Hotel Profit Discovery

From PAR to PAC: The Big Revenue Management Reset

Today, a revolution is happening in hotel revenue management as hoteliers with the highest profit expectations are beginning to follow the customer instead of the product.  They are using advanced analytics to dump their dependence on the crude “Per Available Rooms” (PAR) averages and have begun the move to measure their world by predictive indicators based on “Per Available Customers” (PAC).  This is the Big RM Reset.  It is a seismic shift that is reframing the Hotel Revenue Manager’s world view from PAR to PAC.  Here are the steps required to profit from this transformation.

Step 1. From Property to Purchases
The conventional PAR measurements were inherited from a time when data collection and data access was limited. Since a property’s number of rooms rarely changed, they became the simplest gauge by which to measure changes in the world.  Thus, “after-the-fact” averages like room capture rates, RevPAR, and TRevPAR became the benchmarks for evaluating the success of “what” happened. Ironically, while PAR is great for investors looking at how one property compares to another, it is almost irrelevant for hotel managers trying to make the great decisions that create value for those same investors.  In fact, for most managerial functions, PAR does more to obscure problems and opportunities than to reveal them, often allowing unprofitable trends to go undetected. As an example, while an outlet’s capture rate may have remained unchanged over several years, the mix of guests actually making purchases may have completely shifted from a higher value to a lower value guest — a clear indicator that the product or service of that outlet needs attention.   To truly understand your hotel’s unique demand rhythm, you have to listen to data at the most granular levels. Diving down to individual purchases is the first step in exposing the important patterns in the guests’ actions that truly drive or destroy profit.  This is the spark that ignites all successful Total Revenue Management initiatives.

Step 2:  From Myths to Measures
PAR is easy to calculate, but its simplicity often forces managers to make assumptions about the real drivers of profits. In time, these assumptions become powerful myths which then become the basis by which many critical business decisions are made. PAC, on the other hand, cuts through biases by illuminating what matters most — the customer.  For this reason,  it is critical to establish a set of PAC measures that will be used to establish “guest-centric” goals, objectives, budgets, bonuses and other performance indicators. From RM to Marketing to Human Resources, every department will now be evaluated by one version of the truth.  For example, instead of just looking at the traditional PAR capture rate to evaluate an outlet’s performance, you can instead track the number and type of guests that actually used an outlet. Empowered with this PAC intelligence, managers can then identify the true sources of good and bad trends, move quickly to take immediate action, and track the impact of their decisions.

Step 3: From Flow to Footsteps
Flow through analysis, or how much profit changes with changes in revenue, is a time-honored tool in the PAR world.  Similar to PAR, however, Flow is irrelevant when trying to identify and evaluate the variables that actually create additional profit.  To gain the clarity of the PAC world, you need to trace how profit is affected by every guest choice.  Footsteps analysis is the process of mapping the series of choices and actions made by each guest and the impact they produced. Identifying each guest’s unique booking pattern, marketing response, outlet choices, and even their food preference will reveal which of your hotel’s touchpoints is delivering real value, which need tweaking, and which are unnecessary, thereby allowing you to enhance the interactions that drive loyalty and profit and eliminate those that are obsolete.  Here is where untapped opportunities begin to reveal themselves.  Naturally, the sheer scale and complexity of following each guest action is beyond the ability of any human.   Luckily, the mathematics of Decision Rules, Network Analysis, and Market Basket Analysis can be employed to monitor the significant choices made by each of your guests and expose the areas where making changes would yield the most immediate and long term impact.

Step 4: From Classes to Clusters
The traditional classes used for guest segmentation in the hotel industry are centered around billing instead of behavior.  This is because, in a PAR world, RM only needs to focus on the mechanics of booking instead of what motivates it.  Hence the term “heads in beds”. For instance, an “OTA” label says a lot about how the guest booked but nothing about how much they are willing to spend.  However, a “Relaxation Weekender” tells you a lot about both.  The insights gained from Step 3 are used to scrap the traditional hotel classes for smarter Behavioral Clusters. PAC is then measured at the behavioral cluster level.  Here is where you begin to see constellations where you had only seen stars.  Your new guest segments will open up limitless options for designing rates, packages, and incentives that drive single stay and lifetime value, forever redefining your approach to RM and Marketing.

Step 5: From Sorting to Scoring
Until now, Marketing has been limited to working with segments derived from using the basic methodology of traditional demographic analysis. This has forced hotels to confine their CRM tactics to simple acts of creating mailing lists by sorting guest records. Usually these “sorts” are based on arbitrary filters such as location, total spend, or even number of stays.  The guest clusters created in Step 4 will give Marketing invaluable insight into the true mechanics and motivations behind conversions, loyalty, and lifetime spend.  With behavioral clusters, Marketing can design campaigns that carry more relevant branding messages and promotional offers.  Then, they can target the repeat and potential guests who are most inclined to commit to your brand.  PAC-focused Marketing simultaneously lowers costs while increasing engagement of the types of guests that actually create profit.  Mathematical Guest Scoring helps you identify the guests that have the highest likelihood of responding to specific campaigns, allowing your hotel to reach new levels of customer conversion and retention.

Step 6: From Rates to Relationships
Total Revenue Management begins when the power of RM is unleashed on all revenue streams.  Now, your new guest clusters will allow RM to look beyond room revenue for profit and growth.  By designing rate strategies that optimize total PAC performance, RM can simultaneously drive the success of F&B, Spa, Golf, and all other ancillaries.  Best of all, RM will now be able to tie the impact of yielding decisions across all revenue streams.  This improves the quality of short and long-term forecasting and therefore leads to a more predictive basis for operational and financial planning.  In addition, RM can signal to Marketing when and where incentives are needed in order to improve PAC results.   By shining the spotlight on the customer instead of the rooms, RM can now concentrate on the all the variables that help create meaningful relationships with valued guests.

Step 7: From Silos to Symphonies
In the PAR world, Marketing and Revenue Management are typically disconnected, pursuing objectives that are often at odds.  While the first is focused on the motivations for booking, the latter is single-handedly trying to manipulate the mechanics of booking.  This “silos” behavior implodes in a PAC world as RM and Marketing become focused on the same target.  For this reason, this step is not a step at all, but rather the natural synchronicity that emerges between RM and the rest of the hotel.  This is where the impact of the PAC transformation is actualized.  As all departments begin to realize that the guest sees them as one interconnected package of perceptions, managers begin to coordinate their activities around optimizing their impact on PAC.  That is the synergy that the best hotel companies in the world are chasing.

Step 8. From RM Staff to RM Star
The shift from PAR to PAC requires that hotels seek talent that understands the math that maximizes results in forecasting and decision making.  This transformation has constrained the vast majority of hotel RM professionals, who do not have a mathematics background, to a position where they can not offer the most value to their property.  Subsequently, this talent gap will only increase in the years to come as technology zooms ahead into Big Data platforms – all, while hospitality schools are only now, slowly, beginning to modernize their RM curriculum. In order to quickly capitalize on the Big RM Reset, it is critical to use Hotel Analytics experts to build mathematical models that will allow your RM Staff to successfully navigate the transformation to PAC.  To this end, many top hotel companies have centralized RM and put rate decisions in the hands of mathematicians and technology experts.

The Big RM Reset is well underway in many forward thinking hotel companies.  Embrace this new world view and you will forever change the way you see and do business.

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Robert Hernandez, Statistical Analysis and Data Mining for Revenue Growth Robert is an expert in the field of mathematical Hotel Optimization and Analytics. He has spent the last 17 years building data-driven forecasting and optimization models for companies in over 20 different industries, from tech to tourism. Robert possesses a very unique skill set including cross-disciplinary experience, advanced mathematical and analytics skills, data transformation, industry-specific knowledge and business-process improvement expertise. Robert began his career at the Walt Disney Company in Revenue Planning. Read More+


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