What is revenue management?
Revenue management is a business technique that optimizes inventory and maximizes profits. Its parameters evolve over time with advancements in artificial intelligence, automation, and industry-leading tools, but its core principles remain consistent.
This approach involves promoting the most suitable accommodations to the right clients at optimal prices and times through targeted distribution channels. Ultimately, revenue management offers a cost-effective solution while ensuring customer satisfaction.
This often involves leveraging analytics and data points to develop appropriate strategies. Here are common factors that may be analyzed:
- Predicting demand
- Determining behaviors (such as peak booking periods)
- Understanding consumer spending habits
- Developing dynamic pricing packages
- Analyzing competitors' pricing strategies using business intelligence
Understanding these concepts will enable management to make informed decisions while ensuring that 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.
Why is revenue management 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. 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 (RM) 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.
The revenue management process step by step
Let’s take a step-by-step overview of the revenue management process.
1. 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.
2. 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.
3. 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.
4. 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 remain competitive.
5. 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. 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, making price 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.
What are the main metrics & KPIs in Revenue Management?
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 of time. 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.
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
.webp)