Hotel Revenue Management: Strategies and Tools

Hotel owners must handle many aspects of their hotel’s day-to-day operations. There are many responsibilities, and you can’t afford to neglect any of them. That certainly applies to hotel revenue management. 

We will talk about hotel revenue management in the following article. We will discuss what it is, go over how it compares to yield management, and we’ll also cover strategies and tools that all hotel owners should know about. 

What Does Hotel Revenue Management Mean?

Let’s start with a working definition of hotel revenue management. The terms means the pricing tactics and strategic distribution that a hotel owner uses to sell perishable room inventory. They must attempt to sell that inventory to the right guests at the right time. When they do so, they’ll boost revenue growth, and that should be every hotel owner’s ultimate goal.

There are other aspects of this core strategy as well. Those normally involve other products the hotel offers. These might include beverages, food, and various hotel amenities. 

What Does Hotel Revenue Management Revolve Around?

Hotel revenue management revolves around the measurement of what potential customers representing different audience segments are willing to pay. Monitoring and measuring the supply and demand of your rooms is how you do that as a hotel owner.

You must use analytics and data. This part of your business model cannot be left up to guesswork. What you’re trying to do is keep track of your supply and demand. It is by doing so that you can make accurate predictions of consumer behavior. 

Once you’re predicting consumer behavior accurately, you can then figure out the most suitable distribution channels, the right pricing, and what accommodations to promote to each potential customer. 

Yield Management vs. Revenue Management

It’s also vital as a hotel owner that you understand what yield management is as compared to revenue management. They’re both concepts that you need to pay attention to, but they are not the same thing. 

We’ve already defined revenue management. As for yield management, it’s a strategy for maximizing revenue from your room bookings. You do so by adjusting your prices based on a number of different factors. Those ordinarily include things like seasonality, demand, and booking patterns. 

To master yield management, you must influence, understand, and anticipate a customer’s likely behavior. You must also find the optimal balance between rate and occupancy.

You could describe yield management as the understanding of what customers want and when they want it. Once you have a handle on that information, you can vary your sales approach and prices accordingly to make as much money as possible. 

What is the Main Difference Between These Two Concepts?

With yield management, you are trying to define customer behavior. You’re also attempting to set the best price on your rooms so you can attain the maximum amount of revenue.

This idea has been around for much longer than the concept of revenue management. Yield management is also much more narrowly focused. 

You could look at revenue management as being focused on your business’s entire revenue. That includes ancillary revenue and spending. Yield management, meanwhile, focuses on price and the volume of sales. 

You’ll want to note that yield management is closely related to two other concepts, demand forecasting and inventory management. That is because it aims to sell the largest number of rooms at the highest price possible. You can only do so according to customer demand, though. 

What Are Some Similarities Between Them?

When it comes to similarities between hotel revenue management and yield management, the most notable one is that both involve the application of analytics and forecasting. However, the two concepts go in dramatically different directions from there. 

Yield management has a laser focus on maximizing revenue from guest rooms, while revenue management will take into account all of your property’s departments, including housekeeping, food and beverages, and so forth.

Now, let’s talk about some hotel revenue management strategies and tools that you should be aware of as a hotel owner.

Dynamic Pricing

Dynamic pricing is also sometimes called “time-based pricing.” It is an approach to calculating room prices in real time that typically involves an algorithm.

Computing and big data are your friends if you attempt to employ this approach. You can use it to factor in consumer behavior, what time of year it is, and your current room supply.

When you do this, you can offer your potential guests the optimal price from moment to moment. To make this work, you need automated data tracking. You’ll also require staff who are equipped with the skills and knowledge for trend analysis. Every decision you make when it comes to dynamic pricing must be data driven if it’s truly going to work for you. 

Market Segmentation

Next up is market segmentation. This concept involves correctly categorizing your guests. When you do so, you can draw helpful insights from the data you’re collecting. 

If you lump all your guests into the same category, that won’t be helpful as you try to figure out how to best utilize your available rooms. Consequently, you probably won’t be able to boost your occupancy rates. 

However, if you’re able to get a refined idea of the particular desires of individuals groups that frequent your hotel, or would like to, then you should be able to create a much more effective pricing and discount strategy. 

How Can You Segment Your Customers?

Market segmentation might sound like a good idea, but some hotel owners aren’t sure about the best way to do it. You have multiple options when it comes to this particular hotel revenue management strategy. 

You can use the contract approach. This is when you have a consistent block of rooms that are committed at stipulated contract rates for a period over 30 days, regardless of use. You might employ this tactic with permanent guests, airline crews, and the like.

There is also the group approach. This is where you have blocks of guests that occupy 10 or more rooms. They will do so by committing to a contract. 

The transient approach is a third possibility. This involves rooms sold to groups or individuals that occupy less than 10 rooms per night. 

These three segmentation methods are usually regarded as dependable standbys by experienced operators in the hotel industry.

Accurate Collection and Analysis of Data

The collection and analysis of accurate data is also essential when you’re looking at the general concept of hotel revenue management. Reliable historical data is the backbone of this aspect of your hotel management strategy. 

You can use it to research your hotel’s historical performance, but you can also utilize it to work on predictive analysis. In either case, though, you can’t make decisions regarding your strategy unless you have solid data to back up the moves you make. 

This is the big data era, and you must make decisions accordingly. You’ll need staff members who know how to make sense of the abundant available data, but you must also have the right software to produce it. 

What Features Should These Software Systems Have?

There are many software features you might look for as you peruse the various options that can help dictate your hotel revenue management strategy. At a minimum, though, your system should do the following:

  • Day or week-based performance analytics
  • Channel or segment-based revenue analysis
  • The collection of historical inventory data
  • Revenue reports according to KPIs
  • Analysis of any revenue lost due to cancellations or overbooking
  • Demand forecasting
  • Detection of the most profitable pricing options

There are many bespoke software systems that can help you, so it will make sense to research some of them and pick the one that seems best for your particular situation. You will also probably want to employ revenue managers with analytical skills. 

Now, let’s move on to some hotel revenue management metrics that you should know about. 

TRevPAR

Revenue management metrics are often a large part of your overall hotel revenue management strategy. Each of the ones we’re about to mention can be spoken of at length, but here we’re just going to give a brief definition of each and explain the basics of how they apply to hotel revenue management.  

TRevPAR is shorthand for total revenue per available room. You calculate it by dividing your total revenue by your total available room nights. It’s useful for the evaluation of a property’s overall revenue performance. 

When you’re applying it to hotel revenue management, you can use it to assign value beyond just the room rate that different customer segments paid. TRevPAR looks at all spending. 

Accordingly, analyzing it should help you determine which of your customer segments are the most valuable to the hotel. This applies even if their ADR is lower than another segment. 

GOPPAR

The meaning of GOPPAR is gross operating profit per available room. You calculate it by dividing your gross operating profit by your total number of available room nights. It’s normally used to evaluate broader performance outside of bookings. 

When applied to hotel revenue management, you can use GOPPAR to determine how much gross profit your hotel is bringing in based on the number of rooms you have available for sale each night. Any changes in your GOPPAR must be evaluated in the context of changes to your ADR, RevPAR, and OCC.

OCC

OCC is your occupancy rate. You calculate it by dividing the number of occupied rooms by the total rooms available. It’s useful for gauging your success at securing bookings. 

When applied to hotel revenue management, it allows you to look at the demand patterns that apply to your rooms over different days of the week. If you’re trying to improve your hotel’s yield and modify your pricing strategies, you must take the analysis of your OCC into account.

ADR

ADR is your average daily rate. You calculate it by dividing room revenue by rooms sold. 

You’ll normally use it to determine your revenue per room on average. In the context of hotel revenue management, you can use it to get insight into a customer’s willingness to use a specific channel to pay for a single room at a specific rate. 

RevPAR

RevPAR means revenue per available room. You will often use it to gauge your hotel’s overall revenue performance. 

In the hotel revenue management niche, you would use it to gauge overall revenue performance. You can utilize it when assessing your team’s ability to maximize top-line revenue. The way you calculate it is by dividing rooms revenue by total rooms available.  

You can compare these numbers to what your competitors are doing. You can also use it for comparisons with previous years, or you might look at it in the context of your budgeting forecast. 

Additional Tools in the Hotel Revenue Management Space

In addition to what we’ve talked about so far, many hotel owners are looking into and implementing data science and artificial intelligence in various ways. Chatbots on apps and websites can answer common customer questions. They might also cross-sell or upsell additional services.

Then, there is the generation of ancillary revenue. This is revenue you gain in other ways besides the main product you offer. These might include spas and wellness services, flower delivery, transportation, food and beverage services, etc. 

To generate more ancillary revenue, you might try targeting particular segments of the population that you know frequent your hotel. Those may include business travelers, families, tourist groups, and others. 

Hotel revenue management is a multifaceted concept that you can approach in many different ways. We have described just a few of them in this article. The best hotel owners know that this particular part of their business model is constantly changing. 

It is in your best interest to be mindful of innovations in hotel revenue management. The decision to use or not use a single tool or strategy can make an enormous difference in whether you’re able to remain competitive, meet your financial projections, and generally run a profitable and successful hotel.  

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