Navigating the Thin Line Between Bad Outcomes and Bad Revenue Management Decisions
Have you found yourself defending a group reservation that, in hindsight, negatively impacted your revenue performance? The art of Revenue Management (RM) is a delicate dance between crystal ball forecasts and calculated risks. It's a discipline where success can make a budget, failures break a budget, and where the act of speculation shapes the companies P&L. This prompts the question: How do we recognize and effectively articulate a bad outcome versus a bad Revenue Managment decision?
Join me over the next few weeks as we break down the art and science of decision-making, seeking to debunk some common myths, demystify the musings of our concious and subconcious brain and keep RM professionals on the edge of innovation.
Hindsight is a beautiful thing. If I had a dollar for every time I was chastised for accepting a group at too low a price before a subsequent event was annouced, I could have started the Hindsight Hotel Group and be challenging the big five brands for key count! Equally, I have taken speculative risks in the past that were simply poor decisions with oversight.
First, let’s understand the significant misunderstanding about decision-making. As CEO of a large hotel brand, the decisions I made impacted many. Hence, they were rightly often in the spotlight, judged by customers, employees, the public, owners, sometimes the media, and always the board of Directors. However, I was acutely aware of being more often judged by the quality of the outcome of my decisions and not by the quality of my actual decisions.
Being judged on the outcome of our decisions is common in all parts of society. Take, for example, Thomas Tuchel, the manager of the Chelsea Football Club, when Chelsea faced Liverpool in the 2021/2022 Carabao Cup Final. After more than 120 minutes of on-field play, the two teams could not be separated, so they advanced into a classic and unforgettable penalty shootout.
In an unusual twist, during the final minute of extra time, Tuchel decided to substitute his starting goalkeeper, Edouard Mendy, who had not conceded a goal in the game. Kepa Arrizabalaga, who had a strong penalty record before the Carabao Cup Final, was physically fresh and had prepared for the penalty shootout, was brought on to make a crucial save and win the title for Chelsea.
After the first five designated penalty takers from each team successfully found the net, so did the following five players, leaving the rarity of only the two goalkeepers from each team to attempt a shot on goal. Rarely are goalkeepers required to take a penalty shot, as usually the game is decided before that occurs. First was Alisson Becker, the Brazilian goalkeeper for Liverpool FC, who struck the ball perfectly past Kepa and into the back of the net to make it 11-10. Kepa, the Chelsea FC substituted goalkeeper, stepped up next and, despite having a football in hand for much of his life, struck the ball well over the crossbar in one of the worst penalty attempts in Cup Final history, handing the title to Liverpool FC.
The immediate response from media pundits toward Tuchel lamented an ‘appalling’ and ‘crazy decision.’ Furious fans let their thoughts be known on social media, and the headlines questioned Tuchels’ decision the following day.
The truth is that the quality of the decision was reasonable, given the circumstances. Kepa had been the hero of two penalty shootouts leading up to the final, substituted late in the same manner; he was rested and had prepared for the opposition shot-makers. The quality of the outcome, however, was undesirable.
In Revenue Management, we also make decisions with information available to us at a moment in time. When I accepted the aformementioned group as base business, the event was not known and the decision was correct. As the market dynamics that were not factored into my crystal ball forecast shifted, the outcome of that decision turned a corner - unfortunately for me; the wrong corner. Had the market remained static, I would have outperformed my competitors with a superior base of revenue. The probability of an event being announced was low and in the majority of times, I would perform the highest. The key to high-performance over time is consistency of decision-making and always pursuing the higher probability outcome.
Naturally, a bad decision occurs when the probability is miscalculated, or not calculated at all, or all available information is overlooked when making the calcuation of probability.
Statistically, all RM professionals will experience bad outcomes. The goal is to recognize them as bad outcomes and avoid them impacting your future decisions. The next installment of Elite RM Dispatch will focus on the risks of heuristics and biases in our decision-making.
So, next time you are faced with the unwarranted chasitising from captain hindsight, remember this; just as a poker player calculates the odds of receiving a favourable card when playing their hand, there is always the probability of an unfavourable card. Pursuing the higher probability outcome is still the right decision for the card shark, irrespective of the card that turns over.
About the author: Rob Paterson was a 15-year veteran of Revenue Management before entering the C-Suite and eventually being named CEO of Best Western Hotels Great Britain in 2018, a role he occupied for almost 4 years. He now resides in the US and is the founder of the Grind Leadership Academy and Elite Revenue Management Community. To learn more about how Grind Leadership Academy can help elevate yours' and your company's performance, check out the services page and schedule a call or join one of the performance ally coaching programs listed at the bottom of the page.
The Elite Revenue Management Group
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