The revenue management industry picked an odd time to have an identity crisis, given the opportunity for additional profit that new rate-setting and distribution software could bring.
Hotels are jealous of airlines when it comes to revenue management.
A standard major airline has a second-degree black belt in optimizing airfares. Multiple times a day, an airline adjusts rates in reaction to fresh data about supply and demand. It also distributes different rates on different websites, mobile apps, and travel agency systems for various dates of travel and advanced-purchase windows.
The typical hotel group, on the other hand, is more like a young student of Taekwondo who is unduly pleased with himself for having side-kicked in half his first wood board.
In brief, hotels face large hurdles to shrug off legacy back-end systems. Revenue management and the related issues of marketing and distribution require a full set of data to be done right.
Finger-pointing is one problem. A hotel may be managed by a company that’s different from its owner. If the hotel is a franchise, then it has another voice weighing in. Tech investment decisions become fraught when ownership is fractured.
So tech investment is neglected. Outside of the global hotel giants, today’s rate-setting work is often manual. Think Excel spreadsheets and weekly meetings.
“Often when hoteliers may have ideas for improvement they’re told that the data isn’t available or not easily accessible,” said Farley. “The integration issue has crippled the industry to be able to analyze all the data they have.”
Training is another issue.
“When we talk with hospitality CEOs, we ask, what’s the number one thing they need to change to leverage technology in operations?, and they say, ‘We need to get our people to think at a higher, more rounded level rather than worrying about managing the technology output.'” said Mike Chuma, vice president of product strategy at IDeaS.
At hotel companies too small to have revenue managers, the issue may be a lack of training. Next-generation revenue management tools require staff to spend more time spotting anomalies — like a sudden dip in demand — and responding accordingly and strategically.
A fourth factor is complacency. Some full-time revenue managers may feel threatened about how their role might be changed in adopting a more complex system. Under the status quo, their work and the primacy of their role go unquestioned.
So change has been slow to come. Fewer than one out of 10 of the 156,000 hotels, resorts, and extended-stay properties that have greater than 50-room hotels use revenue management software instead of Excel spreadsheets or, if they are affiliated with a global brand, the unsophisticated software the chain provides.
Hotels have been leaving money on the table. For example, a property might have, say, a rate for members of its loyalty program that is set at a 10 percent discount to the best flexible rate. However, on a high demand day, a hotelier may not want to offer that much of a markdown.
More advanced revenue management tricks, like the ones airlines use to calculate the total lifetime customer value of a passenger, aren’t possible for most hotel groups, even global giants. The reason? The data from various systems — such as the reservation system used by a hotel’s spa and the company’s customer relationship management system used for email marketing — don’t talk to each other well.
Vendors Need to Step Up
Knowing they’re missing revenue, many hoteliers want to follow in the profit-boosting methods of their airline revenue masters.
So it ought to be a perfect time to be a revenue management software company. You might think that vendors are hitting their stride, scaling up rapidly.
But you’d be wrong. Despite revenue management software companies having been around for a couple of decades, there’s only been a crabwise increase in adoption.
What gives? A look at some of the challenges faced by a few representative players — BookingSuite, Duetto, IDeaS, and Rainmaker — plus a look at what may be in the works at technology giants like Amadeus and Sabre — may help give a sense of the scattered issues at play.
On the bright side, most of the companies point to signs of 2019 being a breakout year for the category.
Take the case of Pricematch, a Parisian startup founded in 2012 to offer yield management software. The company’s software used higher math and unusual data sets, like weather forecasts, to suggest how hotels should adjust their rates.
In 2015, Booking Holdings acquired Pricematch and folded it into its BookingSuite set of software services for hoteliers. In the spring of 2016, it renamed the tool Ratemanager and made it widely available.
The product had something unique: Data from Booking.com, the largest online seller of hotel rooms in the world, revealing how demand is shifting at a destination-level for a full year out. Other revenue management services often have to rely on historical data to infer demand.
This spring, BookingSuite quietly shut down the service. A spokesperson said the move allows BookingSuite “to spend more time on the other existing products which have stronger adoption/relevance for our partners.”
The ordinary BookingSuite customer is a general manager or owner at a small hotel company — a company that’s usually so small it can’t afford a revenue manager. We have to infer that either these people didn’t like the product, didn’t feel that knowing what competitors were charging was enough information to be useful, or didn’t trust Booking.com to provide impartial objective data.
Other global brands that offer business services to hotels have similarly been looking for traction with their tools. In September 2016, Expedia Group debuted its revenue management tool, Rev+, for free. Last winter it said it had 20,000 users for it out of the 400,000 hotels who list properties with its brands. In July 2017, Trivago debuted a rate insights tool.
Some other startups and small companies generated buzz a few years ago, as PriceMatch did, for their rate management tools.
“It’s a shiny object syndrome and some hoteliers fall for it,” said Tammy Farley, co-founder and president of Rainmaker Group, which has worked on revenue management tools for two decades. “But when they find that the numbers on the forecast aren’t right, people get dissatisfied. New players truly under-estimate the math and science it takes to go from rate shopping to rate guidance.”
Duetto’s Bid for Scale
The company that collects the most positive headlines in revenue management is Duetto, a San Francisco startup.
In February, Duetto raised $80 million in Series D financing in a round led by Warburg Pincus, bringing the five-year-old startup’s total funding to $143 million. Private equity is betting that revenue management can scale.
Duetto, for its part, decided that offering rate-setting isn’t enough. It has been building out a platform that offers several tools and integrations.
In an a la carte approach, some independent hotels and smaller hotel groups may only want to use its so-called open pricing app, while a larger hotel company may be interested in using all of Duetto’s tools for e-commerce in (presumably) easy integrations with other third-party tools a hotelier may be using.
The platform approach is a hedged bet. Platform businesses in other sectors like Salesforce have shown an ability to scale in usage thanks to a so-called network effect. The model also may reassure hoteliers that Duetto will play nice with the other software they’re already using.
Duetto says a platform approach is needed to tackle the multifaceted issues facing hoteliers wanting to drive more direct bookings.
That’s why the startup prefers to talk about “revenue strategy” instead of revenue management. Part of that means helping hotels drive more direct engagement with customers through personalization on hotel branded websites earlier in a consumer’s research process as a way of avoiding turning over so much business to online travel agencies and other intermediaries that charge high commissions.
IDeaS Big Idea
The incumbent player in revenue management is IDeaS, a Minneapolis, Minnesota-based business owned by tech giant SAS. The company has had particular success with four- and five-star boutique hotels and casino resorts.
IDeaS said it has doubled the number of properties it serves in the past three years to more than 10,000. It claims to be the largest revenue management provider globally if one excludes free solutions like Expedia’s Rev+.
This summer IDeaS debuted a new approach called agile rates. It has added functionality to its revenue management system that lets hoteliers handle the interplay between a variety of the prices they may have for any given room over the course of a year.
“What we hear from many regional hotel groups is that they run into problems where their pricing hierarchy gets upside down — their premium products are sold for less than their economy products — when they try to do things manually using rules in the property management system,” said David Wilker, director of product management at IDeaS.
For example, up until now, the manager may have set a rate for loyalty members to always be at a, say, 10 percent discount to the best flexible rate.
Using agile rates, the company’s system will recognize if it’s a high demand day and suggest by default not to offer as much of a discount by day of the week, by season, by days until the guest’s arrival, by room category, or so on.
The new functionality represents a broader industry trend: the expanding impact of artificial intelligence-powered predictions that promise to make businesses, such as hoteliers, more efficient and handling a hierarchy of prices and customer with different lifetime values.
Rules-Based Versus Analytics-Based
The revenue management space is split into two philosophies, to make a crude division for simplicity: rules-based, which means a lot of manual work by revenue managers, versus analytics-based, which roughly means letting the computers that have a full picture of the data take over.
Rules-based systems expect managers to input business rules, such as “when the occupancy changes by X percent, change the last-minute rate for the executive suites by Y percent.”
“We find that the customers who struggle are ones that always try to override the system,” said Farley of Rainmaker.
Analytics-based automation is the wave of the future, said Balaji Krishnamurthy, vice president of global strategy, corporate development, and business intelligence for Sabre Hospitality Solutions. “Automation can detect subtle signals in supply and demand a lot better than humans can.”
“A reactive mode misses opportunities,” said Bonnie Clay, principal product marketing manager at IDeaS. “Those rules have been built by humans who often don’t have time to go back to revisit them regularly to make sure they’re appropriate.”
For example, computers might automatically detect that a large contract for a group booking has come in, so the hotel could raise its rates for transient visitors during the period more than the rules would ordinarily allow for in a form of surge pricing.
“The old path was very deterministic, meaning creating statistical models based on historical data and a human’s rules of thumb,” Krishnamurthy said. “In the next five years, the industry will shift to probabilistic models which have become possible thanks to the new wave of machine learning. Many players using the old model will be replaced by the competitively better results generated by the new model.”
In theory, a hotel that switches from a system that relied on fixed rules for rate setting to a one based on automation and probabilistic models could see gains when rare events happen.
Michael Schubach, program management director for strategic accounts in hospitality at Infor, said his company has helped install revenue management software at more than 6,000 hotels. The company’s EzRMS automatically calculates demand forecasts for each future use of various hotel rooms and is used by many hotel groups, such as Wyndham.
Yet rules-based, deterministic systems have their champions among revenue managers who prefer what they know and like to be more hands-on about how to use algorithmically driven rate recommendations.
Rainmaker Sees Gains
Rainmaker Group is another incumbent player that has recently seen its growth take off. Between 2013 and 2015, the company grew by 67 percent to $46 million, according to the Inc. 5000 list of the fastest growing privately held companies in the U.S.
The Rainmaker Group, based in Alpharetta, Georgia, raised $33.8 million in venture capital in 2012, and it bought RevCaster, a price monitoring company, in 2015 and folded it into its product suite.
In 2017, it sold a division that ran software for owners multifamily housing units real estate tech firm RealPage for $300 million. That year the company also introduced a platform to allow for companies to choose a la carte from multiple tools, such as a new function for group forecasting.
Farley said the company plans to grow more share, especially among independents, boutiques, luxury resorts, and regional hotel groups in the coming year.
Amadeus and Sabre Watching
By next summer, Sabre Hospitality plans to roll out a revenue management solution for an underserved portion of the market: three-star and below, mid-sized chains, independents, and limited service properties. It will rely on artificial intelligence to let managers set and forget their rate optimization plans.
Amadeus Hospitality, for its part, doesn’t yet have a robust revenue management solution as part of the hospitality e-commerce platform it has begun to sell to hotel companies in earnest.
Warburg Pincus, as Duetto’s private equity backer, and Rainmaker may be secretly hoping that a larger technology company, like Amadeus, Sabre, or Oracle will someday buy them — just as Amadeus bought business intelligence provider TravelClick earlier this month for $1.5 billion.
Noisy and Confusing Market
Other players compete to offer some strategic ecommerce solutions along with some revenue management. RateGain helps travel brands maintain rate integrity across multiple points of sale online, helps them forecast demand and manage their online reputation, and helps them distribute their rates. OTA Insight combines a revenue management tool with the ability to monitor rate changes in various major online travel agencies. LodgIQ, Xotels, and Hotel Scienz mix rate optimization with hotel management tools. The list goes on.
Other startups, such as Avvio, The Hotels Network, and Triptease, offer a variety of digital tools to help hotels drive more direct bookings with sophisticated booking engines and customer chat-based tools. While they lack revenue management components, their existence shows the complexity of vendors and promised solutions that hoteliers are struggling to understand.
Need for a Change Catalyst
A couple of factors have held back the wide rapid adoption of revenue management systems.
As noted before, educating staff is essential. “What would you rather have your revenue managers do: strategy or punching numbers into spreadsheets?” asked Chuma.
At smaller hotel companies, the labor issue is more poignant. “Limited service and three-star-and-below properties should go to driverless revenue management because they’re leaving money on the table because they don’t have the staff to set all the dials and take advantage of opportunities,” said Krishnamurthy of Sabre.
Larger hotel groups often try to address the integration issue by building as much as possible in-house. Witness Radisson, a mid-sized 1,400-hotel group headquartered in Brussels, which announced this spring it would bring its full spectrum of back-end systems mostly in-house.
Other publicly held companies may worry about upsetting Wall Street’s short-term investors by being hit with a million-dollar line-item expense plus a write-down of legacy systems being replaced.
One solution for them to turn to third-party platform providers who are accustomed to offering commercial models that can let public companies spread out their investment expense over multiple quarters, such as Amadeus, Infor, Oracle, and Sabre. Witness how Amadeus Hospitality is creating a back-end booking system for InterContinental Hotels Group.
For more context on the industry’s legacy tech, Skift Research subscribers can read “The Strategic Guide to a Modern Hotel Technology Stack.”
In short, the hotel industry hasn’t seen an obvious upswing in mass adoption of revenue management tools.
But as many revenue managers become inspired by the success of airlines at upselling guests on additional services and distributing different offers to match varied types of customers, they’ll need to adopt the next-generation of sophisticated software.
That’s not great news for the software vendors.
But it’s good news for hoteliers willing to adopt the tools because they’ll be able to gain a notable edge over their less-tech-savvy rivals. They might soar like a profitable airline.
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Photo credit: Pictured: Stephen Hambleton and Kelly Calvo, both IDeaS product managers in Minnesota, review revenue management dashboards that aim to help hoteliers manage pricing and revenue across an entire estate or individual property. IDeaS