This is the Revenue Management Prediction that You Need to Know
By Jordan Hollander
Last updated August 27, 2020
8 min read
Here at Hotel Tech Report we get asked all the time about the most interesting technology trends and tools in the market.
Everyone has a different reason to ask:
Hotel owners want to know how they can run more profitable businesses
Hotel workers want to know which skills will be valuable in the years to come
Venture capitalists want to know which tech companies to invest in
In a recent interview with Hotel Tech Report, Atomize CEO Alexander Edstrom shared an extremely compelling vision for the future of hotel software. Edstrom believes that well documented APIs are ushering in a new era of taylorism driven by more seamless vendor collaboration and consequently the potential for deeper specialization
Within the revenue management software category, for example, Edstrom believes that systems will be bifurcated into two groups that serve very different needs and require very different skill sets:
Strategic Revenue Management: Similar to traditional revenue management software, these systems will focus entirely on business intelligence and reporting.
Tactical Revenue Management: Systems that focus entirely on optimization and real time pricing execution.
If you’re about to have a nervous breakdown at the thought of another system to manage your hotel, don’t panic just yet because Edstrom’s vision has a slight twist. Instead of two separate systems, he believes that deeper collaboration and specialization will usher in a new era of white labelled solution so while it might be two different companies powering different aspects of the product, they would be bundled together into one interface.
Edstrom believes that strategic revenue management software will continue to be the interface that helps hoteliers distill information and make better decisions but it will be powered by tactical revenue management systems that automatically run price optimizations in the background. This means that as a hotelier you might not even need to know the name of the company who powers #2.
A simple analogue to illustrate this concept can be found in the automotive industry with Aston Martin’s supercar, the Vantage. Do you know who produces the Vantage’s 4.0 litre V8 twin-turbocharged engine? If you said Aston Martin, think again. The correct answer is Mercedes. By partnering with Mercedes, both Aston Martin and its customers benefit from Mercedes’ £10 million/day (€3bn/year) R&D spend that goes into developing its AMG twin turbo engines. Mercedes components allow Aston Martin to specialize in other aspects of the product like design, handling and production efficiency.
In this example the Aston Martin is the strategic system providing an interface for the driver to navigate the road where the AMG engine is the tactical system that powers the vehicle but remains out of sight. To give you an idea why this type of collaborative partnership and specialization can benefit consumers all you have to do is look at Aston Martin’s annual revenue which in 2019 was less than 1/10th the size of Mercedes’ R&D budget alone. Instead of reinventing the wheel (pun intended) Aston Martin knew it could partner with Mercedes for the engine where they have invested billions of dollars, and instead invest their own R&D dollars on their core competencies of design and branding.
"If somebody comes up with an innovation that adds value and is faster, better, cheaper, we take it," Murat Aksel, BMW SVP of Purchasing
While the auto industry is an easy to understand example that illustrates a similar type of white labeling, there are dozens of other industries where this trend is happening too. Edstrom’s vision for the future is largely inspired by his experience in the world of ad tech where he and Atomize co-founder Leif Jagerbrand sold their company Admeta to global ad tech powerhouse WideOrbit. In ad tech, white labeling is considered table stakes.
In this article we’ll explore how white label software will impact the future of hospitality. We’ll then dive into the reasons why revenue management systems are the software that’s most likely to get white labeled next.
What is White Label Software?
Have you ever heard of Twilio? It’s ok, most people haven’t.
If you’ve ever gotten a text message from Uber or AirBnB - it was powered by Twilio. If you offer guest messaging services at your hotel, those too are likely powered by Twilio. Twilio is a $15B company that provides the building blocks (APIs) for software developers to create applications that leverage text messaging.
Twilio may have been the first platform as a service company geared towards software developers but many have followed suit. Visa recently purchased fintech unicorn and platform as a service company Plaid for $5.3B. Plaid is the platform that popular tech companies use to connect with banking institutions and is responsible for critical functionality within apps like Venmo, Coinbase and Betterment.
Both Plaid and Twilio are built for software developers which means that consumers rarely even know that the apps they use are powered by them. This enables software companies like Uber and Venmo to focus their energy and resources on its core competencies (e.g. distribution and network density) instead of building out redundant text messaging capabilities.
This kind of white labeling has already begun in the hotel industry but without hoteliers even knowing it.
Many of the property management systems that market channel management capabilities actually white label their channel managers from other vendors without the end user even knowing it’s another product. Edstrom believes that there will be a lot more white labeling like this to come and history is on his side.
There are some taboos around “outing” white label software but this is actually the most innovative way to build tech ecosystems since it frees up vendors to focus R&D spend on new innovations while still providing a comprehensive product portfolio for clients.
"Different degrees of white labeling software partnerships were, and still are, common in adtech. Today, many of the leading and known adtech "software providers" are actually offering products where the IPs (Intellectual Property Rights) belong to a variety of white labelled software providers. We can now see signs that this is starting to happen in the hotel tech industry as well in terms of different types of strategic partnerships, but also the fully cloaked, 100% white labelled partnerships, that the average citizen would never even know are taking place". Alexander Edstrom, CEO at Atomize
In the context of the hotel industry, white labeling is an underrated alternative to the buzzy ‘app store’ concept. Both solve the same problem: allowing software companies to focus R&D efforts on actual innovation instead of wasting time and resources building redundant features and squabbling over distribution which ultimately hurts industry economics and confuses software buyers.
App stores like Mews, protel and SiteMinder solve this problem by allowing users to tap the functionality of partner apps while white labeled solutions can potentially do this in a way that may actually be less confusing for the market (when executed well) since buyers need to work with fewer providers.
Revenue Management Systems are Ripe for White Labeling
Edstrom believes that the revenue management space is ripe for white labeling because it has evolved to solve two distinct problems each requiring different capabilities. Traditional revenue management systems (i.e. strategic) need to be good at reporting and data visualization which is a very different problem than price optimization (i.e. tactical revenue management).
In order to understand how modern revenue management systems came to solve two distinct problems we need to understand a bit about the past.
Before yield management took hold in the 80s and 90s, hotels relied on flat pricing (or at best seasonal fixed rates).
The earliest applications of hotel revenue management began in the mid 1980s (back then it was called yield management). Since there was no such thing as a ‘revenue manager’ back then, this role was generally filled by reservation sales managers. The earliest applications of revenue management were pioneered in the airline industry to meet very rudimentary goals.
For example, airlines would create fenced pricing such as discounts for booking a trip more than 21 days in advance. This began as yield management which generally refers to an inventory-centric price optimization approach. Over time these rules grew more complex and strategies became more sophisticated leading us to where we are today.
As pricing and yield strategies improved there has been a concurrent rise of innovative revenue management software vendors that delivered tools to help revenue managers quickly test and implement new revenue maximization strategies by tapping competitive market and historical PMS data.
Consequently, most revenue management systems today center around data dashboards and reporting tools. Drawing from experience, Edstrom believes that the next evolution of revenue management software will mirror what happened in the ad tech industry. He believes that while most revenue management systems today have focused on reporting functionality, the winning price optimization vendors of tomorrow will be white labeled utilities that work behind the scenes while hoteliers spend their time operating strategic revenue management and business intelligence software.
Since price optimizations automatically happen in the backend, hoteliers don’t actually need to log in to that system. That’s why Edstrom believes that strategic revenue management systems and BI tools are better suited to act as the ‘hotelier facing’ software brands.
If you think automated optimization sounds far-fetched, just take a look at digital marketing platforms like Google Ads that automatically optimize massive real time data sets to determine the right price of billions of ads every day.
As an advertiser on Google, you pick your keywords then set a max bid (and budget) and the optimizations happen automatically in the background because there is no possible way for humans to analyze these massive datasets that are literally changing by the second.
Tactical revenue management systems grow demand by decreasing prices in the same way that ad bidding platforms grow demand by increasing bids and budgets.
The same way your hotel’s marketing team trusts that Google’s automated bidding system will maximize your marketing spend, Edstrom believes the new generation of tactical revenue management systems will serve as the pricing engine that optimizes your hotel’s pricing strategy on a minute-to-minute real time basis leveraging mounds of data that even Einstein couldn’t make sense of.
By most estimates, only around 10-15% of hotels use revenue management systems today. Edstrom believes that the way to increase market utilization of such systems is to pull apart tactical price optimization tools and strategic revenue management software.
What Automation Means for Revenue Managers
The thought of fully automated tactical revenue management might sound scary to most revenue managers like the prospect of autonomous vehicles sounds to Uber drivers--but while driving skills may not be needed in decades to come, the analytical and strategic skills of revenue managers will be more in demand than ever before.
There is no question of whether tactical revenue management will be automated according to Atomize CEO Alexander Edstrom and in many ways that world is already here.
Edstrom told me a story about how he’d recently checked in with an important client whom he hadn’t spoken to in several months. The client owns a small chain of luxury boutique hotels in India and the conversation went something like this:
Alexander: How is everything going with Atomize?
Client: Actually, since we decided to go for Autopilot we have not had any reason to login into Atomize. I’m a bit embarrassed to say that I have even forgotten my login password. The numbers and KPIs look great, that’s all we care about. We don’t need to open the app to see specific prices set for certain room categories for future arrival dates as long as our RevPAR and occupancy rates are beating out the competition.
Here at Hotel Tech Report we’ve written extensively about the day-to-day roles and responsibilities of revenue managers but these roles are changing at a rapid clip.
It’s easy to see why revenue managers might feel threatened by an automated tactical revenue management system like Atomize; however, the reality is that systems like Atomize are actually freeing up commercial leaders in the hotel industry to focus on higher value tasks and strategic revenue management.
Just as “revenue management” has built on the foundational concepts of “yield management”, the next iteration of this role continues to become even more strategic with each passing year. Revenue managers today have widely adopted the concept of total RevPAR (tRevPAR) and the leaders of tomorrow will increasingly be focused on not just tRevPAR but profit maximization through the implementation of actionable business intelligence.
Revenue managers of the future will focus on commercial decision making like orchestrating the efforts of sales and marketing to maximize business profitability. In other words, revenue managers of yesterday focused on questions like “how much should I price this room for?” while revenue managers of tomorrow will likely focus on questions like “is it more profitable for me to drop rates by 10% or increase my PPC (pay-per-click) advertising budget by 20%?”
The automation of tactical revenue management is already here and the best revenue managers are already leveraging this technology to save time and focus on the commercial skills necessary to stand out in tomorrow’s revenue management job market.
This content was created collaboratively by Atomize and Hotel Tech Report.