Believe it or not, the foundations of today’s hotel revenue management practices were first used by airlines.
With the Airline Deregulation Act of 1978 — a law that allowed airlines to set their own fares and routes — airlines got more intelligent with their pricing.
This led to a concept called “yield management”, revenue management’s precursor. American Airlines began tiering their pricing based on specific conditions like discounts for tickets booked more than 21 days in advance.
It was all about getting the highest yield by pricing inventory dynamically. And once Bill Marriott Jr., Chairman and CEO of Marriott International, picked up on this lucrative model, the hotel industry was transformed forever.
And that’s where it all began.
But what is revenue management in hotels today? How does it work? How has it changed over the years? And what are the best modern strategies and tactics for increasing a hotel’s revenue?
What is Hotel Revenue Management?
Hotel revenue management refers to a property’s pricing strategies to sell perishable inventory. It is based on the behavioral economic concept of “willingness to pay”, which is the maximum price a consumer is willing to pay for something.
In a hotel’s case, it’s how much a guest is willing to spend on their whole stay (room, food, amenities). The main goal of hotel revenue management is to outperform competitors, increase profits, and optimize hotel performance.
By looking at factors like past occupancy rates, customer satisfaction, and competitor pricing, revenue managers determine rates and distribution strategies to maximize their hotel revenue.
With revenue management, you’re selling to the right person, at the right time, through the right channel.
Why is Hotel Revenue Management Important?
The importance of revenue management in hotels is summed up nicely by Bill Marriott Jr.:
“Revenue management has contributed millions to the bottom line, and it has educated our people to manage their business more effectively. When you focus on the bottom line, your company grows.”
Bill Marriott Jr., Chairman and CEO, Marriott International
Simply put, revenue management is essential to a hotel’s success. With the right systems, strategies, and software, you can maximize revenues and hit your key performance indicators (KPIs) faster.
Not only that, but it helps you better manage resources & roster the right number of staff based on predicted occupancy levels.
Want to increase upsell revenue at your hotel property by 200%?
Key Components of Revenue Management
Role of a Hotel Revenue Manager
Traditionally, hotel revenue managers made decisions relating to rates, occupancy, and lengths of stay. Today, hotel revenue managers often lead all hotel revenue management efforts, and have a far greater influence on what happens within the company.
Hotel revenue managers manage room rates, negotiate commissions on distribution channels, handle budgeting and forecasting, identify new revenue opportunities and more.
Better data, new management systems, and ever-expanding technological capabilities have revolutionized the revenue manager role, but also presented new challenges. Some of these challenges include: information overload, working with too many systems, and complex distribution.
Importance of a Revenue Management System (RMS)
A revenue management system (RMS) takes the guesswork out of determining what room rates should be. An automated RMS analyzes hotel and local market data in real time and determines the best price for your rooms.
This allows you to maximize revenues by selling at the right price, at the right time throughout the year. Good systems will provide easy-to-read graphs and real time analytics. Also, modern RMSs will be able to connect to your property management system (PMS), channel manager and any online travel agencies you utilize.
In short, a revenue management system helps hoteliers:
Avoid human error
Maximize revenues & yields
Save revenue managers a significant amount of time
Understand your guests & competitors better
Revenue Management Strategies
Hotel Pricing Strategies
Hotel pricing strategies are highly dependent on a property’s unique attributes, which means that no one strategy will work perfectly for you. There are a number of strategies. The most common two are dynamic pricing and open pricing.
Dynamic Pricing in Hotels
Dynamic pricing: This strategy uses the metric Best Available Rate (BAR) as a guide to adjust pricing. Factors such as supply and demand, competitor pricing, seasonality, among others are used to determine prices. Revenue management systems are helpful with dynamic pricing in hotels as it analyzes all available market data.
Open pricing: An increasingly popular strategy; this method allows hotels to pitch rates and services at different price points along a demand curve. With open pricing, you can price all room types, channels, and dates independently of each other. Put simply, this model means never saying no to a customer.
Here are a few other strategies you can look at:
Skimming: Positioning your hotel among the most expensive.
Price per segment: Differing your product prices based on market segments.
Penetration pricing: Positioning yourself as the cheapest in the market.
Value-added pricing: Pricing more expensively than the competition and offering addons at no extra cost.
Length of stay: Setting a minimum length of stay when demand overtakes supply.
Discount pricing: Lowering base rates in order to boost periods of low-occupancy.
Effective Revenue Management Best Practices
In addition to dynamic pricing, other hotel revenue management strategies include understanding customer behavior, managing distribution channels effectively, and using data analytics to identify trends and strategic opportunities.
Optimizing Hotel Revenue
Hotel Revenue Optimization Techniques
By effectively using hotel revenue optimization techniques, you can have a significant impact on your bottom line. Some key techniques include yield management, upselling and cross-selling, all of which can increase the amount of revenue made per guest and create a more robust cash flow for your property.
Using Hotel Revenue Management Tools
To keep track of revenue and understand more opportunities for increasing cash flow, it’s helpful to employ the use of a hotel revenue management tool. This way, you can keep track of how your upsells are performing and see all of your ancillary revenue details at a glance.
Conducting Hotel Revenue Analysis
A hotel revenue analysis involves looking into historical data to identify patterns and opportunities for improvement. This gives you insight into hotel revenue trends, pricing strategies, distribution channels and operational efficiency, while analyzing guest segmentation data can help identify high-value customer segments.
Important KPIs and Metrics for Tracking Revenue Management
While there are a myriad of metrics, like the ones listed below, KPIs are specifically associated with goals. Measuring these metrics and creating KPIs out of them will help you improve the performance of your hotel — and your employees.
Occupancy Rate and Average Daily Rate (ADR)
Occupancy Rate and Average Daily Rate (ADR) are two of the most important metrics to track for revenue management. Occupancy Rate is the measure of which percentage of guest rooms are occupied at any given time. ADR refers to the average rate paid for a hotel room, and is calculated by dividing the total revenue from room sales by the total number of rooms sold.
Revenue per Available Room (RevPAR) and Gross Operating Profit (GOP)
There are many elements that are involved with managing your hotel’s revenue, which can become overwhelming. By staying organized, employing the use of a revenue management software and keeping your goals in mind, it’s easier to prevent information overload.
Managing Complex Distribution Channels
Hotels typically rely on a variety of distribution channels for bookings, including travel agencies, global distribution systems and direct reservations. Third-party distribution channels usually have an associated cost, but can be worth it if they drive enough traffic to your hotel. However, careful management of these channels is key to optimizing your revenue.
Preventing Fraud and Chargebacks
Fraud and chargebacks are terrible for a hotel’s bottom line, so preventing them is a key element of optimizing revenue management. Implementing systems that deter fraud and chargebacks, such as card verification and digital authorizations, can help you save thousands fighting these problems.
Five Ways To Increase Hotel Revenue
1. Find More Ways To Upsell
When we talk about driving hotel revenue, finding new ways to upsell should be first on your list. While you can begin offering new amenities and services (recommended), you should first focus on how to improve the way you upsell those that already exist.
Implementing technology like Canary Upsells is a great way to improve your upsell success. As well as relying on staff to upsell in-person, hotels can use this powerful solution to push customized packages, room upgrades and other add-on services at key moments of high buyer intent. For example, Canary Upsells integrates seamlessly into a mobile-friendly contactless check-in flow enabling guests to enhance their own experience before they even set foot on the property.
Once you have an upsell system in place, then it’s time to think about what new services and packages can be added to it.
Want to earn more money and help out local businesses?
It’s likely that guests will be looking for experiences to fill their time when they visit. Partner with local businesses so that you can offer their services at a reduced rate, and get commission on every referral.
3. Showcase & Sell Hotel Decor
Believe it or not, hotels such as The W Hotel and Sheraton Hotels have started selling their decor, furniture, and linens through branded eCommerce stores. And you can too!
If your hotel has a unique style, consider creating your own eCommerce store. You could even sell large versions of loved in-room amenities like body-lotion or shampoo behind the concierge.
You could also display and sell the work of local artists for a small commission.
4. Improve Your Hotel’s Reputation
Improving your hotel’s reputation seems like an obvious step, but what are the best ways to go about it? A good start would be to analyze your online reviews. Finding out the most frequent complaints will help you discover patterns and areas for improvement.
Then, improve your social media strategy. Everyone and their dogs are on platforms like Facebook, Instagram, TikTok, and LinkedIn. Choose which platforms are best for your business, then figure out a posting schedule.
Will you post videos or images? What style of post suits your brand? These are a couple of key questions to ask yourself as you develop a social media presence.
Additionally, be sure to leverage technology solutions that help hoteliers boost their ratings and rankings on review sites like Tripadvisor and Google.
For example, Canary’s Contactless Checkout product pushes a mobile-friendly survey to every guest at the end of their stay. Any guest that leaves 5 stars is then prompted to share their experience on Tripadvisor and Google. Anything 4 and below is directed to hotel staff members so they can make one last attempt to turn a frown upside down.
Want to increase 5-star reviews for your hotel by 350%?
5. Prevent Fraud & Chargebacks
It’s been estimated that of all instances of credit card fraud, 55% occurs within the hospitality industry. The two most common types of fraud include card-not-present and friendly fraud.
Unfortunately, however, many hotels still rely on outdated practices and technologies. Given the frequency of fraud and the financial damage it can cause, hotels need to have appropriate protections in place, such as:
Canary Contactless Check-In, which allows hotel guests to check-in online before their stay and runs a series of advanced checks designed to prevent card-not-present fraud.
Canary Digital Authorizations, a PCI level 1 compliant solution, allows hotels to collect all relevant customer data (such as name, billing address, and card details), via a secure online form. This is an easier, safer way to handle guest data. What’s more: if a chargeback occurs, you have all the information you need to win the case!
Want to reduce chargebacks & fraud?
Hotel Revenue Management Books
If you are looking for more help, guidance, and wisdom where hotel revenue management is concerned, we’ve compiled four books that could help you up-skill and impress.
Elastic by Leonard Mlodinow. Recommended by Hotel Tech Report, this book will help revenue managers remain resilient and adaptable, no matter the situation.
Travel Industry Economics by Harold Vogel. This book will help you understand industry economics so that you can “speak the business of travel”.
Revenue Superstar!: The Simple Rules of Hotel Revenue Management by Johan Hammer. A fun read, designed to help you improve your revenue management process.
Evolving Dynamics: From Revenue Management to Revenue Strategy by Kathleen Cullen. A detailed, well-rounded guide to revenue management. It’s also the official study guide for the Certified Revenue Management Executive (CRME) certification exam.
The Future of Hotel Revenue Management
Hotel revenue management has changed a lot over the past decade or so. While the hotel industry is typically slow when it comes to the adoption of tech, competition and a need for strategy are now driving forces where revenue management is concerned.
The Impact of AI and Automation
Hospitality woes during COVID-19 and high customer acquisition rates, in addition, have reinforced the need for effective revenue management. Technology advances such as automation, AI, and advanced revenue management systems, are likely to be adopted by more and more hotels across the world.
As Pablo Torres, Hotel Consultant for TSA Solutions says, “There are no more excuses for most hotels to keep leaving money on the table: resources are plenty and available, it’s about the mindset now.”
Personalization and Customization in Pricing
Final Thoughts
Technology is evolving faster than anyone could have predicted, and impacting every facet of our existence. Hotel revenue management is no exception. Hotels everywhere are looking for more ways to incorporate software, AI, and new technology into their hotel revenue management practices.
Improving your hotel revenue management through the use of the right tools will help your hotel stay competitive and improve performance continually.
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