What Is Revenue Management?

Revenue management is a strategic approach to pricing and selling products or services to maximize revenue. Businesses need to understand market demand, customer behavior, and pricing strategies to enhance profitability, especially in hospitality and airlines.

Key Takeaways

  • Maximizing Revenue: Focuses on strategies for pricing and selling services to optimize revenue based on market demand and customer behavior.
  • Data-Driven Decisions: Emphasizes using performance data and analytics for predicting demand and optimizing pricing and distribution.
  • Applicability Across Industries: Highlights its relevance in hospitality and airlines and in any sector where demand varies and pricing flexibility is key.
  • Understanding Market Demand: Emphasizes the importance of comprehending market demand to set optimal prices and maximize revenue.
  • Importance in Hospitality: Underlines the significance of revenue management in the hospitality industry, especially in hotels.

Table of Contents:

Introduction

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

Defining Revenue Management

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 using performance data and analytics, which help hotel owners more accurately predict demand and other consumer behaviors. This, in turn, allows them to make more sensible decisions regarding pricing and distribution to maximize revenue and profit.

As a concept, revenue management began in the airline industry, where companies found ways to anticipate consumer demand 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 is only a certain amount of that product to be sold, and where that product must be sold before a certain point.

To carry out effective revenue management, a business must also have some way of forecasting demand and consumer spending habits to make informed adjustments. 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 maximize the amount of money the business generates. It allows decision-makers to make informed, data-driven choices rather than relying on instincts or guesswork.

Like many other businesses, hotels have fixed costs, which need to be paid regardless of how many rooms are sold and 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 optimized.

Revenue Management vs. Yield Management

Within the hotel industry, revenue and yield management are two of the most useful tools available to managers, allowing them to maximize the 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?”.

Table: Comparison Between Revenue Management & Yield Management

Aspects Revenue Management Yield Management
Focus Maximizing overall hotel revenue across all revenue streams and guest segments. Maximizing revenue per available room (RevPAR) by adjusting prices based on demand.
Pricing Strategy Utilizes dynamic pricing that may change based on historical data, competition, and market conditions. Implements dynamic pricing strategies that respond to immediate and short-term demand fluctuations.
Inventory Control Manages inventory for various hotel services, including rooms and ancillary services like dining, spa, and events. Primarily focuses on managing room inventory and availability.

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 maximize the amount of revenue generated from a perishable inventory because you can predict demand levels ahead of time.

Important Forecasting Tips

Below, you will find a breakdown of some of the best tips to remember 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?’ centers on 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 historical 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

Generally, one of the most important assets you have for forecasting and hotel revenue management is data 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 also go beyond this and look at your website analytics and social media data. Remember, data in the books is some of your most certain information.

Take Events and Holidays Into Account

Your forecasting efforts factor in events and holidays and those relevant adjustments must be made with these in mind. For instance, if you use historical data to forecast a certain level of demand but overlook that a major sporting event is happening in the area, your forecast may be off. Similarly, current hotel trends may be either positively or negatively thrown off course 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, that are impacting bookings? There may also be new ways of doing business that are helping rivals 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 improve your forecasting and come to understand what revenue management is all about. These include maintaining awareness of competitors and breaking down your forecasts into different segments so that you can be more specific with your predictions. You can read more about these tips and how they can help you in the “Forecasting Tips to Improve Your Revenue Management Strategy” article.

Top Revenue Management Strategies

In this section, you can find useful details about some of the main revenue management strategies available. 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 focus on the market. What is your target audience? Where are they based? What are their needs, wants, and expectations? What is the competition like? What local factors 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 Optimization

Price optimization 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 behaviors and booking habits, and then attempt to optimize 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 and work towards the same goals. To do this, you must 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 adjust their existing strategies, if necessary, and ensure 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 can sell rooms that would otherwise be left empty. Ensure there is logic to your strategy and maintain the flexibility to make adjustments.

What Is Revenue Management - Pricing Strategy

Incentives For Direct Bookings

Direct bookings can be extremely beneficial for hotel revenue management because hotels take in all the money guests spend on their bookings. By contrast, while online travel agents allow hotels to reach a wider audience, they charge hotels a commission or listing fee. According to the Expedia Media Solutions study, travelers visit approximately 38 websites before making a hotel booking. With this in mind, you should offer a loyalty program, free extras, and other incentives to encourage as many customers as possible to book directly.

Extra Revenue Management Strategies

On top of the strategies mentioned, various other options are available to help improve your revenue management strategy. These include things like utilizing search engine optimization 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 “Revenue Management Strategies to Grow Your Hotel Business” post.

Ancillary Revenue Strategy

An ancillary revenue strategy is based on generating revenue from additional services and products away from the sale of hotel rooms. For example, you might have a hotel gift shop that sells branded products, or you might offer a wide range of facilities for guests to make use of. Your ancillary services can improve the overall guest experience in your hotel while simultaneously increasing and diversifying your revenue.

When exploring ‘what is revenue management?’, the focus is typically on optimizing room sales. However, ancillary services are often not subject to third-party commission fees, which can make them ideal for maximizing earnings. That said, it is important to set prices sensibly based on demand and available data.

The Main Revenue Management KPIs

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

GOPPAR

GOPPAR is an acronym for gross operating profit per available room. It is a metric that takes into account all of the available rooms in the hotel, regardless of whether they are occupied by paying guests. It also factors in various 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 occupied, only that it is available. It also considers all money from rooms, including room service, food, and 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 amortization. It can help to indicate your hotel’s overall revenue-generating performance while removing the variables that may otherwise distort your results. This makes it easier to compare your hotel to other hotels or 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 amortization)

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

All Revenue Management KPIs

Several other KPIs are useful for hotel revenue management, 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 learn more by reading the article “The Most Used Revenue Management KPIs for Hotels”.

What Is Revenue Management - KPIs

Key Revenue Management Pricing Strategies

Any explanation of revenue management will reference price, and you will need to select the right pricing strategy for the right situation to bring in as much money as possible. Below, you can learn about some of the common pricing strategies hotels and resorts use.

Length of Stay Strategy (LOS)

As the name indicates, a length-of-stay strategy is a strategy where the pricing varies depending on the time a guest stays in the hotel. This can work in several 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 and in any post-booking communication with customers.

Cross-Selling

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 originally intended. For instance, this could mean persuading them to pay for breakfasts and their room or 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 because customers give up their right to a refund if they cancel their booking. By the same token, you might also charge a higher rate for your room than you otherwise would but offer greater 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 benefit your hotel and your customers by reading the “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

You should create a revenue management culture within your hotel to achieve the absolute best results. This will mean that everyone within the business will take an active interest in revenue management and try to contribute towards success in this area. You may need to work with individual departments and their leaders to explain why it is so important and how it can benefit the whole organization 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 historical data. Although this data is precious, its use can be hindered if significant changes to customer behaviors and habits occur. With this in mind, it is essential that you keep up with any of these changes and that you take these shifts in behaviors or habits into account when making predictions.

Remember to Place a Focus on Value

Answers to the question ‘What is revenue management?’ will often focus on 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 emphasize 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 beneficial 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 several further tips worth knowing when trying to optimize 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, prioritizing mobile optimization, and actually creating a map of where you expect demand to come from. Read “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?’ 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 the information you need to optimize 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 Revenue Management in Relation to Open Pricing?

Now that you are equipped with an understanding of revenue management, it is worth exploring what revenue management is about open pricing. Open pricing refers to a flexible pricing model, which moves away from the fixed modifiers traditionally associated with BAR (best available rate).

When using an open pricing approach, hotels can adjust prices beyond the parameters usually in place when using these fixed modifiers. Pricing can also be adjusted for each distribution channel independently, allowing specific audiences to be targeted with pricing that makes sense.

Hotels can use this approach to optimize their revenue management strategy by setting the ideal room rate. For example, during periods of high demand, hotels can freely adjust the rate to make it higher, while during lower demand periods, hotels can drop the price significantly, especially if they are desperate to fill a room.

This flexibility also can benefit customers, as lower room rates may be available, or pricing may be targeted more accurately to different market segments. To learn more about the approach, how it works, and its benefits, take a look at the “Open Pricing: Why Is It the Next Hotel Revenue Management Strategy?” article.

What is a Revenue Management System?

When you prioritize revenue management, investing in a revenue management system (RMS) is often sensible. This software solution will make various revenue management tasks easier and allow you to maintain and access related information or data easily.

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 various 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, 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, etc. Total revenue management can be broadly viewed as optimizing each of these to maximize 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 creating accurate forecasts to making 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 latest strategies, tactics, trends, and tips.

For more advice, 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 people will use marketing communications to form judgments 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 advice, go to the “Hotel Marketing Category Page”

What Is Revenue Management FAQs

Revenue management in the hotel industry refers to the strategic analysis and application of data regarding demand, pricing, and customer behavior to predict future sales and maximize profitability by selling the right product to the right customer at the right time.

The four stages of revenue management are data collection, analysis and forecasting, strategy formulation, and implementation and evaluation. These stages help in understanding market dynamics and optimizing pricing strategies to maximize revenue.

Revenue management involves analyzing market trends, demand patterns, and pricing strategies to optimize a business’s financial performance, ensuring the right product is sold to the right customer at the right time and price.

Finance deals with managing a company’s assets, liabilities, and financial planning, whereas revenue management focuses explicitly on strategic pricing and inventory management to maximize short-term revenue and profitability.

Revenue managers face challenges such as accurately forecasting demand, adapting to market changes, balancing pricing and customer satisfaction, managing distribution channels effectively, and staying ahead of competition while leveraging technology and data analytics.

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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.