A Complete Guide to Hotel Revenue Management

The hospitality sector is seeing a sharp rise in competition as entrepreneurs strive to provide their clients with a distinctive experience. Not only do they want to provide the best services, but they also increase their revenue while doing so.

This is where effective hotel revenue management comes into the picture. By employing specific tactics and the right tools, you can exponentially increase your hotel’s revenue.

If you are looking for a guide that briefs you about effective revenue management in the hotel industry, this article is for you.

We’ll not only be discussing the core principles of hotel revenue management but also how one can effectively manage the revenue for their hotel – irrespective of the size of the business.

So what are you waiting for? Let’s get started!

What is Hotel Revenue Management?

Hotel revenue management is a heterogeneous approach involving a complete understanding of industrial trends, market dynamics, and consumer behavior. It is not just limited to specific activities like setting the price or other provisions.

It involves forecasting demand for your hotel by understanding the buying behavior of different traveler segments and optimizing prices and inventory to get them booked.

When you employ revenue management in the hotel industry, you’re looking to attract suitable travelers by selling them the right hotel room at the right price.

Fundamentals of Revenue Management

The basic idea behind hotel revenue management revolves around several fundamentals necessary for continuous yield management in the hotel industry. These concepts serve as the backbone for employing various strategies of revenue management to optimize financial performance.

When used correctly, they can help you decide what products or services to sell and which customers.

Here are some fundamentals of hotel revenue management you should know about:

1. Competitive Analysis

   Analyzing competition from other hotels is crucial for effective hotel revenue management. Understanding your prime competitors and the provisions they bring to the table will challenge you to stand apart from the competition and do something different.

   It is essential to know what your competitors are doing and see if you can provide the same or better at a reasonable price (or with added perks).

   One must also look out for the smaller, mid-budget options since this will keep you a step ahead of both old and new competitors.

2. Forecasting

   Forecasting is critical to forming an understanding of your expectations with your business. It helps you identify the most realistic goals you’d want your business to achieve in a given timeframe.

   Through forecasting, you can leverage some valuable ideas and set up strategies for revenue management by conducting a thorough analysis of your business.

   You can start by comparing current numbers with the achievements and failures of the last month (or year), analyze the progress made, and analyze customer sentiment.

3. Pricing

   Once you’re done forecasting, it’s about identifying a price point that not only attracts customers but also keeps your business afloat.

   With pricing being a fundamental element of hotel revenue management, you need to:

   • Know the pricing plans your competitors offer
   • Identify what are the demands of the market

   Based on these, you can set a fixed price or go for seasonal rates, whichever works best.

4. Inventory Control

   After setting up the correct prices, you should monitor the inventory to ensure that the services and products are aligned with the goals you’ve set for your hotel.

   This not only helps you manage inventory better but you can also upscale or downscale it based on the requirements.

5. Performance Review

   The final step in the hotel revenue management process involves regular monitoring and performance analysis for your hotel. You can review the results based on the budget, revenue generated, customers gained, or how much business your competitors got in the same timeframe.

   Moreover, you can also use the insights to compare them with the previous year’s data.

The Core Principles of Hotel Revenue Management

There are a few core principles of hotel revenue management that one should know about. Here they are:

1. Production Distribution

   Production distribution is the foremost principle of hotel revenue management. It deals with the optimization of available rooms for maximizing revenue for your hotel. Production distribution includes strategically distributing rooms across channels like online travel agencies, direct bookings, and GDS or global distribution systems.

   One must carefully manage this by minimizing distribution costs and selling rooms through the most profitable channels only for more efficient yield management in their hotel.

2. Market Segmentation

   Market segmentation involves categorizing your customers into diverse groups based on their preferences, demographics, and behavior. Doing this ensures that you’re tailoring the pricing and promotional strategies to meet the requirements of specific customer groups.

   By gaining a proper understanding of each segment, you can optimize revenue and attract a diverse and loyal group of customers.

3. Demand Forecasting

   Demand forecasting involves studying historical data, market trends, and other external factors to help predict future demands for hotel rooms.

   The revenue managers usually use this data to make crucial decisions about inventory management and pricing and ensure that they meet the demands and needs of the customer while also optimizing the revenue.

4. Supply Forecasting

   Supply forecasting is a crucial principle in hotel revenue management focused on predicting the availability of room inventory. It involves analyzing factors like room maintenance schedules, renovations, and changes in room types to ensure an accurate assessment of the hotel’s supply.

   By forecasting supply effectively, hotels can align their pricing and marketing strategies accordingly, preventing overbooking or underutilization.

5. Overbooking control

   Controlling overbooking is another crucial aspect of revenue management in the hotel industry focused on managing room inventory and maximizing revenue and occupancy.

   Careful monitoring and controlling of overbookings can minimize losses occurring due to empty rooms and ensure customer satisfaction.

Tools and Technologies Used for Hotel Revenue Management

Using the right tools and technologies is among the most effective strategies for revenue management. Here are a few you need to know:

1. Business Intelligence Software

   Business intelligence software provides all-round visibility into the inner workings of your hotel.

   It not only focuses on hotel revenue management but also the number of customers, rooms booked, and month-on-month growth in terms of numbers. It also helps in tracking and to build automated performance reports.

2. Global Distribution Systems

   Global distribution systems help ensure efficient hotel revenue management by expanding the reach of your hotel to a broader, more international audience using various distribution channels.

   It ensures seamless room availability, real-time reservations, and dynamic pricing. Doing this allows your hotel to maximize occupancy and gain more revenue per customer.

3. Online Travel Agents

   Online travel agents are the most renowned distribution channels a hotel uses to list their rooms for bookings. Transient guests often use them to book their hotel rooms.

   By using an online travel agent, your hotel can reach out to more diverse customers, eventually increasing both your customer base and revenue.

4. Channel Management Tools

   Channel management tools integrate with online travel agents for room and pricing management.

   They also offer a centralized dashboard and management engine, allowing you to see the number of bookings accepted or declined, alongside making price-related changes to the listings.

5. Property Management Systems

   Hotel employees often use property management software to automate check-ins, billing, and reservations. These tools are more focused on on-site operations and help in improving efficiency.

   They also help you store guest information at a centralized location and provide tailored services to them.

The Role of Data in Revenue Management

Data plays a crucial role in the entire hotel revenue management lifecycle. Through in-depth analysis, hotel owners can set optimal room rates and make informed decisions about pricing and inventory allocation in real-time.

Furthermore, you can also leverage the entire collection of guest data to not only offer personalized services but also retain them for the long run.

Pricing Strategies in Hotel Revenue Management

There are multiple pricing strategies used for optimal hotel revenue management. As a business owner, implementing these strategies can be crucial.

Let’s find out what they are:

1. Demand-based pricing

   Deciding room rates per the traveler’s demand is called demand-based pricing, which depends on the insights gathered from previous occupancy, revenue, or expense data.

   By combining these with the forecast patterns, hotel revenue managers use this method to set the prices accordingly.

2. Rate parity pricing

   The rate parity pricing method helps build customer credibility over time. It ensures that the room rate is consistent across all platforms.

   Room rates appear the same across all distribution channels, including the hotel website or other booking platforms.

3. Occupancy-based pricing

   The occupancy-based pricing strategy is quite dynamic since the rates tend to fluctuate as the occupancy level increases.
   In such scenarios, managers either increase or decrease the room rates as occupancy rises or decreases.

4. Market segment pricing

   The market rate for rooms may be restricted due to rate parity pricing. However, hotels can generate revenue by negotiating discounts with their corporate clients.

   These discounts may cause revenue loss to an extent, but the guarantee of room night production negates it.
   The increase in room night production can also boost the hotel’s occupancy.

Forecasting and Demand Management

Customer segmentation is a crucial step in hotel revenue management and also plays a key role in efficient demand forecasting. As a business owner, it’s critical to identify high and low-yield rooms or inventory. It not only ensures better inventory management but can also help you optimize the pricing to ensure incremental revenue.

The demand of different segments during different periods also needs to be taken care of.

Knowledge of the upcoming trends and yield management in the hotel industry may also help you with staffing and marketing.

You may accept early bookings during the low-demand period, whereas late bookings can help capture the high-yielding guests at the last minute.

To ensure this, you need to understand the concept of constrained and unconstrained demands.

1. Constrained demand

   In simple terms, constrained demand is the maximum demand for all the rooms your hotel can provide. So, for example, if you’ve got 20 rooms on your property, the demand for them would equal 20.

2. Unconstrained demand

   It is the number of rooms that can be booked in a single day if you have no limits on the number of rooms. Suppose your property has 30 rooms, but the demand is for 50 rooms – the unconstrained demand would be 50.

Distribution Channels and Inventory Management

The process of monitoring the inventory and controlling it is called hotel inventory management. It helps you decide the number of rooms you need to allocate to the different channels and when to restrict your business, among others.

Understandably, not all customer segments will give you profitable business throughout the year. So, ensuring effective yield management becomes crucial.

You need to balance out the high-yielding business with the low-yielding one. The former may be short-term, whereas the latter can be comparatively longer.

If you cut down the business from the low-yield guests, it may hamper the customer relationship. This is where hotel yield management becomes more crucial.

Here are some things that you need to consider while managing hotel inventory:

1. Opening and closing the distribution channels

   Each distribution channel needs to be managed keeping in mind their business potential. For example, direct bookings don’t require compensation, whereas corporate booking rates are slightly lower.

   This is where you’ll need to make a choice and ensure you’re using the distribution channels better.

2. The best time to accept the bookings

   Having the analytics of the hotel over time helps you understand traveler behavior for better yield management in hotels. You can decide the booking window for different segments on your distribution channel.

   It will also give you an idea of the best time to accept the low-yielding bookings.

3. Check Overbooking

   You would want to avoid affecting customer satisfaction due to something as crucial as overbooking. It’s essential to keep track of them to avoid the cost of shifting the customer to a different property simply because you are liable for their inconvenience.

Revenue Management for Different Hotel Types

Hotel revenue management practices can vary drastically with the type and nature of hotels. As a thumb rule, each hotel must have a tailored approach to managing their revenues better. Here’s how you can do this for each of them:

1. Luxury Hotels

   As luxury hotels focus more on the lavish lifestyle and personalized services, such hotels emphasize maintaining high average rates while providing the most premium experiences.

   Increased pricing during the peak period is quite common for luxury hotels, whereas maintaining an average rate helps them be consistent in revenue throughout the year – especially during the low phases.

2. Boutique Hotels

   These hotels focus on a particular niche and unique themes to attract customers and stand out. As a result, they try to improve the experience through various add-ons and services that enhance the overall customer experience.

3. Business Hotels

   Business hotels focus more on establishing long-term relationships with corporate clients for different events. The hotels offer negotiated prices and tailor the package according to their client.

   On other days, they also offer competitive market rates for traveling business people.

4. Budget Hotels

   These hotels focus on catering to the price-conscious segment while maintaining profitability. The occupancy can be amplified by value-added services like free Wi-Fi, breakfast, and accessible shuttle services as part of the package without increasing prices significantly. For such hotels, increasing occupancy rates in the off-season is given more importance.

Final Thoughts

Providing customers with the best possible experience through various services is the main objective of any hotel business. As a business owner, you want to create a memorable customer experience while increasing their LTV in the long term.

This is precisely where hotel revenue management holds the key to your success. Being mindful of it helps your business thrive, beat the competition, and grow profitability year-on-year.

If you’re serious about optimizing the growth of your hotel business, you must focus on using the strategies outlined above to create a unique experience for your customers.

FAQs

What is revenue management in a hotel?

Revenue management in the hotel industry includes optimizing inventory, distribution strategies, and pricing to increase revenue by balancing demand, rates, and occupancy.

What are the pillars of revenue management?

The following are the pillars of effective hotel revenue management:

• Pricing strategies
• Technology and tools used
• Demand forecasting
• Inventory management
• Production distribution
• Data analysis

What is the formula for hotel revenue?

Various formulas can calculate the hotel revenue, which includes total occupancy rate, ADR, RevPAR, GopPAR & NRevPAR, among others.

How does revenue management differ from traditional pricing strategies used in hotels?

Hotel revenue management helps you to price your rooms according to the peak time or low time in your region through a detailed analysis of the data recorded over some time. In contrast, traditional pricing strategies are based on mere experiences.

What are the three main concepts used in revenue management?

The three main concepts used in hotel revenue management are customer segmentation, demand forecasting, and price management.