Revenue management is an extremely important concept within the hospitality industry, because it allows hotel owners to anticipate demand and optimise availability and pricing, in order to achieve the best possible financial results. In this article, we will answer the question of ‘what is revenue management?’ and explain the importance of adopting a revenue management strategy of your own.

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Defining Revenue Management

In order to understand revenue management, we must first define it. Within the hotel industry, the widely accepted definition is: “Selling the right room, to the right client, at the right moment, for the right price, through the right distribution channel, with the best cost efficiency”.

It involves the use of performance data and analytics, which serve to help hotel owners to more accurately predict demand and other consumer behaviours. This, in turn, allows them to make more sensible decisions regarding pricing and distribution, in order to maximise revenue and, therefore, profit.

As a concept, revenue management actually began in the airline industry, where companies found ways to anticipate consumer demand in order to introduce dynamic pricing. However, it is applicable in any industry where different customers are willing to pay different prices for the same product, where there are only a certain amount of that product to be sold, and where that product must be sold before a certain point in time.

To carry out effective revenue management, a business must also have some way of forecasting demand and consumer spending habits, so that informed adjustments can be made. For instance, hotels can use past data, existing bookings, weather forecasts, and other industry data to inform their revenue management strategy.

Why is Revenue Management Important?

For hotel owners, hotel revenue management provides the ability to make the most out of a perishable inventory of hotel rooms, allowing them to maximise the amount of money the business generates. Essentially, it allows decision-makers to make informed, data-driven choices, rather than relying on instincts or guesswork.

Hotels, like many other businesses, have fixed costs, which need to be paid regardless of how many rooms are sold and regardless of how much money is generated from guests. Therefore, through a revenue management strategy, hotel owners can ensure their costs are met and their prices and services are dynamically optimised.

Revenue Management vs Yield Management

Within the hotel industry, revenue management and yield management are two of the most useful tools available to managers, allowing them to maximise the amount of money they make from guests. Although the two concepts are closely linked and share a lot of similarities, there are some important differences too. For more detailed information about yield management, please also read the article “What is Yield Management?”.

Video “What is revenue management?”

 

Understanding Forecasting

Forecasting is an important concept to get to grips with when trying to answer the question: what is revenue management? In simple terms, forecasting is a means of using past data, present data and the analysis of trends, in order to make future predictions. This then allows you to anticipate future conditions and events.

For those involved with hotel management, forecasting has a useful role to play, because it makes it easier to plan for the future and make more informed strategic decisions. Additionally, it can help you to maximise the amount of revenue generated from a perishable inventory, because you can predict levels of demand ahead of time.

Important Forecasting Tips

Below, you will find a breakdown of some of the best tips to keep in mind when using forecasting as part of a hotel revenue management strategy, complete with explanations of why those tips matter.

Keep Accurate Records

The answer to the question ‘What is revenue management?’ centres on the concept of selling the right product, to the right customer, at the right time, via the right channel, for the right price, at the lowest cost to you. Doing this involves using the information that is available to you and that, in turn, means it is crucial to keep accurate records. In particular, you need to track occupancy rates, revenue, room rates and other KPIs covered later in this article.

Make Use of Historical Data

Most forecasts rely heavily on past data and the assumption that historic trends may repeat themselves, and this is especially true with hotel revenue management. As an example, you may notice when looking at your data that you experience a decline in demand from September to December, or that your busiest months are usually in the summer. This information can be used to make reasonable predictions about what will happen to demand in the future.

Utilise Data Already in the Books

One of the most important assets you have for forecasting and hotel revenue management, in general, is data that is already in the books. This will typically mean rooms that have already been booked, as well as any events, functions or meals that have already been scheduled. However, you can go beyond this and look at your website analytics and social media data too. Remember, data in the books is some of the most certain information you have at your disposal.

Take Events and Holidays Into Account

It is essential that your forecasting efforts factor in events and holidays, and those relevant adjustments are made with these in mind. For instance, if you use historic data to forecast a certain level of demand, but overlook the fact that a major sporting event is happening in the area, your forecast may be off. Similarly, current hotel trends may be thrown off course – either positively or negatively – by holidays like Christmas, Easter, Ramadan and Thanksgiving.

Keep an Eye on Industry Trends

It is also important to pay careful attention to wider market trends. For example, has there been a decline in overall travel to the location where your hotel is based? Are there world events, such as the COVID 19 pandemic, which are having an impact on bookings? There may also be new ways of doing business that is helping rivals to attract guests, or new distribution channels that are worth exploring. These issues all need to be considered when forecasting.

More Forecasting Tips

There are a number of additional tips that can help you to improve your forecasting and really come to understand what revenue management is all about. These include maintaining awareness of competitors and breaking down your forecasts into different segments, so you can be more specific with your predictions. You can read more about these tips and how they can help you in the “9 Forecasting Tips to Improve Your Revenue Management Strategy” article.

Top Revenue Management Strategies

In this section, you can find some useful details about some of the main revenue management strategies available to you. Each of these strategies can help you to achieve better financial results.

Get to Know the Hotel Market

One of the most important strategies you can adopt for your hotel revenue management efforts is to really focus in on the market itself. What is your target audience? Where are they based? What are their needs, wants and expectations? What is the competition like? What local factors are there that may influence levels of demand over time? How does demand change as the seasons change? Getting to know the market is vital for making informed decisions.

Segmentation and Price Optimisation

Price optimisation is a major factor in any good answer to the question: what is revenue management? One possible way to achieve this is through segmentation, where you divide your customer base into different ‘types’, look at their behaviours and booking habits, and then attempt to optimise pricing for each segment. For instance, you might charge business customers lower room rates, because you know you can recoup the money via their use of corporate facilities.

Align Your Different Departments

Next, you need to think about how you can help the different departments within your hotel to collaborate with one another and work towards the same goals. To do this, you will need to bring the major decision-makers within each department on board by explaining what revenue management is and why it is important. Work with them to make adjustments to their existing strategies, if necessary, and make sure their record keeping is up to scratch too.

Select the Best Pricing Strategy

A key part of successful revenue management is selecting the right pricing strategy for the right moment. In times of high demand, it may make sense to charge more for your hotel rooms, because the demand will ensure you still fill them, whereas when demand is low, a discount pricing strategy could ensure you are able to sell rooms that would otherwise be left empty. Make sure there is a logic to your strategy and maintain the flexibility to make adjustments.

Incentives For Direct Bookings

Direct bookings can be extremely beneficial for hotel revenue management, because hotels get to take in all of the money guests spend on their booking. By contrast, while online travel agents allow hotels to reach a wider audience, they charge hotels a commission fee, or a listing fee. With this in mind, you should offer a loyalty programme, free extras and other incentives that will encourage as many customers as possible to book directly.

Extra Revenue Management Strategies

On top of the strategies mentioned, there are various other options available to help improve your revenue management strategy. These include things like utilising search engine optimisation to boost visibility and attract more customers, and working with a freelance revenue manager, who may be able to offer fresh perspectives. You can read more about these tips in the “9 Revenue Management Strategies to Grow Your Hotel Business” post.

The Main Revenue Management KPIs

Effective hotel revenue management relies on the tracking of key performance indicators, or KPIs. You can use software and other hotel technology solutions to track these, but first, it is important to truly understand them.

GOPPAR

GOPPAR is an acronym for gross operating profit per available room. It is a metric which takes into account all of the available rooms in the hotel, regardless of whether they are actually occupied by paying guests. It also factors in various different revenue streams, and expenses, giving you a good idea of overall financial performance.

GOPPAR = Gross Operating Profit / Number of Rooms in Hotel

You can read more in the article “What is GOPPAR?”

TRevPAR

TRevPAR is a key performance indicator that is focused solely on revenue coming in. It stands for total revenue per available room and, like GOPPAR, is not concerned with whether or not a room is actually occupied, only that it is available. It also considers all money brought in from rooms, including room service, food, other services.

TRevPAR = Total Revenue / Number of Rooms in Hotel

You can read more in the article “What is TRevPAR?”

NRevPAR

Net revenue per available room, or NRevPAR, is concerned only with revenue generated from room sales, meaning other revenue sources are ignored. Again, it focuses on available rooms, rather than occupied rooms. However, prior to dividing room revenue by the number of rooms available, you deduct distribution costs to calculate ‘net revenue’.

NRevPAR = (Room Revenue – Distribution Costs) / Number of Rooms in Hotel

You can read more in the article “What is NRevPAR?”

ARPA

ARPA, or average revenue per account, is a KPI that can help to tell you how valuable customers are. It is concerned with the average amount of revenue generated per customer account, over a specified period of time – typically monthly or annually. You can also use this to compare past data and see the comparative value of new customers.

ARPA = Recurring Revenue / Total Number of Customer Accounts

You can read more in the article “What is ARPA?”

EBITDA

The EBITDA KPI stands for earnings before interest, taxes, depreciation and amortisation. It can help to indicate your hotel’s overall revenue-generating performance, while removing the variables that may otherwise distort your results. This then makes it easier to compare your hotel to other hotels, or even other chains of your own hotel brand, without the results being thrown off by things like tax rates varying across different countries.

EBITDA = Total Revenue – Expenses (not including interest, taxes, depreciation and amortisation)

You can read more in the article “What is EBITDA?”

All Revenue Management KPIs

There are a number of other KPIs that are useful for hotel revenue management, with examples including average daily rate (ADR) and revenue per available room (RevPAR). It is beneficial to learn about as many of these as possible, so that you can track them within your hotel and enhance your revenue management efforts. You can find out more by reading the article entitled “The Most Used Revenue Management KPIs for Hotels”.

Key Revenue Management Pricing Strategies

Any explanation of what revenue management is will reference price and you will need to select the right pricing strategy for the right situation, so that you are bringing in as much money as possible. Below, you can learn about some of the common pricing strategies that are utilised by hotels and resorts.

Length of Stay Strategy (LOS)

A length of stay strategy is, as the name indicates, a strategy where the pricing varies depending on the length of time a guest stays in the hotel. This can work in a number of possible ways, but one of the most common is charging a lower overall rate for longer stays booked during low demand periods. This can help to encourage guests to book longer visits, which means your hotel brings in more money from them overall, while they get better value for their money.

Up-Selling

Up-selling is a strategy where you attempt to get customers to spend more on the products or services they buy than they initially intended, and it can work extremely well in hotels. For example, you may be able to get customers to upgrade to a room with a better view, or to a room with a larger bed. Up-selling can be attempted during the booking process itself, but also in any post-booking communication with customers as well.

Cross-Selling

The concept of cross-selling is similar to up-selling, in that you attempt to get customers to spend more money, however this time it is achieved by convincing them to make additional purchases on top of what they were originally intending. For instance, this could mean persuading them to pay for breakfasts as well as their room, or it may involve selling additional products or services, such as travel passes, gym access or tickets to local attractions.

Cancellation Policy

It is also important to understand that your cancellation policy can factor into pricing. For instance, some hotels charge lower rates than they otherwise would, on the basis that customers give up their right to a refund in the event that they cancel their booking. By the same token, you might also charge a higher rate for your room than you otherwise would, but offer a greater amount of flexibility or leeway on cancellations and refunds.

More Pricing Strategies

Aside from those mentioned, there are various other pricing strategies available too, including price per segment, rate parity, forecast-based pricing and discounted direct bookings. You can learn much more about these different strategies, what they mean, when they may be applicable and how they can be of benefit to both your hotel and your customers by reading the “10 Pricing Strategies to Increase Your Hotel Revenue” article.

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.

Check Out Hotel Revenue Management Courses

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.

What is a Revenue Management System?

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.

Essential Revenue Management System Features

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.

What is Total Revenue Management?

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.

The Latest Hotel Revenue Management Strategies, Tactics, Trends and Tips

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.

For more advise, go to the “Hotel Marketing Category Page”

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, to optimise revenue, innovate processes and improve customer experience. You can find all hotel & hospitality tips in the categories Revenue Management, Marketing & Distribution, Technology and Software.