What is hotel revenue management?
Robert G. Cross, the author of the book Revenue Management: Hard-Core Tactics for Market Domination defines revenue management as “the art and science of predicting real-time customer demand at the micromarket level and optimizing the price and availability of product.”
Simply, revenue management means predicting consumer behavior to sell the product at an optimal price every day. Therefore, the definition of hotel revenue management is straightforward: selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission efficiency. Sometimes revenue management is called yield management, but these terms aren’t interchangeable.
Revenue management is defined by interconnected components, which are
- Customer segmentation,
- Demand forecasting,
- Inventory management,
- Yield management, and
Each plays a crucial role and greatly impacts the ultimate financial result of a hotel, so let’s describe them one by one.
ELEMENTS OF REVENUE MANAGEMENT
Customer segmentation is an important part of marketing and pricing as it allows you to define groups of travelers that visit your hotel and address them differently. For example, business travelers have different needs and preferences than backpackers on a budget, so you have to know your customer and be ready with the offers that fit each group.
However, there are more possible categories that you might want to identify and market to than just “business vs leisure”. Some typical segmentation criteria are
- demographic factors (age, gender, marital status, etc.),
- the trip’s purpose (business, sport or entertainment event, family vacation, wedding, etc.),
- stay duration,
- traveler status (new, returning, or regular),
- booking channel (direct, through an OTA, or walk-in), and so on.
Each customer group provides opportunities to gain extra profit — if you do it right. For example, you might offer discounts to your loyal customers, create tour packages for families, or negotiate rates with companies that have many business trips.
Further analysis can help you discover important trends in customer behavior. You might find out that some customer groups have a high rate of cancelations or no-shows, so it makes sense to focus your marketing efforts on other segments. Here, the technique that can help predict such disruptions is demand forecasting.
Customer demand is never static. It fluctuates depending on different factors such as the season, important events in the area, or even macroeconomic conditions. Demand forecasting is the analysis of information about past demand, as well as current and future events across all the customer segments. Based on this data, you can predict when the demand will increase or decrease, and develop the right pricing, marketing, and distribution strategy.
This part of revenue management is especially important because it serves as a basis for setting prices, choosing distribution channels, creating promotions to engage more guests, or launching other marketing activities to increase occupancy. To learn more, visit our post about machine learning approaches to price forecasting.
The goal of yield management is to define customer behavior and set the best price to sell rooms with maximum profit. This concept appeared much earlier than the concept of revenue management and is narrower. While revenue management is focused on the whole revenue of a business, including ancillary revenue and spendings, yield management focuses on the price and the volume of sales.
Yield management is closely related to both inventory management and demand forecasting since it aims at selling the greatest number of rooms at the highest possible price according to customer demand. Here are some of the tactics and tricks you can use to play around with your inventory and maximize revenue.
Maximum length of stay (MaxLOS) restricts reservations to a maximum duration. It can be used to limit the availability of discounted or promotional rates.
Minimum length of stay (MinLOS) restricts reservations to a minimum duration. It’s used during high-demand periods to encourage longer visits.
Closed to arrival means that no reservations are allowed with arrival on a particular day. It can be applied to lighten the workload of the front desk team on a busy day but is definitely risky as it can turn away some of the guests.
Allotment is giving your partners (such as wholesalers, travel agents, or event organizers) a pre-negotiated number of rooms to sell, often at a discounted rate.
Last room availability relates to a contract between a company and a hotel that fixes the room rate. It is done to support last-minute reservations for business trips and guarantee room availability for a pre-negotiated price.
Inventory management or distribution management
In revenue management, the term inventory refers to the product (i.e. rooms) sold. A room is considered a perishable product with a certain “expiration date”. It means that if you do not sell a room for tonight, you can’t sell it later. And if a room is not sold, a hotel loses money.
So, another core aspect of revenue management is choosing the right mix of distribution channels. The main channels you deal with are probably GDSs, OTAs, bed banks (or wholesalers), and metasearch engines. Using demand forecasting results for various customer segments and channels, you build the distribution strategy that will balance occupancy and revenue maximization.
For instance, hotels may use online travel agencies as the leading distribution channel, while making allotments for bed banks to fill in remaining rooms for a lower cost.
Price is one of the main factors impacting a guest’s decision to choose your hotel. Pricing, or setting optimal rates for your inventory, is the key to maximizing your revenue. You have to carefully analyze the market to understand your customer and see booking trends. That will help you build the right pricing strategy for your hotel.
Note that you have to analyze demand and set your rates well in advance so that you have everything ready for travelers who prefer to book early.
Pricing strategies and approaches
You already know that it’s a good idea to base your pricing strategy on customer demand forecasts and the different groups of guests that you can carve out. However, there are several approaches to price setting. Let’s see what the main ones are.
Dynamic pricing is about changing the room rates regularly (sometimes multiple times per day) according to market demand. Dynamic pricing strategies are built around selling the property for the best price possible. They are based on supply and demand ratio, as well as external and internal data. External data includes such data points as competitors’ prices, weather data, and booking patterns; while internal data includes segmentation, customer profiles, rates, etc.
Dynamic pricing strategies allow hotels to keep up with the market and maximize occupancy rate, as well as the other hotel revenue management KPIs (we’ll talk more about them in the next section).
Open pricing refers to creating different prices for reservations made by different guest segments at different time periods through different distribution channels, etc. Such flexibility allows you to maintain stable levels of occupancy and generate revenue even during low demand periods.
So, if dynamic pricing mostly focuses on the supply and demand balance, open pricing is more about varying profitability margins across segments and channels.
Open pricing requires building complex price matrixes based on accurate forecasts; however, it enables discount channels to generate revenue instead of closing them off.
Here’s an example to illustrate the concept. Imagine you have your standard room priced at $100 and your luxe suite at $200. But you know that there’s going to be an elite car show in the area so you can charge more for your luxes since they would be in demand. At other times, you expect a big business conference nearby, so you can discount the luxes to get them occupied together with standard rooms.
Additional pricing strategies
There is a wide variety of other pricing strategies that can be implemented (often in conjunction with one another):
Length of stay pricing can refer to either setting a minimum visit duration (can be effective during high-demand period) or offering a lower rate for longer stays (say, set a discount for reservations of more than 4 nights). The latter not only ensures higher occupancy, but might also lead to higher ancillary revenue.
Packages and value-added pricing is offering a bundle or package of services at discounted rates. You can include other hotel services in such packages (e.g., airport transfer, meals, spa, etc.) or partner with external providers (such as car rentals or tour agencies) to provide guests with special deals.
Cancellation policy can also impact your pricing strategy. For example, you offer higher prices with an opportunity to cancel the reservation and get a refund and vice versa.
Segment based pricing is setting different rates for different guest segments. For example, you can offer special rates or create special offers for those who book directly through your website (read on to learn more about the importance of encouraging direct bookings).
Exclusivity vs affordability are two opposite approaches when you either position yourself the highest (most exclusive) or the cheapest on the market. Depending on your property, you can promote yourself as a luxury place and target top-shelf travelers or as an affordable place for price-sensitive guests. Note that in the first case, it’s important to create and maintain an excellent reputation and also to be fully transparent with what you offer, letting your guests understand what they are paying for. In the second case, remember about the break-even point and don’t let high occupancy with low prices lead to losses.
FOR MORE INFO: https://www.altexsoft.com/blog/business/hotel-revenue-management-solutions-best-practices-revenue-managers-role/
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 try to 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 will make an effort to contribute towards success in this area. You may need to work with individual departments and their leaders, in order to explain why it is so important and how it can benefit the whole organisation 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 historic data. Although this data is perfectly valuable, its use can be hindered if there are significant changes to customer behaviours 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 behaviours or habits into account when making predictions about the future.
Remember to Place a Focus on Value
Answers to the question ‘what is revenue management?’ will often focus on the idea of 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 emphasise 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 especially useful 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 a number of further tips that are worth knowing when trying to optimise 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, prioritising mobile optimisation and actually creating a map of where you expect demand to come from. Read “8 Revenue Management Tips for Hotels” for more information.
Hotel revenue management courses will cover everything, from answering the basic question of ‘what is revenue management?’ right the way through 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 of the information you need to optimise financial results.
Take a look at “Hotel Revenue Management Courses: Information + List of Educators” for further information, along with a directory of some of the main educators who are actually offering these courses.
When you make revenue management a priority, it is often sensible to invest in a revenue management system (RMS). This is essentially a software solution, which will make various revenue management tasks easier and allow you to more easily maintain and access related information or data.
Read “Revenue Management System (RMS): What Are the Advantages?” for more information on what an RMS is and how it can help you, along with details about some of the specific advantages associated with these solutions.
There are a variety of different 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, the process of selecting your revenue management system becomes significantly easier.
Take a look at “RMS System: An Overview of the Most Important Features” for further information on the most important features to look out for, and details on why those features are so useful.
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 and much more. Total revenue management can be broadly viewed as the process of optimising each of these, to maximise profitability.
Read “Total Revenue Management: How Hotels Can Maximise Their Revenue” to find out much more about what total revenue management is, how it differs from the more conventional concept of hotel revenue management and why it is so important, along with some useful tips for implementing your own total revenue management strategy.
Hotel revenue management is an important topic and there is a lot to cover, from how to create accurate forecasts, through to how to make 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 very latest strategies, tactics, trends and tips.
For more advise, go to the “Hotel Revenue Management Category Page”
The Latest Hotel Marketing Strategies, Tactics, Trends and Tips
Your marketing efforts will have a huge bearing on how successful your hotel is, as marketing communications will be used by people to form judgements about your business and its values. On top of this, the decisions you make can influence how many customers you attract, the types of customers you attract, their expectations, and how much they are willing to pay. Check out our hotel marketing category page for strategies, tactics, trends and tips.
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FOR MORE INFO: https://www.revfine.com/what-is-revenue-management/