Hotel Revenue Management: Definition, Purpose, and Strategies

Defining hotel revenue management is not all that simple, since it combines multiple components of an entire system into one robust strategy. One definition has been aptly given by Robert G. Cross which states that revenue management is the art and science of predicting real-time customer demand at the micro-market level and optimizing the price and availability of products. 

Thus, revenue management in hotels stands for predicting consumer behavior to sell products at the most optimal and best pricing each day. It can also be selling the right room to clients at the opportune moment, with the proper price, and across the best possible distribution channel. For any hospitality company, revenue management comprises multiple components, which include segmentation of customers, forecasting demand, managing inventory, and pricing models. Let us take a look at what they mean and how you can get your own revenue management system in place. 

The Purpose of Revenue Management 

Going by the revenue management definition, its purpose is pretty clear- to create a reliable and dynamic mechanism for achieving higher profitability. Another objective is to leverage data and advanced software and services for better decision-making. Hotels also experience the benefits of easier comparisons and benchmarking with rivals, while maximizing revenue through proper pricing strategies. Revenue management also helps in lowering costs and in utilizing maximum capacity. 

Key Strategies in Hotel Revenue Management 

Whenever the question comes up what is revenue management in hotels, then there are several components that come into play, as mentioned earlier. These include the following: 

• Customer Segmentation- Segmentation of customers is the biggest part of pricing and marketing initiatives, enabling you to clearly define travel groups visiting your property. You can now address them differently with proper segmentation. Some examples include coming up with offerings tailored to suit the specific needs of business travelers or providing amenities suitable for backpackers/leisure travelers on a budget. 

You can thus be ready with services and offers that fit every segment or group. Some other criteria include demographics (marital status, age, gender, etc.), purpose of the trip (sports, entertainment, vacation, wedding, business, etc.), duration, booking channel (OTA, walk-in, direct booking, etc.), status of traveler (regular, returning, new), and more. Every group can give you chances to earn additional revenues. For instance, you can offer freebies to loyal customers, create tour packages exclusively for families, or negotiate the rates with corporates that have multiple business trips annually. In-depth data analysis can also give you insights into customer behavior that you can use to find and fix issues like cancellations, poor reviews, etc.  

• Demand Forecasting- Forecasting is another crucial component of any hotel revenue management system. This is because consumer demand is never the same or static. It keeps fluctuating, depending on diverse aspects like the season, local events, macroeconomic variables, and more. This is where a demand forecasting system helps you analyze historical past demand and present and future events throughout all customer segments.  

You can thus predict increases or decreases in demand and create marketing, pricing, and distribution strategies accordingly. It will help you not just set prices, but also select distribution channels, choose proper promotions for guest engagement, and also launch initiatives for scaling up occupancy in lean seasons.  

• Yield Management- Yield management aims at defining consumer behavior and setting the best possible price accordingly. The purpose of revenue management is to sell hotel rooms with maximization of profits in this case. It is a slightly narrower concept as compared to dynamic revenue management systems that take all additional/ancillary revenues and expenditures into account. Yield management, however, concentrates only on the sales volume and pricing.  

It is linked to demand forecasting and inventory management since it strives to sell the highest number of possible rooms based on consumer demand. Some key parameters under this component include the maximum and minimum length of stay, allotment, last room availability, and closed to arrival. You can play with these variables and tweak them to scale up yields.  

• Inventory and Distribution Management- With hotel yield management sorted, you’ve got to focus on distribution and inventory. The latter means your product or rooms that you’re selling. Rooms are taken as perishables with specific expiry dates in order to keep the sales channels chugging along. Another aspect is selecting proper distribution channels.  

You’ll mainly deal with OTAs, bed banks, metasearch engines, and so on. Leveraging demand forecasting for every customer segment and channel will help you create the right distribution strategy to balance maximum revenues and occupancy levels. For example, you may choose OTAs as your prime distribution channel, while allotting remaining rooms to bed banks/third-party partners who can fill them in for lower costs. 

• Pricing- Pricing strategies are the foundation of any hotel revenue management framework. Setting optimal prices is vital for scaling up revenues, depending on market and customer analysis and booking trends. Dynamic pricing is one strategy worth considering, where you can tweak room rates on a regular basis (even multiple times each day), depending on market demand. This strategy aims at selling each room for the best possible rate, as per the demand and supply equation. Some external/internal data points that also influence dynamic pricing include customer segment, profile, competitor rates, weather, booking trends/patterns, etc.  

Another option is open pricing where you have different rates for multiple guest categories at varying periods of time across multiple channels. This flexibility may help maintain stable and high occupancy levels while generating revenues steadily even during periods of low demand. Some other strategies include packages or value-added pricing, length of stay pricing, and segment-based pricing models. 

Top 10 Tactics to Boost Revenue 

There are several strategies that you can employ to boost revenue at your property. Some of them include: 

1. Driving a higher percentage of direct bookings- This means you don’t have to pay commissions to anyone, thereby maximizing profits. You can also be in control of guest experiences from the outset and offer better personalization and value-added services. 

2. Linking up to added channels- If you wish to increase your customer reach, you can always link up with more channels for distribution. For example, increasing your reach from two to five OTAs will dramatically scale up your occupancy levels. 

3. Accurate and attractive pricing- Dynamic/flexible pricing that is at par with/better than rivals is the need of the hour. You’ll find several opportunities for extra earnings throughout the year by not sticking to a standard rate. 

4. Target suitable markets/segments- Do a historical analysis of your customer segments. You’ll find out the categories that your hotel is more popular with, i.e. seniors, families, couples, business travelers, etc. Once you know this, target these categories with tailored offers and value additions. 

5. Respond promptly to feedback and ask for reviews- Encourage more customers to post reviews on their experience, while responding promptly to feedback across both online and offline channels. 

6. Extended stays may also work- Guests who want to stay for more than 7-14 days come under this category. They have different needs in comparison to regular vacationers or leisure guests. Figure out and offer additional services that they may require, including laundry, housekeeping, etc. These guests may also be looking for fitness amenities, outdoor living zones, common rooms, and more. You can create special packages for them. 

7. Boost loyalty- A little personalization here and there, smiling faces, good hospitality, attentiveness, and quick service are all USPs. They will get you far in terms of higher customer loyalty and more recommendations or word-of-mouth marketing. This will ultimately equate to higher revenues. 

8. Build a compelling online presence- Your property should be listed across major distribution and online channels. The listing should have attractive pictures, compelling descriptions, and all details regarding rooms, pricing, amenities, etc. Keep information updated not just on OTAs and Google, but also on your social media pages. 

9. Identify and tap into up-selling opportunities- Whenever the opportunity arises, gently persuade guests to check out additional services/extras. You can use guest apps and other software to promote these extras and build additional income streams. Sometimes, letting guests know about additional options is enough to up-sell. 

10.  Audits are indispensable- One way to increase revenue is through regular audits. See how much you spend on supplies, water, energy, etc. This will help you plug revenue leaks and scale up profitability. 

Revenue Management Systems: Choosing the Best Solution 

A technologically advanced hotel revenue management system is undoubtedly the best solution for all your needs. How do you choose the right one? You should keep an eye out for the following aspects: 

• Price setting/dynamic pricing options

• Automation of repetitive/manual tasks 

• Customizable reports across multiple categories 

• Demand forecasting, inventory management, booking, and channel manager

• KPI-based revenue and historical data collection and analysis 

There are several choices available in the market, although you can take a look at aPerfectStay, with its pioneering PMS (property management software) solution. It helps you enhance revenue with an in-built channel manager, custom reports, mobile apps, centralized dashboards, and more. You can easily manage reservations, billings, maintenance, housekeeping, reporting, and all other functions with a single PMS. There’s even a 15-day trial to help you decide whether it’s the right fit for your property. 

KPIs to Track in Hotel Revenue Management 

There are multiple hotel revenue KPIs that you should also focus on. Here’s a closer look at some of them. 

Simply knowing about hotel revenue management is not enough; you’ll have to implement and adhere to a few best practices for the same. They include: 

1. Shift towards strategic management of profits, with a focus on GOPPAR and RevPAR. This helps you get a broader view of how the property/business is performing. Also, look at net revenue per room (RevPAR). 

2. Leverage data analysis and predictive analytics. It will help you forecast demand, occupancy rate levels, and consumer patterns. You can thus set pricing and personalize offerings across segments and distribution channels. 

3. Use the right property management software (PMS) to streamline all aspects, including revenue management, KPI-based reporting, channel and booking manager, etc. 

4. Focus on driving direct bookings through your website, offering incentives for the same. This will help you enhance customer experiences and loyalty considerably, along with overall profitability. 

5. Optimize your website and listings for mobile bookings. 

6. Use AI-powered Chatbots to offer 24-7 customer support and guidance. 

7. Generate ancillary revenues with top-class F&B, wellness, fitness, transportation, entertainment, and other services. Build packages for customer segments that integrate these additional services. 

8. Offer loyalty programs with rewards and discounts to regular guests. It will increase brand loyalty and occupancy rates simultaneously. 

9. Keep benchmarking rates and revenues with rivals in order to understand what you’re doing right and what you need to fix. 

10.  Tie up with local vendors and businesses for cross-selling opportunities and additional revenues. They may include local attractions/landmarks nearby, F&B players, rental/transportation companies, artisans and craft stores, etc. You can integrate value-additions into your packages and offer them to customers in the right segments to scale up revenues. 

Conclusion 

As you can see, hotel revenue management is indispensable for keeping up with the competition in today’s tech-driven hospitality era. You’ll need the right software solutions to stay ahead and maximize revenues while optimizing marketing, pricing, and income streams accordingly.