Industry  |  6 October 2021  |  Eva Lacalle  |  6 minute read

What is revenue management and why is it important?

what is revenue management
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This is a question that hoteliers and property owners have redefined over the years in accordance with the latest strategies and technologies. Not only does effective revenue management provide a clear road map in terms of pricing and optimization, but it also offers a means by which a hotel can better gauge its success.

Therefore, there are many factors to take into account in order to adopt the most effective approach. This article will take a basic look at revenue management and define some of the most common practices so that stakeholders can make the right decisions at the right times.

 

What is revenue management?

Revenue management is a business technique that enables the optimization of your inventories and maximizes your profits. Its exact parameters evolve over time due to new artificial intelligence systems, processes, automation, and the general advancement of industry-leading tools, but at its core it remains the same.

It involves promoting the most suitable accommodations to the appropriate client at the right prices and at the right times through the use of targeted distribution channels. This provides a cost-effective solution while still helping to ensure customer satisfaction.

This will often require the use of analytics and similar data points in order to develop the most appropriate strategies. Here are some common factors that may be analyzed:

  • Predicting demand
  • Determining behaviours (such as the times of the year with the highest booking rates)
  • Understanding consumer spending habits
  • Developing dynamic pricing packages
  • Analysis of competition’s pricing strategy thanks to business intelligence

Understanding these concepts will allow management to make informed decisions while ensuring that any revenue generated can be used in the most efficient manner possible. In other words, revenue management depends upon addressing the "who, what, where, why, and how" of the hotel industry.

 

Why is revenue management important in the hotel industry?

Revenue management is highly important to hoteliers because it allows them to maximize revenues and yields, using smart tech and big data. The main aim is to foresee market demand and react to changes in the market efficiently.

Without a doubt, these are challenging times for the hospitality industry. In that sense, it is important to invest all our efforts into breakthrough technologies and powerful systems that apply intelligent automation to boost yield, grow revenue flow, and enhance the guest experience.

Therefore, it’s essential for the hotel industry to adopt new strategies and systems such as advanced revenue management in order to stay afloat and reinvent itself, providing hoteliers around the world with major business success.

The revenue manager’s new functions

The revenue manager’s duties are changing over time due to the information technology improving and, therefore, it provides us with new business opportunities. Now, they have undertaken a series of commercial and marketing roles, while the most arduous processes are automated.

Adopting artificial intelligence in the hospitality industry

Using automated communication channels such as social networks’ instant messages, chatbots, and virtual assistants, allows the hotel industry to create a superior experience for guests and solve problems instantly.

Also, this helps to analyze and understand the data in order to improve some strategies like dynamic prices.

Highly-customized experience

Personalizing experiences and prices is possible through the use of powerful tools such as a PMS (property management system), channel manager and so on. In such a way,  it is possible to transform products and services based on guests’ preferences and lifestyle. 

Hospitality clouds computing

Nowadays, hotels need to be in the cloud because of its agility (faster data access and simultaneity) and reachability (world-wide and multi-device). In other words, implementing cloud computing solutions within this industry gives a huge competitive advantage over other hotels. Firstly, it improves the guest’s experience due to the digitalization of all operations and customized offers. Secondly, it brings down hotel costs and higher productivity. 

Direct bookings

Revenue management is crucial to build direct bookings. In addition, it can be a useful tool to be more efficient, boost sales, get higher profits margins, and thus save intermediary costs.

The perfect combination

Integrating revenue management (RM) into a PMS would be the best idea for your business because they’re innovative solutions that provide a better, more modern hospitality experience, and at the same time,  greater management and quality services. 

Social networks 

Thanks to social media, guests have instant access to any information such as reviews, videos, photographs, feedback from others etc. This has led many organizations to consider it as valuable information for revenue management and decision making.

why is revenue management important in the hotel industry

 

What are the most common revenue management strategies in hospitality?

Within the industry, all hoteliers still use common procedures and metrics, but each property requires their own special revenue management strategy. It should focus on its competitive environment, differentiating factors, and ideal customers – without imitating competitors. They are intended to improve the existing revenue stream, to attract the right customers, and to offer highly competitive prices (ensuring return bookings). Let’s take a look at a handful of effective strategies to consider.

Understanding seasonal variations

The hospitality sector is seasonal. In other words, booking rates will naturally vary depending upon the time of the year. Currently, It’s important to have advanced management tools to appreciate these fluctuations to better predict factors such as occupancy rates and return on investment (ROI).

Seasonal changes can also impact other concerns such as the number of employees, the types of promotions that are being offered, and how much money guests are willing to spend at any given time.This point also serves to lead us into the next main strategy that should be embraced.

Developing dynamic pricing models

As mentioned previously, competition is rife throughout the hospitality industry. This is why in many cases price is crucial. Guests are not only looking for quality products and services. They are just as concerned about how much they can afford to spend when searching for accommodation.

These are some of the very same reasons why online aggregators such as TripAdvisor and Booking.com will partially base their client reviews on value for money. Properties should therefore adopt a more dynamic pricing structure. This will help to account for the seasonal variations mentioned above while simultaneously highlighting the fact that management appreciates the needs of the average visitor. 

Embracing the digital edge and the Internet of Things

We’re living in an increasingly digital community. Therefore, it stands to reason that a portion of revenue management needs to revolve around adopting the latest services. A handful of examples include (but are certainly not limited to):

  • 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) in daily life and then think about how it also pertains to hospitality. Customers are now becoming accustomed to digital amenities such as location-based recommendations, hyper-personalized rooms, digital key fobs, predictive maintenance, and scannable QR codes that offer discounts.

Promoting and selling ancillary products and services

One mistake that can often be made by newer hotels is the belief that their main objective is simply to offer rooms to their clients. While this may represent the core of the organization, we need to remember that effective revenue management should always seek to rise a property head and shoulders above the competition. This is why other on-site amenities should be promoted with equal enthusiasm.

The main takeaway here is that revenue management should also focus on any other amenities that may be present. Guests may be provided with the ability to purchase on-site items such as towels, soap, and bathrobes. A hotel could choose to implement a promotional campaign for a very popular branded restaurant. Some properties may even be able to partner with nearby third-party companies (such as tourist agencies) in order to offer guests the ability to visit nearby locations.

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 in order to hold business seminars and conferences. Not only can these and other actions represent a welcome source of additional income, but they are also all excellent ways to increase loyalty and overall brand awareness.

Proactively analysing important hotel metrics

Finally, we should mention the more technical side of revenue management. After all, managers and stakeholders need to be able to appreciate how their property is performing on a regular basis. It's always much better to ask "how are we doing" in contrast to "how did we do?". This is why the metrics listed below should always be taken seriously:

  • Overall occupancy rates
  • The ADR (average daily rate)
  • The revenue associated with each room (RevPAR)
  • The gross operating revenue attributed to each room (known as GOPPAR)
  • In terms of on-site restaurants, how much revenue each seat can potentially generate per hour (sometimes referred to as RevPASH) 
  • New Kpi that compares a room with the total inventory (ReRTI)

As some of these variables can be confusing, a growing number of properties are choosing to outsource such services to third-party revenue management software solutions.  

Conclusion

Revenue management is not something to be taken lightly to achieve long-term success due to hoteliers handling historical and current data. It also should be in line with dynamic strategies, the needs of your hotel and customers.

It goes without saying, of course, that artificial intelligence and automated processes play an important role in this sector. These systems have helped to simplify and automate all hotel operations, creating more memorable experiences as well as better profits for business.

You know how highly competitive our industry is. It’s essential to make any revenue management improvements sooner rather than later in order to remain one step ahead of the game.

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Eva Lacalle
6 October 2021

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