Maximising profitability in hospitality: The Profit-Oriented Revenue Management Revolution (PORM)

HSMAI convened three industry professionals and academics to develop a whitepaper introducing Profit-Oriented Revenue Management (PORM)

AccomNews Wednesday, January 31, 2024

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HSMAI Authors: A/Prof. Dr. Detlev Remy, Senior Lecturer Brandon Chan, and the CEO of Demand Calendar Anders Johansson.

Traditional revenue management methods quickly become outdated in today’s hyper-competitive hospitality industry. Today’s landscape requires a nuanced strategy focused on profitability, not just revenue.

HSMAI convened three industry professionals and academics to develop a whitepaper introducing Profit-Oriented Revenue Management (PORM). It’s not just a methodology but a transformational mindset that pivots from mere revenue accumulation to sustainable profit generation.

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A strategic approach

Profit-Oriented Revenue Management (PORM) represents a strategic pivot, infusing traditional revenue management with key financial concepts like flow-through, marginal gains, and total revenue balance against actual profit. This approach doesn’t just skim the surface of financial influx but dives deeper into the essence of enduring profitability.

The mantra ‘Revenue is vanity, profit is sanity’ holds in the realm of PORM. Revenue optimisation has been the bedrock of hospitality management, focusing on filling rooms and maximising sales through strategic pricing and inventory management. Hotels have started to move to total revenue management to maximise the revenue per guest. Yet, this is still a focus on revenue and often overlooks the ultimate goal: profit.

Revenue vs profit optimisation

Revenue optimisation focuses on maximising the total revenue generated by a hotel. It involves employing dynamic pricing, demand forecasting and inventory management strategies to sell the right product or service, to the right customer, at the right time and price. Traditional revenue management techniques typically emphasise revenue optimisation, aiming to increase top-line revenue without necessarily considering the impact on profitability.
In the context of hotels, revenue optimisation primarily focuses on optimising occupancy levels at the highest possible rate. However, revenue management should also encompass other revenue streams such as food and beverage, event spaces, spa services and so forth.
Profit optimisation aims to maximise a hotel’s overall profitability. While revenue optimisation is essential to profit optimisation, it is not the only factor to consider. Profit optimisation involves a comprehensive approach that considers both revenue generation and cost management, ensuring that an increase in revenue results in a corresponding increase in profit.
PORM teaches us that profit optimisation is the holistic picture, blending revenue maximisation with astute cost management. It’s about ensuring that each incremental sale contributes positively to the bottom line. PORM offers a comprehensive view of a hotel’s financial health, considering all aspects of revenue generation against the backdrop of associated costs, such as Customer Acquisition Cost (CAC) and Cost of Goods Sold (COGS). It recognises that not all revenue streams are equal and that prioritising high-profit segments can substantially bolster the bottom line.

Actionable insights

The authors have delineated ten actionable strategies that have been proven to significantly elevate a hotel’s profitability. These strategies span from comprehending marginal profit to leveraging data analytics, aiming to refine operations and marketing to achieve a synergistic and profitable balance.

Here are the ten areas where hoteliers need to come up with actions:

Understanding marginal profit.
Developing profitable products and services.
Flexible and creative packages.
Pricing strategies.
Productive marketing and sales.
Optimising distribution channels.
Upselling and cross-selling.
Enhancing the guest experience.
Invest in technology.
Leverage data and analytics.

The whitepaper explains these actions in more detail.

Collaboration is key

The implementation of PORM is a collaborative effort. It necessitates the involvement of the commercial team, operational managers, and other pivotal players who must have a firm grasp of cost structures, revenue potential, and profitability for each service offered. The whitepaper offers a pragmatic three-step approach for adopting PORM: starting with an initial brainstorming phase, progressing to an in-depth understanding of the cost structure, and culminating in allocating responsibilities across stakeholders. This ensures that all hotel departments work in concert to accentuate profits. The whitepaper also includes an example of a profit-oriented revenue management strategy.

In conclusion

Hospitality professionals should be looking at adopting PORM as a strategic cornerstone to redefine profitability in the hospitality industry, and arm themselves with the knowledge and tools necessary to thrive in an ever-evolving marketplace. The authors invite you to share your experiences of your PORM journey and welcome a continuous discussion on improving hotel profitability.