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The Gatekeeper

Understanding revenue management in casino resorts

The Gatekeeper

It is hard to imagine that there could be another function in casino resorts that is as misunderstood and yet so critical to driving profits as revenue management. Most people think revenue management is the department that forecasts occupancy and sets prices for hotel rooms. This is an overly simplistic view of revenue management, as the function is much more than that—or at least it should be.

The most profitable customers of a resort are typically those who are staying in the hotel. These guests tend to spend more time and money in the casino, restaurants, spa and on other amenities regardless of whether or not they are paying for the room. Therefore, determining which customers stay in the hotel on busy days is critically important. None of the assets perform well when low-value customers are occupying the hotel.

Maximizing Revenues

Revenue management must act as the gatekeeper to the hotel. Maximizing room revenue is one component, but an effective revenue manager at a casino resort must also consider the profit customers are contributing beyond the hotel rate.

Raising rates serves two functions, as it increases revenue per room sold while also saving space for higher-value customers who may book later. Comping a guest who spends lavishly in non-casino outlets may also increase profits by motivating them to stay with you rather than a competitor, or to plan incremental visits. These scenarios and many others must be analyzed every day to ensure the optimal mix of customers.

Problematically, in today’s casino hotels, most revenue managers are not empowered to fulfill that role. The casino marketing and hotel sales departments often wield much more organizational power than revenue management, and they are not compelled to defer judgment about who gets into the hotel. This causes two issues that surface over and over again.

First, coordination is difficult among the departments. There are numerous instances of inventory management mistakes when a hotel sells out too fast or misses a sellout because there is no one accountable with the authority to balance demand across all booking channels. Often, the property president or another senior executive will step in when there is a crisis, but this fire-drill approach doesn’t even begin to address the significant losses that happen every other day.

Second, revenue management is rarely empowered to effectively rein in casino marketing or hotel sales when they are booking unprofitable business as compared to the business being displaced. There is no doubt that casino players and contracted groups are two of the most profitable customer segments, but some clients are much more profitable than others.

Also, these teams are experts in attracting business, but not in forecasting demand. Without clear criteria that are actively managed, it is the nature of sales managers and hosts to book anything they can, so all too often low-value customers crowd out higher-value customers who book late in the booking window.

Revenue management should be the function responsible for leading strategic marketing decisions and setting up the sales teams to succeed. There will always be a role for senior property executives to advise and set strategy, but they have too many other responsibilities to be accountable for the numerous real-time decisions that must be made, and they may lack the skills and tools needed to manage in a rapidly changing market with evolving technologies.

Revenue Management Today

In most cases, if companies in our industry elevated the existing revenue management teams in the way described above, they would fail. Not to say they are incompetent, but many lack the experience to lead strategic marketing. Effective revenue management requires the alignment of human capital, technology, departmental power, processes and culture, and each must be addressed in organizations before the transition can succeed.

The first step is to dispel some illusions and start from a clear understanding of where the industry is today. We as an industry are less sophisticated than we think we are when it comes to revenue management. Companies have spent millions of dollars on revenue management systems and data warehouses, and yet in most instances, the systems are not being used as intended to improve decision-making. Numerous revenue managers admit privately that their decisions are based almost entirely on reports that they built in Microsoft Excel, despite having implemented a revenue management system.

There are three reasons for this:

1.  Implementations have failed because the data being fed to the system is incorrect, and so the forecast produced is invalid, which renders it useless.

2. Strategies and/or processes for setting rates are imposed on revenue managers, mitigating the benefit of maintaining the system because they would rarely take its recommendations anyway.

3. Most people in revenue management are unqualified and not trained to understand how to use a system, since so many were promoted from jobs in the call center or front desk, and were never taught revenue management theory, best practices, time-series regressions or linear programming algorithms.

Technology and Training

It is important to note that the major revenue management systems on the market today work well if implemented and used properly. However, vendors do a disservice to their customers and the industry by suggesting that any revenue management system is “plug-and-play,” requiring little expertise or organizational changes to use. This is an appealing sales pitch, but it perpetuates a gross discrepancy between expectations and results.

It is not surprising that revenue management teams are reluctant to expose this reality, since hundreds of thousands or millions of dollars were spent to give them the tools. So, they protect their jobs and keep quiet.

If you purchased a revenue management system and you want to know whether it is being used as designed, ask the following questions:

• Are the “bid prices” produced by the system being used to set rates? How often are the rate recommendations overridden or ignored?

• Are most decisions made from an Excel spreadsheet or the system? Or worse, are decisions made by a group of people sitting around a table with limited information besides a forecast report and competitor rate shops?

• Is the system being actively maintained by manually entering demand assumptions for channels that are difficult for a system to forecast, like contracted groups and direct marketing offers?

• Is the system’s forecast reliable enough to use? How often is the forecast overridden?

To earn a return on investment, bid prices need to be used for most pricing decisions, the systems must be actively maintained and the forecast must be accurate and trusted.

If your company has not purchased a system, it is worthwhile at most resorts to implement one, but only if you are committed to aligning your people, technology, processes and culture to utilize it properly.

Preparing Revenue Management to Lead

Success in revenue management is achievable. Aligning the components takes leadership, investment and persistence.

Human Capital. Revenue management requires a skill set that is extremely difficult to find. The perfect candidate would have analytical skills including statistics, technology and theory, knowledge of operations, sales and marketing, familiarity with systems, persuasiveness, independence and judgment.

If you win the lottery and find an applicant with these skills, knowledge and abilities, hire them. In reality, pick one of two typical candidates. Either hire someone with general experience in the industry with analytical aptitude then invest in training for them to round out their skills and knowledge; or, hire someone with strong analytical skills and emotional intelligence and setup mentors within the company to acclimate them to the business.

Technology. Select vendors based on a system architecture that includes a data warehouse, revenue management system and online booking engine with customer log-in functionality. Scale the investment to your needs and do not overbuy by automatically selecting the best-in-class. Most systems work well enough, but you must be diligent about ensuring that the connectivity between systems is working and that data is aggregated accurately. Since no vendor provides everything you will need, expect to do some custom development to put it all together.

Processes. Establish clear authority for revenue management to set rates and availability by channel. Create an exception process for those rare circumstances when there is a compelling reason to override optimal decisions. Hold revenue management accountable by tracking the accuracy of forecasts with metrics such as mean absolute deviation and mean absolute percentage error, and by analyzing key dates to identify problems that might have occurred. In general, during periods of peak demand, a hotel should sell out on the day of arrival, not days or weeks in advance, and there should be space for your most profitable customers to book at the last minute. This is an impossible expectation to meet every time, but if there are more mis-yielded days than well-yielded days, then you have a big problem.

Culture. Foster a culture that recognizes that revenue management is a discipline that can only be understood through data. Discourage senior executives from second-guessing revenue managers with their “gut feel” about how it should be managed. Set high expectations for revenue management once all the pieces are in place.

Most people intuitively know that revenue management is not working well in their organizations. By following this prescription, you solve problems that have persisted for many years.

The rewards of getting it right can be great. There is a lack of data from casino resorts about the benefits of revenue management, but if other industries are a guide, then operators in our industry should expect a minimum of a 5 percent-to-10 percent boost in property earnings by transitioning from rudimentary revenue management to best practices.

If adopted, this could be the next great driver of growth in our industry, with an investment much smaller than constructing a new building.

Marco Benvenuti is the managing partner at Duetto Consulting. With more than 10 years of experience in revenue management, business analytics and IT, Benvenuti is a practical strategist who is fundamentally changing revenue management from a price-setting function to an enterprise strategy partner that enables marketing and operations to perform more profitably. In June 2008, Benvenuti founded and managed the enterprise strategy department at Wynn and Encore in Las Vegas.

Patrick Bosworth is a partner at Duetto Consulting. From 2008 to 2010, Bosworth was the director of yielding and business strategy at Wynn Las Vegas. He managed two departments—revenue management set pricing and managed distribution channels—for two Las Vegas properties with 4,750 hotel rooms; and his business strategy provided business intelligence and analytical support for marketing, operations and business development by reporting on company performance, market trends and competitors.

 Anuj Jenveja is a vice president at Duetto Consulting. From 2008 to 2011, Jenveja worked at Caesars Entertainment Corporation as a president’s associate. He worked in corporate finance, where he managed projects related to financial forecasting, development, valuation, capital, liquidity and cash flow for the entire enterprise.

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