The meaning of revenue management in a time of pandemic

The recent pandemic has posed some serious challenges for the future of hospitality and tourism: how can hotel revenue management still find a role in the face of this crisis?

In these days, when all over the world everyone is talking about one thing only – a virus outbreak that has recently been declared a pandemic by WHO, that is not only infecting tens of thousands of people, putting a considerable strain on healthcare systems and claiming many victims, but also having a huge impact on the world economy – a question is surfacing among professionals in the tourism sector and particularly in the hospitality industry, that is: does revenue management still make sense in the face of planetary crises such as this?

The confusing numbers of this tragedy

First, a necessary premise must be made: this global crisis has taught us a great lesson, namely, that there is absolutely no unified international coordination to manage the crisis in a global way in the areas of health, politics and economics.

Each country has responded in an uncoordinated and autonomous manner, also due to the insidious nature of the virus and a lack of uniformity in the compilation of datasets pertaining to this crisis.

Probably some Asian countries, due to the memory of SARS and an advanced technology, have been able to keep the epidemic more under control compared to Europe and America.

But globally speaking we have witnessed a total discrepancy in the data reported by individual countries, due to the fact that some countries conduct vast numbers of swab tests to identify the infected, other countries conduct a minor number of tests or none at all, due to a shortage of supplies and resources; certain countries test and count both symptomatic and asymptomatic individuals, while others only the symptomatic, some countries count as fatalities both those dying from coronavirus and those deceased while infected with coronavirus (in combination with pre-existing conditions), others exclude coronavirus as cause of death if pre-existing conditions are present (a questionable choice since those who lead a normal life and still have years of life ahead of them, despite having some health conditions, should always be included in the coronavirus death toll if they contract the virus and die).

This disparity in procedures from one country to another has given rise to the perception that certain countries have a percentage of infected people much higher or much lower than average, or a case fatality rate (deceased-to-infected ratio) much higher or much lower than average (with extremes ranging from 8% in some countries to 0.1% in others, a wide range that doesn’t make much sense even if consider the average age of each population).

Not to mention all the people that in some countries have passed away at home, who haven’t been tested for the virus and therefore haven’t been reported in the counting.

This total discrepancy has generated confusion and led to various extremes (overstatements on the one hand or minimization and delays on the other) and, therefore, to rather uneven political decisions.

As if this virus had unleashed its hostility on certain countries more than others. Or, even worse, that some countries were unable to control the epidemic and were guilty of the spread, and some other victims.

We will probably never know the real figures of this tragedy, however facts have now shown that this insidious virus (that probably bypassed also limitations in borders’ circulation and airport controls spreading as well through asymptomatic individuals not subject to travel restrictions or that probably got infected and entered a country before travel restrictions were implemented) strikes one and all without geographical distinctions and is exerting almost everywhere the same strain on the healthcare system due to the fact that it is a highly contagious and fast-spreading virus, and that a 10% of cases involve the need for hospitalization and intensive care to ensure survival.

This is generating the risk of an excessive overload of patients and a collapse of the healthcare system with the resulting risk of an increased case fatality rate, which although not standardized at an international level (in part owing to differing data collection procedures between countries) is very low, probably below 1%, due to the fact that the number of infected people globally is much higher (experts say at least 5 times) than official statistics if one takes into account all the asymptomatic individuals who are not aware of being infected and are not tested and included in the various tallies.

For sure if the entire world’s population (7.7 billion) gets infected with this virus, even 1% of fatality rate must be considered a mass slaughter, but it’s up to the responsibility of each one of us as individual to avoid this catastrophic scenario, at least until science finds some sort of solution.

The role of hotel revenue management in this crisis

That being said, let’s return to the topic of hotels and revenue management: having had the opportunity over the past 15 years to work with over 2,000 properties in 4 continents of the world, as a firm providing consultancy and revenue management softwares, we have often found ourselves facing sudden crises in certain countries following natural disasters, terrorist attacks, tensions or other sociopolitical events that had a truly devastating effect on hotels and accommodation facilities.

This has enabled us to gather historical data on how large-scale crises can affect that which is the very core of our work, revenue management.

And, on how often such crises present similar trends.

A question that recurs frequently in our sector is whether revenue management can truly serve a purpose in the face of such large-scale negative phenomena.

In other words, when faced with almost apocalyptic scenarios, where all the plans go out the window and businesses are hit by a slew of cancellations; when, in some cases, hotels running 90% occupancy suddenly see their rate drop to less than 10%, when bookings stop completely or slow down dramatically, what can revenue management do?

There are those who argue that revenue management is useless in such cases, based on the assumption that revenue management is limited to pricing and that the price lever is therefore ineffective in stimulating demand that is non-existent in any case.

All the more so when there are a number of objective factors that intervene in preventing people from traveling.

Given that the coronavirus crisis will be resolved mainly in the realms of healthcare, politics and media, the goal of revenue management in this case is to carefully study the situation everyday, keep up to date, envisage potential scenarios and study measures to mitigate the economic impact in the short, medium and long term.

This article does not presume to provide advice on how to financially solve the problem of plummeting hotel demand, and therefore lack or shortage of revenues, associated with the pandemic but rather, if anything, to provide ideas on how to better manage the post-emergency period.

First of all, when we are faced with these crises, we must analyze which factors are blocking or destroying demand, in other words, the objective limitations (e.g. restrictions on transport and flights, prohibitions and restrictive measures imposed by governments, quarantines, closure of businesses, commercial activities and gathering places, cancellation of events, etc.) and subjective ones (psychological fears of sustaining damage to one’s health and safety or inconvenience).

Depending on the impact that each of these may have, one can obviously form an opinion about the extent to which demand can be conditioned and which segments, channels and activities are useful to this end; one can then outline potential scenarios and consequently make informed decisions.

After all, this too is part of revenue management.

What can we do in the short term?

If the hotel is suddenly empty overnight and the PMS planner becomes a blank slate, what can one do in the short term?

Given that in earliest stages of a crisis it becomes difficult to even imagine an increase in revenue compared to the previous year and the goal becomes instead mitigating damages and losses, what should be done?

Should prices be lowered?

Should prices be raised?

Should hotels be closed?

Should one cut costs and lay off staff?

The truth is that the pandemic, as demonstrated by the measures implemented in some countries, is also challenging the very legitimacy of the choice to remain open and operational for a certain period of time, both for reasons of public safety and health, and because it is objectively impossible for people to move even within national borders due to some necessary regulations imposed by governments to slow down the transmission of the infection, as well as the disruption of transport (flights, trains, etc.).

And in such situations, it no longer makes sense to study pricing and marketing measures or cost reduction to limit the damage.

In such cases, economic support measures implemented by the respective governments of each country (or supranational institutions) clearly become indispensable to provide liquidity to the businesses forced to shut down due to regulations and lack of revenue, and to safeguard employment in the short term.

However, where and as soon as regulations allow it and conditions exist for the presence of a demand, even if limited to a few specific segments, we believe that remaining open and continuing to maneuver the levers of revenue management (not only in terms of pricing, but also cancellation policies, rate parity, distribution channels etc.) and marketing is the ideal solution.

Certainly, closing the facility altogether and downsizing staff waiting for better times ahead is the worst choice one can make.

For several reasons.

First of all, shutting down will make it difficult to understand when times are indeed better, when the crisis is really over, and it makes sense to reopen for business.

Secondly, because the interruption of online sales entails an inevitable loss of visibility and damages the virtuous mechanism of OTAs ranking in the medium to long term, as well as causing the loss of potential short-term bookings of those customers unaffected by objective or subjective limitations (and while recently OTAs have been strongly criticized by hoteliers for some controversial decisions about cancellations and refunds, we assume that the same OTAs will keep being crucial for hotels to help them get out of the crisis in the short-medium term as customers will keep using those channels for a while).

Although their number may be significantly lower than usual, these customers still contribute to keeping the hotel alive, and should always be treated in the best way possible to further feed the online review and reputation score.

Those hotels that will resist the temptation to close will surely be able to enjoy the benefits of the end of the crisis sooner and more fully than those who have opted instead for the more drastic solution of closure, with ensuing personnel layoff.

As much as occupancy and revenue can now convey the impression that costs incurred in keeping facilities open are not justifiable, the damages of such a choice in the long run could outweigh the relative advantages in the short run.

Rather, it would be more advisable to take advantage of the situation and move forward in tackling a partial renovation of rooms and hotel facilities or to train staff in order to present an improved appearance, be more productive and better perform once the crisis is over.

What are the possible scenarios in the medium and long term?

Ok, and what about afterwards?

When will the crisis end?

When will booking flows resume and hotel occupancy bounce back?

It is difficult to estimate a timeline. It all depends on the evolution of this virus and how each individual government responds to current circumstances, which is also contingent upon how critical the situation is within each country.

The best-case scenario, which we all hope for, is that the containment and quarantine measures implemented at a national level in many countries eventually lead to a stabilization and reduction of the number of infections over the course of the next few months and, in the meantime, the virus weakens with the onset of summer and warm weather (scientists, however, have yet to agree regarding this hypothesis).

At the same time, various countries should begin to relax their restrictive measures concerning free movement of people, flights will resume a regular schedule and things will return to normal with the compensatory effect of faster-than-normal booking flows.

But, even in a super-optimistic scenario like this one, we will have to factor in that this virus might recur in wintertime, posing the same problem all over again.

We will certainly be better prepared internationally and with a few more remedies, but still unvaccinated and exposed to the risk of contagion.

The worst-case scenario, and perhaps the most likely according to some scientists, is that this pandemic could instead become a constant presence, albeit fluctuating and irregular, for several months, if not a year.

Indeed, as long as the virus continues to circulate in some countries, no country can be considered risk-free (the example of China, where the emergency seems to have ended after two months is encouraging, on the one hand, and on the other hand it makes us realize how vigilant we must remain even when the crisis appears to have subsided).

In such a scenario, the global impact of this crisis will prompt individual governments to make decisions of vital importance for the entire world economy.

Granted that a vaccine eventually becomes available, whether within a year or a year and a half, what do we do in the meantime?

Do we cancel all planetary events?

Do we suspend the Schengen Agreement and close all borders and international flights until a vaccine is available?

Do we all barricade ourselves at home for a year and bring the entire world economy to a standstill on account of a virus with a case fatality rate likely to be less than 1%?

With consequences, at that point, far more hazardous for the health of mankind than the virus itself?

Inconceivable, unsustainable and senseless that such a scenario should transpire.

More realistically, we will all likely learn to live with the risk awareness of this virus for a long time and the natural instinct to live, enjoy life (and travel) shall overcome fear in a liberating and overwhelming way.

After all, in today’s world we are exposed to the perils of phenomena far more lethal and frightening, inasmuch as they are unpredictable, such as terrorist attacks or natural disasters, which certainly do not prevent us from continuing to travel.

We fail to see why a virus that at the very least has the benefit of being predictable, compared to other disasters, and therefore manageable and controllable, should put the entire human race in lockdown for such a long time.

Even in the best of hypotheses – namely, the natural disappearance of the virus – we will remain in any case forever psychologically conditioned by this historical event.

The way we perceive the space around us will change, as well as our personal, professional and social relationships; probably some current common sense and responsible social distancing and prevention measures will turn into laws and consequently, our way of organizing events in the spheres of business, tourism and entertainment will also change, as will our way of managing hospitality.

Hotels will have to adapt, focusing their attention (also from a communication and marketing point of view) towards all those measures pertaining to prevention, hygiene and sanitation that can minimize the risk of virus spread, both real and potential (and also minimize the risks of high amounts of cancellations).

Those facilities that benefit from a very high score in the cleanliness parameter on OTAs, will certainly have a competitive advantage over others.

From a hospitality point of view, an unsteady, uncertain and indefinite scenario of this kind will certainly entail a contraction of international tourism in the first months (as indeed was the case in the aftermath of 9/11 or during the economic crisis of 2008), also by way of restrictions on access and reduction of flights that could alternatively involve one country or another.

Once the health emergency begins to subside globally, the first few months will, in any case, be conditioned by a natural reluctance among people to travel outside their own countries, on account of both subjective fears and objective limitations.

Domestic tourism within many countries will consequently tend to increase and partially compensate for the inevitable losses of international tourism.

The levers of revenue management will enable businesses to mitigate potential damages from this crisis by intercepting this internal demand, which will be likely characterized by average shorter stays.

However, once the situation has stabilized internationally and medicine has found some remedy, the recovery will be much more overwhelming than the collapse ever was. At which point, one will have to be skillful at managing the effects of the recovery.

For this reason, our recommendation is to be strategically sparing in the distribution and sale of rooms online and offline for the future months, lest the situation get out of hand at the moment of the explosive recovery, and to avoid selling too many rooms in advance at prices lower than market willingness to pay, thus being unable to recoup losses sustained due to the current collapse of demand.

We will have to be very dynamic and reactive in navigating the various stages of the transition.

The vision and mission of revenue management during the crisis

So, revenue management still has a usefulness and a purpose even in these dramatic circumstances, seeing as it enables us to carefully monitor the situation on a daily basis, mitigate losses in the short term, make forecasts and be reactive in managing in the most profitable way possible the recovery in the medium and long term, in order to regain all that was lost.

In conclusion, it is pointless to hide the evidence, there will be months of hardship, and it is pointless to wallow in self-pity, but if we stay strong and manage not to panic and make the necessary strategic decisions on the short, medium and long term, at the moment of recovery (which will surely come and will be even more unstoppable than the virus), we can recoup all of the losses that we are presently sustaining, plus interest.

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