Hotel Revenue Management Guide: Overview and Basic Concepts

Hotel Revenue Management: Overview and Basic Concepts

Hotel Revenue Management is crucial for any hospitality business. Without sufficient revenue, any business will not be able to cover its costs, and will not be able to gain profits. The hospitality industry is even more competitive, with low margins. Hence, hotel revenue management is an essential part of any hotel.

Hotel revenue management involves using data-driven strategies to optimise revenue and profitability from all distribution channels. To keep it simple, it involves getting the right room, to the right customer, at the right place, and at the right time. In this blog, we will be discussing all the important aspects of revenue management, from the overview to diving deep into the basic concepts.

So if you are a budding hotelier, no need to worry! We are here to offer you the best hotel revenue management guide that will make you a pro!

Table Of Content

• What Is Hotel Revenue Management?

• Benefits Of Hotel Revenue Management

• Components of Revenue Management

• Role Of Hotel Revenue Managers

• To Conclude

What Is Hotel Revenue Management

There is a simple and a complex definition of hotel revenue management. Let us start with the simple one. Revenue management involves selling the right room, to the right customer, at the right price, at the right time, and ultimately, through the right channel. We hope that you all understand where we are getting at.

Hotel revenue management uses data-driven strategies to set the right prices for the rooms, manage inventory, choose optimal distribution channels as well as forecast demand. It involves analyzing consumer behaviour, market conditions, and competitor pricing. Based on this data, revenue managers and hotels make decisions to optimize revenue.

With the help of hotel revenue management, hotels can increase their revenue, gain higher occupancy and in the end, gain higher profitability.

Benefits Of Hotel Revenue Management

Revenue management for hotels offers various benefits. It can increase the efficiency of your hotel, and make it a profit-generating machine.

1. Increase In Revenue

One of the main benefits of hotel revenue management is an increase in hotel revenue. When hotels optimize their prices and inventory, they can gain more profits per room. This leads to higher revenue and ultimately, higher profitability.

By analyzing customer behaviour, market conditions, seasonability, demand forecasting and competitor’s pricing, hotels can sell the right room, to the right customer, at the right price, at the right time through the right distribution channel.

2. Higher Occupancy Rates

Higher Occupancy Rates lead to higher revenue - this is what people believe. It is mostly true, but hoteliers can make the mistake of keeping the prices too low, making higher occupancy ineffective.

With proper hotel revenue management, you can strategically increase occupancy rates by utilizing proper pricing strategies during the off-season. Hotels can offer discounts and promos during the off-season. During the peak season, they can keep a higher price to take advantage of the increase in demand.

3. Competitive Advantage

Imagine you are a hotel that performs hotel revenue management throughout the business, and there are some competitors who neglect it. It will be no surprise that you will gain higher revenue and occupancy rates compared to your competitors.

By analyzing consumer behaviour, emerging market trends and the competitor's pricing, hotels can effectively devise strategies that will give them an edge over their competitors. We have a new say -

“You may or may not win win a sword, but you can surely win with data!”

4. Better Forecasting

With historical data and marketing trends data, revenue management offers better forecasting for hotels. With better data, hotels can make better pricing strategies as well as perform better hotel revenue management.

5. Operational Efficiency

Since the focus of hotel revenue management is on revenue and profitability, it helps hotels in increasing their operational efficiency. Hoteliers can identify under-used rooms and overstaffed departments and amenities. For example, hotels can check whether the latest sauna facility is offering a good Return On Investment (ROI) or not.

6. Better Guest Satisfaction

Last but not least, hotel revenue management leads to better customer experience, since hotels are offering the right price, to the right customer, at the right price and at the right time. Based on guest persona, hotels can provide customized deals, promotions and prices. By analyzing customer behaviour data and competitors' data, they can offer what the customer wants.

Components Of Hotel Revenue Management

Now that we have discussed the basics of hotel revenue management, let us discuss its various elements or components. In this guide, we will explain all these components in detail, so that hoteliers will be able to master this concept in a short time (with the help of revenue managers of course!)

1. Yield Management

Yield Management is the most important concept of revenue management. It involves selling the right room at the right price to the right customer at the right time. Even though these terms are used interchangeably, there is a difference between the two.

The concept of Yield Management came earlier than revenue management, with the latter being an evolution of the former. Yield management is all about maximizing revenue by selling the rooms at an optimal price. It is only focused on increasing sales and volume, as well as managing the pricing of hotel rooms. It focuses on optimizing RevPAR, or Revenue Per Available Room.

Hotel Revenue Management, on the other hand, is a broader concept that deals with all aspects of hotel revenue, such as pricing, inventory management, distribution channel management, and revenue from ancillary services. Yield Management is tactics from daily/weekly operations, while Hotel Revenue Management is a long-term strategy.

2. Pricing

Pricing is another important component of hotel revenue management, as well as yield management. It is the main factor for the guests when they are choosing the hotels, based on what the hotel is offering. It also depends on seasonality as well.

There are two main types of pricing strategies used by hotels: Dynamic Pricing and Open Pricing. In Dynamic pricing, the room rates change automatically based on market demand. The main of dynamic pricing is to offer the best rates possible.

Open Pricing means refers to creating separate prices for reservations made by different guest segments, based on different time periods and different distribution channels. With these pricing strategies, you will be able to gain revenue for your hotel and make your business profitable as well.

3. Customer Segmentation

Customer Segmentation based on guest persona is an important component of hotel revenue management. Under it, you define groups based on their age, income, marital status, stay duration and booking channels. The reason for this exercise is that each customer is different.

They will obviously want different pricing and amenities. As a hotelier, you need to also understand which type of customers to do you want to attract to your hotels. If you are a luxury hotel, you will mostly attract rich travellers and business customers.

Of course, if you want to gain more revenue and occupancy, you can offer loyalty programs that will encourage upper-midscale travellers as well. This way, you can gain customers and also increase your hotel revenue. It is among the most effective strategies to market your hotel to the customers who want to come to your hotel.

4. Demand Forecasting

Customer demand is never static, it fluctuates based on demand and supply. Seasonality, important events, weather, as well as major emergencies and disasters can hamper demand. Demand forecasting is the analysis of past demand as well as market trends.

With past demand, you can understand the current position of your hotel, meaning if your hotel had x number of bookings last month, this month will not be that different, if it's the same season.

However, the number of bookings can increase or decrease based on seasonality. Of course, the demand for room inventory will also be affected by the overall market demand. This is where demand forecasting comes into play.

5. Inventory And Distribution Management

In marketing, place, or the distribution channel is one of its most important components. Here, inventory means the number of rooms sold. It's a perishable item, meaning that if the rooms are not sold that day, you miss out on the inventory.

That’s why it's an important component of hotel revenue management. Hotels need to work on the rates, cancellation policies and rate plans to ensure that you don’t miss out on room sales. Distribution channels are essential as well. OTAs, Hotel websites, Offline Agents, and other direct channels are your pipeline to gain hotel revenue.

Role Of A Hotel Revenue Manager

Being a specialized field, hotel revenue management needs a dedicated team of revenue managers to run the show. In fact, many reservations managers also perform revenue management, since reservations and revenue go hand in hand.

The role of a hotel revenue manager is diverse since revenue management involves various tasks such as forecasting, OTA management, channel management, and pricing. Let us discuss these roles in detail.

1. Pricing Management

The main job of the revenue manager is to formulate and understand prices. It is a task that takes a lot of experience in the hospitality industry. Good pricing is one which increases hotel occupancy while increasing hotel revenue at the same time.

To put it in other words, you should set a price which does not increase occupancy, at the cost of decreasing revenue. Here, pricing management also involves setting dynamic pricing, as well as setting meal plans.

2. Channel Management

Channel Management is an important aspect of hotel revenue management. Hotels have to promote themselves on various channels including but not limited to OTAs, websites, travel agents etc. Revenue managers need to decide which channel is the most beneficial for the hotel and based on that, hotels distribute room inventory.

With the help of a channel manager, you can put all the rooms in all the channels. Booking from one channel will block the inventory from all the other channels automatically. The task of a revenue manager is to manage it to ensure its smooth functioning.

3. Forecasting

Forecasting is another essential task of a hotel revenue manager. As we discussed earlier, revenue management goes beyond yield management. The former involves forecasting because you need to make a revenue strategy based on the predictions you make based on current trends, seasonality and past performance.

For example, if you know that every booking in the peak season is a revenue generator, you can keep higher pricing and also keep stricter cancellation policies. A booking cancelled during high demand is revenue lost. For the off-season, you need to be more flexible because customers have a higher bargaining power due to lower demand.

4. Policies And Plans

Hotel revenue managers also need to work on the policies and plans. For example, managers need to understand what cancellation policies they should offer in what season. For example, you can’t be liberal during peak season, otherwise, you will lose out on precious revenue. During the off-season, you need to be more flexible, since the aim at that time should be to gain occupancy.

Your meal plans should also be economical. You need to decide whether to offer EP, CP, MAP or AP meal plans after taking the customer's point of view. For example, if your hotel is at a location filled with budget-friendly restaurants, cafes and dine-outs, it makes no sense to offer a MAP or an AP plan. However, a CP plan is always beneficial, because a guest will always want to have breakfast before leaving for the day’s excursion or sightseeing.

To Conclude

We hope that we were able to explain to you the basics of hotel revenue management. You can also earn about the ways to earn more revenue in a separate blog. Our aim was to familiarize budding hoteliers and hospitality professionals with the nitty-gritty of revenue management.

Hotel revenue management has emerged as the most important concept for hotels. If you want to know more about the hospitality industry, you should check out our blogs! Bigfoot Hospitality is the best hotel revenue management company in India, offering you various hotel management and marketing services to take your property to the next level.