Hotel revenue management is the industry process that uses data and analytics to predict future guest behavior and demand. The objective of revenue management is to obtain a property’s maximum amount of overall possible revenue.
Where Did Revenue Management Originate?
The concept evolved from innovations in the airline industry where yield-management techniques, such as dynamic pricing and customer segmentation, were first implemented to maximize flight ticket sales.
Some foundational concepts related to revenue management include:
Perishable Inventory
The hotel and airline industries, as well as other industries like clothing and grocery stores, all offer “perishable inventory", which are items that lose value over time until they hold no value. In terms of hotel room reservations, value expires once a reservation date has passed.
WTP (Willingness to Pay)
One of the most challenging aspects of revenue management is determining your customers’ willingness to pay (WTP), or the maximum price they’re willing to pay for a good or service. Gauging your customers’ WTP requires context:
- How do seasonal patterns influence consumer behavior?
- What are your most profitable guest segments?
- What are your competitors offering?
Without that information, WTP will be difficult to calculate.
Why Is Hotel Revenue Management Important?
Revenue management is important to the hotel industry because it provides a reliable methodology for achieving maximum profitability, provided you have dependable data at your disposal. That’s because data-driven decision making is the basis for any effective hotel revenue management strategy.
For example, you may want to compare your performance with a given comp set, but if your competitive intelligence is outdated, your comparison will be flawed and so will the conclusions you draw, which may lead to poor pricing decisions.
Revenue Management vs. Yield Management
While these two concepts are closely related, they have distinct meanings in the hospitality industry. The focus of revenue management is broader than yield management. They both involve the application of forecasting and analytics, but revenue management accounts for all the property’s departments, including food and beverage, housekeeping, and purchasing, whereas yield management is solely concerned with maximizing revenue from guest rooms.
Key Hotel Revenue Management Strategies
While no strategies can guarantee successful revenue management, the following strategies reliably contribute to strong hotel revenue management performance.
Accurate Data Collection and Analysis
Reliable historical data is essential to effective hotel revenue management. Whether you’re researching historical performance or working on predictive analysis, you can’t make effective decisions when you use faulty data.
Since this is the era of big data, you’ll need both software and staff who can make sense of the abundance of data available, which is what makes revenue managers with analytical skills and a product like CoStar with its hotel benchmarking solution so valuable.
Market Segmentation
At its root, segmentation is about correctly categorizing your guests so that you can draw more helpful insights from your data. If all your guests are lumped into one category, you won’t know how to best utilize your available rooms and boost your occupancy rates. When you have a refined idea of the specific desires of discrete groups within your business mix, you’ll have a much better handle on how you need to adjust your prices and discounts.
There are multiples ways to segment your customers, but the following three categories are solid standbys:
- Transient – Rooms sold to individuals or groups occupying less than 10 rooms per night.
- Group – Blocks of guests occupying 10 or more rooms who commit to a contract
- Contract – A consistent block of rooms committed at stipulated contract rates for an extended period over 30 days with payment guaranteed regardless of use, such as for airline crews and permanent guests.
Dynamic Pricing
Also known as “time-based pricing,” dynamic pricing is a real-time, algorithmic approach to calculating room prices. This is another method that leverages the value of big data and computing to factor in time of year, consumer behavior, and your current room supply so that the optimal prices can be offered to your guests from moment to moment. Yet again, this requires automated data reporting and staff who are equipped with the knowledge and skills to analyze trends and make data-driven decisions.
Hotel Revenue Management Metrics
Revenue management metrics are useful for gauging progress but only if they’re used appropriately. Every metric has strengths and limitations. Therefore, a hotel revenue management strategy is the skillful use of the right metrics for the right decisions.
Revenue Per Available Room (RevPAR)
How it’s calculated: Room Revenue / Total Rooms Available
Commonly used for: gauging overall revenue performance
How it applies to hotel revenue management: Allows revenue leaders to assess the team’s ability to maximize top-line revenue relative to last year, budget/forecast and against competitors.
Average Daily Rate (ADR)
How it’s calculated: Room Revenue / Rooms Sold
Commonly used for: determining revenue per room on average
How it applies to hotel revenue management: Gives insight into the customer’s willingness to pay for a single room through a specific channel and for a specific type of rate (rack, negotiated etc.).
Occupancy Rate (OCC)
How it’s calculated: Number of Occupied Rooms / Total Rooms Available
Commonly used for: gauging success at securing bookings
How it applies to hotel revenue management: Over multiple days allows the revenue leader to understand the patterns of demand that can be captured by day of week. This analysis is taken into account in determining the hotel’s yield and pricing strategies.
Gross Operating Profit Per Available Room (GOPPAR)
How it’s calculated: Gross operating profit (GOP) / Total number of Available Room Nights
Commonly used for: evaluation of broader performance outside of bookings
How it applies to hotel revenue management: Revenue leaders can use GOPPAR to determine how much business was captured to the bottom line. Changes in GOPPAR need to be evaluated alongside changes in RevPAR, OCC and ADR.
Total Revenue Per Available Room (TRevPAR)
How it’s calculated: Total Revenue / Total Available Room Nights
Commonly used for: evaluation of a property’s overall financial performance
How it applies to hotel revenue management: Allows revenue leaders to assign value beyond just the room rate paid by different customer segments. Since TRevPAR looks at all spending, this analysis will help determine which customer segment is the most valuable to the hotel even if their ADR is lower than another.