Article for Wednesday, 12th of 2011

This article deals with the new management tool that is necessary to understand to be an efficient revenue manager as selling trends are changing rapidly. It is called the "Net ADR Yield" and is used for the management of distribution channel related costs.

Indeed, in the past, revenue managers focused mostly on the top-line revenue or the RevPAR to assess which distribution channel was the best to sell the products. In brief, it was considered that "The higher the total revenue generated by a distribution channel (evaluated by assessing Rooms Sold x ADR); the better the channel."


As you saw in my previous article about the conflict between the airline companies and the intermediaries, RevPAR is not the only element to consider to maximise revenue. Today, hotels, like air companies, are using different distribution channels to offer their guests the choice of booking where, when and how they want. It gives an added value to the hotel products but the problem is, not all distribution channels have the same cost. All the intermediaries have to charge their services to the hotels but the fees between them may vary dramatically. Thus, it is very important to manage these costs. One solution is to manage which channel you use, another is to move repeat buyers from costly distribution channels to less costly channels. How can we measure the profitability of each channel?

The old tool of using ADR and RevPAR is not useful here as it does not take into consideration the distribution channel cost. The new tool to be used then is the Net ADR Yield. You can obtain it by calculating the Net room rate (Standard room rate - cost) divided by the standard room rate. It will give you in percentage what is left to you after you paid for the costs of selling the room. For instance, if you sell the same number of rooms at the same price through 2 different channels that have 2 different fees, 1 very low and 1 high, you will realize that your revenue at the end will dramatically change...

As a consequence, with this tool, you can find which channels have the highest Net ADR Yield, that is which of them are the most profitable. The most important is to calculate the average Net ADR Yield, combining the results of each distribution channel to see how you manage these channels and their related costs. A high Average ADR Yield would show that you have a good control over your distribution channels while a low Average ADR Yield may show that you need to review your channel distribution.

However, it would be restrictive to say that high Net ADR Yield  are always more desiderable than lower Net ADR Yield. A low ADR with a high Net ADR Yield will have a very bad impact on GOPPAR as will a very high ADR with a lower Net ADR Yield. A high Net ADR Yield will also be a problem if it is combined with only a small proportion of rooms sold.
What is important to understand then is that today, revenue manager still have to attach importance to Rev PAR optimization (as ADR times the  room sold gives the revenue) but that they also have to pay attention to the profitability of each channel of distribution.

Comments:

Revenue Management has become a key component in the hotel industry and it will become more and more important as the selling process is changing and the competition is getting harder and harder. The dream for a revenue manager would be of course to reduce or even eliminate the transaction fees the hotel pays to its intermediaries to maximize the hotel profit. New technological tools and practices are already helping hoteliers to attract guests to their site to book directly on their own booking engine. Hotels also are more and more numerous to use the mobile app and mobile websites to respond customers' demand. With the conflict between the airline companies and the intermediaries, would it be unbelievable to think that hotels would follow the trends? I think the current fight is to be watched very closely...