Professor using software to get hospitality down to a science
8 July 2011
Students at MIT and Stanford use high-tech devices to study nerve impulses in the human brain and subatomic particles in the solar system. Now UNLV students will take a similarly scientific approach to something crucial to this tourism-dependent town: hotel room rates.
Starting in August, a graduate-level class in hotel revenue management at the William F. Harrah College of Hotel Administration will get a crack at software that’s expected to revamp some of the management decisions that define the casino niche.
The software simulates hotel management by using mathematical formulas to forecast demand based on bookings from different types of customers and the scheduling of concerts and conventions to attract business. Students will use the software to set rates for hotel rooms based on what customers spend throughout the simulated hotels.
Rather than raising room rates when demand rises, students could give customers free rooms if they expect to make at least $100 off each customer during their hotel stay.
Hotel pricing is largely guesswork despite the widespread use of simpler forecasting systems in the industry, said Mehmet Erdem, a UNLV associate professor who will incorporate the software into his class. Many hotel managers are focused on maximizing room revenue, but charging customers lower rates may be more profitable long term, he said.
“You can’t just look at the revenue generated by a room,” he said. “You have to look at the revenue generated by each customer and be willing to adjust prices for those who go to the spa and dine in restaurants.”
Erdem hopes the software will create more strategically minded hotel managers who can use similar systems to create customized room rates based on what customers spend. By using the software, students could operate their simulated hotels profitably by offering certain customers — say, those who attended a concert at the hotel last year and are expected to do so again — discounted rooms, he said.
Improved demand forecasts and customized room rates are more profitable for hotels and also benefit consumers, Erdem said. Visitors with more discretionary income will spend more for a hotel room on busy days — especially if such rates are published in advance, he said. Customers who can be flexible with their travel dates will find better deals than before — or even stay at a hotel for free — if they have a history of spending money at that hotel and steer clear of peak demand periods, he said.
Consumer advocate and travel writer Christopher Elliott is skeptical, saying hotels will be tempted to use such systems to charge for things that were included in the price of a room.
Airlines have used revenue management systems to their benefit by frequently changing prices for the same seats on the same flights and to seek additional revenue sources, such as baggage fees.
“I hope cooler heads prevail and realize that while some airlines have revenue-managed their way to profitability, their customers hate them for it,” Elliott said.
Loyalty programs abound in the hotel and casino industries, which allow customers to use accumulated points to get freebies and discounts. They have yet to customize rates based on what people spend throughout the properties, regardless of points earned.
Big casinos have fine-tuned systems offering comped or discounted rooms to gamblers based on history or predictions of gambling losses. However, such systems don’t personalize those rates based on everything customers have spent at the hotel, from bottled water and sweatshirts in the gift shop to cocktails and appetizers by the pool.
Since 2006, Erdem has taught courses in revenue or yield management, which involves maximizing profits for a fixed amount of inventory, such as hotel rooms or airline seats, that would otherwise lose money for a company if not sold. In tourist destinations such as Las Vegas, revenue management is responsible for steep room rates on weekends when demand is high and lower rates during the week when fewer visitors are in town.
Although pioneered by airlines in the 1980s and incorporated by hotels in the 1990s, revenue management isn’t widely taught in academia, and its broader applications for casinos are largely unexplored, Erdem said.
“Gaming companies are coming to UNLV saying, ‘We need revenue managers,’ ” he said. “In almost every class somebody comes up to me and says, ‘This is the most important topic I’ve heard all year. Or, since I’ve been at UNLV.’ ”
The recession exposed management mistakes at Las Vegas casinos that didn’t have to worry about demand when times were flush, said Marco Benvenuti, a UNLV hotel college graduate and former hotel revenue strategist for Caesars Entertainment and Wynn Resorts. Benvenuti, who developed the software and is donating it to UNLV, co-founded Duetto Consulting in Las Vegas last year.
Casinos are primitive practitioners of revenue management given how far behind they are in tracking what customers spend on activities besides gambling, Benvenuti said. When times were good, they didn’t have to worry about maximizing profit, he said. After recent budget cuts, companies have lacked the resources to hire skilled employees and develop complex systems, he added.
“This is clearly a new field that needs a lot of science and numbers and (information technology) behind it. But you have marketing people who don’t understand IT” and vice versa, he said. “You have hotels that will always be higher than the one next door because it’s an ego thing or they don’t trust their revenue management system and will override it, saying, ‘I’ve been in this industry a long time and I know what I should be charging customers.’ ”
Such comments may sound self-serving for a consultant such as Benvenuti who is seeking casino customers. He contends his sales pitch has softened since the days when he worked for corporations attempting to change ways of doing business.
“When clients come to me, they already know what they want. They don’t need convincing,” he said.
Benvenuti hopes for a more direct benefit from his software donation in the form of future employees.
“I would have liked to hire someone from UNLV, but they didn’t have the training,” he said. “UNLV has a great opportunity to position itself (as an expert) in casino revenue management.”
For a niche industry built on a mistrust of outsiders, habits die hard. Casinos that comp gamblers through hosts with which they have longtime relationships may find it difficult to yield such decisions to a software specialist, Benvenuti said. Although software has long been used to comp gamblers, future systems could determine that gamblers aren’t necessarily more profitable, all things considered, he said.
Some industry consultants and consumers question the hotel industry’s increasing reliance on technology, saying it may replace old-fashioned customer service with machines. When used strategically, technology can improve customer service, especially at giant hotels, by freeing up employees to serve customers while relying on software to create custom marketing offers, officials say.
“I don’t think it can ever be an exact science,” Erdem said of his chosen field. “But we’re trying to make it as close to an exact science as possible.”
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