Revenue management is concerned with optimising financial results and is especially popular in industries like hospitality, which must contend with high fixed costs and a perishable inventory. For example, hotels have a certain number of rooms and fixed costs which must be met, regardless of how many rooms are sold. In such industries, revenue management is employed in an effort to predict demand and optimise inventory and price availability. When utilised correctly, this will ultimately result in higher revenue.
Quick menu:
- History of Revenue Management
- What is Revenue Management?
- Necessary Conditions for Revenue Management
- Revenue Management vs. Yield Management
- The Importance of Revenue Management
- All About Forecasting
- What is Forecasting?
- Why is Forecasting So Important?
- Useful Forecasting Tips
- Strategies for Revenue Management
- The Main KPIs for Revenue Management
- Revenue Management Pricing Strategies
- Further Revenue Management Tips
- Open Pricing Strategy for Your Hotel
- Explore Hotel Revenue Management Courses
- How Can a Revenue Management System Help?
- Features of a Revenue Management System
- What is Total Revenue Management?
- The Latest Hotel Revenue Management Strategies, Tactics, Trends and Tips
- The Latest Hotel Marketing Strategies, Tactics, Trends and Tips
- Revenue Management in Other Industries
History of Revenue Management
The history of revenue management can be traced back to the 1980s, originating in the airline industry. In order to optimise financial results, airlines began to introduce a concept known as dynamic pricing. Businesses like American Airlines found huge success in applying price discrimination techniques and anticipating consumer demand.
What is Revenue Management?
So what is revenue management, and what does it actually entail? Broadly, it can be described as the use of analytics, which helps to predict the behaviour of customers, so that product availability and price can be optimised in order to generate the maximum amount of revenue possible. Within the hospitality industry, the chief purpose is to increase revenue while selling the same number of products or services, such as hotel rooms. It is, essentially, about matching supply and demand and successful revenue management involves understanding how customers think and what their perceptions of value are. This may mean also refusing to sell a room today, so that you can sell it for a higher price tomorrow, but it might also mean recognising when demand is low enough that you should sell at a discounted price.
The Most Common Definition of Revenue Management is:
Selling the right product to the right client at the right moment at the right price via the right distribution channel with the best cost efficiency
Video “What is revenue management?”
Necessary Conditions for Revenue Management
In order for a business to employ a revenue management strategy effectively, a number of conditions must be in place.
These conditions are as follows:
• Different customers must be willing to pay different prices for the same service or commodity;
• The business must be some ability to predict the changing levels of demand ahead of time;
• Only a fixed amount of resources are available to be sold at any given time;
• A perishable inventory e.g. after a certain point, the resources can no longer be sold.
Revenue Management vs. Yield Management
Revenue management can be considered to be quite similar to yield management and indeed, many business owners confuse the two concepts. Yield management came first and is more tactical than strategic. It also has a narrower focus, as yield management describes the price optimisation part of the process. By contrast, revenue management considers the bigger picture more and may involve things like forecasting and in-depth analytics. To provide an example concerning the hospitality sector, yield management would be concerned with the sale of a hotel room, whereas revenue management may take into account the full implications, including areas of secondary spend and the cost involved in actually selling the room in the first place.
For more detailed information about the difference between revenue management and yield management, please also read the article“Revenue Management vs Yield Management”.
The Importance of Revenue Management
As a strategy, revenue management allows businesses to adopt a data-driven approach to decisions on what to sell them. It is a way of ensuring that informed decisions are made and your business does its best to drive revenue upwards, while selling the same amount of products and services as before. Revenue management is often concerned with predicting demand and optimising price and availability, in an effort to boost revenue. An even more professional approach is also to take into account all spend revenue per area per room and also take into account all distribution and/ or operational costs. This will give hoteliers an even greater insight into the actual performance of their hotel.
All About Forecasting
Forecasting can play a key role in revenue management strategies, but first, it is essential to know what forecasting actually is, why it is so beneficial and some of the best ways to optimise its uses.
What is Forecasting?
Forecasting refers to the practice of predicting future events, based on an analysis of past and present data. Within the hotel industry, this means looking at past performance data, wider industry data, and information available to your business right now. From there, forecasting typically relies on identifying trends.
Once trends have been identified within the data, they can be taken into consideration, alongside other information, in order to make more informed predictions about what the future will bring. This may mean forecasting future revenue generation, room occupancy rates, customer behaviours and much more.
Why is Forecasting So Important?
Forecasting is a useful tool for revenue management purposes, because it allows those involved with hotel management to anticipate future events and plan for them ahead of time. For example, you may be able to make adjustments to your expenditure if your forecast suggests you are going to generate less revenue than the previous year.
Accurate forecasts can be invaluable, because they allow hotels to prepare for bad news and mitigate damage, while also capitalising fully on high demand periods. Although forecasting is never 100 per cent accurate, it does mean key decisions can be taken based on trends and relevant information, eradicating some of the guesswork involved.
Useful Forecasting Tips
Below, you will find a breakdown of some useful tips that can assist you with your forecasting efforts.
1. Maintain Accurate Records
Good forecasting is reliant on accurate data, which is why it is so crucial that you commit to organising and recording information properly. In particular, for hotel revenue management purposes, you will want to maintain spreadsheets with revenue, profit, occupancy rates, room rates and other sales information. Ultimately, because forecasting depends on data, the quality of the records you keep can have a huge bearing on how precise your forecasts end up being.
2. Turn to Historical Data
One of the best tools at your disposal in terms of forecasting is historical data, because many patterns that can influence revenue management are repetitive. While it cannot provide you with complete certainty, if you notice that your hotel experiences much higher demand in June, July and August than at other times of the year, you can reasonably assume the same will occur again and the same applies for periods of low demand too.
3. Examine Data Already in the Books
It is important to keep in mind that the most reliable data you have available to you when attempting to make forecasts is the data that is in the books already. For hotels, this means room and restaurant bookings that have already been made, as well as any planned events that are scheduled within the premises. Essentially, data in the books can be seen as “what you already know for sure” and, at times, this information may contradict past hotel trends.
4. Remember Holidays and Events
Various holidays and events can have a significant bearing on levels of demand, and this can, in turn, impact upon your revenue management strategy. For instance, if there are upcoming events close to your hotel, you may be able to forecast higher levels of demand than would be usual at that time of year. At the same time, holidays like Christmas will often lead to increased demand for hotel rooms, so these must also be taken into account.
5. Monitor Rival Hotels and Resorts
Another external factor to consider when forecasting for revenue management purposes is the behaviour of your competitors. To do this, you will need to make sure you are aware of the various other hotels or accommodation options in the nearby area, as well as hotels in other areas that appeal to your target audience. Have any new competitors emerged? Have existing ones made changes that may attract more visitors? Have any rival hotels closed?
6. Additional Forecasting Tips
Furthermore, you need to take into account wider industry and market trends, and you will have to follow up on your forecast with different departments, so that strategies can be adjusted to maximise revenue generation. For instance, you may need to change the distribution channels you use, or the regions you target. For more forecasting tips, read the “9 Forecasting Tips to Improve Your Revenue Management Strategy” article.
Strategies for Revenue Management
Below, you will be able to learn more about some of the different strategies you can adopt for revenue management purposes, allowing you to optimise your hotel’s financial results.
Get to Grips With Your Industry and the Market
Getting to know the market you are in and fully understanding your own industry are prerequisites for successful revenue management. You must be aware of your competitors, not only in the hotel industry, but also in other areas where your business could potentially be impacted. You also need to understand hotel technology trends and other trends that are impacting your industry, along with your ability to appeal to customers.
Segmentation and Price Optimisation
Another useful revenue management strategy involves segmenting your customers into different types. Once you have done this, you can start to think about how each type of customer behaves, when they book, how they book and so on. The benefit here is that you can approach different customer types with different pricing strategies and marketing strategies, rather than trying to appeal to everyone with a single, uniformed approach.
Aim for Cross-Departmental Alignment
Hotels and other similar businesses achieve success when the various departments pull in the same direction, in order to achieve common goals, and this is relevant to revenue management too. Your overall approach here needs to be based on evidence and data, and you can use this to bring individual departments on board. From there, it is important that all departments then work together to create consistent messaging and experiences for customers.
Choose the Best Pricing Strategy for the Moment
When it comes to pricing strategies, it is important to select the right strategy for the moment you are in. There may, for example, be points in time where demand is low and the priority is simply to fill a room in your hotel. In such a moment, offering discount pricing makes sense. However, there may be other points where demand is high and you adopt a value-added approach, or alternatively, you may base your pricing on your competitors’ rates.
Make Direct Bookings a Top Priority
A key part of revenue management is using the right distribution channel to find the right customer, and while you want to reach as many people as possible, the priority should be to generate direct bookings when you can. When bookings are made directly, you do not need to pay commission fees or other fees to anyone else, maximising revenue. Special offers, loyalty programmes and a high-quality booking process are all ways to offer incentives for direct bookings.
Additional Revenue Management Strategies
There are a number of other revenue management strategies that are worth keeping in mind. Examples of this include everything from embracing digital marketing strategies like search engine optimisation and mobile optimisation, in order to reach more people, right the way through to enlisting the help of a freelance revenue manager, so you can optimise your strategy. Read “9 Revenue Management Strategies to Grow Your Hotel Business” to find out more.
The Main KPIs for Revenue Management
Ultimately, revenue management is about improving financial results. However, to do this, you need to understand how your hotel is performing. Below, you will find some of the most essential key performance indicators (KPIs) to monitor.
Occupancy Rate
A hotel’s occupancy rate describes the number of occupied rooms at a particular period of time, in comparison to the number of rooms that are actually able to be occupied. Essentially, the point of this key performance indicator is to identify how many of the available rooms have actually been filled, and this is expressed as a percentage.
Formula: Occupancy Rate (%) = Number of Occupied Rooms / Total Number of Available Rooms
Average Daily Rate (ADR)
The average daily rate KPI tells a hotel the average amount it is making in rental income per occupied room. It only considers rooms that are occupied through paid bookings, so will not include empty rooms, or rooms occupied by staff. It is a crucial metric for understanding how much money you are making, on average, from each room you sell.
Formula: ADR = Room Revenue Earned / Total Number of Rooms Sold
RevPAR
RevPAR is one of the most widely-used KPIs for hotel revenue management purposes and it stands for revenue per available room. This metric tells you the amount of revenue that is being generated per room, irrespective of whether those rooms are actually occupied. It is, therefore, a measure of your property’s overall revenue performance.
Formula: RevPAR = Room Revenue Earned / Total Number of Available Rooms
RevPOR
Revenue per occupied room, or RevPOR, shares similarities with the average daily rate metric, because it is also concerned with revenue that is generated from rooms that are occupied. However, while ADR is concerned with room rental income, RevPOR takes a wider view, factoring in things like breakfast, room service, spa services, etc.
Formula: RevPOR = Total Revenue from Occupied Rooms / Number of Rooms Sold
GOPPAR
The GOPPAR metric stands for gross operating profit per available room. By tracking and examining this, you can understand the real financial performance of your hotel, because it is focused on profit, rather than revenue. This factors in expenditure and is done based on the rooms available to be sold, rather than the rooms that have been sold.
Formula: GOPPAR = (Total Revenue – Total Expenditure) / Total Number of Available Rooms
All Revenue Management KPIs
To get the most from your revenue management efforts, it is best to track as many different key performance indicators as possible, as this will equip you with more information to use when making strategic decisions. Crucially, each KPI will tell you something slightly different, giving you a holistic view, and certain problems may be easier to spot using one KPI than with another. Check out “The Most Used Revenue Management KPI’s for Hotels” to learn more.
Revenue Management Pricing Strategies
Here, you will find a breakdown of some of the main pricing strategies that may be adopted for revenue management purposes. Each strategy has its own unique benefits, but some strategies are best deployed at specific times.
Forecast-Based Pricing
Pricing which is based on forecasting allows hotels to adjust their rates seamlessly, in line with anticipated demand. For example, when demand is expected to be high, the hotel can charge higher room rates, whereas, during times of low demand, the hotel can potentially fill rooms that would otherwise be left unoccupied by offering discounted rates. This strategy does, however, rely heavily on a high-quality forecasting strategy.
Rate Parity
The basic principle behind rate parity is to achieve consistent pricing across all available distribution channels. It is actually a requirement to list your hotel on certain online travel agency websites and it can help to generate trust from customers, because they will know they are all paying the same price for the same rooms. However, it does make it harder for hotels to use pricing to attract direct bookings and this might mean paying more commission to third parties.
Price Per Segment
Price per segment is another common strategy for revenue management purposes and involves selling the same rooms at different prices to different customer segments. For example, this might mean selling rooms at a lower rate to business customers, because they are likely to use corporate facilities. It may also involve selling rooms at a lower rate to travel agents, who will then sell them on to customers as part of package deals.
Discount Codes for Direct Bookings
Direct bookings should always be prioritised, because they allow you to take all of the money the customer spends, rather than paying a commission. One of the strategies hotels adopt to encourage this is to offer discount codes. These can be offered in advance, in order to attract bookings during times of low demand, but can also be offered upon check out, in order to encourage return custom and persuade customers to book directly next time.
Package Room Deals
Package deals allow you to offer discounts on sales of multiple rooms, which makes them extremely effective for attracting group bookings. This can help your revenue management efforts, especially at periods of time where you are looking to fill as many rooms as possible. Although you will be selling the rooms for slightly less than they would sell for individually, the guarantee of multiple rooms being sold is often worth it, especially when demand is low.
More Pricing Strategies
Aside from those mentioned, there are a number of other pricing strategies that can be of great use when attempting to optimise revenue. These include a length of stay strategy, where you may be able to encourage guests to extend their stay by offering a discount, as well as up-selling and cross-selling. To find out more about these strategies and how they work in practice, take a look at the “10 Pricing Strategies to Increase Your Hotel Revenue” article.
Further Revenue Management Tips
Below, you will be able to find some extra tips that will help you with your revenue management strategy.
Build a Culture of Revenue Management
One of the best ways to enhance your revenue management is to create a culture where revenue management matters to everyone. This means creating awareness within your hotel of what revenue management is, its purpose, and why it is so important to your hotel. When you create this kind of culture, you boost the chances of individual departments and employees utilising best practices for recording data and making evidence-based decisions.
Keep Pace With Changes in Customer Behaviour
While past data plays an important role in revenue management, you cannot neglect what is happening today and tomorrow. This is especially true when it comes to changes in customer behaviours and habits. For instance, you may notice that, when compared with five or ten years ago, more of your customers are booking online rather than through travel agents. Keep a close eye on changing habits and make sure your strategies are relevant for modern customers.
Emphasise Value Rather Than Price
It is not always possible to generate greater demand by lowering the price and it may not always be advisable to do so anyway. An alternative is to emphasise value rather than price. After all, people are willing to pay more if they are guaranteed a better level of service and a better overall experience. You can also provide extras, such as discounts on additional nights, free breakfasts, or other services, while keeping your prices where you want them.
Only Use Automation in the Right Places
Automation has a major role to play in revenue management, but it is important not to become overly reliant on it. While software can be used to make calculations instantly and algorithms can be set up to inform decisions, the best strategies require nuanced thinking. There may be times when you need to think outside the box, take chances, or try something new, and a human touch is going to be required for this.
More Revenue Management Tips
There are a number of additional revenue management tips to keep in mind, from mapping out where demand comes from, to make sure your website and booking engines are all fully mobile optimised. You can read more about these tips and gain an understanding of why they are important by reading “8 Revenue Management Tips for Hotels”.
Open Pricing Strategy for Your Hotel
An open pricing strategy moves away from the fixed modifiers associated with the BAR (best available rate) model that many hotels rely on, providing hotels with greater flexibility to change the rate they are charging for a room, based on the level of demand at the time, in order to maximise revenue.
This model also provides potential benefits for the customer, because it means the hotel has greater flexibility to price rooms away from the established BAR, which can sometimes result in a better rate for hotel guests, especially in times when it suits a hotel’s revenue management strategy to fill a room quickly.
Essentially, open pricing means many different incremental price points to be plotted against a demand curve. Pricing can be moved away from BAR when the situation requires it, or when it is beneficial to do so. This wider range of price points makes it easier to attract customers, meaning more rooms are filled and more revenue comes in.
Using a more fixed approach to pricing, hotels are sometimes required to close off potential distribution channels, or limit sales on particular days, even if customers are planning to stay longer. Open pricing provides freedom and avoids closing off distribution channels or promotional opportunities. You can find out more about this approach the benefits by reading “Open Pricing: Why Is It the Next Hotel Revenue Management Strategy?”
Explore Hotel Revenue Management Courses
If you are a hotel owner, general manager, or otherwise involved in key strategic decisions around revenue management, it may be beneficial to take a closer look at formal hotel revenue management courses. These will cover everything from the basics of revenue management, to the specific strategies and the best tools to use.
Read “Hotel Revenue Management Courses: Information + List of Educators” for more information on how these courses can benefit you, and for a list of some of the organisations that offer these courses.
How Can a Revenue Management System Help?
A revenue management system, or RMS, is a software solution, which allows you to more easily perform various revenue management-related tasks. The software can make use of data you input, as well as wider industry data, and perform real-time analysis of the state of your business and your current financial performance.
Using a revenue management system can help to improve efficiency and accuracy, while also offering you some useful insights. To learn more, read “Revenue Management System (RMS): What Are the Advantages?”
Features of a Revenue Management System
Before investing in a revenue management system, it is a good idea to familiarise yourself with the features that are available. These can vary from one solution to the next, but typically include thing like pricing systems, integration with other hotel software, data visualisation, forecast management options, and much more.
Read “RMS System: An Overview of the Most Important Features” for a more in-depth breakdown of the main features, complete with an explanation of how they work and why they may be useful to you.
What is Total Revenue Management?
In order to maximise profitability, hotels need to optimise the performance of multiple different revenue sources, which may include food and beverages, conferencing facilities, leisure activities and more. This is the basic idea behind total revenue management, where you apply revenue management techniques to all applicable departments.
Check out “Total Revenue Management: How Hotels Can Maximise Their Revenue” to learn much more about total revenue management as a concept, how it differs from more standard hotel revenue management, the advantages of using total revenue management, and some tips on implementing such a strategy in your hotel.
The Latest Hotel Revenue Management Strategies, Tactics, Trends and Tips
Revenue management involves selling the right room, to the right guests, at the right price, through the right channels, in order to maximise your financial results. In the category “Revenue Management”, you will be able to learn more about some of the specific revenue management strategies and tactics that can assist with this, as well as key trends. You will also find specific tips that can help you to improve your own revenue management efforts.
The Latest Hotel Marketing Strategies, Tactics, Trends and Tips
Hotel marketing encompasses a wide range of different strategies and tactics, and it is important to familiarise yourself with these. In the category “Hotel Marketing”, you will find blog posts that offer all of the most critical information, as well as details on some of the key trends within the hotel industry. Beyond this, you will be able to access tips, which can help you to improve your own hotel marketing and get the most out of your financial investment in this area.
Revenue Management in Other Industries
It all began in the airline industry and is primarily associated with hotels, but it can be employed in almost any business where changes in levels of demand can be predicted, where fixed costs must be paid regardless of sales and where customers are willing to pay different prices for the same product or service. In addition to its use within the hospitality industry, revenue management has emerged as a popular strategy within car rental companies, theatres, financial services, medical services and the telecommunications industry.
Want to Learn More About Management in Related Industries?
All hospitality, travel and tourism-related industries have commonalities, however, management in each industry is influenced by specific unique factors. In the following articles, you can learn more about management within related industries.
- Hotel Management: Everything You Need to Know About Managing a Hotel
- Hospitality Management: The Essentials About Hospitality
- Tourism Management: All You Need to Know About Tourism
- Restaurant Management: Everything You Need to Know
- What is Travel Management?
- Aviation Management: A Great Guide to Start Your Career in Aviation
- Destination Management: How Tourism Adds Value to Your Destination
More Tips to Grow Your Business
Revfine.com is a knowledge platform for the hospitality & travel industry. Professionals use our insights, strategies and actionable tips to get inspired, optimise revenue, innovate processes and improve customer experience. You can find all hotel & hospitality tips in the categories Revenue Management, Marketing & Distribution, Hotel Operations, Staffing & Career, Technology and Software.
