Revenue Management; clearly explained!

Revenue Management

Revenue management is a strategic approach to pricing and selling products or services to maximize revenue. It involves understanding market demand, customer behavior, and pricing strategies. This approach is crucial for businesses, particularly in hospitality and travel, to optimize profit by selling the right product to the right customer at the right time and price.

Key Takeaways

• Dynamic Pricing Strategies: Revenue management utilizes dynamic pricing based on demand forecasting and customer behavior, which is crucial in sectors like hospitality.
• Data-Driven Approach: Involves using analytics to optimize product availability and pricing, aiming for maximum revenue generation.
• Predicting Demand and Customer Segmentation: Focuses on predicting demand changes and segmenting customers to tailor pricing and availability.
• Importance of Market Analysis: Emphasizes the need for thorough market analysis to understand competition and price sensitivity.
• Impact of Overbooking Strategies: Discusses the strategic use of overbooking to maximize revenue, balancing risk and potential gains.

Table of Contents:

• 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

Introduction

Revenue management is concerned with optimizing 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 predicts demand and optimizes inventory and price availability. When utilized correctly, this will ultimately result in higher revenue.

History of Revenue Management

The history of revenue management can be traced back to the 1980s, originating in the airline industry. Airlines began introducing a dynamic pricing concept to optimize financial results. Businesses like American Airlines successfully applied price discrimination techniques and anticipated consumer demand.

What Is Revenue Management?

So what is revenue management, and what does it entail? Broadly, it can be described as the use of analytics, which helps predict customer behavior so that product availability and price can be optimized 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 their perceptions of value.

This may mean refusing to sell a room today so that you can sell it for a higher price tomorrow, but it might also mean recognizing 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

For a business to employ a revenue management strategy effectively, several 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 have 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., the resources can no longer be sold after a certain point.

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 optimization 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 spending 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 ensures that informed decisions are made and your business does its best to drive revenue upward while selling the same products and services as before.

Revenue management is often concerned with predicting demand and optimizing price and availability to boost revenue. An even more professional approach is also to take into account all spending revenue per area per room and 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. Still, it is essential to know what forecasting is, why it is so beneficial, and some of the best ways to optimize 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, to make more informed predictions about what the future will bring. This may mean forecasting future revenue generation, room occupancy rates, customer behaviors, etc.

Why Is Forecasting So Important?

Forecasting is a useful tool for revenue management because it allows those involved with hotel management to anticipate future events and plan for them. For example, you may be able to adjust your expenditure if your forecast suggests you will 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 capitalizing fully on high-demand periods. Although forecasting is never 100 percent accurate, it does mean key decisions can be taken based on trends and relevant information, eradicating some guesswork involved. An example is a Forecast Report by CBRE, which shows a 5.8% increase in RevPAR in 2023 because of inflation.

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 relies on accurate data, so properly organizing and recording information is crucial. 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 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 remember that the most reliable data available to you when attempting to make forecasts is the data in the books already. For hotels, this means room and restaurant bookings that have already been made and any planned events 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 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 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 considered.

5. Monitor Rival Hotels and Resorts

Another external factor to consider when forecasting for revenue management purposes is the behavior 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 and 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 consider 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 maximize revenue generation. For instance, you may need to change the distribution channels you use or the regions you target. Read the article “Forecasting Tips to Improve Your Revenue Management Strategy” for more forecasting tips.

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 optimize 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 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 impacting your industry, along with your ability to appeal to customers.

Segmentation and Price Optimization

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, uniform approach.

Aim for Cross-Departmental Alignment

Hotels and similar businesses succeed when the various departments pull in the same direction to achieve common goals, which is also relevant to revenue management. 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, selecting the right strategy for the moment you are in is important. There may, for example, be points in time when demand is low, and the priority is simply to fill a room in your hotel. At 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 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. While you want to reach as many people as possible, the priority should be generating direct bookings when possible. When bookings are made directly, you do not need to pay commission fees or other fees to anyone else, maximizing revenue. According to the Global Hotel and Other Travel Accommodation Market Report by Research and Markets, direct bookings account for 27% of hotel bookings. Special offers, loyalty programs, and a high-quality booking process are all ways to offer incentives for direct bookings.

Ancillary Revenue Strategy

An ancillary revenue strategy involves maximizing the amount of revenue generated through additional products or services offered by your hotel business aside from simply selling hotel rooms. Examples are numerous and include spa and leisure services, conference and events services, tours, food and beverage services, a hotel gift shop, and more.

From a revenue management perspective, an ancillary revenue strategy is beneficial because it allows revenue and profit generation to be optimized throughout the entire business. Many additional income sources are also not subject to “lost” income associated with guests booking their rooms through third-party platforms, resulting in commission fees.

Table: Components, Benefits, and Examples of Ancillary Revenue Management Strategy

Additional Revenue Management Strategies

Several other revenue management strategies are worth keeping in mind. Examples of this include everything from embracing digital marketing strategies like search engine optimization and mobile optimization to reach more people right the way through to enlisting the help of a freelance revenue manager so that you can optimize your strategy. Read “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, you must understand how your hotel performs to do this. Below are 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 in comparison to the number of rooms that can be occupied. Essentially, the point of this key performance indicator is to identify how many available rooms have been filled, which 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 makes 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 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 generated from occupied rooms. 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 available rooms rather than the rooms sold.

Formula: GOPPAR = (Total Revenue – Total Expenditure) / Total Number of Available Rooms

All Revenue Management KPIs

It is best to track as many key performance indicators as possible to get the most from your revenue management efforts 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 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 unique benefits, but some strategies are best deployed at specific times.

Forecast-Based Pricing

Pricing 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 consistent pricing across all available distribution channels. It is 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 prioritized 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 to attract bookings during times of low demand, but they can also be offered upon checkout to encourage return customers and persuade customers to book directly next time.

Package Room Deals

Package deals allow you to offer discounts on multiple room sales, making them extremely effective for attracting group bookings. This can help your revenue management efforts, especially when you want to fill as many rooms as possible. Although you will be selling the rooms for slightly less than they would sell individually, the guarantee of multiple rooms being sold is often worth it, especially when demand is low.

More Pricing Strategies

Aside from those mentioned, several other pricing strategies can be useful when optimizing 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 learn more about these strategies and how they work in practice, look at the “Pricing Strategies to Increase Your Hotel Revenue” article.

Further Revenue Management Tips

Below are 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 revenue management, 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 utilizing best practices for recording data and making evidence-based decisions.

Keep Pace With Changes in Customer Behavior

While past data is important in revenue management, you cannot neglect what is happening today and tomorrow. This is especially true regarding changes in customer behaviors and habits. For instance, you may notice that, 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 ensure 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 emphasize value rather than price. After all, people are willing to pay more if guaranteed better 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 in revenue management, but it is important not to become overly reliant on it. While software can make calculations instantly and algorithms can be set up to inform decisions, the best strategies require nuanced thinking. Sometimes, you need to think outside the box, take chances, or try something new; a human touch will be required.

More Revenue Management Tips

There are several additional revenue management tips to keep in mind, from mapping out where demand comes from to making sure your website and booking engines are all fully mobile-optimized. You can read more about these tips and understand why they are important by reading “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, to maximize 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.

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. 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 plan to stay longer. Open pricing provides freedom and avoids closing off distribution channels or promotional opportunities. You can learn more about this approach and its 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.

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 organizations that offer these courses.

How Can a Revenue Management System Help?

A revenue management system, or RMS, is a software solution that allows you to perform various revenue management-related tasks more easily. The software can use 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 improve efficiency and accuracy while offering 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 available features. These can vary from one solution to the next but typically include things like pricing systems, integration with other hotel software, data visualization, 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?

To maximize profitability, hotels need to optimize the performance of multiple revenue sources, including food and beverages, conferencing facilities, leisure activities, and more. This is the basic idea behind total revenue management: applying 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 to maximize 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 to help you improve your revenue management efforts.

The Latest Hotel Marketing Strategies, Tactics, Trends and Tips

Hotel marketing encompasses various 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 and details on some of the key trends within the hotel industry. Beyond this, you can access tips that can help you improve your 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 telecommunications.

Revenue Management FAQs

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. You can learn more about management within related industries in the following articles.

• 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

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This article is written by:

Martijn Barten

Hi, I am Martijn Barten, founder of Revfine.com. I am specialized in optimizing revenue by combining revenue management with marketing strategies. I have over 15 years of experience developing, implementing, and managing revenue management and marketing strategies and processes for individual properties and multi-properties.