Thought Leadership

I t’s an age-old story: Revenue managers are paid to improve unit-revenues and profit margins, but down the hall, the sales department is paid to hit sales targets. Question: What’s wrong with this picture? Answer: Nothing. The yin and yang of RM departments disagreeing with Sales organizations, if managed properly, is healthy and moves a business closer to great results. However, if not managed carefully, it can deteriorate into power struggles and politics that will doom an organization to fail. The keys are communication, communication and communication—and an RM team that understands how to position revenue management techniques as a win-win-win for the company, the salespeople and the customers.

Much has been written about price wars recently, considering the economic roller coaster, occupancy crash and recovery that has taken place since 2008. The downturn hit the hotel industry with terrible timing, right at the intersection of Internet price transparency and the mobile shopping revolution. It was a perfect storm — a wave of economic weakness hitting an industry poised at the tipping point of price volatility and vulnerability.

When people think of price wars they think of the industry’s B2C retail or transient business segment. With varying intensity, most hotels are in a constant war with local competitors to capture market share and fill otherwise-empty rooms. The price wars we are most familiar with occur when one competitor panics and drops rates dramatically attempting to steal market share or stimulate new business. Images of highway signage advertising “as low as” pricing comes to mind, or online travel agency price comparisons with competitor rates matched dollar for dollar and ending in 99 cents.

There is a different kind of “price war” though, which commonly occurs within the walls of a hotel, or central chain headquarters, between the Revenue Management (RM) department and sales team or sales director.

Revenue Managers versus Sales – The Price War in Your Own Office BY BIll KOTRBA, VICe PReSIdeNT Of INduSTRY STRATegY AT JdA SOfT WARe

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Thought Leadership

This price war concerns the pricing a hotel offers in B2B distribution channels, such as to groups, corporate contracts, wholesalers, tour operators and the like—and refers to the conflict that occurs between revenue managers who are charged with increasing unit-revenue (RevPAR) or total profits, versus sales staff who may be measured on occupancy or sales volume for particular business segments.

The conflict between RM and Sales is common in hospitality and also exists in adjacent travel industry verticals like airlines, cruise lines, car rental, etc. I believe it arises from the cultural dNA of revenue-generating organizations. Salespeople are deemed to be effective when bookings are being made, whereas RM people are deemed to be effective when bookings are being turned away. As such, revenue managers are prone to leaving money on the table by pushing too hard for higher rates, and salespeople may be biased toward leaving money on the table by pushing for higher occupancy.

What’s Wrong With This Picture?The problem with this conflict between RM and Sales is … nothing! In any hotel, from largest to smallest, there is a constant push-pull between rates and occupancy. As occupancy increases, the opportunity arises to generate more total revenue or profits by increasing rates—more than can be generated by further increases in occupancy alone. This back-and-forth between RM and Sales, constantly pressure-testing the other’s assumptions on rates versus occupancy, distribution channel mix, groups versus transient, etc., is a healthy and vital means of ensuring no stone is left unturned. The combination of a skilled sales team and RM team, armed with disciplined analysis, good forecasting and optimization technology, can efficiently propel a business to grab every possible dollar of revenue and profit.

With rewards like this, though, come some risks. The most common complaint I hear from salespeople about revenue managers is that “they automatically say no.” Or that RM takes a purely transactional view of the business—disregarding the value of long-term relationships with large B2B customers, like corporate travel managers or tour operators. RM, in turn, complains that salespeople are too quick to offer lower rates in every negotiation, without considering what alternative business segments or transient business might be vying for the same capacity on the same nights. If not managed carefully and impartially, the valuable RM/Sales push-and-pull can deteriorate into a power struggle (or worse) and undermine results. The biggest mistake executives make is to advocate either a “sales view” or an “RM view” consistently, instead of positioning the two as a constant check and balance.

The Sharpest Knife in the drawerIn a previous job as head of revenue management in a large organization, I worked with a sales director who asked for only one simple piece of information to provide to his account managers—a spreadsheet showing the walk-away, or “how low can we go?”, prices for each day and market. He wanted his staff to quickly be able to see the absolute lowest price that revenue management would accept as they conducted negotiations with prospective customers.

He wasn’t wrong to ask for this—but this looked to me like a one-way ticket to lowering rates. The last thing I wanted to tell every salesperson was the rock-bottom rate we would accept on a given day or week. Instead, with help from an impartial executive, we created a system of rate recommendations, which put a few more hoops in place for salespeople to jump through before they were free to drop to the lowest rates. Yes, it slowed down our response time to prospective customers in some cases, but it also forced Sales and RM to communicate in real-time, every day, to evaluate the most contentious opportunities.

Thought Leadership

At the same time, as an RM team we set out to make a set of tools—knives in the drawer—that would provide more negotiating leverage than simply lowering rates.

What Can RM do for Sales?first and foremost, communication and more communication. RM and Sales cannot push and pull effectively without timely information flowing constantly. for example, RM needs to ensure that account execs have access to the latest forecasts, pricing information and bookings on hand for the upcoming booking window. Sales needs to know from RM exactly what mix of business segments and rates will maximize revenue and profit for an upcoming period? If that expected mix changes, Sales needs an efficient means to receive that information to change course accordingly and in time.

Another thing RM can do for sales, as mentioned previously, is to provide a complete set of negotiating tools that can be positioned as “win-win” for both the hotel and the customer. In the best case, these tools provide upside to the salesperson and the hotel, help close deals and help counteract the natural downward pressure on rates. for example, while bulk room buyers often prefer net rates—absolute rate amounts guaranteed for future period of time—it’s usually in the hotel’s interest to offer a percent discount off BAR rates instead. RM can help quantify a deeper discount off of BAR to entice a customer and close

a deal, while locking in upside potential when BAR rates go up according to RM forecasts for peak periods such that more total revenue comes to the hotel.

Other “toolbox” examples might be for RM to quantify optimal discounts in exchange for room-night commitments, or backend discounts for achieving tiered volume targets, or guaranteed access to constrained properties in exchange for slightly higher rates across the board.

What Can Sales do for RM?Of course, the need for communication is vital in both directions. Kathleen Mallery, director of Revenue Optimization for Carlson Hotels, provided a great example:

“One of our account execs received an RfP from a corporate travel manager requesting discounted rates for every day of the upcoming year—for hundreds of properties—with submission due in 48 hours. These types of RfPs were not uncommon, but RM didn’t know about them, and Sales was paralyzed with no means to generate a meaningful response on short notice. There’s no way we can respond to that effectively without working together. Now we are building RM tools to speed up the review process and ensure there’s support from Sales and RM so we can respond to large urgent RfP’s like this.”

Thought Leadership

About JdA Software group, Inc. JdA® Software group, Inc. (NASdAQ: JdAS), The Supply Chain Company®, is a leading provider of innovative supply chain management, merchandising and pricing excellence solutions. JdA empowers more than 6,000 companies of all sizes to make optimal decisions that improve profitability and achieve real results in the discrete and process manufacturing, wholesale distribution, transportation, retail and services industries. With an integrated solutions offering that spans the entire supply chain from materials to the consumer, JdA leverages the powerful heritage and knowledge capital of acquired market leaders including i2 Technologies®, Manugistics®, e3®, Intactix® and Arthur®. JdA’s multiple service options, delivered via the JdA® Private Cloud, provide customers with flexible configurations, rapid time-to-value, lower total cost of ownership and 24/7 functional and technical support and expertise.

What Can executives do?executives need to think carefully about how to align incentives for effective Sales/RM push-pull to ensure every possible dollar of revenue and profit gets generated—while also making sure that both Sales and RM are rewarded for great results. An individual account manager selling group space needs to be incentivized for driving business in the group segment, and revenue managers need to be compensated for driving total RevPAR and profit improvements. Those goals will occasionally be at odds—but in a way that benefits the total result.

executives also need to be prepared to step in and resolve Sales/RM conflicts impartially with an eye to RevPAR and total profitability. Without strong leadership and appreciation for how Sales/RM interaction and disagreements can help generate great financial results, the outcome will most certainly be an internal “price war” that can be just as destructive as those waged by a competitor.

About JdA Pricing and Revenue Management group

JdA Pricing and Revenue Management group, a global business unit within JdA Software, is a leading provider of Price Sensitive Revenue Management™ solutions that help companies improve profits by balancing supply and demand through innovative forecasting, pricing and revenue management. for more than 25 years, companies in the travel, transportation, hospitality and media industries have benefited from the ongoing innovation and deep domain expertise from JdA. To learn more about JdA Pricing and Revenue Management, please visit www.jda.com/revenuemanagement.

www.jda.com | info@jda.com | +1 800 479 7382

Bill Kotrba serves as vice president of industry strategy in JDA Software’s Pricing and Revenue Management Group. He is responsible for overseeing strategic business initiatives for the leisure travel and hospitality industries.