What is Hotel Revenue Management - Everything you Need to Know, Tips & Strategies

Revenue management can be defined as the strategic distribution and pricing tactics used to sell a property’s perishable inventory to the right guests at the right time, to boost overall revenue growth. Basic revenue management strategies comprise of: market understanding and competitor awareness, segmentation and price optimization, pricing strategy, forecasting and yield management.

For a long time, Revenue Management was only considered to be a supplemental offering, or an additional business process, in the hospitality industry. However, times have changed and hoteliers have realized the importance of good revenue management strategies.

Nowadays revenue management is one of the core areas that impact sales and growth.

Pricing, strategy, operational management, and almost everything else takes into account revenue management to gain a competitive advantage, offer a better guest experience, and drive more revenue.

Definition of Revenue Management for Hotels

Revenue management can be defined as the strategic pricing and distribution of a property's rooms, facilities, and amenities to the right audience at the right time.

In both short- and long-run, revenue management helps in boosting sales and revenue.

Revenue management measures what different customers from multiple segments are willing to pay. This can only be done by measuring and monitoring the supply and demand of the hotel rooms, eventually breaking it down into various factors.

History of Revenue Management in Hospitality

Revenue management was born in the aviation industry, and the concepts of inventory management and price optimization further spread to different segments of the hospitality business. Revenue management is also extensively used in other industries. The most vital change came from a tactical inventory management approach to evolve into a more strategic marketing approach.

In the past, hotels didn’t take into consideration the importance of acquiring new market segments to fill slow demand periods or try to apprehend if the prices that were being offered were ideal.

Based on the airline industry’s yield management, the hotel industry started to apply revenue management strategies in the late 1980s, as the products shared similar characteristics, such as perishability, fixed capacity and the need for segmentation based on customers’ levels of price sensitivity.

Why is Revenue Management Important in Hotels?

Revenue Management is critical for hotels as it’s a service, not just a product on the shelf. Demand varies by day of the week and by season, and there are many services that hoteliers can attach or package to a simple room night to capture the interest of many different types of customers. These may range from business travellers and solo tourists to couples and families.

Finding the best tailor-made solution for the specific property requires a dedicated Revenue Manager who will analyze the competitor set and the market to find the best opportunities for the hotel.

If the pricing is not right or well-thought of backed by data, a hotel could lose a lot of potential revenue.

Revenue Management versus Yield Management

While revenue management includes predicting consumer behaviour by various market segments, forecasting demand, and optimizing prices for several different types of products, yield management refers specifically to maximizing revenue through inventory control.

There are three essential conditions for yield management to be applicable:

• There should be a fixed number of products available
• Perishable product (there is a time limit to selling the resources, after which they cease to be of value) should be available
• Different customers should be willing to pay a different price for the same product
• There should be high fixed cost and low variable cost – every additional revenue will contribute to overall profit

Revenue Management Strategies, Tips, and Examples

There are six basic revenue management strategies that need to be implemented in every hotel. These are the pillars of success.

1. Understanding Your Market

It's important to make sure you know what the peaks and highs are for the season. You also need to consider which days of the week remain busy, and which ones are slower. Knowing the market trend can put you ahead of the competitor set and help you maximize revenue.

2. Segmentation and Price Optimization

It’s critical to understand the market and know what type of customers are staying at the hotel. It's also important to figure out who is willing to pay how much. Here's our guide on this: Identify, Segment and Target your Hotel Customers

3. Knowing Your Competitors

The competitors in your area are your main rivals. They have the best opportunities in taking business from you. Hence, you need to familiarize yourself with their products, pricing and any advantages that they might be using. It's good to use this information as a benchmark to know what you need to do better.

To learn more about creating your own hotel competitor set, check out: How to create your hotel competitive set analysis?

4. Choosing the Right Pricing Strategy

Pricing is the key, and understanding your market and segments helps you choose the right price points to maximize revenue

Here's a full guide: How to build a pricing strategy for your independent hotel

5. Forecasting

In order to understand future demand and set the correct pricing strategy, you need to have a forecast in place to see what you can anticipate in specific segments. This helps you prepare for the future. Looking ahead is key in Revenue Management! Here's everything you need to know about forecasting.

6. Incentives for Direct Bookings

Direct booking are important in building guest loyalty. You need to make sure that the customers know they can receive the best price at the hotel website, instead of using third-party channels where you end up paying commissions.

To discover the most widely used incentives you can implement, check out: 10 ways to get more direct bookings.

Outsourcing Revenue Management

Having an in-house Revenue Manager is good, but the distractions don't help. In a hotel, there is always something happening, and someone needs to give a hand.

Having a Revenue Manager on site as part of the team can take away time from core revenue management. The person may just be involved with a lot, and you might end up losing opportunities to impact revenue.

Hence, outsourcing revenue management is a good idea, as it frees up a team member and allows them to focus on the operational part of the business. This creates outstanding guest experience, while the 'offsite' Revenue Manager can work on maximizing the revenue.

Revenue Management as a Competitive Advantage

Overall, Revenue Management is critical for maximizing a hotel’s revenue. Every market is getting saturated with more and more hotels opening up, and in order to gain competitive advantage, you need to use revenue management to its full potential.

As mentioned, Revenue Management is not just about pricing. There is much more than the rate of the rooms. It makes you consider demand, budget, forecast, and everything else to make the most of the opportunities and reservations.

It’s not just the hotel room anymore, but also the added amenities and everything that is included for a certain price point. Setting the right rate is just the beginning.

Utilizing Revenue Management and its software, such as Revenue Management Systems (RMS) or Rate Shopping & Market Intelligence Software to assist you, brings your property to the next level by broadening the horizon and helping you reach your goals.