Hotel Revenue Management

What is hotel revenue management?

defines revenue management as “the art and science of predicting real-time customer demand at the micromarket level and optimizing the price and availability of product.”

Simply, revenue management means predicting consumer behavior to sell the product at an optimal price every day. Therefore, the definition of hotel revenue management is straightforward: selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission efficiency. Sometimes revenue management is called yield management, but these terms aren’t interchangeable.

Revenue management is defined by interconnected components, which are

• Customer segmentation,
• Demand forecasting,
• Inventory management,
• Yield management, and
• Pricing.

Each plays a crucial role and greatly impacts the ultimate financial result of a hotel, so let’s describe them one by one.

Customer segmentation

Customer segmentation is an important part of marketing and pricing as it allows you to define groups of travelers that visit your hotel and address them differently. For example, business travelers have different needs and preferences than backpackers on a budget, so you have to know your customer and be ready with the offers that fit each group.

However, there are more possible categories that you might want to identify and market to than just “business vs leisure”. Some typical segmentation criteria are

• demographic factors (age, gender, marital status, etc.),
• the trip’s purpose (business, sport or entertainment event, family vacation, wedding, etc.),
• stay duration,
• traveler status (new, returning, or regular),
• booking channel (direct, through an OTA, or walk-in), and so on.

Each customer group provides opportunities to gain extra profit — if you do it right. For example, you might offer discounts to your loyal customers, create tour packages for families, or negotiate rates with companies that have many business trips.

Further analysis can help you discover important trends in customer behavior. You might find out that some customer groups have a high rate of cancellations or no-shows, so it makes sense to focus your marketing efforts on other segments. Here, the technique that can help predict such disruptions is demand forecasting.

Demand forecasting

Customer demand is never static. It fluctuates depending on different factors, such as the season, important events in the area, or even macroeconomic conditions. Demand forecasting is the analysis of information about past demand, as well as current and future events across all customer segments. Based on this data, you can predict when demand will increase or decrease, and develop the right pricing, marketing, and distribution strategy.

Inventory management or distribution management

In revenue management, the term inventory refers to the product (i.e. rooms) sold. A room is considered a perishable product with a certain “expiration date”. It means that if you do not sell a room for tonight, you can’t sell it later. And if a room is not sold, a hotel loses money.

So, another core aspect of revenue management is choosing the right mix of distribution channels. The main channels you deal with are probably GDSs, OTAs, bed banks (or wholesalers), and metasearch engines. Using demand forecasting results for various customer segments and channels, you build the distribution strategy that will balance occupancy and revenue maximization.

For instance, hotels may use online travel agencies as the leading distribution channel, while making allotments for bed banks to fill in remaining rooms for a lower cost.

Yield management

The goal of yield management is to define customer behavior and set the best price to sell rooms with maximum profit. This concept appeared much earlier than the concept of revenue management and is narrower. While revenue management is focused on the whole revenue of a business, including ancillary revenue and spending, yield management focuses on the price and the volume of sales.

Yield management is closely related to both inventory management and demand forecasting since it aims at selling the greatest number of rooms at the highest possible price according to customer demand. Here are some of the tactics and tricks you can use to play around with your inventory and maximize revenue.

Pricing

Price is one of the main factors impacting a guest’s decision to choose your hotel. Pricing, or setting optimal rates for your inventory, is the key to maximizing your revenue. You have to carefully analyze the market to understand your customers and see booking trends. That will help you build the right pricing strategy for your hotel.

Note that you have to analyze demand and set your rates well in advance so that you have everything ready for travelers who prefer to book early.

KPIs in hotel revenue management

Traditionally, the effectiveness of revenue management strategy is measured using the following KPIs:

Occupancy rate – the number of occupied rental units at a given time, compared to the total number of available rental units at that time.

Occupancy rate = Rooms sold / Room available

Average daily rate (ADR) – this rate is applied to a room’s average rental income during a certain period of time. It’s compared to the hotel’s historical ADR or competitors’ metrics.

ADR = Rooms revenue earned / Number of rooms sold

Revenue per available room (RevPAR) – a KPI that assesses financial and business performance of a hotel. RevPAR measures the ability of a property to fill all the rooms and define the best price for them. There are two ways to calculate it:

RevPAR = Rooms revenue / Rooms available

RevPAR = Average daily rate * Occupancy rate

Total revenue per available room (TRevPAR) – a metric that assesses total revenue, generated by the property, including additional revenue streams. This KPI captures a snapshot of overall business performance. TRevPAR is one of the main benchmarking tools for big hotels and resorts.

TRevPAR = Total revenue / Total number of available rooms

Net revenue per available room (NRevPAR) – a KPI that includes spendings on marketing and distribution in the calculation. It allows hotel revenue managers to measure the impact of distribution costs on room revenue.

NRevPAR = (Room revenue – distribution costs) / Number of available rooms

Gross operating profit per available room (GOPPAR) – measures the profit of a hotel and value of all assets at any given time. GOPPAR measures profit to capacity, including all the hotel’s expenditure.

GOPPAR = Gross Operating Profit / Number of available rooms

For a fuller list and more detailed descriptions, check our article on hotel metrics and KPIs.

A revenue manager’s task is to track these KPIs and develop a strategy to improve the metrics, making the hotel a successful business. A hotel revenue manager has to deal with multiple reports and data. Specialized software can save time and resolve some issues. In the next section, we’ll look closer at some of those systems.