What is revenue management?
Revenue management is a technique that optimizes inventory and maximizes profits. While it’s parameters are ever-evolving thanks to advancements in artificial intelligence, automation, and industry-leading tools, its core principles remain the same.
In the context of hospitality, revenue management involves promoting the most suitable accommodation to the right clients at optimal prices and times through targeted distribution channels. Essentially, it offers a cost-effective solution while ensuring customer satisfaction.
You’ll often need to leverage analytics and data points to develop your appropriate strategies. Here are some of the most common ways properties may do this:
- Predicting demand
- Determining behaviors (such as peak booking periods)
- Understanding consumer spending habits
- Developing dynamic pricing packages
- Analyzing competitors' pricing strategies using business intelligence
By understanding these concepts, the management team can make informed decisions while ensuring that the revenue generated is utilized in the most efficient manner possible. In essence, revenue management involves addressing the "who, what, where, why, and how" of the hotel industry.
History of revenue management
There are many theories as to where modern revenue management comes from. Some trace it back to the airline industry in the 1970s when British Airways’ predecessor, BOAC, started offering early-bird bookings when they noticed leisure travelers were more price-sensitive than their business counterparts.
The strategy posed some issues for inventory control. Filling the plane with leisure travelers meant they were no longer taking advantage of higher revenue from business travelers, who also tended to travel more often. This conundrum over the early-bird promotion is what made way to what is now known as revenue management across the travel sector, soon influencing hospitality sector as well.
Why is it important in the hotel industry?
Revenue management is important to hoteliers because it enables them to maximize revenues and yields through smart technology and big data. Its primary goal is to anticipate market demand and respond to market changes efficiently.
For modern hoteliers, investing in breakthrough technologies and powerful systems that leverage intelligent automation to increase yield, grow revenue flow, and enhance the guest experience is crucial. The best place to start? Adopt new strategies and systems such as advanced revenue management to stay competitive and ensure significant business success.
The revenue manager’s new functions
The duties of revenue managers are evolving due to improvements in information technology, which are creating new business opportunities. They now undertake various commercial and marketing roles, while the most arduous processes are automated.
Adopting AI in the hospitality industry
Using automated communication such as social network instant messages, chatbots, and virtual assistants enables hoteliers to provide a superior guest experience and address issues promptly. It also facilitates data analysis and insights to enhance strategies such as dynamic pricing.
Highly customized experience
Personalizing experiences and prices is made possible through powerful tools like a property management system, channel manager, and more. These tools make it feasible to tailor products and services based on guests’ preferences and lifestyles.
Hospitality cloud computing
Nowadays, hotels need to embrace cloud computing due to its agility (faster data access and real-time capabilities) and reachability (worldwide access across multiple devices). Implementing cloud solutions in this industry provides a significant competitive advantage over other hotels. Firstly, it enhances the guest experience by digitalizing operations and enabling customized offers. And secondly, it reduces hotel costs and boosts productivity.
Direct bookings
Revenue management is crucial for increasing direct bookings and driving efficiency. It serves as a valuable tool to boost sales, achieve higher profit margins, and ultimately reduce intermediary costs.
The perfect combination
Integrating revenue management into a PMS is a great idea for your business. These innovative solutions enhance the modern hospitality experience while improving management efficiency and delivering higher quality services.
Social networks
Thanks to social media, guests have instant access to reviews, videos, photographs, and more. This makes social networks a valuable information source for revenue management and decision making.
What is the difference between Revenue management and yield management?
Revenue management and yield management are similar, but the scope and application are different. Revenue management has a broader scope than yield management, encompassing capacity management, variable pricing, and inventory control. Yield management, on the other hand, focuses on optimizing revenue generated from hotel rooms.
While revenue management is focused on optimizing the entire revenue generation process with the aim of achieving maximum revenue, yield management focuses on maximizing revenue by selling the right product to the right guest at the right time for the right price.
What is total revenue management?
Total Revenue Management focuses on optimizing all potential revenue sources, rather than just room rates. It’s a more holistic approach to revenue management, which aims to boost a hotel’s overall revenue. It’s also a more comprehensive approach to revenue management, because it considers ancillary revenue and other sources of revenue that aren’t solely from room rates.
It helps to align all departments to work towards a common goal of maximizing overall revenue, whether that be marketing, sales, operations or finance. This means the front desk will help push upselling and additional services, and the marketing team will focus on creating campaigns to drive this additional revenue from different sources.
The revenue management process step by step
Let’s take a step-by-step overview of the revenue management process.
Market analysis
Begin by analyzing various segments based on demographics, traveler type, and booking behavior. Study their demand patterns in relation to market trends, historical booking data, and other external factors affecting demand. Next, examine your competitive set to analyze their pricing strategies, occupancy rates, and positioning. Conduct a SWOT analysis to assess the strengths, weaknesses, opportunities, and threats of your business and your competitors.
Demand forecasting
Practice forecasting to gain insight into future demand and any macro or microeconomic factors affecting the market, such as seasonality, economic conditions, or special events that may impact demand for each segment.
Inventory management
Next, determine pricing tiers based on factors like room type, booking window, day of the week, and demand level. Decide on pricing strategies such as deals, packages, discount pricing, or bundling to cater to various customer preferences. Continuously monitor competitor pricing to remain competitive.
Pricing strategy
Then it’s time to determine pricing tiers based on factors like room type, booking window, day of the week and demand level. Then decide what pricing strategies you will use whether it’s a deal, a package, discount pricing or bundling to attract different customers with different pricing needs. Make sure you continuously monitor competitor pricing so that you can remain competitive.
Optimize revenue and distribution
Utilize your PMS and other technology to improve pricing decisions, analyze data, and update revenue strategies regularly. Track KPIs such as RevPAR, ADR, and occupancy rates to evaluate the performance of your revenue management strategy and adjust pricing to align with market conditions and demand fluctuations.
Evaluate the performance of each distribution channel and allocate inventory accordingly to minimize distribution costs and maximize revenue. Continuously analyze results to gauge performance and make necessary adjustments, and experiment regularly to drive ongoing improvements.
What are the most common revenue management strategies in hospitality?
Hoteliers share common procedures and metrics, but each property requires a unique revenue management strategy tailored to its competitive environment, differentiating factors, and targeting customers without simply imitating competitors. These strategies aim to enhance existing revenue streams, attract ideal customers, and offer competitive pricing to encourage repeat bookings. Let’s explore a few effective strategies to consider.
Understanding seasonal variations
The hospitality sector experiences seasonal fluctuations, meaning booking rates naturally vary throughout the year. Advanced management tools are crucial to understand these fluctuations and predict factors like occupancy rates and return on investment (ROI).
Seasonal changes can also affect other aspects such as staffing levels, promotional strategies, and guest spending patterns. This highlights the importance of embracing the next key strategy.
Developing dynamic pricing models
As mentioned earlier, competition is fierce in the hospitality industry, so price is a crucial factor. Guests aren't just seeking quality products and services; they're also concerned about affordability when searching for accommodation.
This is why online aggregators like TripAdvisor and Booking.com often base client reviews partially on value for money. Properties should therefore adopt a dynamic pricing structure to accommodate seasonal variations, while demonstrating an understanding of the average visitor's needs.
Embracing the digital edge and the Internet of Things
We're living in an increasingly digital community, so a significant part of revenue management should involve adopting the latest services. Examples include:
- Online bookings
- Virtual agents
- Downloadable smartphone apps
- A strong social media presence
- A clear, concise, informative, and attractive website
Consider the impact of the Internet of Things (IoT) on daily life and its relevance to hospitality. Customers now expect digital amenities like location-based recommendations, hyper-personalized rooms, digital key fobs, predictive maintenance, and scannable QR codes offering discounts.
Promoting and selling ancillary products and services
One mistake that newer hotels often make is believing that their main objective is simply to offer rooms to clients. Effective revenue management should aim to elevate a property head and shoulders above the competition. This is why other on-site amenities should be promoted with equal enthusiasm.
Guests could be provided with the ability to purchase on-site items such as towels, soap, and bathrobes. Hotels could implement promotional campaigns for popular branded restaurants. Some properties may even partner with nearby third-party companies, such as tourist agencies.
Sponsoring events and attractions
The hospitality and entertainment sectors are closely intertwined. This is why it makes perfect sense to offer guests additional options during their stay. One well-known example is to provide clients with travel discounts when using public transportation.
Still, there are other strategies directly related to on-site revenue management. Hotels equipped with meeting halls can rent out these locations to hold business seminars and conferences. Not only can these and other actions represent a welcome source of additional income, but they’re also all excellent ways to increase loyalty and overall brand awareness.
Proactively analyzing important hotel metrics
Finally, we should address the more technical side of revenue management. Managers and stakeholders need to regularly check how their property is performing. It's always better to ask, "how are we doing?" rather than "how did we do?"
This is why the following metrics should be taken seriously:
- Overall occupancy rates
- ADR
- RevPAR
- Gross operating profit per available room (GOPPAR)
- Revenue per available seat per hour for on-site restaurants (RevPASH)
- New KPI comparing room revenue with total inventory (ReRTI)
As some of these variables can be complex, an increasing number of properties are opting to outsource these services to third-party revenue management software solutions.
The value of revenue forecasting
Revenue forecasting is super beneficial for business planning and strategy, giving you the ability to make predictions about future demand based on analyzing past trends. Here are some of the key values that come with it.
Allows for strategic planning
When forecasting revenue, your hotel can better make strategic decisions to plan for growth and expansion based on projected revenue. This, in turn, allows you to better allocate resources to the sectors where the highest projected revenue is located.
Better management of finances
The more accurate your budget predictions, the easier it is to align budget with expenses for better cash flow management. This way, your hotel is sure to have adequate cash flow and resources for each department’s needs.
Operational efficiency
By predicting demand, hotels can better practice inventory management. This also means you can better plan operational capacity to meet the demand at any given time of the year, without being overstaffed or understaffed. Overall, your hotel can be more economically efficient by having only the necessary resources available at any given time.
Sales and marketing
For the sales department, forecasting helps with the creation of realistic sales targets based on projected demand. And marketing can support those efforts by creating campaigns targeted at increasing demand during low season and identifying the right target audiences for each season. Creating targeted campaigns also helps with getting the most return on investment from campaigns.
What are the main metrics & KPIs?
There are many metrics and key performance indicators that can be used to measure the effectiveness of your revenue management strategies. Some of those metrics are:
Revenue per available room (RevPAR)
RevPAR is calculated by dividing total room revenue by the total number of available rooms in a given period. This metric helps your hotel understand how effectively you are generating revenue from the available inventory, which, in turn, informs your distribution strategy and optimizes revenue management.
Average Daily Rate
ADR is the average price paid per room sold. This figure can be calculated by dividing the total room revenue by the number of rooms sold during a certain period. ADR helps your hotel see how effective your pricing strategies are and the potential for generating revenue.
Occupancy rate
The occupancy rate can be calculated by dividing the number of rooms sold by the total number of available rooms, then multiplying by 100. This rate is expressed as a percentage of available rooms in a certain period, allowing you to understand demand and how well inventory is being utilized.
Cost per available room
CPOR helps control and optimize costs by indicating how much of your costs are being incurred per available room.
Profit margin
Profit margin is another important metric to look at, indicating the percentage of sales that is pure profit. It’s important to know this number to see how much revenue you are generating based on your strategies.
The best Revenue Management tips
Revenue management is an art, and to be at the top of your industry it’s important to play the game to your advantage. Here are some tips to help your hotel succeed.
Experimentation is key
Your hotel might be hesitant to try new things if certain strategies are already working for you. In a dynamic industry like hospitality, however, it’s important to be adaptable and try new things. Experimentation can help you better understand the market and identify what it is that your guests are looking for and better understand their behavior and adapt over time to new trends.
Take a holistic approach
The more your team can collaborate across departments, the more successful your revenue management strategies will be. Taking a holistic approach across operations, marketing, and sales will help solidify the idea of one team, one goal. Plus, the more minds work together, the greater the chances of success. A holistic approach that works across sectors will likely be a full funnel approach.
Don’t be shortsighted
It’s easy to have a myopic idea of revenue management success. Hoteliers want to see results fast, but fast doesn’t necessarily lead to long-term success. Keep an eye on the goal but design your revenue strategies to work for you to stand the test of time, making your brand more consolidated and trustworthy.
Adjust and repeat
Once you’ve experimented, thought long-term and taken a holistic approach to revenue management, it’s important to step back and examine your key performance metrics. Is there room for improvement? Should you change anything? If the answer is yes, adjust and repeat. With each iteration, there is no doubt your revenue management strategy will be stronger. Practice makes perfect!
Why is revenue management software important?
Revenue management software is important because it can help to take stress off your staff by automating their efforts. This also reduces the chance for human error, which can potentially be costly to your bottom line. Finally, it helps to optimize revenue streams, improve operational efficiency and gives you enhanced forecasting and planning thanks to advanced algorithms and historical data.
The better your hotel can utilize technology to leverage its revenue management efforts the greater your hotel’s competitive advantage, ensuring rate parity across distribution channels and preventing loss. By continuously monitoring market trends and competitor rates, your hotel can further stay ahead of the competition, optimizing inventory and enhancing profitability.
How to choose a Revenue Management System?
Choosing the right RMS is crucial for a successful operation. Let’s explore some key factors when selecting the right hotel software for your property.
Identify your needs
When selecting an RMS, it’s crucial to consider your property’s unique requirements. Revenue management isn’t a one-size-fits-all decision. Factors such as the size of your property, its structure, target market, distribution channels, and existing software infrastructure (PMS, channel manager, etc.) should all be considered when choosing the system that best suits your needs.
Look at the features
As mentioned earlier, every property has unique needs, so essential features can vary. Some functionalities to consider include demand forecasting, dynamic pricing, channel management, seamless integration with other software, and scalability.
Research and evaluate
Once you've determined your unique needs and key functionalities, start researching and comparing different revenue management systems. Create a spreadsheet to note down key features, technology, and compatibility with your existing systems to ensure smooth integration. Consider user experience and usability to make your staff's work easier. Evaluate scalability to accommodate your property's growth and evolving business needs.
Consider cost and ROI
When researching, consider costs like upfront fees, subscription costs, implementation expenses, training costs, and the potential return on investment. Evaluate the tool's value proposition to understand how it will contribute to revenue growth, cost savings, and improved operational efficiency.
Conclusion
Revenue management is critical for achieving long-term success. It's essential to continually improve your revenue management strategies that align with the evolving needs of your hotel and customers to stay ahead of the competition.
Artificial intelligence and automated processes play a vital role in simplifying and automating hotel operations, creating memorable guest experiences, and improving business profitability.
Download our guide How to Diversify Hotel Revenue
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