A hotel jam-packed with people isn’t always a profitable hotel. The hallmark of a successful hospitality business is the revenue.
Compared to airlines, revenue management in hotels evolves slowly. Seventy-one percent of hotel businesses worldwide are looking for smarter and more efficient ways to do business, according to Global Hotel Business Index 2018. In this article, we will define hotel revenue management, identify the facets that shape it, and look at the most effective revenue-increasing strategies.
What is hotel revenue management?
Robert G. Cross, the author of the book Revenue Management: Hard-Core Tactics for Market Domination 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.”
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, yield management, dynamic pricing.
Customer segmentation
Customer segmentation is an important part of marketing and pricing because it allows a target message to be defined while identifying the most suitable price for different customer segments. The guests are segmented according to demographic criteria like age, gender, marital status, the trip’s purpose, spending habits, or interests. The status of a traveler, whether a new or returning guest, to a property, is also a segmentation criterion.
Demand forecasting
Demand forecasting is the analysis of information about past demand across all the customer segments. Based on historical data, you can predict when the demand will increase or decrease, and develop the right distribution strategy. This part of revenue management is especially important because it allows for setting prices, creating promotions to engage more guests, or launching other marketing activities to increase occupancy.
How demand forecasting works during peak and low demand periods
Yield management
The goal of yield management is to define the best price to sell products 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 tactics
Dynamic pricing
Dynamic pricing is an approach that allows retailers to change the price according to market demand. Dynamic pricing strategies are built around selling the property for the best price possible. They are based on demand, supply, external, and internal data. External data includes such data points as competitors’ prices, weather data, and booking patterns; while internal data includes segmentation, customer profiles, rates, etc. Dynamic pricing strategies allow hotels to keep up with the market and maximize occupancy rate, as well as the other hotel revenue management KPIs. The pricing strategies can be cost- or value-based, and customer- or competitor driven.
Dynamic pricing strategies for hotels
Revenue manager’s role
The core spheres of a revenue manager’s interest include forecasting, pricing, inventory management, marketing, and distribution channel management.
Forecasting is based on data and segmentation, the main pillars supporting revenue management. Predicting customer behavior enables a revenue manager to optimize revenue. The primary intelligence is derived from historical data on occupancy, room rates, previous revenue, and the current data on customer activity.
Pricing depends on market demand and customer desire to pay for a particular type of property. To set the price, a revenue manager analyzes the market, competitors’ prices, and their products. The prices are optimized according to different pricing strategies. They include demand-based pricing strategies, such as corporate pricing, packages, contract agreements, and dynamic pricing strategies.
Inventory management. In revenue management, the term inventory refers to the product (i.e. rooms) sold. A room is a perishable product. If a room is not occupied, a hotel loses money. The main task of a revenue manager is to make sure that all the rooms are occupied.
Marketing. The goal of any marketing activity is to increase the volume of sales. It uses the tools that allow a property to sell all the inventory by keeping customer flow steady and attracting new guests. This includes such marketing activities as promotions, discounts, and loyalty programs.
Distribution channel management. In revenue management, inventory must be sold to customers within specific segments. Channels are often closely tied to the customer segments that use them. Depending on the product type, a revenue manager can choose a channel and set prices for a particular segment of a target audience.
Revenue management software solutions
Hotel revenue management software facilitates setting the best prices for hotel rooms, based on data and helps generate dynamic offers. Typical features are:
* Detecting the most profitable pricing options
* Demand forecasting
* Analysis of lost revenue due to overbooking or cancellations
* Revenue reports by KPIs
* Collection of historical inventory data
* Channel- and segment-based revenue analysis
* Day- or week-based performance analysis
Popular tools
Duetto – industry-leading software with modules for revenue management in hotels (BlockBuster), casinos (GameChanger), sales (PlayMaker), and reporting (ScoreBoard).
IDeaS – another popular automated solution for revenue management, pricing, forecasting, and reporting. IDeaS also offers products that track revenue of parking lots and function space.
TravelClick – offers iHotelier suite with revenue management and channel management modules. iHotelier also has media and web modules for driving direct bookings through an online presence.
Kepion – a revenue management platform with integrated planning and reporting features. And, the vendor offers additional solutions with an expanded business intelligence module.
RateBoard – a software that uniquely focuses on yield management and analysis. It analyses booking habits and the market to suggest prices for 365 days in advance.
RevPar Guru – software focused on tracking Occupancy, ADR, and RevPAR. Besides the revenue management system, RevPar Guru has a channel management module and a booking engine.
ResNexus – a yield management solution with front desk, CRM, reservation manager, housekeeping integrations, and reporting.
On top of that, some hotel property management systems like Maestro, Oracle PMS, or IQware have integrated revenue management modules.
Best practices in hotel revenue management
1. Shift to profit management
For a long time Occupancy rate, ADR, RevPAR, and NRevPAR were the most important KPIs in hotel revenue management. They measured business success and were compared to the same metrics of competitors, but today’s paradigm is different.
Hotel revenue management is moving towards strategic profit management, as confirmed by a 2017 study Total Hotel Revenue Management: A Strategic Profit Perspective. This means that the KPIs will focus mostly on GOPPAR (gross operating profit per room) and TRevPAR (total revenue per room). Another 2017 study, conducted by Sheryl E. Kimes of Cornell University School of Hotel Administration The Future of Hotel Revenue Management, reveals that GOPPAR and TRevPAR are indicated as the most important benchmarks with 33.7 and 17.5% of respondents supporting this idea. The research participants were 400 revenue management professionals. RevPAR (revenue per room) remains an important KPI for hotel revenue management, but its relevance is declining.
Compared to the other KPIs, GOPPAR and TRevPAR draw a broader picture of business performance. This means that a revenue manager focuses not just on a single parameter that relates to the occupancy, but the value of a room in the global economic prospects of a hotel. Another significant metric is NRevPAR (net revenue per room), because it allows revenue managers to account for expenses in their calculations.
2.Using data analysis and predictive analytics
Data is the foundation for effective business operations. By analyzing historical data on cancellation rates and denials, you can predict occupancy rate levels and room rates, based on past booking calendars. Deep analysis of customer behavior allows for personalizing the offers for different customer segments across distribution channels.
Today hotel revenue managers shift from relying on general historical trends to current data that captures guest online activities, like shopping behavior analysis, cancellations and no-shows, booking patterns, and more. Such data allows hotels to improve marketing and dynamic pricing strategies. Grounding on this data, you can use predictive analytics in pricing strategies. During the last few years, some hotel giants like Marriott International have been creating analytics divisions that use existing data for further development of data-based pricing models.
In 2013, El Cortez Hotel & Casino started using Duetto revenue management software to track shopping behavior. Based on predictive analytics data, they took away discounts on some unnecessary positions, changed their pricing policy by decreasing midweek rates, and increasing rates on weekends or during some events. Also, the hotel changed their policy for the casino segment by identifying the most valuable players and offering them additional services. As a result, they achieved a 30% increase in cash revenue, a 10% increase in ADR (average daily rate), and a 109% increase in direct room nights. The occupancy rate grew by 4.5%.
3.Channel and overbooking management
Revenue highly depends on the channels that guests use for booking. Channel management influences revenue management, preventing overbooking and managing customer bookings sources. Channel management software, like SiteMinder, AxisRooms, or ChannelRUSH, refreshes information about the available rooms, updating it across all the channels (OTAs and metasearch engines), and avoiding double bookings. But there are situations when overbooking can benefit the revenue of a hotel. Let’s see how.
Sometimes a couple of overbookings won’t matter if a cancellation is predicted. In case there isn’t a cancellation, a hotel can either send a guest to another hotel, provide compensation, or offer a future discount, which costs much less than a room without a guest.
Selling slightly more inventory than is actually available can be a good revenue management strategy. For instance, it’s widely applied by US airlines. Cancellations and no-shows, which always happen, lead to empty rooms. Overbooking strategy can maximize total capacity and increase revenue.
4.Driving direct bookings
Bookings that come from a direct channel increase RevPAR, remaining an effective distribution channel. At the same time, OTAs are growing more popular, making hotels visible to a larger number of travelers worldwide. But there is something that makes it less great: rate parity.
Second, you can improve your website. In an increasingly competitive hospitality industry, a hotel website must be user-friendly, as well as optimized for search engines and mobile channels.
And third, make online-bookings easier for them.
5.Mobile-driven booking
The three main elements of a mobile responsive website are: enhanced UX, a shorter reservation form, with only critical fields, and a secure mobile payment system.
A successful mobile app for a hotel is a great opportunity to cross-sell hotel services and make a guest’s stay more comfortable with online check-ins and virtual concierges. And if you add an opportunity to earn points through a customer loyalty program, the chances that a traveler will choose your hotel again increase.
6.Using AI and chatbots
Artificial intelligence and data science in the hospitality industry is not just trending, it’s also impacting revenue. A chatbot on a website or within an app can answer common questions, upsell or cross-sell additional services 24/7, interacting with a customer in a natural conversation manner. A chatbot on social networks, like a hotel’s Facebook group, can serve as an additional sales channel.
Chatbots can answer travelers’ questions about a property, services, facilities – redirecting more complicated requests to humans – and collect information about the target audience, e.g. customer preferences and the purpose of a trip.
7.Generating ancillary revenue
In the hospitality industry, the term ancillary revenue refers to the revenue gained from sources other than the primary product offering, the rooms. These sources include food and beverage services, transportation, entertainment, spa and wellness, or miscellaneous services such as extra beds, flower delivery.
Several types of sources can be packaged and offered to a particular customer segment, like business, leisure, bleisure, family, or group travelers. Additional services are in high demand by business travelers of all age groups; while packages are more popular with leisure travelers.
Interest of buying additional services by business travelers Source: iSeatz
Ancillary revenue influences GOPPAR, so a hotel that offers packages will be much more profitable than one that doesn’t. There are internal and external packages. An internal package consists only of the items, produced, controlled, and offered by a hotel, for example, a wellness package that includes airport pick up, spa-service in a hotel, access to a gym, and a dinner at the hotel restaurant.
An external package entails offering third-party products and services, like car rental, transportation, or coupons/vouchers. For instance, travelers can book rooms with an airport-hotel transfer from a single interface; while a hotel receives a commission from the transfer partner. We’ve described how to include airport transfers in a booking engine in a related article. A hotel can choose a third party for cooperation, or leverage a dynamic packaging platform, which is another revenue-increasing strategy.
8.Dynamic packaging
Dynamic packaging is a strategy that allows travelers to customize their trip by adding necessary services through dynamic packaging engines. This method allows travelers to book from multiple sources using a single online application. People find this way more flexible and customizable than ordering any ready-made tours or trips or booking everything manually.
When a property utilizes a dynamic packaging platform, room prices, as well as the prices on other inventories, can be adjusted in accordance with them. So, if your guest books expensive ancillaries, the cost of a room will change accordingly. But the pricing approaches may be more complicated than that.
9.Launching loyalty programs
Loyalty programs can be launched independently, or a hotel can join a network loyalty program like Stash Hotel Rewards or IHG. Depending on the hotel, guests can earn points for direct bookings or even passing on housekeeping. Then they can use earned points on other services or hotel stays. Such activities not only allow hotels to win a guest’s trust, but also increase revenue: According to Cornell University’s School of Hotel Administration study, hotels that joined Stash Hotel Rewards experienced an almost 50% increase in annual room-nights for each guest and a 57% revenue gain per year.
To sum up: steps to increase a hotel’s revenue
Hotel revenue management develops slowly and still leaves much to be desired. The main tasks are performed by a revenue manager, who deals with loads of data. A revenue manager must make the final decisions to create a job that’s more efficient and less stressful, but it requires effort from the whole team. To elevate a hotel’s revenue, consider taking the following steps:
* Create or engage with a data science team to focus on predictive analytics input
* Ensure collaboration across all departments
* Use a revenue management software or a PMS with an integrated revenue management module
* Increase ancillary revenue by selling additional services
* Manage sales channels
* Adapt to current digital trends
* Provide some perks to returning guests and those who book directly
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