Now, more than ever, revenue management is the cornerstone of running a successful and profitable hotel. The growth of data that’s now readily available as well as the ways to track and analyse it provides a wealth of new opportunities for your business to turn a profit. Show
The most successful hoteliers are savvy operators who continually look for ways to learn and improve the way they do things, gaining an edge over the competition. Yet, only a small percentage of independent hoteliers use revenue management strategies and thus limit their revenue-generating potential. Read on to learn the strategies that will help you realise optimal revenues and profit for capacity-constrained and perishable assets (rooms, in this case). But before we get into that, let’s get our heads around the basics, starting with what revenue management is and what it can mean for your hotel. Table of contents What is hotel revenue management? Revenue management refers to the strategic distribution and pricing tactics you use to sell your property’s perishable inventory to the right guests at the right time, to boost revenue growth. Other products such as your amenities and food and beverage offerings will also come into the picture. Revenue management revolves around measurement of what customers from different audience segments are willing to pay and this can only be done by measuring and monitoring the supply and demand of your hotel rooms. Within the hotel industry, it involves the use of data and analytics to help hotel owners monitor supply and demand so they can make predictions on consumer behaviour. This then allows them to make better informed decisions on what accommodation to promote to the right client, at the right time with appropriate pricing through the most suitable distribution channel. It’s a cost effective business technique that allows the optimisation of inventories and helps to maximise profits while ensuring customer satisfaction. Understanding hotel revenue managementLet’s start with the basics of hotel revenue management to get a better understanding; every traveller has a maximum value they can offer your hotel and revenue management is about capturing as much of this value as you possibly can. There are many ways you can approach this, from motivating guests to book directly to offering purchase extensions, up-sells or extras as well as encouraging guests to become a return visitor. Remember, the best strategies and techniques are based on the understanding that hotel pricing is fluid and can change from one day to the next. This is a key reason why hoteliers should never be afraid to increase your rates, and this may be surprising, but customers actually expect increases over time. Most businesses where consumers spend money, have varying prices based on demand, supply and shifts in costs. Why is revenue management important for the hotel industry?Effective hotel revenue management strategies and techniques can also help hoteliers:
With all this in mind, hotel revenue management can drive the entire business plan when implemented effectively. Your hotel distribution strategy is also a vital part of your revenue management plan; make sure you’re on internet distribution channels that are best to promote your destination online. The right distribution channels can have strong marketing power, putting your hotel in front of many customers you aren’t able to contact directly. It is important to have a secure and advanced hotel revenue management system to maximise revenues and yields. By using smart technology and a large dataset, hotels are able to foresee market demand in hospitality and react to changes in the market where they can adopt new strategies and systems in order to maintain high levels of performance. How to increase hotel revenueThere are many strategies that ensure more revenue is driven to your hotel, and many of them don’t involve raising prices or playing with your rates much at all. The key driver is to ensure the satisfaction of your customer. If your product offering is universally recognised as quality, you have the foundations to charge a higher price. If guests feel like they’re getting maximum value for their money, it’s very likely they’ll be willing to spend more. Getting more out of each individual guest who stays with you is a great way to increase the overall revenue of your hotel. For instance, guaranteed revenue from a guest you convince to stay an extra night by discounting the additional night might be worth your while, especially in low season. Here’s a list of general tactics you can use to improve your hotel’s revenue stream:
These days travellers enjoy the flexibility, convenience, and value of booking online. By starting to connect to online travel agents (or more OTAs) you’ll easily see an uplift.
Who’s on your revenue team? Everyone!
Revenue opportunities extend far beyond simply selling your rooms. Think about the amenities you have on site and what you’re charging for them. Go even further by offering hotel guests the chance to purchase items like soap, utensils, bathrobes etc, specifically hotels that have a unique sense of style (boutique hotels are more likely to succeed with selling unique products used within their establishment).
Events and attractions in the area are a great opportunity to curate packages for guests or offer additional services such as transport. The benefits are two-fold; guests enjoy their stay more and your hotel generates more income. As you move away from tactics and towards a completely developed strategy around your revenue and room sales, you also need to start thinking about and understanding your key performance indicators (KPIs). Once you know what you should be looking at you can start analysing the data and developing ways to manipulate them in your favour. As a base, these are some metrics you can explore:
The principle that you should always keep in mind when choosing KPIs to benchmark against, is to assess market conditions in real-time and adapt accordingly. Revenue management strategiesIt’s critical for any hotelier to create a revenue management strategy that is adaptable to the current conditions. And more often than not (at least at first), it’s much more important to focus on your own business – with full confidence in your strategy – than to worry too much about competitors. Every hospitality business strategy has to have the customer at its heart. It’s vital you have an idea of your audience’s consumer behaviour if you want to squeeze the most value out of each guest that enters your door. Factors to consider may be:
The better you know the guest the more guest loyalty you can generate, which is extremely important for recurring revenue. Once you have a strong customer retention base, you’ll know you’ll have a certain number of guests returning each year, meaning more secured bookings and less rooms to worry about filling, allowing you to focus on upselling and cross-selling your hotel services. Planning how to price and what to promote 12 months from now will set you up for success, because you’ll already be prepared for the travellers who are dreaming of their ski holiday, summer getaway, or event-based trip. For instance, are there festivals, concerts or events that occur every year or are announced well in advance by local tourism bodies and event centres? Make sure these are incorporated in your revenue, forecasting, and yield strategy! In short, you need a revenue management strategy to remain sustainable. Let’s go into some specific strategies that will help you gain revenue and increase profit. Hotel pricing strategiesThere’s not one pricing strategy that works for all hotels. Each individual property must consider a pricing strategy (or strategies) that work best for their particular brand. A revenue manager should spend some time analysing data and other influencing factors to ensure the business is operating with the best possible chance to maximise income. There are a number of questions you should ask yourself surrounding pricing strategies:
What do we mean by this? Let’s take a closer look at the first question as an example. Certain guests will prefer or be accustomed to seeing particular pricing methods: some may like a cost breakdown of their stay per day, while others are happy with a total cost for their entire stay. So, this is where either Daily Pricing or Length of Stay pricing strategies might come into play. Bearing in mind the above, the first priority and most important step of pricing strategies for hotels should be forecasting. This way you can predict demand and set prices based on raising hotel room rates as availability drops and demand increases, encouraging travellers to book early. This is an ideal pricing structure known as the “ascending model” whereby pricing increases closer to an arrival day.) We’ll talk more about forecasting and analysis later. Here’s a list of the most common and effective pricing strategies you can employ at your hotel. What is dynamic pricing?Dynamic pricing is also known as ‘time-based pricing’ and involves changing room rates based on real-time market data, which could occur daily. This type of strategy takes supply and demand into account and other factors that may affect market demand; competitor pricing, room availability, seasonality and other external aspects. Within a dynamic pricing strategy, prices should vary based on supply and demand to improve revenue and ensure maximum occupancy. This pricing option is well suited in today’s market and is one many hoteliers opt to use. Hotel revenue managers can use a revenue management system to help better understand trends in which they can modify the supply of rooms and adjust a pricing strategy whereby rates are implemented with the aim to increase sales and profitability. Take advantage of the shifting market and raise your rates compared to keeping them static in order to earn more revenue. What is open pricing?Open pricing defines the flexibility hotels around the globe have to set their prices at different levels depending on the various target markets and distribution channels they deal with. It allows hotels to sell rooms at the best and most attractive price for a consumer and also the most profitable price for the property no matter the season or circumstances. This type of pricing strategy ensures hotels never needlessly miss out on potential deals, booking or distribution channels; if there is availability for room bookings, it can be filled at a reasonable rate. For example, a high-end hotel may usually attract guests with no budget constraints, but in the off-season bookings will drop and the hotel has more flexibility to drop rates, attracting travellers who normally would not be able to afford the stay. While the average daily rate of the hotel will be lower, occupancy will remain steady and still work to maximise revenue. Other hotel pricing strategiesThere are numerous pricing strategies you can use at your hotel as part of your broader revenue management strategy, many of them in conjunction. Here’s a list of the most common pricing strategies your hotel might find useful:
Hotel market segmentationMarket segmentation is a key aspect of revenue management in the hotel industry. It allows you to differentiate between travellers who are coming to your hotel and devise unique and individual strategies for all of them. For example, the approach you take for young adventurers will be very different to a business professional. Hotel market segmentation can be a little more complex than simply business vs leisure, but you can use it to discover trends within your hotel business. One of the best ways to identify and filter segments is by their reason for travel; family holiday, wedding, tourist event, adventure, relaxation, business, etc. However, more and more hotels are adopting a different strategy completely known as a “blended segmentation”. This is the method of defining market segments by how a reservation was made, combining the reason for stay and method of booking e.g. Expedia as a market segment. Hotel chains have adopted different applications of the traditional definition of a market segment and channels. Some identify a channel as an OTA and then identify the likes of Booking.com’s reward program and Expedia’s Egencia (for corporate travel) as sub-channels. Further segmentation factors that you should take into account include:
Once you have a good understanding on market segments you can start to decide which groups your business wants to focus on more, and which to close out at different times of the year. By doing a deeper dive analysis, you might realise certain segments have higher cancellation rates and you could want to resist marketing to them. Remember, each segment will have a unique opportunity for you to gain extra business or revenue. Here’s a quick snapshot of the possibilities:
Every piece of analysis you do helps you build the optimal business mix for your hotel, so it’s important to look at all your options. If selling is a problem, there’s always an opportunity to adapt the current process or a new market to target. If spending is the problem, think of a way to entice customers to open their wallets again. Hotel price forecastingForecasting is not only important for rate setting, but also for budgeting purposes. Accurate and effective forecasting requires a strong foundation in historical data. By budgeting and forecasting in advance you’ll have plenty of time and opportunity to make adjustments to your strategy. If you know one point in the year is particularly valuable to your hotel, write your forecast immediately for that period a year in advance. Key components of an effective forecast include:
Hotel budgeting and demand forecastingIt’s a good idea to create a demand calendar prior to setting your budgeting plan so you know exactly what you’re dealing with. Most hotels forecast every day for the next 30 days and every week for the next 90 days. A lot of hoteliers do this in a spreadsheet after extracting data from their PMS, but this is where you need a really high tech yet easy to use system – that can do it all in one place. Take into account factors from last year and also trends for the upcoming year. Mark the following as things to track:
This will allow you to make informed pricing strategies based on solid data sets. Before you reach your ideal budget you have to take into account influences such as sales resources, online marketing and distribution, refurbishment needs, and developments your competitor set is making. Your budget should be developed on the basis of this question: at which rate and how many rooms can you sell for every future day? So you’ll need to have established how you’ll anticipate the business demand and the leisure demand per country, at which rate can you sell in the upcoming months, and how will your main corporate accounts behave? There are two distinct demand measurements: 1. Constrained
demand 2. Unconstrained demand You should still identify when unconstrained demand is above the capacity of the hotel; this is an important part of your hotel revenue management strategy. The unconstrained demand is useful for hotels as it can help you calculate your Last Room Value (LRV) for certain dates, and possible length of stay restrictions that may apply. Hotel revenue analysisHotels will commonly benchmark against their competition to evaluate performance. It’s not the definitive way to track performance, nor should it be treated as a performance metric, but it does enable you to see where you stand and how travellers might react. You’ll be required to benchmark on criteria such as:
Remember, a competitor is only a competitor if they’re targeting the same markets as you; even then you might not be competing for the same segments at the same time. However, if you can anticipate their strategies, making your own adjustments will become much easier. When you complete a hotel analysis of your property against the competitor set, results can often look very different. Perhaps you thought you only had an average year, when in fact your competitors were much worse off and you were the stellar hotel in the area (or vice versa). To benchmark for this, the Average Rate Index is a good way of looking at this. It measures your Hotel’s Average Daily Rate against the Market/Competitor ADR: (Hotel ADR/Market (competitor) ADR) x 100 Example: Based on this data, you’re then able to analyse to see how you can adapt your hotel revenue management strategy accordingly. To get an edge on your competitors, you can try to:
Hotel revenue management systems/softwareIt’s very likely everyone will be using some kind of technology system or solution to manage their hotel and price their rooms within the next 10 years. Many solutions already exist to help with this. Of course, one of these is a revenue management system, or RMS. Some leading RMS’s on the market include: BEONPRICE An RMS enables you to carry out important revenue management tasks more efficiently and effectively. It helps to handle and make use of all the data your hotel produces – as well as the market at large – in order to help you to make more informed decisions. Without continued analysis of the information, rooms and services may be frequently overpriced or underpriced, leaving your hotel a step behind local competitors and confused about the profitability of the business. This type of inconsistency can have a domino effect on the entire market. For example, if a hotel is constantly under-selling on the expected rate, they might inadvertently create a price war in their confusion because competitors may react in kind. Here’s how revenue management technology can help:
Key takeaways
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