The Hotel Revenue Management Landscape 2019

by Wouter Geerts + Skift Team - Apr 2019

Skift Research Take

Revenue management is unquestionably becoming more important for hotels in an ever-more competitive market. Revenue Management Systems play an important role in automating pricing, but hotels should not see these as a one-stop solution to all their problems. There are bigger strategic questions that need answering.

Report Overview

It feels like we are at a crossroads. Looking back a few years from now, we might be shocked to see how few hotels practice sophisticated revenue management today. Excel worksheets, heuristics, and gut feeling are still very prominent when it comes to setting room prices and developing a greater pricing strategy. This might all be about to change.

As technology becomes more affordable, and machine learning and artificial intelligence are being introduced in all walks of life, more hotels are starting to look at automated pricing systems to allow more competitive pricing. Reliance on online travel agents with high commission rates and rate parity issues furthermore increase the need for a coherent revenue strategy.

This report investigates the current landscape of revenue management systems, highlighting the opportunities for growth over the coming years. As a rapidly growing industry, there is a plethora of small players which makes for an opaque landscape which can seem daunting to newcomers and outsiders. Here we clarify the key differentiators of the vendors, as well as some of their shortcomings. An important discussion about the future of revenue management is kicked off.

What You'll Learn From This Report

  • How the revenue management discipline has evolved and where it is today
  • The main revenue management vendors and how their products differ
  • The size and growth opportunity of the revenue management vendor landscape
  • The main opportunities and challenges for the future

Executives Interviewed

  • Ari Andricopoulos – CEO at RoomPriceGenie
  • Florian Augustin – Chief Marketing and Business Development Officer at HotelPartner
  • Joris Beerten – Global Commercial Director at OTA Insight
  • Vivek Bhogaraju – Director, Revenue Management Solutions at Expedia Group
  • Matt Curry – SVP, Global Head of Sales at Rainmaker
  • Alexander Edstrӧm – CEO at Atomize
  • Craig Eister – SVP Revenue Management at InterContinental Hotels Group
  • Nadim El Manawy – CEO at Arise
  • Cindy Estis Green – CEO at Kalibri Labs
  • David Grey – Director of Yield Management at Hostmaker
  • Caryl Helsel – CEO at Dragonfly Strategists
  • Neville Isaac – Chief Customer Officer at Beonprice
  • Klaus Kohlmayr – Chief Evangelist at IDeaS
  • Emil Majkowski – Platform Architect and CIO at Rentals United
  • Michael McCartan – Managing Director EMEA at Duetto
  • Jens Munch – CEO at Pace
  • Jason Pinto – COO at Pace
  • Vineeth Purushothaman – Senior Manager Distribution EMEA at Wyndham Hotels & Resorts
  • Stan van Roij – VP Hospitality Solutions & Program Management at Infor
  • Ira Vouk – Pricing Intelligence Product Leader at Cloudbeds and co-founder of iRates
  • Vendor insights and data was also provided by representatives of Outperform RMS, Hotel Price Reporter, Spotpilot, Rateboard, LodgIQ, Kriya RevGen, RevControl, Hotel Scienz, Price My Hotel Room, Dataria, and Climber RMS.

Executive Summary

Revenue management in the hospitality industry has come a long way in the past 20 years, but we are still only at the conception of its full potential.

According to research by Skift, 16.3% of hotels worldwide use sophisticated revenue management technology that goes beyond Excel spreadsheets, heuristics and gut feeling. 55% of total room revenue is not overseen by revenue management tech. This equals a $330 billion opportunity for growth.

The first revenue management system IDeaS has been offering its services to the hotel industry since 1998, and since then a host of new players have entered the market. The big three, IDeaS, EzRMS (Infor), and Duetto have been successful with extensive and sophisticated systems which are particularly popular with hotels that have an in-house understanding of revenue management. In more recent years the market has expanded as more affordable technology has enabled startups to target smaller and independent hotels which do not necessarily have in-house knowledge of revenue management basics.

The main problem that revenue management systems solve is pricing, which is becoming increasingly complicated in a convoluted landscape of online travel agents, wholesalers, social media, and direct booking channels. Using sets of algorithms and machine learning, revenue management systems can process millions of computations which no human would be able to do, and provide the optimal price for every room on every day.

While each algorithm will be different, it is impossible to compare these and decide which one is the best. We therefore highlight a number of differentiators between the different systems. This includes whether they promote human influence on pricing decisions or fully automated pricing, whether they use mostly internal data or external data, and how many times they refresh the prices — the optimization rate.

Data will become increasingly important to improve performance. Today most hotels are fighting a losing battle with tech-savvy online travel agents and giants like Google when it comes to the collection and utilization of customer data. Revenue management systems and revenue managers will play a more important role to ensure hotels can win the fight for the customer.

It is important to highlight that revenue management is much more than pricing, and that the application of revenue management systems beyond pricing is limited today. It is important for hoteliers to look beyond pricing, however, and ensure that revenue management sits at the core of their operations and is not siloed from other departments like sales, marketing, distribution, and brand.

There are calls for some fundamental changes to hotel strategies moving forward. Hotels should start focusing more on their bottom line, rather than their topline, considering their profit over gross room revenues. The concept of total room revenue highlights that all revenue-generating departments need to work in tandem to achieve the hotel’s strategic goals. As revenue management moves to the core of the business, enhanced and continuous training will become more important to stay ahead of the competition.


A Short History of Revenue Management

Airlines’ yield management origins

Robert Crandall, CEO of American Airlines, is widely credited for the inception of yield management in the airline industry. On the back of airline deregulation in 1978, which pushed American into the free market, discount pricing and low-cost carriers grew rapidly, forcing American to look closer at its operational costs and bottom line.

It took another decade for the practice of yield management to come to the hotel industry. Famously, Crandall discussed pricing challenges with Bill Marriott, the former CEO of Marriott International, who started implementing initiatives in his organization. The concept of revenue management was born.

During the 1990s, Marriott developed two revenue management systems (RMS), the Demand Forecasting System for its full-service properties, and the Revenue Management System for select-service hotels. In 2003 the company combined the systems into One Yield, currently in its second iteration and still used by Marriott today.

Meanwhile, IHG introduced its own revenue management system in 1993 called HIRO, which morphed into PERFORM as IHG made some changes to the analytics and user interface. With IHG’s launch of its proprietary central reservation system (CRS) Concerto in 2017, PERFORM is now accessed through Concerto, making the CRS and RMS more integrated.

Marriott and IHG are the largest chains still working with in-house systems today, having invested millions in upgrading these in the past few years to remain nimble and up to date. Other major chains include Choice Hotels with its new ChoiceEdge reservation system with built-in pricing and revenue capabilities, and Best Western’s 2016 investment in a new revenue management system called Best Rev.

Launch of third-party systems

All other sizable chains today rely on third-party technology to optimize their revenue management decision-making.

In the same year that Marriott started looking into the application of yield management in the hospitality sphere, Dr. Ravi Mehrotra started IDeaS, which would grow out to be the largest third-party revenue management system in the hospitality industry. Although initially focusing on the airline industry, in 1996 the company signed Shangri-La, Keystone Resorts, and Hilton as its first hospitality clients.

Another player entering the market a few years later was EasyRMS, founded in 2002 and later acquired by Infor and rebranded to EzRMS. After a major push into Europe from IDeaS in 1998, EasyRMS became the first serious competitor, with Accor Hotels as a major client. EasyRMS was founded as a Software as a Service (SaaS) company, and IDeaS brought its own SaaS product to market in 2003. Through Accor, EasyRMS gained strength especially in Asia Pacific.

There were other players around, but none had the impact these two players did. Rainmaker stemmed from the casino landscape, and still today counts many casino hotels as its clients. Optims was another provider, and was bought by Amadeus in 2004 to turn into Amadeus Revenue Management, which was later disbanded.

Due to a lack of bandwidth in those days, IDeaS worked with summary data rather than full transactional data, but in 2009 the company started working on a new system called G3 which would be able to provide a much more granular view. After a 2012 pilot with Hilton, this program was launched in 2013.

Meanwhile, a new player entered the market: Duetto. Launched in 2012, Duetto focused on transactional data, and also introduced the concept of ‘open pricing’ to RMS technology. Open pricing moved away from having pricing limits and restricted pricing levels – e.g. pricing increments of $10. Instead, the company claims it allows for truly optimal pricing.

Today, IDeaS, EzRMS and Duetto are seen by many in the industry as the frontrunners, and can be called the “big three” of the RMS landscape.

Technology boosts further dissemination

As technology has become cheaper and more advanced, a host of revenue management systems has sprung up to fill gaps left by the three main players. Applying AI and machine learning is no longer only available to the IBMs of this world.

IDeaS and Duetto are undoubtedly built for revenue managers by revenue managers. In a highly unconsolidated hospitality market, this puts up barriers to greater dissemination. The long tail of small, independent hotels which do not have a revenue department or revenue manager will not necessarily consider one of the big three as their first entry into the world of revenue management. As Caryl Helsel, CEO of Dragonfly Strategists said: “Duetto and IDeaS are sophisticated systems that have in-depth algorithms to produce spot on forecasts and pricing decisions, which is truly the most important aspect of an RMS. However, some non-revenue leaders feel that those systems don’t represent the data in a way that is easy for a non-revenue person to look at and understand. Some of the other less sophisticated systems or business intelligence technologies provide the view of the data in a more consumable format, so that virtually anyone can go in and comprehend it very quickly.”

A new wave of players has greatly improved the ease of use and how data is visualized. This has come, however, with consequences. Automated pricing systems with strong visualizations are offered by vendors like Atomize, Pace, Climber RMS, Spotpilot, and others. However, this key focus on pricing means that the remit of these players is narrower. This allows them to offer a slick product with a short time to market, but limited features compared to the big three.

Interestingly, many of these new players stem from Europe where the hotel landscape is far more fragmented than in North America, and players with a strong visual and user-friendly product are likely to have a large customer base to tap into. The main challenge for these newer players, however, will be scaling to larger properties, small chains and beyond, where dedicated revenue managers will more likely appreciate the increased complexity and customizability of the big three.

Online travel agents enter the game

Competition is also coming out of another corner. Two of the largest online travel agents (OTAs), Expedia and Booking.com, launched revenue management systems for their hotel partners.

Booking.com bought PriceMatch in May 2015, to add to its BookingSuite under the name RateManager. Two years later, Expedia followed with its proprietary system Rev+.

It was not all plain sailing for RateManager, and in 2018 Booking announced it was scrapping RateManager because they had not “seen a sustainable level of demand in the market.” It is easy to draw premature conclusions from this, but it is not unsurprising that hotel managers are not chomping at the bit to join. As Michael McCartan of Duetto said: “OTAs are a drug you depend on from a distribution perspective. If you allow them to see all 100% of your business — because to do proper revenue management you have to see not just the business that’s coming through the OTAs, but all other business — you really are handing the keys of your operation over to those guys.”

Meanwhile, Expedia Group is doing things slightly different with Rev+. Expedia’s product is free and more of a market intelligence tool combined with a rate shopping tool which uses market information to produce forecasts and provide pricing guidance. Despite this, it will provide strong attraction to those hoteliers that already rely on Expedia for most of their business and do not have the time or funds to invest in another RMS. Rev+ furthermore does not need access to hoteliers’ full transactional data, instead basing its pricing recommendations fully on Expedia’s own market data and third-party market data. This likely satisfies most fears of a hotel losing control over its data, and Rev+ is now boasting over 50,000 active hotel properties per month and seems to be moving along just nicely.

When asked if further integration with hotels and their property management systems was on the cards for Rev+, Vivek Bhogaraju of Expedia Group gave us a “never-say-never” answer when he said, “in the version that is available today there is no connectivity to transaction systems — we are continuously listening to our hotel partners to learn how Expedia Group can help them drive their revenue performance”.

Revenue Management Stakes Its Claim at the Core of Hotel Operations

From revenue management to revenue strategy

Now, let’s go back to basics. Knowledge of revenue management and its several aspects is limited amongst many hoteliers. Hoteliers in some countries like the U.S. and United Kingdom have paid service to the discipline for longer than others. But this is far from a global practice. In Southern Europe, for example, revenue management is still a new concept for many, with the exception of larger chains like NH Hotels.

Those organizations that have applied revenue management from its origins in the early 1990s have witnessed quite a transformation of the discipline. “Whether you call it Revenue Management, Revenue Strategy, Revenue Optimization, or Profit Optimization, it’s clear the discipline has changed quite a bit over the last 15 years,” said Stan van Roij of Infor. Where it started with a focus on yields and pricing, there is a growing understanding of the strategic importance of the discipline for the entire hotel business.

In a 2017 study by professor Sheryl E. Kimes, published in Cornell Hospitality Report, 63% of 381 respondents from the hotel industry commented that revenue management will likely become applied more broadly within the hotel, and 37% believed revenue management will become more strategic.

Revenue management, then, is increasingly seen as a core discipline of hotel operations, which should not be siloed from other departments like sales, marketing, distribution, and brand. As Cindy Estis Green of Kalibri Labs points out: “it’s about taking into account each of the other revenue disciplines so they all work together to the same optimal goals. You don’t want to end up with the digital marketing team trying to drive revenue through their channels, and sales working on getting more corporate clients. Everyone is well intended, but not aware of the trade-offs that need to be made, and how much time and money you spend on each discipline.”

So where do the Revenue Management Systems (RMS) sit within this changing picture? Pricing is an important part of revenue management, but it is increasingly seen as only one slice making up a much larger pie. Revenue Management Systems are quick to point this out themselves. Jens Munch of Pace said: “Revenue management is a diverse discipline. It’s dynamic pricing, but also brand promise, distribution strategy, group displacement, customer mix etc. Today, there is no single solution that does a great job at all of these. You have to decide where your priorities lie.”

The importance, however, of Revenue Management Systems should not be downplayed. While being able to set dynamic prices in itself is very important, having technology to do this also frees up time for a revenue manager or hotelier to do the more strategic tasks.

The channel challenge — power struggle with online travel agencies

If we were forced to pinpoint a certain development which has pushed revenue management towards the core of hotel operations, it would be the growth in distribution channels and the related power play of online travel agents. High OTA commissions, generally between 10 and 25%, mean that hotel margins are under immense pressure. Having a strong revenue strategy underwritten by all revenue-generating departments in the hotel is lauded as a solution, or at least a critical step to taking back some control.

OTAs have historically held a stranglehold on hotels as they offered the demand individual hotels could not even attempt to source themselves. In return they would take a hefty commission. OTAs are becoming more challenged, however. The larger hotel chains have been investing in direct booking campaigns, with Hilton reportedly spending north of $100 million on their direct booking campaigns ‘Stop Clicking Around’ and ‘Expect Better, Expect Hilton’, and seeing a major uplift in new members signing up to Hilton’s loyalty program.

Hotel chains are becoming better and smarter at ensuring that pricing strategies take OTA commissions into consideration. Marriott rolled out a new feature last year in its internal One Yield revenue management system, which allows the company to better factor in all costs of acquiring new customers. In the U.S., Marriott now takes OTA commissions into consideration when accepting bookings, and therefore might take lower-priced direct bookings over higher-priced OTA bookings, as the profit from the latter will be lower for Marriott.

According to Cindy Estis Green of Kalibri Labs, revenue management systems are falling short in supporting hotels to better manage their distribution overheads. She said revenue management systems “are not set up to tell the hotel what the optimal mix is based on what is available in the market and few can recognize channels or their costs. They just respond to the flow of business coming in by segment, help determine what rates to get and adjust inventory according to the best rate they can get.”

But as Neville Isaac of Beonprice pointed out, “we definitely need to start optimizing by our net RevPAR [Revenue per Available Room after commissions and costs], not our gross RevPAR [before commission and costs], but we need channel cost data for that, and the hotels need to be able to show us how much a channel costs, and that data often is not stored in a PMS [Property Management System], so we do not have access to that.”

While revenue management systems might not provide all the answers, it is clear that OTA commissions have come under the spotlight, and hotel managers should look to manage these channel costs as they do any other operational costs. While RevPAR continues to be seen as the holy grail of room sales in the hotel industry, looking at the bottom line (net income) over the top line (revenue) is an important first step.

Help might also come from some unexpected corners. Airbnb has made a major push into hotels with the recent acquisition of HotelTonight — after a period where it was already expanding its offering of independent and boutique hotels on its platform. Airbnb’s commission model is very different from OTAs, and at 3–5% commissions for the hotelier, this could become an attractive alternative channel.

Competition to OTAs might also come from tech giants such as Google and Amazon. These players are the frontrunners in the “voice” space with their AI assistants Google Assistant and Alexa. Search will be inherently different through voice, and if OTAs cannot adapt to this, they might struggle. Michael McCartan of Duetto believes: “if hotels play it right, it might allow them to get some control back and be less dependent on OTAs”.

The distribution debacle — rate parity issues

Another major issue which is putting revenue management squarely at the centre of hotel profitability is rate parity. In many countries, OTAs write rate parity clauses into their contracts with hoteliers, forcing hoteliers to always offer OTAs the lowest rate that is on the market. While these clauses have been successfully contested in a number of markets including France, Germany, Sweden, and soon likely Australia, in other countries hoteliers are still tied to this.

What complicates matters are opaque distribution pipelines with wholesalers buying blocks of rooms for lower prices, and then selling these on to non-contracted OTAs. This results in rate parity issues where some OTAs can offer lower prices than others. Recent research by OTA Insight showed that hotel rates are undercut by as much as 25%. Wholesalers Hotelbeds, Tourico, and GTA — all part of the Hotelbeds Group — undercut the highest volume of hotel rooms worldwide, with OTAs Amoma and Elvoline marketing the highest volumes of non-contracted discounted room rates to customers.

Unsurprisingly, major OTAs like Expedia and Booking.com are not happy about being undercut and put the blame fair and square at the hotelier, downgrading it in search results. A further unfortunate consequence for hoteliers is consumers losing the belief that direct bookings always offer the best deal.

Bringing the different disciplines of channel management, distribution and revenue management under a single revenue umbrella will help battle rate parity issues. According to Vineeth Purushothaman of Wyndham Hotels & Resorts EMEA, there is a lot of “revenue leakage through a range of ways hotels are distributing”. It “makes sense for revenue and distribution to work together, and also equally with sales and marketing to get promotions to the right segments”, Purushothaman added.

The RMS Landscape

As revenue management evolves and starts to take on a more prevalent position within the hotel, it is expected that technology will start to play a bigger role. Today, however, the number of hotels which use revenue management systems is still limited. There are different numbers floating around on really how low the uptake of this type of tech is, but these wildly vary. Let’s try to put this discussion to bed, by painting a comprehensive picture of the revenue management space as it is today.

From heuristics to Excel — the lack of RM tech in hotels

There is no question about the lack of uptake of sophisticated revenue management systems amongst hoteliers worldwide. We would include the revenue management systems discussed before, as well as in-house systems like those produced by Marriott (One Yield), IHG (Concerto), Choice Hotels (ChoiceEdge), and Best Western (Best Rev) in the “sophisticated” bracket. What falls outside it is anything from excel spreadsheets to heuristics and gut feeling. This is not to say that a hotelier’s knowledge and gut feeling is not important, but it cannot do the millions of computations done by revenue management systems to come up with the best room price.

As Neville Isaac of Beonprice pointed out, “There are two speeds in the industry. The big chains and everybody else, and this needs to be addressed.” Alexander Edstrӧm of Atomize agreed, noting that the big three, IDeaS, Duetto, and EzRMS, have a sophisticated product, “but they are not able to scale throughout the long tail of the hotel market as they are too complex and you need to employ a revenue manager to operate that RMS.” The rise of the newer players is therefore not necessarily stealing customers away from the established players, but instead targeting the major market of small and independent hotels. As Florian Augustin of HotelPartner pointed out, “The independent sector needs to make sure that it has the knowhow to apply distribution and revenue strategies, so they don’t lose ground to the chains or their competitors.”

For many hotels, then, acquiring an RMS is an additional expense they did not have to consider before. Most hoteliers will have done basic pricing for a long time, but with the ever-changing online landscape, and with technology becoming more affordable, revenue management systems are becoming seen as both more necessary as well as more affordable. As Matt Curry of Rainmaker said, “Believe it or not, the majority of hotels still use Excel and other manual processes.” Klaus Kohlmayr of IDeaS, however, is starting to see a change in the industry, calling it FOMOR, “the Fear of Missing Out on RMS.” “As even the smallest hotels in the most remote locations become connected, the need for a more dynamic and automated approach [to pricing] is growing hugely,” said Kohlmayr.

While the “need is growing hugely”, penetration of revenue management systems is still at its infancy. According to Hotel Tech Report, only 7% of the hotel industry uses revenue management software to help with pricing decisions. Expedia Group’s research involving hotel partners that used revenue management systems concluded that the penetration was less than 3% (July 2017). The figure generally quoted in the industry is somewhere between 10 and 20%, once you take into consideration that some of the largest hotel chains have their own in-house tech.

Research by Skift shows that 16.3% of global hotels use revenue management technology. With around 600,000 hotels in the world, this equals just under 100,000 hotels, leaving an enormous potential 500,000 hotels without sophisticated revenue management technology. As Ira Vouk of Cloudbeds said, “the hotel industry has been slow to adopt new technology. That is one of the biggest obstacles for revenue management software companies.”

Current use of revenue management tech in the hotel industry

Just over 16% of all hotels worldwide use revenue management technology, but when excluding in-house systems by the large chains this reduces to 12.3% which use a third-party revenue management system. If we further take out the free pricing recommendations tool from Expedia called Rev+ from this figure, it would be as little as 4.8% of hotels.

Exhibit 1: Less than 20% of hotels utilize revenue management technology

Estimates from Skift Research furthermore show that it is mainly larger hotels that use revenue management systems, which is not at all surprising. The 16.3% of hotels with some sort of revenue management technology in place represent 32.9% of global hotel rooms, and 44.7% of total room revenues.

Close to $270 billion in room revenues are priced using room revenue technology, of which 63% is overseen by third-party revenue management systems.

Exhibit 2: Larger hotels are more likely to use revenue management tech

Sizing the hotel and revenue management industries

To be able to make the above comparisons, Skift first established the size of the hotel industry, before looking at the size of the different revenue management players. A similar approach was taken for number of hotels, rooms, and room revenue, with market research sources and Skift estimates used to determine the market size. Vendor information provided by each vendor, and topped up with Skift estimates where information was lacking, was used to determine the size of the RMS landscape.

The actual size of the hotel industry is an interesting conundrum. There are many figures floating around about the number of hotels there are in the world, but most people will tell you it is somewhere between half a million and a million. We collected information from different sources to provide an educated estimate, and set the total number of hotels at 600,000. This is much higher than the often quoted STR figure, which is below 200,000 but excludes properties with less than 10 rooms, and while known for its strong coverage of highly branded markets like the U.S., struggles to capture more independent markets in Europe and Asia.

Therefore, other sources were taken into consideration. Euromonitor International, a market research company which includes coverage on independent and chained hotels for 100 countries estimates the market is just short of 600,000. Expedia asserts it has more than 600,000 properties on its platform, although this is likely to include more than just hotels.

Exhibit 3: Skift estimates there are 600,000 hotels worldwide

Data on the number of rooms also shows extreme differences between sources. STR asserts that the average hotel has 92 rooms, while Euromonitor International puts this figure at 55. As both disregard small establishment to different degrees — with STR particularly having limited coverage of independent and smaller hotels — we estimate that the average hotel has 50 rooms, to total 30 million rooms worldwide.

With regards to total room revenue, STR puts the total annual room revenue at $540 billion, while Euromonitor International is slightly higher at $587 billion. As per the shortcomings discussed before, we decided to put our estimate for total annual room revenue at $600 billion.

The next step was to establish the size of all different revenue management systems on the market today, as well as in-house tech that is being utilized. Vendors were asked to provide the number of hotels that used their services, how many rooms this represented, and the total room revenue their systems oversaw. Where vendors did not provide all these indicators, estimates were made to plug gaps. All efforts were made to include all major players, but an additional 5% was added to each indicator to allow for any smaller players. Exhibit 4 highlights the calculations.

Exhibit 4: Calculating the scale of revenue management tech usage

 

Largest revenue management systems

There is a plethora of players on the market today that offer revenue management services to hotels. Here we look at sizing these players and highlighting some key differentiators between these players.

Exhibit 5 & 6: The complex RMS landscape

RMS as Key Pillar of Tech Stack

As penetration of RMS grows, it will become a key feature of the hotel tech stack. As highlighted in The State of the Hotel Tech Stack 2018, revenue management and its related tech form one part of a larger tech stack, which all sits around the property management system. The better the integration of the RMS with other systems, the better it will be able to take decision-making from across the entire business into consideration when setting prices.

Some important steps are being taken to improve integration. Open architecture allows for easier integration between systems, and a number of players are opening marketplaces where users can pick and choose from different vendors, similar to an app-store on your phone. If one vendor does not perform as expected, users can more easily switch to another. Cloudbeds, for example, offers its own marketplace, while Beonprice is working on a “revenue hub” where its clients can access different vendors to “tag” on to the core product. As more and more business-to-business vendors come onto the market, having these marketplaces will become more important to provide clarity and simplify decision-making for hoteliers.

Today, however, integration often still falls short, which is a main reason for larger hotel companies to produce systems in-house to their specific requirements.

Exhibit 7: RMS and the wider tech stack

To Source or Not to Source — Integration trumps all

Ask any hotel tech player and they are likely to tell you that hoteliers are not technology players, so they should stay away from producing their own tech. Even most hoteliers would agree with this. Despite this, however, large hotel chains like Marriott, IHG, Choice, and Best Western decided to continue investment in in-house systems. Marriott works with its longstanding One Yield system, while IHG and ChoiceEdge have invested heavily in the past years to add revenue management capabilities to their new Global Reservations Systems, Concerto, and ChoiceEdge respectively. The argument that in-house legacy systems are “dinosaurs” and not fit for purpose seems off the mark.

These companies have made a conscious decision to invest in tech and talent, and it is working for them in a market where most of their competitors are still using Excel. For the vast majority of hotel players, third party expertise is cheaper and can work better than going at it alone, but especially for large international chains there are limitations to what third parties can offer. As IHG’s Craig Eister points out, his company has “created a flexible architecture that allows us to ‘plug and play’ different technologies together to provide a holistic solution to our properties. Particularly in our global, multi-brand environment, one size does not fit all.”

Having a host of different vendors all doing their own thing, which are not optimized to the chain’s internal systems results in loss of business. There is a lot of talk about open architecture and marketplaces to improve integration, because, as Ira Vouk of Cloudbeds said: “It is one of the biggest barriers to entry for standalone revenue management systems. In order to grow their market share, they rely on these integrations.” And according to Vouk not all types of connectivity are made equal. Having a daily data-dump is sold as integration, but this does not provide the ability to make truly dynamic and real-time pricing decisions. In-house systems, made by and for the end-user will have no such problems as integration with all necessary systems will have been taken into consideration from the outset.

Blackbox Algorithms — What Truly Differentiates RM Players

As already discussed, there is a plethora of revenue management systems on the market today. All have strong testimonials on their website and will claim they have the best algorithm, but what really distinguishes one from another? Even if we did a deep dive into the different algorithms — and managed to surface again — there is really no way in telling which one is the best.

A/B testing, the practice of testing two systems at the same time to establish which one is better, is very popular in the tech world, but impossible to implement as such in revenue management. No two hotels are the same, no two days are the same, and you can only have one revenue management system running on a particular day in a particular hotel. This makes like-for-like testing impossible, and therefore makes comparing the math of one system with another also ultimately impossible.

For that reason, we will focus here on some of the key differentiators which are clear to understand for all. Exhibit 8 focuses on two of these main differences: some systems focus on internal data, others more on external data, and while some systems promote full automation, others continue to promote human decision-making.

Exhibit 8: Identifying key differentiators amongst revenue management vendors

Full automation or the human touch

Revenue management vendors are very aware of the opaqueness of their product. An algorithm is like a black box, it is impossible to explain all the computations that go in, and how this results in the figure that comes out on the other end. IDeaS, for example, made around 19 billion pricing computations in 2018. It would not be offering a good service if it showed all these pricing decisions to its clients.

It all comes down to trust. Users need to trust the system to provide the best price for each situation. Revenue management systems need to prove their capabilities and show results to earn this trust. As Stan van Roij of Infor said: “As we bring in more automation and AI, we see some reluctance, and people need to get used to that which is normal. Nobody will be perfect, also not a machine. To me, man plus machine equals 3. In this case 1 plus 1 equals 3 is a very valid statement.”

This gets to the heart of one of the main debates in revenue management today. Can technology completely replace the human touch? Some vendors, like Pace and Atomize, believe it can. They are fully invested in a system which, after an initial grace period, is expected to work completely autonomously.

Caryl Helsel of Dragonfly Strategist sits firmly in the opposite camp. “I completely disagree with anyone that says that it is purely science and purely mathematics. I agree that these systems have sophisticated algorithms, but there is art and science to revenue management. There are people that rely way too much on the art and rely way too much on their gut, and they make bad decisions. And I’ve also seen people that only rely on the science and have a less than stellar performance because they aren’t paying attention.”

Most revenue management systems on the market today agree with her, advocating some form of human input in the decision-making process. Emil Majkowski of Rentals United put it succinctly, saying, “I’m a fan of computers and systems as a support decision system, not a decision system.”

One size does not fit all

As Craig Eister of IHG said, “one size does not fit all,” and this is another differentiator between systems. Systems like IDeaS and EzRMS that have been on the market for a while, and have had time to improve and expand their products agree with this, and tend to offer different versions or add-ons to accommodate to different users. A clear example is IDeaS, which has three different systems, its most basic Pricing System, the more sophisticated G2 system, and its top-end product G3. Klaus Kohlmayr of IDeaS notes that the company offers a range of solutions to “align with the revenue maturity of [each] company.”

But customizability goes beyond that, and comes back to the previous point of whether revenue management is a science or an art. On one end of the spectrum you have companies that expect you to work the system, help it to learn, mold it into something that you can eventually trust to make certain decisions for you. “IDeaS and Duetto will tell you that you can’t just turn it on and let it run and not touch it. It does not work that way” explained Helsel, who has extensively worked with both systems.

On the other end of the spectrum are players which do not believe in this approach. Jens Munch from Pace, for example, said: “[Other RM systems] will configure custom rules so that their recommendations match your expectations. Our philosophy is different. Even if you know now what the best configuration is, if demand changes next week will it still hold true? You should establish the goal and strategy and then let the RM engine chose the optimal actions.”

Internal and external data

A third clear differentiator between players is their focus on internal data, external data or both. Internal data, also referred to as primary data, is the transactional booking data that revenue management systems tap into in the property management system. Seamless integration is extremely important for this, and this is where many of the younger companies struggle, as it requires a lot of investment to get these integrations off the ground.

External data is the market data, and can range from rate shopping — comparing your prices with competitors on different channels — to business intelligence, from event calendars to airport arrivals and the weather. Companies like OTA Insight and RateGain provide rate shopping and business intelligence services which are plugged into the revenue management systems. There is no right answer when it comes to the correlation between different external factors and hotel performance, which is why each revenue management system includes and weighs different factors differently. Pace is currently the only one which completely disregards external data, saying it “just adds noise”.

Optimization frequency

The speed and frequency of optimization is another buzzword thrown around a lot by revenue management systems, or at least the ones that see it as their unique selling point. Optimization is a fourth differentiator and refers to the frequency of prices being recalculated and pushed out to the PMS and channel manager. While this might not be important for hotels in relatively quiet destinations or those with a predictable seasonality, in dynamic cities like New York or London the rate of optimization can help a hotelier to boost performance, or loose out.

Some players optimize once a day, most more regularly, and some even over 90 times per day. For most hotels having a few updates per day at regular intervals will be enough to stay on top of market fluctuations, and only those in very dynamic markets will be looking for more frequent updates.

As cloud computing capabilities increase and become cheaper, more and more revenue management systems are moving towards more regular optimizations, or offer on-demand optimizations for when the user feels it is necessary to refresh rates based on the latest data. We expect that over the coming years, optimization will become close to realtime, where any changes to market conditions and internal booking data will automatically update all other prices. Many players are indicating they have aspirations along these lines.

Exhibit 9: Current optimization rates of select players

Moving Forward — Opportunities and Challenges

There are a number of developments on the horizon, or closer, which will impact how revenue management is practiced and applied over the coming years. In this final section we take a look at important developments, and what this means for the industry and its practitioners.

Total revenue management

As already mentioned earlier, there are calls in the industry to move away from Gross RevPAR, the revenue made per room, and instead focus on Net RevPAR, the actual revenue after commissions, distribution and acquisition costs. However, Net RevPAR still focuses highly on room sales, which discounts a lot of revenue-generating departments of a hotel, such as events, meetings, restaurants, spas and sports facilities such as golf.

Total Revenue Management has been touted as the way forward. As highlighted by Noone, Enz, and Glassmire in their 2017 article for the Cornell Hospitality Report, the concept revolves around applying revenue management beyond the hotel room, getting a more holistic picture of the guest, and looking at the bottom line rather than the top line. Profitability becomes even more important when revenue management moves beyond hotel rooms, as restaurants, for example, have far higher variable costs than rooms. Certainly, these ideas are not new or necessarily ground-breaking. While not called as such, major players like Marriott have considered other revenue-generating streams as part of the overall package for decades.

Some of the more established revenue management systems are playing into this by adding functionality to their systems. Rainmaker was built with this in mind and leverages the total value of a guest or group, including spending away from the hotel room. Similarly, EzRMS has done a total revenue forecast since its inception, and parent company Infor recently purchased ReServe, which specializes in floor management, sales and reservation software for restaurants, entertainment and event venues, and golf and country clubs to enhance revenue management services to its hotel clients. IDeaS, meanwhile, has had a function space product since 2014, and acquired SmartSpace Strategies in 2017 to further its meeting space capabilities. It recently signed Omni Hotels, known for its hotels with large event spaces.

Newer vendors currently tend to focus on room pricing only, not yet looking beyond this. There is still a lot to be gained in room revenues, so this is not necessarily a mistake, but it is expected that we will start to see hotels, especially those with large events and convention centers or with golf and spa facilities, move beyond room sales only. Optimizing the total business mix will become increasingly important.

Segmentation and personalization

Hilton was the first hotel company to allow travelers to book a specific room, just as airlines allow travelers to book a specific seat. Marriott and IHG —the latter in cooperation with Amadeus — have since gone a step further and added attribute-based shopping features to its reservation systems, so that travelers can book a specific room based on preferred features such as the view, the type of bed, floor etc.

The major hotel chains will likely use their attribute-based features to attract more direct bookers. Craig Eister of IHG said that “consumer needs and perceptions are rapidly evolving. Personalization is critical to driving customer preference. It’s no longer enough to just look at ‘the demand for a room.’ AI is enabling us to truly understand the demand for very specific attributes.”

There is a pitfall to attribute-based shopping, however, as it will further increase the choice offered to consumers. Already, when Skift searched for a hotel room in New York six months into the future, the platform provided 1,984 search results. Do consumers want even more choice?

It is therefore important that attribute-based shopping is combined with ever-enhancing AI to provide a truly personalized service to travelers. Attribute-based shopping, in this way, can turn into attribute-based pricing, where revenue management will become increasingly important to offer personalized pricing. Consumer expectations are changing, as they are becoming used to a more real-time, dynamic view of services.

While today prices are personalized up to a certain extent, there is a lot of future potential here. Offering different prices based on attributes is one step towards personalization, but could we get to a stage where the hotel or booking channel can combine this with information about the external environment and past online behavior to provide real-time personalized pricing, so that theoretically no two travelers will receive the same price?

Beyond the moral question of whether we want to see revenue management go this far, it is important to highlight that to achieve any of this, companies need data, and a lot of it. This has never been the hotel industry’s strongest point.

It’s all about data

“Data puddles.” That’s how Michael McCartan of Duetto describes the current situation in hotel revenue management. “The problem for the hotel industry is that data sits in little puddles, [but] in order to solve difficult problems, you need data lakes.” To truly understand the customer, hotels need to start collecting data throughout the entire customer journey, from the initial exploration stages to post-stay aftercare.

Here the entire tech stack will need to come into play. Seamless connections between the property management system, the central reservation system, the revenue management system are vital. Any customer facing tech such as mobile applications or IoT (Internet of Things) enabled devices in the guest room can further enhance hotels’ understanding of their guests. Seamless integrations are paramount.

While this is easier said than done, it will be even harder to ensure that marketing, sales, distribution and channel management are all geared towards a single strategy. A lot of data is kept by third-party players like Expedia or Booking.com, and they are unlikely to be forthcoming in sharing this with the hotel, wanting to keep ownership of the customer themselves.

When talking about data, hotels often compare themselves with these tech partners-cum-enemies. It is true that these players are generally better at collecting and utilizing data, but even they are nowhere near the level of some other tech giants.

You cannot talk about data, and not mention the giants Google, Amazon, and Facebook. They are ingrained in consumers lives far beyond the travel sphere, but are increasingly looking at the travel industry as a way to further their services and products. These companies are native to data, they have a ton of it and know how to use it. In comparison, hotels are best known for a host of data breaches.

As data has turned into the new gold, more data will become available and affordable to hotels. It is important to identify which data points are important to better understand the customer and offer a more personalized service, and to ensure hotels get better at keeping ownership of these data points. Revenue management systems have an important role to play here, to partner with hotels and ensure they get the best available data to improve the short-term pricing and long-term revenue strategy. While historical data remains paramount in the industry, it is likely that the future growth area will be forward-looking data that allow hotels to be more proactive in their fight for the customer.

Tomorrow’s revenue manager

With this many changes afoot, and revenue management taking on a more central role in hotel operations, the revenue management profession needs to evolve. As Vivek Bhogaraju of Expedia said: “the future is all about the skill-set of revenue managers. The skill-set around today is not the skill-set they need in the future”.

Internal research by the Hospitality Sales and Marketing Association International (HSMAI) shows that this need starts early. Bob Gilbert, CEO of HSMAI, shared internal research with Skift that highlights the lack of revenue management education as part of the hospitality school curriculum. Looking at the top 100 hospitality schools, 60% had no revenue management class, while it is a required class at only 16% of the top 100 programs.

Exhibit 10: There is a strong need for more revenue management education

On top of that, “with the exception of a few big hotel companies, there is very little opportunity for interns to get hands-on experience with revenue management” according to Caryl Helsel. It is important that this is improved, as there is a clear consensus amongst the interviewed executives that revenue managers will increasingly take on core roles in the hotel business.

Michael McCartan believes that “the revenue management function will become more elevated within hotel operations. There will be fewer revenue managers, so it’s going to become a much more strategic position.” Helsel already sees this happening: “we’re seeing revenue leaders move into more responsibility, overseeing revenue for a lot of streams of revenue and a lot of disciplines. In the past it was often the VP of sales or marketing that was in that role, but now it’s more revenue people moving in that central role.”

Revenue management systems are undoubtedly contributing to this shift. As artificial intelligence and automation takes on the minute-by-minute and day-by-day price fluctuations, revenue managers can free up time to become strategists. “It’s not the highest and best use of a revenue manager’s time when a computer can do that. However, it is the best use to have an analyst looking at the overall deployment strategy, and figuring what is the best target in the market and figuring how much it will cost to get it”, as Cindy Estis Green put it. Continuous education and training will be important in a rapidly evolving landscape of practices, vendors and tech innovations. Those hotels that ensure their employees are ready for this are one step ahead.

Conclusions

The RMS landscape is quickly expanding and evolving, making it look daunting to newcomers and outsiders. When it comes down to it, all revenue management systems on the market today offer a service which provides the hotel manager or revenue manager with a useful tool, and the use of revenue management tech is undoubtedly the way forward.

At the moment there is only limited competition between the different systems, as there is still $330 billion in room revenue that is not supported by revenue management tech. 83.5% of hotels worldwide have no revenue management tech yet, and each hotel will need to determine whether they can afford to purchase the services of one of these providers. Or maybe they simply can’t afford not to purchase one. This report has discussed a number of key differentiators between the vendors, but each hotelier is encouraged to do their own due-diligence to analyze which system fits best with its portfolio, aims and vision.

There is still a sizable gap between the big three, IDeaS, EzRMS, and Duetto, and the rest of the vendors. It will be challenging for the smaller vendors to scale up to the size and product offerings of the big three. As revenue management becomes more institutionalized in hotels, we could see hotels moving on from the smaller players to the big three, which offer a more complicated but holistic system, and which can better cater to hotels which want to move beyond pricing and use their RMS for more complete strategy planning. The startups will need to continue evolving with their clients. Some will fall by the wayside, while we foresee some others starting to reach the same heights as the big three within the coming five to ten years.

Integrations will continue to be another stumbling block for smaller revenue management systems, although pushes for open architecture and marketplaces are encouraging. The problem is that many hotels today still work with property management systems which do not subscribe to this open approach, like Oracle. This could change over the coming years, which will make trialing different systems, and the sharing of information between operations systems, much easier.

Expedia’s entry with Rev+ is interesting, and one to watch. While currently only focusing on external data — so not asking hotel partners to share their transactional data — this might change in the future. Expedia will be aware that Booking.com failed in this approach and therefore be cautious to take this jump. We believe Expedia will initially focus on growing its consumer base for the free Rev+, before starting to offer a paid-for sister-product which will include a connection to hotel property management systems. We could be at the advent of major disruption.


Further Reading