Revenue Optimization for Leisure Travel Operators

by Joseph Slattery

An Open-Ended Opportunity

In the leisure travel business, revenue is an open-ended opportunity. For products anchored in fixed costs, even small, marginal gains in yield are significantly magnified on the P&L.

Yet, the market is flooded with outstanding products that go unsold or sell well below fair value. Rarely is this from lack of raw demand. The issue is qualified demand, defined by willingness to pay. Those who fully appreciate the special, differentiating characteristics of an experience are fewer and harder to find than those who see a commodity with readily available substitutes. An even larger group has a take-it-or-leave-it mindset, triggered only when “the deal” is too good to refuse.

Optimal revenue for any given tranche of inventory may include all three of these classes, in a carefully calibrated mix. Upfront market segmentation is just as essential as the actual execution: reaching, engaging, and converting both new-to-brand and repeat customers, efficiently converting demand into revenue, and ROI-driven management of acquisition and distribution costs. The revenue opportunity may be open-ended, but marketing budgets seldom are.

The availability of big data, when supported by the right technology and expertise, has made a science out of what was once an art. But not completely. Insights, extracted from data, fuel creativity. Great storytelling is too often forsaken in the frenzy of price and promotion.

In most travel businesses, responsibility for generating and managing demand is shared by marketing, sales and revenue management (RM), three interconnected functions that can be organized in myriad ways. With so many moving parts, integration is key. Shared objectives and strategies, coordinated planning, collaborative execution, and a focused, disciplined management system are all crucial. Organizational silos are the enemy. They create friction, drag, inefficiencies and missed opportunities.

A Game of Inches

Revenue optimization is a game of inches. Hotels, airlines, cruise lines, and tour operators almost always go to market with constrained capacity. When this happens, ticket revenue depends on just two things: the percentage of inventory actually sold (we will use the term "utilization" rather than the sector-specific "load factor" or "occupancy") and the selling price, usually net of distribution costs. Because leisure travel demand is relatively elastic (e.g. price-sensitive), these two forces -- volume and price — oppose each other. Optimization is like trying to connect the positive sides of two magnets. The pressure to sell out the inventory is counterbalanced by pressure to sell each discrete unit at the maximum possible price.

In most organizations, capturing the upside from price, let alone the fickle tuning of the opposing forces, is the purview of RM. Marketing and sales tend to focus on the raw material -- demand. “We just need more demand,” it is often said. How is demand measured by those responsible for its generation? Usually by counting. Point-in-time bookings and revenue make simple comps but unreliable measures of real performance. Sales meeting mantras like "bodies in beds" and "bodies in seats" often translate to revenue management as "money left on the table."

Four Tasks that Matter Most

For leisure travel products, revenue performance depends largely on how well the commercial team executes four tasks. While it may be tempting to assign these “responsibilities” among organizational lines, doing so is a recipe for tangled wires and sub-optimal results.

1. Optimize Asset Deployment

Leisure travel products require assets to operate. Assets can be owned, contracted or hired. Typically they are fixed costs to an operation — not easily scaled on the fly. Ships, airplanes, blocks of hotel rooms, motor coaches, rail car seats, whitewater rafts, event tickets, expert tour guides, for example. Asset deployment can be simple (land-based resort hotel), or complex (where to position a fleet of cruise ships). Tour products can involve dozens of components that can be arranged in myriad ways.

Each new planning cycle requires upfront decisions that can profoundly impact performance. There are safe choices and there are bold choices. There are safe choices that become bold choices at capacity thresholds. Decisions must consider asset availability, past performance, new ideas, changes to the market and competitive landscape, and dozens of other variables that impact demand and operating costs.

To be clear, asset deployment is typically optimized for operating income, not revenue, though there is a strong correlation. For example, cruise ship operating costs are often far higher in some regions than in others. In such instances, estimating program margin — revenue + marginal operating costs — is the way to go. Other factors that can lead to a lower-revenue choice include risks, adherence to a longer-term strategies, and new program introductions.

When a new product cycle is launched, stakeholders throughout the organization presumed that the final mix of destinations, itineraries and experiences — the inventory to sell, the departure dates, the variations and iterations — is optimized for success, however that success is defined.

2. Generate Quality Demand

Filling seats and beds with scant regard for price shouldn’t be difficult. If it is, there’s a bigger problem to solve. Revenue performance depends on the quality of demand, defined by customer willingness to pay (WTP). WTP to pay falls when a product is commoditized, i.e. undifferentiated from readily available substitutes. This can lead to a price-and-promotion spiral that’s hard to get out of.

To stay focused on the “blue chips,” marketing initiatives and sales account performances should be evaluated with qualitative as well as quantitative KPI. The qualitative view starts with price, but goes beyond the immediate transaction, considering the importance of new-to-brand customers and customer lifetime value, for example.

3. Efficiently Convert Demand to Revenue

The revenue management function, whether one person or a data-devouring army, doesn’t perform well in silos. Working unsegmented demand with the levers of dynamic pricing, especially when guided by an algorithmic black box, can be very profitable, but there are limits and downsides. Well-executed segmentation allows RM to capture discrete pockets of demand based on willingness to pay and other criteria, with minimal interference to other sources. This is impossible for RM do on its own. The whole commercial org must align on segment definitions and targeting strategies, with marketing and sales held accountable for delivery.

4. Manage Distribution Costs

Whether or not factored into net revenue, distribution costs are a huge expense for many operators. Often, especially in organizations highly dependent on retail trade support, costs become subservient to sales volume and are exacerbated by channel conflicts. Trade compensation is too often based on one-dimensional metrics that don’t necessarily align with real value. In the worst cases, sales managers compete with each other through account surrogates, funding zero-sum battles within and between particular channels. Stepping up sales analytics – particularly qualitative-based ROI analysis of trade compensation and support -- is a profitable opportunity for many companies.

Other Factors

Nobody likes org silos. Companies are fond of slogans espousing collaboration and cooperation, but actually changing behavior can’t be done with a PR campaign. Usually, the louder the chanting, the deeper the problem. The first, critical step is to understand why people don’t collaborate and cooperate in the first place. Fear. Politics. Mistrust. Objectives and strategies that don’t sync up. Misaligned performance targets are a common culprit. Does an individual or departmental win correlate to enterprise success? Does a victory in one corner come with offsets absorbed elsewhere in the business? Are people and departments subversively motivated to squander resources on their own vested interests?

Lastly, revenue optimization requires discipline and accountability. A bulletproof commercial process starts with careful planning (not the “it’s that time of year again” do-it-and-shelve-it routine), and is executed with relentless attention to every bed, every seat, every dollar, every day. Lock the team in a room, if necessary, and sweat it out. Figure it out. Hold people accountable. In a game of inches, there is no other way.