This article has been written by Soma Chaudhury pursuing a Remote Freelancing and Profile Building Program from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

A trick question to start with; “What is the most perishable item in a hotel”? 

You will be surprised with the answer; it is ‘the room’.

A room that is not sold for the day/night is a loss of revenue that can never be recovered.

The above mentioned statement is the precise cause towards understanding why revenue management strategy is a key to improving and expanding the hotel industry.

What is revenue management

Revenue management, a concept initially defined by Robert Cross in the 1970s, centres around the idea of “selling the right room to the right client at the right moment for the right price.” In the case of the hotel industry, where demand changes periodically, strategy is crucial for revenue and ensuring a return on the capital investments.

Understanding the core principles

Revenue management involves predicting customer demand patterns and then adjusting pricing and availability strategies accordingly. By analysing historical data, market trends, and competitor behaviour, hotels can gain insights into how demand might change overtime. This information allows them to optimise pricing structures to capture the highest possible revenue from each available room.

Key strategies and techniques

• Dynamic pricing: This involves adjusting room rates in real-time based on factors such as current demand, competitor pricing, and remaining availability. By increasing prices during periods of high demand and lowering them during slower periods, hotels can maximise overall revenue.
• Market segmentation: This strategy involves dividing the market into distinct segments based on factors such as customer demographics, booking behaviour, and price sensitivity. By tailoring pricing and offers to each segment, hotels can attract a wider range of guests and increase occupancy rates.
• Forecasting and demand management: Accurately forecasting future demand is essential for effective revenue management. By using historical data and statistical models, hotels can predict upcoming demand patterns and adjust their strategies accordingly.
• Channel management: This involves managing the distribution of rooms through various channels, such as online travel agencies, direct bookings, and corporate travel partners. By optimising the mix of channels, hotels can reach a wider audience and maximise occupancy rates.
• Inventory control: This strategy involves managing the number of rooms available for sale at different price points. By carefully controlling inventory, hotels can ensure that they are not selling rooms too cheaply or leaving them unsold.
• Upselling and cross-selling: This involves offering guests additional products or services, such as room upgrades, spa treatments, or dining packages. By encouraging guests to spend more during their stay, hotels can increase overall revenue.

The evolving landscape of revenue management

As technology advances and the hospitality industry evolves, the practice of revenue management continues to adapt. The integration of artificial intelligence and machine learning is enabling hotels to analyse vast amounts of data and make more accurate predictions about future demand. Additionally, the rise of mobile bookings and social media has created new opportunities for hotels to connect with potential guests and personalise their offers.

In conclusion, revenue management is a dynamic and essential strategy for hotels seeking profitability and to remain competitive in a constantly changing market. By leveraging data-driven insights, advanced technologies, and a deep understanding of customer behaviour, hotels can optimise their pricing availability strategies to achieve sustainable success.

But along with that, what is important is to see that the guests appreciate the value-added services and lengthen their stay or come back as repeat customers. One of the techniques to ensure that is to offer the regular guests loyalty discounts.

Efficient management of inventory also helps in cutting the expenses incurred by the hotels in their maintenance and providing the customer with the luxury and comfort that come with the price.  

To elaborate on the same, the number of staff a hotel hires varies depending on the occupancy of rooms. For peak seasons, a hotel may hire temporary staff on a contractual basis.

Understanding hotel revenue management

To do so, one must know the main sources of revenue generation.

They are the following:

• Rooms
• Food and Beverage services
• Room Service
• Mini bar
• Charging for the use of spaces and other banquet services during events like weddings, conferences, and exhibitions
• Charging for amenities like salons, spas, gyms, or parking facilities.

The collection and recording of the revenue from these various sources leads to data generation. Analysis of this data helps us to understand the market demands across timelines.

This, in turn, helps to determine the asking price of the rooms, which varies with supply and demand.

Rooms are assigned through different distribution modes, like; online travel bookings, group bookings, direct bookings, or corporate bookings, etc.

Direct bookings will always generate more revenue as the hotels save on commissions given to other distribution channels.

Achieving optimum tariffs

It is important to understand that price strategizing is a dynamic process and it alters with

• The revenue generated in the past.
• The current demand
• Future forecasting

 The pricing process is continuous and involves acute observation and continuous monitoring and evaluation. The optimum tariff of a hotel is also variable depending on the following factors:.

• Booking Windows
• Room availability
• Service level
• Market conditions
• Target market trends
• Market segment mix
• Competitor Pricing

 Some of the data that are used to determine if the revenue is being managed with the best practices are the following: 

Average daily rate or ADR.

It is calculated by dividing the total room revenue by the number of rooms sold. 

Occupancy rate: It is the percentage of rooms occupied over a period of time; it could be a day or month. It helps in calculating the best pricing strategies to attract clients.

Revenue per available room, also known as RevPAR, is calculated by multiplying the ADR by the occupancy rate. It gives an overview of the financial performance.

One can get a more detailed and accurate picture with Revpor, revenue per occupied room.

Since rooms are not the only source of revenue in a hotel, GOPPAR (gross operating profit per available room) includes other areas of the hotel that generate revenue. 

With this tool, it is easier to pinpoint the areas that need improvement.

Understanding, analysing and comparing the data makes it easier to forecast the demand, which in turn helps to determine the peak season and off-peak seasons and aid in pricing. They also help to make precise overbooking strategies as there are indeed a certain amount of cancellations. It also helps to forecast the length of stay which in turn helps to optimise future bookings.

Forecasting involves analysing occupancy data from the past and calculating  the following

• Percentage of no-shows
• Percentage of walk-ins
• Percentage of stayovers.

There are different types of forecasting done by front office management for different purposes,

• A daily forecast to facilitate room allocation
• A ten day forecast that is shared with all departments to ensure staff availability.
• A three day forecast is made to pinpoint any significant change happening in the ten day forecast.

Forecasting also helps to determine budget requirements.

To envision the number of guests in a hotel for a certain period, the following analytical reports are essential:

• Time series analysis
• Regression analysis
• Market research
• Competitive analysis
• Social media analysis

The tools that help in gathering these vast amounts of data and also help in their analysis are the following:

Property Management Systems (PMS)

It manages the administrative side of hotel operations like front desk operations, reservations, management of channel distribution, housekeeping, occupancy management and payment processing. The first PMS were introduced in the 70s, today, PMS software has shifted from pen and paper to software that are cloud based. Some of the latest PMS  are

• Mews
• Hotlogix
• Hoteltime
• Oracle Hospitality

Central Reservation System

It is used to manage reservations, occupancy rates, and distribution of inventory from a centralised control. A few of them are listed below:

• Amadeus
• Pegasus
• GuestCentric

CRM Software: It’s a tool that helps analyse data on customer behaviour and preference to create customised marketing and pricing strategies.

CRM softwares vary and selecting the one that suits your business is the tricky part.

The most common ones that are used in hotels are:

• Zoho
• Keep
• Microsoft Dynamics

Revenue management software that is used in hotels includes the following:

• Atomizer
• RoomPriceGenie
• BEONx
• IDeaS

Business intelligence software is used in hotels to obtain quick and accurate information from varied sources to make timely decisions.

This software varies with the type of hotel:

• For branded hotels and for budget hotels, Actabl comes with a high recommendation.
• For luxury hotels, Lighthouse is quite popular.

Recent developments in revenue management

In recent times, some more innovative tools and techniques have revolutionised revenue management. Below are listed a few of them.

Segmenting the market

For better understanding, the market is divided into smaller sections to pinpoint the needs of the guests, enhance their stay experience, and price the rooms with precision. It also helps to seize upselling prospects by adding value to the service provided, like a virtual concierge or a tour of the luxury property, ensuring that guests are informed of the amenities and services they can choose to partake in.  Segmenting market strategy helps to analyse different kinds of travel, like

• Business or transient travel
• Group travel
• Corporate managed travel
• Leisure travel
• Weddings and other event participants.

Media visibility

It always helps to be visible to the target market, and this can be achieved by:

• Creating a Google business profile
• Using geo-local services
• Managing hotel branding
• Publishing hotel directory listing
• Responding to reviews by guests.
• Advertising on Social media

Hotel listings help to get noticed by the world and promote group events, corporate and transient business.

Social media marketing

Today, social media is the key to connecting with customers across various platforms. Being high up on the different search engines increases occupancy rates and increases revenue generation. Therefore, hotel websites need to be mobile friendly, search engine optimising strategies need to be applied and must have on page and off page SEO strategies must be implemented.

Collaborating with local businesses to reduce expenses incurred for the service provided to the guests.

In the early eighties, most starred hotels had an in-house laundry since laundry service is provided to guests in all starred hotels. It involved heavy machinery, ample space and staff for 24 hours. Today that has changed. Hotels tie up with local laundry businesses for the same. They save on capital investments,  repair and maintenance of heavy machinery, and staff remuneration.

It’s these practical and effective changes in operations that ensure better revenue management.

Knowing your competitor

The demand generators and fluctuations in the market are usually similar. Identifying them can provide key insight into the analysis of travel patterns. Thus, keeping a close eye on competitor pricing helps to fine-tune your own pricing. It also helps to grow new perspectives about the market.

What elements impact hotels revenue management

Some key factors that make the revenue management process effective are:

Demand forecasting:

• Precise forecasting: Entering data for past booking patterns, seasonal trends, special events, and market demand is critical to determining future demand and implementing appropriate pricing strategies.
• This leveraging of advanced analytics tools and techniques to analyse data such as market data, competitor data and consumer behaviour can identify trends and make sound decisions.

Pricing strategies:

• Dynamic pricing: Using flexible pricing models to adjust room rates according to real-time demand, occupancy, and competitor pricing are ways to maximise revenue.
• Segmentation: This helps hotels to price and offer promotion specifically for this customer.
• Value proposition: Clearly communicate the value of the hotel offering the amenities to justify pricing decisions to attract the target market.

Inventory management:

• Room availability: Ensuring that enough rooms are available to accommodate guests while also avoiding overbooking and underselling.
• Channel management: Sharing room stock across different distribution channels like OTAs, direct bookings, and global distribution systems (GDS) to maximise reach.
• Length of stay restrictions: Requesting a minimum or maximum amount of time guests can stay for Bull and Bull and maximizing income during high seasons

Distribution channel management:

• Online Travel Agencies (OTAs): Collaborating with OTAs to broaden market reach and draw in new customers while keeping an eye on commission expenses.
• Direct bookings: Promoting direct bookings on the hotel website or reservation system to reduce dependence on third-party channels and drive profitability.
• Point source: Linking the hotel website with search engines to compare prices and availability across different channels to improve visibility and drive traffic to the hotel website.

Market segmentation:

• Customer profiling: exploring the needs, references, and booking behaviour of different customer segments, including leisure travellers, business travellers, and group bookings.
• Focused marketing: Creating targeted campaigns and promotions to reach specific customer groups and capture revenue opportunities.
• Loyalty programs: Offering incentives to customers for repeat business through loyalty programs.

Competitive analysis:

• Market monitoring: Monitors competitors’ pricing, promotions, and offerings and adjusts their own accordingly to stay ahead of the market and maintain a competitive advantage.
• Benchmarking Performance: compare hotel against industry benchmarks and competitors.
• Example: Rate parity: The practice of keeping prices consistent across all distribution channels to avoid discrepancies and protect brand integrity.

Conclusion

They say, ‘Success in hospitality is a blend of art and science, and revenue management is its heartbeat.’

Revenue management strategies in the hotel business need to be made with precision but on time. The window of opportunities, though recurring, is short-lived.

Knowing the current strategies and finding how it balances out with your future revenue management goals and objectives, also having a grasp on the locale of a hotel, is a must, as you need to know the local attractions and events.

Understanding if you are managing your revenue in a proactive manner or if you are more reactive to it is essential. Customising your group pricing and optimising the same involves knowing how balanced your market mix is.

Knowing your demand generators and identifying the change in demand or variance in rate helps you take quick action and prevents missed rate opportunities. Reviewing RFps to prioritise those that were ideal for your hotel is a better strategy than reading long RFps.

Keeping in mind the above factors is key to generating and maintaining an efficient revenue management system.

References

• Revenue Management by Robert G. Cross
• Hotel Sales and Revenue Management by Carol Veret
• https://www.altexsoft.com/blog/hotel-revenue-management-solutions-best-practices-revenue-managers-role/