencies like Expedia, retail travel agents, metasearch engines such as Google, global distribution systems or direct channels through a hotel’s direct website or mobile app and/or social media.

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Hoteliers are becoming more selective in how they think about managing channels, focusing on the value of partnership and net key performance indicator performance. In this context, channel management is a process by which hoteliers control where and how they sell their products, namely hotel rooms and the ancillaries attached to them, across their distribution landscape. The pandemic and other socioeconomic changes across the world and the rising costs associated with these changes have motivated a move to focus on profitability. This is accelerating a move from revenue metrics to net-revenue-centric metrics (after accounting for costs to acquire and/or service this revenue). This shift allows hoteliers to create a strategy that drives profitability.

While topline revenue metrics like revenue per available room will always have a role when reporting out to financial markets, investors and STR, innovative solutions today take into account what it costs to acquire reservations and service rooms at a time when leisure demand is booming and corporate demand returns. 

Over time, the channel/acquisition costs have increased as hotels have seen a lot of business shift to OTA partners due to customer trust and post-pandemic business mix being more heavily weighted toward leisure segments. This segment has a heavier booking preference for OTA channels.

Driving average daily rate growth, holding out for longer level-of-service demand and business from lower-cost channels might mean filling fewer rooms with less cost to make more profit overall. Unlike rules-only-based approaches to pricing and restrictions that require significant time and attention from the revenue manager, best-in-class revenue-management solutions have been designed to automate pricing and rate availability decisions, making it easier to create and distribute them, driving not only the most revenue but the most profit. 

Revenue-management system solutions have provided key revenue-management levers like high-powered forecasting, analytical pricing and rate availability to help drive better revenue performance. But to holistically optimize commercial strategy and performance, hoteliers must make more informed decisions about their distribution and channel strategies.

Due to labor cost and market pressures, the softening of some market segments and new technology capabilities, the time has never been better and more vital to collect additional data to move toward profit optimization. Ensuring your commercial decision-making systems understand and can account for the costs to acquire additional reservations through key distribution channels will allow you to evolve your strategy and automate profit-driven, not revenue-driven decisions.

Understanding Past Performance and Future Demand by Channel

The channel performance reporting available in some property management systems, business intelligence, and revenue management solutions provide hoteliers with a view into historical and on-the-books channel costs by channel. In essence, by looking backward, revenue managers can determine “what happened in my strategy” while factoring in the impact of acquisition costs.

The competitive edge, though, is gained by being able to answer, “What happens next?” By understanding future channel materialization and forecasting net KPIs and demand by channel, revenue managers can take the next step toward optimizing their channel strategy. But what if revenue managers could look ahead and see how their current distribution strategy was playing out on weekdays and weekends? This could provide valuable forward-looking insights into channel strategy and how this is playing out on key days of the week.

Previously, forecasting has been done at the hotel level. However, new capabilities in RMS today provide hoteliers with forecasts by room type, market segment, and channel. In doing so, the revenue manager is provided the means to tune their business mix and maximize the most valuable business. If a hotel wants to target optimal pricing or make availability decisions by room type, segment, and channel, it will require a system that can reliably forecast at those same levels of granularity.

A hotelier, for example, can plan for and expect specific channel costs and look at how effective their distribution strategy has been or is likely to be. By understanding and forecasting net channel ADR, RevPAR, revenues and costs for all channels or specific channels, they can improve their marketing spend efficiency by channel while finding opportunities to save on commission when they know the demand is already there from less expensive media. Conversely, where required, they can also boost spending with key partners (for example, adjusting commission) where additional demand is needed—beginning to leverage a true partnership with key distribution partners.

Understanding Future Projected Costs per Channel

In the past, hoteliers could only imagine having the ability to see which channels their guests would book on weekends. This capability would allow them to proactively drive direct business with digital marketing dollars or special offers on their brand site. It would also allow them to plan for future projected costs per channel or support long-term strategic negotiations with OTA partners.

The speed of market recovery and economic conditions are leading to new strategies—hotels are attracting more guests who are paying more and are driving profit by filling fewer rooms at higher ADR from the most profitable channels and leveraging more demand from key distribution partners, where needed. New tools, algorithms and forecasting approaches help them confidently manage the risk associated with being selective about their revenue and distribution strategy—balancing acquisition costs.

Preparing for the Journey to Profit Optimization

Hospitality organizations can enhance revenue and profit performance by harnessing the power of clean reservation data. Optimizing channel strategy and data management will not happen overnight; it will take time and effort. To get started, hoteliers can:

Review the business coding for channel and source. Having well-defined codes representing each booking origin point and ensuring these are reliably assigned to the reservation will ensure good data collection. Do this initially for reporting and forecasting, later as an input to optimization (i.e., pricing and/or managing availability by channel).

Gather and centralize channel costs. In other words, ensure you have looked at each booking endpoint in your distribution ecosystem from global distribution system to each OTA, to branded/ direct channels and have a central repository of the cost of taking a reservation through each booking endpoint. By considering each booking origin point, hoteliers can better define the cost of taking each reservation on these channels. For instance, “If I pay an annual subscription for my central reservation system/channel manager—I pay this fee regardless of the number of reservations I take through this channel,” or “To optimize the costs I incur to acquire reservations, I need to understand the cost of taking each additional booking from a channel,” or “Having long-term channel forecasts will support informed decision making on both the long-term (annual fees) and day-to-day business strategy about what business I need, when.”

Start to review contractual commitments. Better understanding these commitments to rate and availability parity will help the hotel gain more flexibility in its obligations with OTAs and wholesale partners—these will take time to change and have a significant bearing on the hotel’s ability to enact channel optimization in the longer term. Being flexible as partners will benefit all parties in the long run and ensure you can make the best decisions to help maximize profit for your assets. See these as partnerships that can be leveraged when needed.

This is but one step in the journey toward profit optimization. Hotels need to gather acquisition costs, ancillary revenues and profit margins and more granular service costs to build a path to profit optimization. However, it is essential to note that pieces of this can be taken up one step at a time.

Effective channel strategy and management require going beyond decision-making using stale growth revenue reports generated at month’s end. Insights are needed in real-time to stay ahead of the competition by identifying what will happen next. 

Maintaining a well-oiled, proactive distribution strategy has become the next step in commercial strategy. How a hotel chooses to distribute its room offerings should be carefully and regularly assessed, with the goal of maximizing profit. A functional distribution strategy starts with having the right tools in place to drive it forward. These steps also begin a shift toward more long-term decision-making, where to date, revenue management has always been a short-term discipline.

Read more articles from IDeaS

The post Why You Should Use Channel Forecasting To Drive Hotel Profits appeared first on Revenue Hub.

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