Hotel Business Intelligence

Where we’ve been
In the late 1980s, Revenue Management Systems entered the hotel world by way of the airline industry. These early systems produced forecasts and used forecasts to manage availability of products and were predominantly yield management systems that closed out discount rates and instituted length-of-stay controls.

The emergence of the Internet in the mid 1990s led to expanding distribution options, reducing the hotel industry’s dependence on the airline reservation systems. Expedia and Travelocity entered the distribution game, establishing the online travel agencies’ influence in the distribution system. Rate-shopping tools such as Rubicon’s Market Vision Price Shops and TravelClick’s RateView emerged, providing easy access to competitors’ public rates.

Until a decade ago, RMS were focused on primarily “yielding” hotels:

  • focusing on only high-demand dates;
  • managing availability through rate hurdles (aka hurdle points);
  • basing decisions on a hotel’s internal demand and remaining availability;
  • addressing length-of-stay controls; and
  • including complex enterprise forecasting systems.

Where we are today
Like a teenager’s report card, revenue per available room and RevPAR indices overvalue past performance and often are not predictive of future trends. Additionally, since the late ‘90s, revenue management business intelligence solutions have become fragmented across various vendors and various brands. For example:

  • Marriott International is evolving One Yield and is rolling out Retail Pricing Optimizer.
  • InterContinental Hotels Group evolved from HIRO to PERFORM with embedded price optimization.
  • Hilton Worldwide continues to update their OnQ solutions, and price optimization is TBD.
  • Hyatt Hotels Corporation continues to evolve e-Flex.
  • Starwood Hotels & Resorts Worldwide continues to evolve TLPe and test retail price optimization.
  • Carlson has gone through the full development of price optimization with JDA over the past 18 months.

Today’s paradigm in the hotel business is focused on price optimization where:

1) price is a function of demand and demand is a function of price, and
2) decisions should be based on demand, remaining availability and relative competitor price positioning.

Despite all the price optimization work being performed by the major brands, no one has successfully designed the business intelligence/pricing system that will take us into the future. None of this price optimization work takes into account market demand and market pace. And, most of these systems have an inherent bias in the algorithms of how competitor-published rates are weighted. They allow the end user to weight the competitors rather than testing for competitor influence/correlation and subsequently scientifically recommending the competitor hotels and their associated weightings. Not to mention, in primary markets, competitor rate data is not refreshed often enough with most of these models.

On top of our current challenges with data and systems, we’re facing the obstacle of silos throughout our companies. We only have a small piece of the big picture. The need is for, and in a few cases the trend is toward, a strategic integration of revenue management, marketing and guest analytics.

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As Kelly McGuire, practice director of hospitality and travel global practice with SAS states, “We see our technology helping to break down barriers between traditionally siloed departments, like revenue management and marketing. Key pieces of information, held by each of these departments, can be used to improve the decisions generated by the other. In addition to internal data sources, many emerging external data sources, like social media or market-level demand information, are also good candidates to improve pricing and marketing decisions. Over the next few years, I think these two departments will begin to leverage all of these data sources, allowing them to work more closely together both scientifically and creatively.”

No matter how we’re organized—integrated or not—two cornerstones of our business intelligence today are speed and efficiency. This is not likely to change as interactive data dashboards become even more widely utilized. As STR says regarding their executive dashboards through Tableau: “Quicker, Simpler, & Avoid Analysis Paralysis.”

Where we’re going
In a world where the consumer is becoming harder to segment along traditional lines and where distribution is becoming more complex, how will hotel executives keep up?

My prediction (and my hope) is that our business intelligence is moving toward:
1. Better industry benchmarks centered around profitability, not just revenue.
2. Market-aware price optimization tied to distribution strategy.
3. Behavioral economics and neuromarketing embedded into pricing and marketing decisions.
4. Integrated technology with CRS, RMS, PMS, POS, social media, loyalty and sales data all blended into one system and/or data source.

Before addressing the above four topics, let’s briefly address consumers and distribution as both will have a dramatic influence on the direction of future business intelligence solutions.

It’s key to note how consumers are changing because they will dictate what the business intelligence tools of tomorrow look like. As described in Amadeus’s Hotels 2020: Beyond Segmentation, women will control 70% of the global spend by 2020; by the same year, Asia will account for 32% of global travel spend versus 21% today; and hotels will be in a constant state of experimentation because the consumer is increasingly “unique, connected and informed.”

As Gerard Cachon of The Wharton School and Robert Swinney of Stanford outline in The Impact of Strategic Consumer Behavior on the Value of Operational Flexibility, “Increasingly sophisticated consumers have learned to anticipate future price reductions & forego purchasing products until markdowns occur. Such forward-looking or strategic behavior on the part of consumers can have a significant impact on margins.”

As the consumer continues to become more complex and savvy, personalization and micro-segmentation will become even more important within the business intelligence solutions for hotels as behavioral economics and neuromarketing enter the hotel marketplace over the next decade or two.

Neuromarketing is defined by Wikipedia as “a new field of marketing that studies consumers' sensorimotor, cognitive, and affective response to marketing stimuli. Researchers use technologies such as functional magnetic resonance imaging (fMRI) to measure changes in activity in parts of the brain, electroencephalography (EEG) to measure activity in specific regional spectra of the brain response, and/or sensors to measure changes in one's physiological state (heart rate, respiratory rate, galvanic skin response) to learn why consumers make the decisions they do and what part of the brain is telling them to do it.”

In regard to distribution, every hospitality executive is waiting for Google’s potential ITA acquisition to play out. At the same time, it has become clear that mobile is NOT just a trend. Amadeus predicts mobile data traffic will grow 300% by 2015, and Morgan Stanley has reported that “mobile Internet usage will overtake desktop Internet usage domestically in 2013 at the current growth rate.” Group buying and flash sales continue to widen the distribution net as more and more consumers move online for purchase decisions. For most hoteliers, the current margins are near non-profitable for these channels, but as flash sales continue to grow there is hope that the margins will start to make sense.

And now on to those four topics introduced above …

Better industry benchmarks
Almost all hoteliers overvalue RevPAR and RevPAR indices as measurements, albeit both are valuable within the right context. I believe that the reporting needs to shift to GOPPAR (Gross Operating Profit Per Available Room) so profitability becomes the true measure of success. Owners care about profit and cash flow, not mere market share. Yes, GOPPAR would not be normalized from economy to midscale to full-service chain scales, etc., given that the flow through on rooms, food and beverage, spa, golf, etc., are dramatically different. However, GOPPAR could be segmented by department (e.g., rooms, food, beverage, etc.).

There are a lot of labor tools for expense control in the hotel industry. However, there is limited (or no) benchmark reporting on GOPPAR (outside of HOST Studies through STR). I predict that whoever creates the GOPPAR version of a STR Report for benchmarking will make a lot of money.

When it comes to managing total profitability and not mere market share, casinos are the closest to “optimizing full patron value.” The segmentation of tomorrow needs to take profitability metrics into account, not just segmentation by business type or sell channel. The following graph demonstrates possible future segmentation by profitability.

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Market-aware price optimization tied to distribution strategy
The forecasting and pricing systems of tomorrow need to take into account several factors:

  • “decomposed” market demand, not merely “unconstrained” internal hotel demand;
  • different primary competitors by sell channel (i.e., your primary competitor is often far different than your OTA competitor);
  • price sensitivity/elasticity varying by sell channel and by booking window; and
  • forecasts should predict multiple outcomes based upon varied pricing and distribution strategies (remember that price is a function of demand and demand, in turn, is a function of price).

One shortcoming of the current price optimization systems are that none of them fully take into account market demand data. Rather, they all rely on internal hotel demand forecasts that produce a narrow view of the marketplace. Additionally, many of the systems allow the end user to bias the system by setting the weighting percentages for the competitor hotels.

Rubicon is the only vendor that provides market demand data. Lloyd Biddle with Rubicon notes, “Rubicon’s forward-looking market demand data, when triangulated with publically available price optimization information, becomes the next generation RMS tool and truly incomparable business intelligence.” The following graphic illustrates the current state:

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We need to move toward pricing that is market-aware and price-sensitive by sell channel and by booking window. The next graphic outlines how pricing should move from today’s “2-D” version above to “3-D” and/or “4-D” in the future, incorporating booking windows and distribution strategy.

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Variation of Graph provided courtesy of Rubicon

Embedded behavioral economics and neuromarketing
The business intelligence tools of tomorrow need to account for what Dan Ariely in Predictably Irrational refers to as “the fallacy of supply and demand” or what Martin Lindstrom in Buyology refers to as “the power of somatic markers.”

Both Ariely and Lindstrom talk about how consumer decisions often are not rational and significantly are influenced by the relative context in which those decisions are framed. For example, how content and pricing actually are displayed on your website can and will have a large impact on the consumers’ willingness to buy your offering.

Web analytics has started to attempt to optimize for consumer flow on websites. However, hoteliers often forget to approach a problem from how consumers shop. Add to that the simple fact that consumers often say one thing and do another. Thus, consumer surveys should not be overemphasized in your marketing and pricing strategy.

The business intelligence tools of tomorrow will need to have behavioral economics and neuromarketing embedded in their framework so the recommendations are premised upon “the consumer’s irrationality” and the inherent uncertainty of demand.

Integrated technology
Lastly, to achieve better benchmarking, optimized pricing and integrated behavioral economics, we will need integrated systems. Apo Demirtas with R&D Intelligent Hospitality says it well:

“One of the biggest, if not the biggest, void or gap in the hotel industry today is the absence of a holistic decision science and business intelligence platform that answers the why, where, what and how in sales, marketing, distribution and revenue management. There are many technology and software companies that are trying to address this need in the hotel business by offering their business intelligence tools. While such BI products are great for ‘slicing and dicing’ data and reporting in visually appealing ways, they do not fill the ‘gap’ as they do not bring together decision science and hotel business expertise.”

Casinos have gone the furthest in this area—loyalty card data has allowed vendors and brands to integrate point-of-sale data with property-management system data with centralized reservation system data with social media—gaining what many refer to as the “360-degree view of the guest.”

Few if any outside of gaming are scratching the surface with that “360-degree view” of the consumer. Many of the major brands and third-party management companies like to talk about it—that perfect utopia of data—but few have it in place. They are all challenged by a lack of vision, the staggering upfront costs and the consumer data collection. With almost all major brands having a CRS that is different from the PMS that is different from the RMS that is different from the sales automation system, you have a hodge podge of systems that do not link nor talk to one another efficiently, if at all.

To achieve the ideal business intelligence of tomorrow, hoteliers of all shapes and sizes need leadership and technology that understands the distribution landscape, consumer fragmentation, information technology, revenue management and pricing and marketing—and can consolidate across all functional departments. With this in place, the business intelligence systems of tomorrow will need to interface with and/or integrate CRS, RMS, PMS, POS, social media, loyalty and sales data, linking ALL departments of a hotel with one central data source.

Recommended reading
To keep up with consumers, distribution, pricing and technology, which feed into ever-evolving business intelligence tools, my current Top 10 reading/action list follows:

1. Hotels 2020: Beyond Segmentation by aMADEUS (the future)
2. Epsilon Consumer Study – October 2010 (consumers)
3. Recent articles on a) Google/ITA transaction and b) Google Places (changes in distribution)
4. Predictably Irrational by Dan Ariely (pricing and behavioral economics)
5. Buyology: Truth and Lies about Why We Buy by Martin Lindstrom (neuromarketing)
6. PhocusWright white papers, research, and free weekly newsletter (trends)
7. (industry news)
8. The Rubicon Perspective newsletter (future pace data)