What is Revenue Management in Hospitality?

Revenue Management is an essential part of hospitality industry administration and success today, having a significant impact on the growth and sales of a business.

For the longest time, it was considered a side offer or supplemental business process. Now, business owners and hoteliers have realized the importance of such practices and strategies for exceptional management of clients, pricing, and sales in the hospitality industry.

Today, people understand how pricing strategies, segmentation and optimization, awareness of who’s the competition, and knowledge of market tendencies can affect the overall performance of a hotel, restaurant, or other businesses in the hospitality industry.

Here you will read about what is revenue management exactly, its origins and importance to the hospitality industry, and the best strategies for running a successful revenue management operation.

What is Revenue Management

Revenue Management looks at performance data and analytics to create forecasts that predict consumer behavior. By using this data, hoteliers can then decide pricing, distribution, marketing, and availability.

These forecasts are usually related to average weather conditions at specific times of the year, the spending habits of the target audience, tourism numbers, and bookings during the current and past years.

In the hospitality industry, the best way to define revenue management 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.” By gathering data from previous sales, revenue managers can predict how to optimize their sales strategies and increase the revenue of a given establishment, maximizing its profits.

The analyzed performance data gives insight into how customers think and act, what they value most, and how much they’re willing to pay for an experience or service. With that information in hand, hotels can understand the demand and match the supply accordingly.

The result of that is, for example, an awareness of when there’s a higher demand for rooms, allowing the hotel to charge higher prices. It can also tell them when the demand is low, meaning they should work with discounts and special rates to attract more customers.

The Origins of Hospitality Revenue Management

Airline industries first developed the idea of revenue management to predict the behavior and travel tendencies of their clients. This allowed them to forecast the times of the year (and even days of the week) when there was a higher demand for flights, adjusting prices accordingly.

After a while, this strategy became helpful to any industry with customers who would pay different prices for the same product, depending on availability and seasonality. This includes the hospitality business.

The first hotel chain to adopt revenue management as a parameter for price adjustment was the Marriott Hotels company. Seeing their success and increase in overall revenue and profits, other hotels started to adapt to this new pricing model, making it an essential aspect of the hospitality industry.

The Importance of Revenue Management

Revenue management is extremely important to hotels because it allows it to find the maximum possible revenue that can come from room reservations, as well as other areas of the establishment. It allows hoteliers to better sell perishable hotel rooms for the best price possible at a given time.

Fixed costs at hotels are larger than variable costs. This means that, even at low occupancy, costs like electricity and staff wage are constant. Having a large occupancy rate and an optimized cost per room can allow for the hotel to cover such costs and to reach high profits.

Also, revenue management can help improve overall costumer service, not only monetary growth. By gathering data about costumer preferences and habits, hotels can better understand what additional services they should be providing their guests. Even though those may not increase profit, they hook individuals and increase the chance of them coming back or recommending the venue to other travelers.

Reducing unnecessary costs, balancing the staff and improving the efficiency of the hotel are also consequences of revenue management.

Revenue Management vs. Yield Management

Although these two concepts may be similar to one another, there are differences in the complexity of both, and what kind of data is analysed in each situation.

For yield management, the goal is to come up with a price strategy that allows for hotels to reach their maximum turnover. Analysts here use data gathered from previous booking information and from the competition to come up with the ideal price for the ideal guest.

This distinction in price is reached by looking at the length of the stay, how many months in advance it is being booked, and what time of the year the room is booked for. It is solemnly based on inventory control.

Now, for revenue management, the data analysis goes beyond optimizing the prices of a room. Here the research goes into more detail regarding the overall revenue of the hotel. They use Key Performance Indicators (KPIs) to create forecasts that encompass other venues at the hotel, like the spa, activities, and restaurants.

Revenue management includes different market segments of consumer behavior to their forecast, going beyond the goal of increasing revenue.

Best Revenue Management Strategies

There are many strategies to revenue management that can help hotel owners optimize their prices, driving up profits:

Customer segmentation

Knowing your costumer profile is essential for adapting your marketing strategy and attracting them to your hotel. People who go on family vacations want a different experience than young adults who are on a budget backpacking trip, for example.

It is essential to study the demographics of potential costumers, as well as the average duration of their stay, their preferred booking channel, purpose of the trip, and many other factors. This type of data allows revenue managers to formulate accurate forecasts to know what prices they should charge potential consumers, and how much they will be willing to pay for a room at a given time.

Different consumer segments have different spending habits and trends in their behavior. Mapping it out will allow you to optimize your room rates according to each segment.

Knowing the Market and Competitors

Aside from costumer segmentation, hoteliers should also study the overall hospitality market and the competition around them. Where are the competitors located, what do they offer, and how much do they charge? What are the clients saying about them?

Regarding the market as a whole, what are the outside factors that affect consumer decisions around you? What are the travel and hospitality trends among those who are your target audience?

Demand forecasting

Consumer demand is never fixed. It changes according to tendencies in the market, season, important events at a given area, economic situation, etc. That’s why it is important to create a demand forecast based on past and present consumer behavior. This allows for hoteliers to predict what their future demand will be, adjusting prices and supply accordingly and maximizing their revenue.

By having a notion of what future demand will look like, hotel owners can start investing on marketing strategies such as promotions, the most efficient distribution channels, and the prices for rooms.

Yield management serves to define the highest price for rooms according to demand, all based on the study and analysis of past and present data.

Pricing

This is where hoteliers apply the basic principles of supply and demand. If there’s a high demand for hotel rooms at your area, you should charge higher rates from each room. The opposite also applies for the situation: if there is low demand, you should work with lower rates and discounts.

Price flexibility is what makes a hotel competitive. Revenue management allows hotel owners to see what are the highest prices they can charge their costumers before they become too expensive, and no longer competitive. It does it by analysing consumer trends, seasonality, and distribution channels to help hoteliers come up with the best prices to drive up profits.

Distribution Channel Optimization

Clients tend to book hotel room through different distribution channels, and some are more profitable to the hotel then others. Online travel agencies (OTAs), Global Distribution Systems (GDSs), the Hotel’s own website, and metasearch engines are some of the most used channels today.

It is important to develop a strategy to divide the room inventory according to the profit each channel provides. OTAs, for example, charge a commission for every room booked, but they also attract a lot of costumers. By forecasting the results of different channels, hoteliers can distribute inventory in a way that will maximize profits. They should also charge different prices per room, according to the channel.

Direct Bookings are the most profitable of all distribution channels, because they do not need to go through third-party price adjustments.

* Berny Huber -

World travelled Swiss / Canadian business manager and consultant with over 30 years of experience. Trilingual (E, F, G). 

Certified Swiss Chef, Diploma from the Swiss Hotel Management school of Lucerne (SHL), 

Master of Business Administration (EMBA) from the university of applied science of Chur (HTW Chur), Switzerland.

Senior Director Global Business Development of ICRME (International Center of Revenue Management Education), 

Lecturer in Revenue Management, Ecology, Investment Psychology and Quality Assurance at the Swiss Hotel Management school of Lucerne(SHL Schweizerische Hotelfachschule Luzern). Various certificates from Cornell University: Digital Marketing, Hotel Revenue Management, Advanced Hospitality Revenue Management (Pricing and Demand Strategies). Currently working on the Revenue Management 360 certificate

Some Sources Used:

EHL Hospitality Business School

REVFINE

HotelTechReport 

Altexsoft 

SHL