The Science (and Art) of Performance Management

Author: John Wallace

There's a well-known business adage that says "you can't manage what you don't measure." My follow-along question is, "if you don't measure it, how do you know you're improving?"

glasses and calculator above a performance manager's papers


Interestingly (and oddly), I've heard one of our newest competitors mistakenly postulate that "it's simply not possible to measure the full revenue potential one can realize from a Pricing and Revenue Management program or solution." I guess I'm a bit puzzled by this comment, as it implies a "just trust us approach."

You see, measuring whether, where and why your revenue management system and policies are delivering value is fundamentally necessary if you wish to take your yielding program to a higher, more sophisticated plane.

The general approach is to look at key performance indicators (KPIs) prior to and following the implementation of a revenue management system. The most common KPIs are RevPAR and RevPAR Index (for those of you who subscribe to Smith Travel Research, STR, data). Casino hotels employ an additional measure, known as TotalPAR (Room + Non Room Revenue). And, for those who want to measure profitability, there's GOPAR or ProfitPAR.

While these are all sound KPI measurement tools, none can tell you why you're doing well, what's truly driving your revenue gain (or loss), or the reason(s) behind your performance.

Yes, you can measure the change in Occupancy and ADR or ADO (average daily other, non-room revenue) to determine if your gain (or loss) is attributable to higher occupancy, higher rate, or higher non-room spend. But when you analyze these KPIs - and only these KPIs - you don't get the full picture. You get the canvas and the paint, but not the artist and the paintbrush.

So, just how do you identify gains that can be directly attributable to better revenue management practices? 

My suggestion to identify gains that can be directly attributable to better revenue management practices is to use a process we employ for our customers and, in fact, have done so successfully for years. Very simply, it involves replaying the booking process - that is, looking closely at the bookings and denials for historical dates and measuring results for each of the following:

  • If we accepted bookings only on a first-come, first-served basis, what would the results have been?
  • Utilizing a combination of system and user yielding, what were the actual results achieved?
  • What is the optimal combination of bookings, which, in hindsight, would have generated maximum revenue/profit?

Using this approach, four valuable performance management metrics emerge:

  1. Revenue Opportunity: the total amount of revenue that could have been achieved through any yielding practices. FORMULA: Hindsight Revenue minus First-Come, First-Served Revenue
  2. Revenue Opportunity Gained: the total amount of revenue gained from current yielding practices. FORMULA: Actual Revenue minus First-Come, First-Served Revenue
  3. Remaining Revenue: the amount of remaining revenue that can be captured through improved yielding practices. FORMULA: Revenue Opportunity minus Revenue Opportunity Gained
  4. Percentage of Revenue Opportunity Realized: the percent of Revenue Opportunity achieved. FORMULA: Revenue Opportunity Gained divided by Revenue Opportunity

formula on a chalkboard

For optimal insight into the effectiveness of your yield program, it is necessary to track these measurements for an extended period and then compare this data to similar data from prior-year periods (e.g., weekly, monthly, quarterly).

Single-day analysis is also useful. While it will not give you an assessment of your overall success, analyzing several single dates can help you pinpoint the source of a problem area and where you can focus efforts to improve your yielding practices. Retrospective date-level analysis, for example, clearly reveals what mix of business you should have accepted and should have declined.

Bottom line is this:

Traditional KPIs give you sort of an aerial perspective of your yielding program from 30,000 feet up; that is, speaking in the broadest terms:

Is your overall revenue improving or not improving?

Our approach goes deeper, giving you both an aerial perspective and the ground-level perspective on which you can take action to strengthen your program; that is,

Are you truly realizing your full revenue potential and, if so, what are the key drivers? And if not, where are the specific areas you need to work on to achieve your revenue goal?

Not only can you measure the true value of your yielding program by expanding your drilling beyond the traditional KPIs (or the canvas and the paint), you owe it to yourself to do so.

This is not easy, though, and this approach requires broad knowledge of the revenue management discipline, deep data science skill set, and years of building and refining complex optimization-based solutions. You don't get this level of sophistication without tracking results over years and changing economic environment, and continuous refinement of your models. So make sure you partner with the most experienced technology providers / science teams (artists) who have the highest-performing and proven systems (paintbrushes) and what you'll ultimately reveal is the total opportunity available at your property or properties and, in the end, drive more revenue to your company's bottom line.

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