Revenue management is an extremely important concept within the hospitality industry, because it allows hotel owners to anticipate demand and optimize availability and pricing, to achieve the best possible financial results. In this article, we will answer the question of ‘What is revenue management?’ and explain the importance of adopting your own revenue management strategy.
Defining Revenue Management
To understand revenue management, we must first define it. Within the hotel industry, the widely accepted definition is: “Selling the right room, to the right client, at the right moment, for the right price, through the right distribution channel, with the best cost efficiency”.
It involves using performance data and analytics, which help hotel owners more accurately predict demand and other consumer behaviors. This, in turn, allows them to make more sensible decisions regarding pricing and distribution, to maximize revenue and, therefore, profit.
As a concept, revenue management began in the airline industry, where companies found ways to anticipate consumer demand to introduce dynamic pricing. However, it is applicable in any industry where different customers are willing to pay different prices for the same product, where there is only a certain amount of that product to be sold, and where that product must be sold before a certain point.
To carry out effective revenue management, a business must also have some way of forecasting demand and consumer spending habits to make informed adjustments. For instance, hotels can use past data, existing bookings, weather forecasts, and other industry data to inform their revenue management strategy.
Why is Revenue Management Important?
For hotel owners, hotel revenue management provides the ability to make the most out of a perishable inventory of hotel rooms, allowing them to maximize the amount of money the business generates. Essentially, it allows decision-makers to make informed, data-driven choices, rather than relying on instincts or guesswork.
Like many other businesses, hotels have fixed costs, which need to be paid regardless of how many rooms are sold and how much money is generated from guests. Therefore, through a revenue management strategy, hotel owners can ensure their costs are met, and their prices and services are dynamically optimized.
Revenue Management vs. Yield Management
Within the hotel industry, revenue management and yield management are two of the most useful tools available to managers, allowing them to maximize the amount of money they make from guests. Although the two concepts are closely linked and share a lot of similarities, there are some important differences too. For more detailed information about yield management, please also read the article “What is Yield Management?”.
Video “What is revenue management?
Forecasting is an important concept to get to grips with when trying to answer the question: what is revenue management? In simple terms, forecasting is a means of using past data, present data, and the analysis of trends, in order to make future predictions. This then allows you to anticipate future conditions and events.
For those involved with hotel management, forecasting has a useful role to play, because it makes it easier to plan for the future and make more informed strategic decisions. Additionally, it can help you to maximize the amount of revenue generated from a perishable inventory, because you can predict levels of demand ahead of time.
Important Forecasting Tips
Below, you will find a breakdown of some of the best tips to remember when using forecasting as part of a hotel revenue management strategy, complete with explanations of why those tips matter.
Keep Accurate Records
The answer to the question ‘What is revenue management?’ centers on selling the right product, to the right customer, at the right time, via the right channel, for the right price, at the lowest cost to you. Doing this involves using the information that is available to you, and that, in turn, means it is crucial to keep accurate records. In particular, you need to track occupancy rates, revenue, room rates, and other KPIs covered later in this article.
Make Use of Historical Data
Most forecasts rely heavily on past data and the assumption that historical trends may repeat themselves, and this is especially true with hotel revenue management. As an example, you may notice when looking at your data that you experience a decline in demand from September to December, or that your busiest months are usually in the summer. This information can be used to make reasonable predictions about what will happen to demand in the future.
Utilize Data Already in the Books
One of the most important assets you have for forecasting and hotel revenue management, generally, is data already in the books. This will typically mean rooms that have already been booked, as well as any events, functions, or meals that have already been scheduled. However, you can also go beyond this and look at your website analytics and social media data. Remember, data in the books is some of the most certain information you have.
Take Events and Holidays Into Account
Your forecasting efforts factor in events and holidays, and those relevant adjustments must be made with these in mind. For instance, if you use historical data to forecast a certain level of demand, but overlook that a major sporting event is happening in the area, your forecast may be off. Similarly, current hotel trends may be either positively or negatively thrown off course by holidays like Christmas, Easter, Ramadan, and Thanksgiving.
Keep an Eye on Industry Trends
It is also important to pay careful attention to wider market trends. For example, has there been a decline in overall travel to the location where your hotel is based? Are there world events, such as the COVID-19 pandemic, which are having an impact on bookings? There may also be new ways of doing business that are helping rivals to attract guests, or new distribution channels that are worth exploring. These issues all need to be considered when forecasting.
More Forecasting Tips
There are a number of additional tips that can help you to improve your forecasting and come to understand what revenue management is all about. These include maintaining awareness of competitors and breaking down your forecasts into different segments so that you can be more specific with your predictions.
Top Revenue Management Strategies
In this section, you can find useful details about some of the main revenue management strategies available. Each of these strategies can help you to achieve better financial results.
Get to Know the Hotel Market
One of the most important strategies you can adopt for your hotel revenue management efforts is to really focus on the market itself. What is your target audience? Where are they based? What are their needs, wants, and expectations? What is the competition like? What local factors are there that may influence levels of demand over time? How does demand change as the seasons change? Getting to know the market is vital for making informed decisions.
Segmentation and Price Optimization
Price optimization is a major factor in any good answer to the question: what is revenue management? One possible way to achieve this is through segmentation, where you divide your customer base into different ‘types’, look at their behaviors and booking habits, and then attempt to optimize pricing for each segment. For instance, you might charge business customers lower room rates, because you know you can recoup the money via their use of corporate facilities.
Align Your Different Departments
Next, you need to think about how you can help the different departments within your hotel to collaborate and work towards the same goals. To do this, you must bring the major decision-makers within each department on board by explaining what revenue management is and why it is important. Work with them to adjust their existing strategies, if necessary, and ensure their record-keeping is up to scratch too.
Select the Best Pricing Strategy
A key part of successful revenue management is selecting the right pricing strategy for the right moment. In times of high demand, it may make sense to charge more for your hotel rooms, because the demand will ensure you still fill them, whereas when demand is low, a discount pricing strategy could ensure you can sell rooms that would otherwise be left empty. Ensure there is logic to your strategy and maintain the flexibility to make adjustments.
Incentives For Direct Bookings
Direct bookings can be extremely beneficial for hotel revenue management, because hotels take in all the money guests spend on their booking. By contrast, while online travel agents allow hotels to reach a wider audience, they charge hotels a commission fee, or a listing fee. With this in mind, you should offer a loyalty program, free extras, and other incentives to encourage as many customers as possible to book directly.
Extra Revenue Management Strategies
On top of the strategies mentioned, there are various other options available to help improve your revenue management strategy. These include things like utilizing search engine optimization to boost visibility and attract more customers, and working with a freelance revenue manager, who may be able to offer fresh perspectives.
The Main Revenue Management KPIs
Effective hotel revenue management relies on tracking key performance indicators or KPIs. You can use software and other hotel technology solutions to track these, but first, it is important to truly understand them.
GOPPAR is an acronym for gross operating profit per available room. It is a metric that takes into account all of the available rooms in the hotel, regardless of whether they are occupied by paying guests. It also factors in various revenue streams, and expenses, giving you a good idea of overall financial performance.
GOPPAR = Gross Operating Profit / Number of Rooms in Hotel
TRevPAR is a key performance indicator that is focused solely on revenue coming in. It stands for total revenue per available room and, like GOPPAR, is not concerned with whether or not a room is occupied, only that it is available. It also considers all money from rooms, including room service, food, and other services.
TRevPAR = Total Revenue / Number of Rooms in Hotel
Net revenue per available room, or NRevPAR, is concerned only with revenue generated from room sales, meaning other revenue sources are ignored. Again, it focuses on available rooms, rather than occupied rooms. However, prior to dividing room revenue by the number of rooms available, you deduct distribution costs to calculate ‘net revenue’.
NRevPAR = (Room Revenue – Distribution Costs) / Number of Rooms in Hotel
ARPA, or average revenue per account, is a KPI that can help to tell you how valuable customers are. It is concerned with the average amount of revenue generated per customer account, over a specified period of time – typically monthly or annually. You can also use this to compare past data and see the comparative value of new customers.
ARPA = Recurring Revenue / Total Number of Customer Accounts
The EBITDA KPI stands for earnings before interest, taxes, depreciation, and amortization. It can help to indicate your hotel’s overall revenue-generating performance while removing the variables that may otherwise distort your results. This makes it easier to compare your hotel to other hotels or chains of your own hotel brand without the results being thrown off by things like tax rates varying across different countries.
EBITDA = Total Revenue – Expenses (not including interest, taxes, depreciation, and amortization)
All Revenue Management KPIs
There are a number of other KPIs that are useful for hotel revenue management, with examples including average daily rate (ADR) and revenue per available room (RevPAR). It is beneficial to learn about as many of these as possible, so that you can track them within your hotel and enhance your revenue management efforts.
Key Revenue Management Pricing Strategies
Any explanation of revenue management will reference price, and you will need to select the right pricing strategy for the right situation to bring in as much money as possible. Below, you can learn about some of the common pricing strategies hotels and resorts use.
Length of Stay Strategy (LOS)
A length of stay strategy is, as the name indicates, a strategy where the pricing varies depending on the time a guest stays in the hotel. This can work in several ways, but one of the most common is charging a lower overall rate for longer stays booked during low-demand periods. This can help to encourage guests to book longer visits, which means your hotel brings in more money from them overall, while they get better value for their money.
Up-selling is a strategy where you attempt to get customers to spend more on the products or services they buy than they initially intended, and it can work extremely well in hotels. For example, you may be able to get customers to upgrade to a room with a better view, or to a room with a larger bed. Up-selling can be attempted during the booking process itself but also in any post-booking communication with customers as well.
The concept of cross-selling is similar to up-selling in that you attempt to get customers to spend more money; however, this time, it is achieved by convincing them to make additional purchases on top of what they were originally intending. For instance, this could mean persuading them to pay for breakfasts and their room or selling additional products or services, such as travel passes, gym access, or tickets to local attractions.
It is also important to understand that your cancellation policy can factor into pricing. For instance, some hotels charge lower rates than they otherwise would on the basis that customers give up their right to a refund in the event that they cancel their booking. By the same token, you might also charge a higher rate for your room than you otherwise would but offer greater flexibility or leeway on cancellations and refunds.
More Pricing Strategies
Aside from those mentioned, there are various other pricing strategies available, too, including price per segment, rate parity, forecast-based pricing, and discounted direct bookings.
Additional Hotel Revenue Management Tips
The following tips can help those associated with hotel management to deliver better revenue management results.
Develop a Revenue Management Culture
To achieve the absolute best results, you should create a revenue management culture within your hotel. This will mean that everyone within the business will take an active interest in revenue management and try to contribute towards success in this area. You may need to work with individual departments and their leaders to explain why it is so important and how it can benefit the whole organization in the long run.
Stay Aware of Changing Habits
One potential problem with revenue management is related to the fact that it will often draw heavily from historical data. Although this data is precious, its use can be hindered if there are significant changes to customer behaviors and habits. With this in mind, it is essential that you keep up with any of these changes and that you take these shifts in behaviors or habits into account when making predictions.
Remember to Place a Focus on Value
Answers to the question ‘What is revenue management?’ will often focus on price, but it is worth stressing that you can sell hotel rooms at a higher rate if you offer your customers good value. As a basic rule, guests are happy to pay more for a high-quality room, in a hotel where they are guaranteed good service, and this is especially true if you also throw in extras. Do not be afraid to emphasize value instead of pure price.
Avoid Over-Reliance on Automation
Many aspects of revenue management can now be carried out through AI and software automation. Yet, it is imperative that you use this hotel technology intelligently and avoid over-reliance on it. Automation can be beneficial for calculations and purely logic-driven decisions. Nevertheless, the very best hotel leaders and decision-makers will also take calculated risks and take the kind of chances that AI will not be able to replicate.
More Revenue Management Tips
There are several further tips worth knowing when trying to optimize your revenue management strategy. These include making sure you are keeping consistent and relevant records, providing clear incentives for customers to book hotel rooms directly, prioritizing mobile optimization, and actually creating a map of where you expect demand to come from.
Check Out Hotel Revenue Management Courses
Hotel revenue management courses will cover everything, from answering the basic question of ‘what is revenue management?’ right the way to using advanced tools and techniques. In some cases, it may be worth investing in a course of this kind, as they can equip you with all the information you need to optimize financial results.
What is Revenue Management in Relation to Open Pricing?
Now that you are equipped with an understanding of revenue management, it is worth exploring what revenue management is about open pricing. Open pricing refers to a flexible pricing model, which moves away from the fixed modifiers traditionally associated with BAR (best available rate).
When using an open pricing approach, hotels can adjust prices beyond the parameters usually in place when using these fixed modifiers. Pricing can also be adjusted for each distribution channel independently, allowing specific audiences to be targeted with pricing that makes sense.
Hotels can use this approach to optimize their revenue management strategy by setting the ideal room rate. For example, during periods of high demand, hotels can freely adjust the rate to make it higher, while during lower demand periods, hotels can drop the price significantly, especially if they are desperate to fill a room.
This flexibility also can benefit customers, as lower room rates may be available, or pricing may be targeted more accurately to different market segments.
What is a Revenue Management System?
When you prioritize revenue management, investing in a revenue management system (RMS) is often sensible. This software solution will make various revenue management tasks easier and allow you to easily maintain and access related information or data.
Essential Revenue Management System Features
There are various RMS software solutions on the market and it can be difficult to know where to start when choosing between them. However, once you know the main features to look out for, selecting your revenue management system becomes significantly easier.
What is Total Revenue Management?
For most hotels, there are a number of revenue sources beyond simply selling hotel rooms. Depending on the hotel, this could include leisure activities, conferencing facilities, food and beverage sales, etc. Total revenue management can be broadly viewed as optimizing each of these to maximize profitability.
The Latest Hotel Revenue Management Strategies, Tactics, Trends and Tips
Hotel revenue management is an important topic, and there is a lot to cover, from creating accurate forecasts to making the best use of your revenue management system. To read more about these topics, try exploring our hotel revenue management category page, where you will find an archive of our posts on the topic, allowing you to develop a more rounded knowledge and access the latest strategies, tactics, trends, and tips.
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Article by Revfine.com