What is Revenue Management?

What is hotel revenue management? Find out more about the concept, purpose and importance of revenue management...

What is Revenue Management?

What is Revenue Management?

Revenue Management can greatly influence the success of a hotel. Simply selling as many rooms at a pre-determined price can be profitable. However, it does not lead to an optimal sales result. The introduction and pursuit of a clear price and revenue strategy is the key to success here.

The goal is to sell the right product at the right price, at the right time, to the right customer through the right distribution channel.

The use of revenue management is only possible for product which are available for a limited time (the room that has not been sold today, cannot be sold tomorrow), for products that are only available in a certain number (hotel rooms) and address different customers (segments) which are ready to book different rates.

Where does Revenue Management come from?

In the 1970s there was a strong deregulation in American aviation. This led to the emergence of new airlines, which were significantly more cost-efficient, in addition to the classic and price-intensive airline companies.

American Airlines (AA) held an emergency meeting to consider how the costs could be further reduced to meet this competition. After many hours and countless coffees, the AA managers realized that they had no cost but a sales problem. Many seats remained empty and could not be sold later. This was the birth of the early booking discount.

In the 1980s Bill Marriott met the CEO of AA and learned of Revenue Management. Marriott saw the potential for the hotel industry and its hotels were the first to introduce the revenue management. The success was so great that other hotels soon followed.

Today, revenue management from the hotel industry is no longer to be thought away, and modern cloud solutions mean that not only big hotels and chains can benefit from it, but also small, privately owned houses.

Why Revenue Management?

What is the right product? Are the guests very price sensitive for a period, or will they book the room at almost any price? What kind of customer mix do I need, so that I fill the hotel optimally? Through which sales channels do I reach these guests and who are willing to pay the highest average prices? Is it enough to sell the hotel via your own website, or do I need partners, such as online travel agents (OTAs) and tour operators?

With Revenue Management, you can not only find answers to these questions, but you can also estimate demand and maximize profits by controlling availability and pricing.

Current and historical data are analyzed and linked to each other. The behavior of the guests and the current situation on the market are followed by conclusions, which are then reflected in adjustments to price and restrictions. With systems such as RateBoard, this can also be easily implemented and automated.

Revenue Management Indicators

Various key figures are used, which help in the analysis and implementation:

Occupancy

Usually expressed in percent. If a lot of sales are made in the area of ​​F & B and Spa, it is sensible to place great value on the utilization.

(Number of rooms sold) / (Number of hotel rooms) x 100

Average Daily Rate

Is also translated as ADR (Average daily rate) and gives the average prices for a hotel room or a room category.

(Total rooms revenue) / (Number of rooms sold)

RevPAR

To see both the average price and the occupancy, there is the RevPAR. It combines the occupancy with revenue and provides a standardized view of the current revenue per available room. It can be calculated in two ways:

(ADR) x (Occupancy in percent) or

(Total rooms revenue) / (Number of hotel rooms)

Pick Up

To be able to make a statement about the demand, however, not only revenue-related indicators are necessary. Also, the amount of bookings give crucial information about the hotels performance. In Revenue Management, one speaks of Pick Up. The more reservations booked for a certain time, the higher the demand and the higher prices can be achieved.

Conclusion

Crucial in the use of revenue management in a hotel is that the strategy derived tactics cannot be a rigid construct. Depending on how the individual key figures develop, the applied tactics must also be adapted.

You can imagine a hotel as a ship on the high seas. The strategy provides the target port and the individual revenue management tools allow the permanent review of the course. If one finds that the course is not leading to the target, the tactics must be adjusted. The permanent correction leaves the hotel at the end of the goals.

If you also want to get your ship on course, step on (Rate)board!