For those operating in the hotel industry, revenue management is a key concept, as it enables hotel owners to predict levels of demand and optimise things like distribution and pricing, in order to maximise financial results. In this article, you will find out more about hotel revenue management, the reasons it is so valuable to hotel owners, and the necessary conditions for implementing a hotel revenue management strategy.
What is Hotel Revenue Management?
So, what is hotel revenue management? Hotel revenue management is a process of using analytics, performance data and other information to anticipate customer demand, so that pricing, distribution and availability can all be optimised. In the process, those within the hotel industry can maximise the amount of revenue they generate, improving their overall financial results.
In many ways, hotel revenue management is about achieving the best possible balance between supply and demand, while understanding customer habits. Crucially, it is more concerned with revenue than occupancy.
Typically, hotels use analytics, past data and external information to gain a clearer understanding of demand levels. This then allows them to identify patterns, to understand when hotel rooms need to be sold at a discount, and to anticipate periods of high demand, at which point rooms can be sold for a much higher price.
A simple way to think of hotel revenue management is:
Selling the right room, to the right customer, at the right time, for the right price, via the right distribution channel, with optimal cost efficiency
Video: What is Hotel Revenue Management?
Necessary Conditions for Hotel Revenue Management
It is important to understand that revenue management strategies are not appropriate in all businesses and there are certain necessary conditions that must exist for it to be relevant. These necessary conditions are as follows:
- A customer base that will willingly pay different prices for the same commodity
- A perishable inventory, meaning that after a certain point the commodity can no longer be sold
- A fixed number of resources available to be sold at any one time
- A capacity to accurately predict or anticipate changes in demand, in advance
These necessary conditions make hotels an ideal businesses to employ revenue management strategies. After all, customers willingly pay different prices for hotel rooms, depending on demand, time of the year, and other factors, while the hotel has both a perishable inventory and a fixed number of rooms to actually sell.
The Importance of Hotel Revenue Management
Hotel revenue management is important because the hotel industry itself is highly competitive. Through a robust revenue management strategy, hotel management and finance departments are able to take more of a data and evidence-driven approach to pricing and distribution decisions, instead of relying on guesswork.
Essentially, if a hotel can more accurately anticipate demand, it can take a much more informed approach to pricing, dynamically adjusting the strategy to maximise income. This, in turn, is vital, because hotels have fixed costs, which need to be met, regardless of the number of hotel rooms they manage to sell on any given day.
What is the Difference Between Revenue Management and Yield Management
One common area of confusion for hotel owners and others involved with revenue management is the difference between this discipline and yield management. The difference between the two can be briefly summarised by explaining that yield management has a narrower focus and is tactical, whereas revenue management is strategic.
Interestingly, yield management is actually the older of the two disciplines and is firmly focused on price optimisation. Within the hotel industry, this would mean optimising the price of rooms.
By contrast, revenue management has a wider focus, incorporating ideas like choosing the right distribution channel to minimise the costs involved in making a sale, as well as considering secondary sources of revenue.
Revenue Management in Other Industries
Finally, it is important to understand that hotel revenue management is not the only form of revenue management that exists. In fact, the practice actually originated in the airline industry. To this day, airline companies often make use of dynamic pricing, and share many of the methods of anticipating future demand that hotels use.
Moreover, revenue management practices have become commonplace in other industries away from the travel and tourism industry, with examples including financial services, theatres and even medical services.
In a highly competitive hotel industry, optimising financial results is usually the key to achieving long-term success. Through a carefully coordinated revenue management strategy, hotel owners can more accurately anticipate changing levels of demand, and then use that information to make informed decisions about pricing and distribution.