What is Revenue Management?

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.

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, 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.

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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?”.