With the high levels of competition and the fact that the tourism industry is one of the largest in the world, hotels can’t afford to overlook any method that could potentially increase their profits. Using the hotel revenue management methodology creates dynamic and flexible sales strategies that can be combined with marketing and other promotional efforts. The result is potential profits are maximized and resources are balanced across the entire business model of a hotel.
Revenue management definition – What is hotel revenue management?
Hotel revenue management involves the process of comparing various KPIs (key performance indicators) to formulate a sales strategy with the utmost efficiency. It involves strategic pricing solutions that boost revenue and supplement factors like bookings, customer value, and value of amenities. It creates a balance between supply and demand to provide your hotel with the maximum amount of profit.
What are the benefits of hotel revenue management?
Hotels are highly encouraged to use revenue management systems because they have so many advantages. Now that tourism levels are at an all-time high, hotel managers need to be prepared to cope with the high level of flexibility hotels need to maintain to stay competitive.
Improved resource management
The goal of hotel revenue management is to find harmony between pricing, supplies required and the influx of customers. When you don’t have a full-scale picture, finding this harmony can be as tricky as walking a tightrope. Simply said, you’ll lose money by not doing it.
Using a hotel revenue management strategy brings clarity to all these different elements a hotel has to consider and formats them into a streamlined process. Typically, a streamlined process means that resources are used efficiently, such as how much catering to order, how much food to prepare in a restaurant, how many cleaning staff to employee, and when to schedule their work. Besides, marketing budgets can also be calculated with this data (more on this below).
In-depth understanding of pricing to forecast sales
The majority of hotels don’t have a fixed room price for the entire year. It simply wouldn’t work. Hotels experience high and low seasons, varying types of customers arriving on certain days, have completely different target markets, and are also affected by external issues such as weather conditions and politics. A strategic way to plan for these changes is to compare different hotel KPIs, which then gives you a comprehensive overview of pricing. As a result, this information can be applied to create pricing models so that hotels can also forecast sales and plan individual room pricing effectively.
Harmonizes expenses with revenue
Using a revenue management system can in effect drive your entire business plan, including marketing. Not only does analyzing KPIs help with pricing, it also provides information on who to market to, which types of rooms to promote, and when. You can create discount packages based on this, estimate your marketing budget more accurately, as well as ensure that all costs for running the hotel are taken into account.
For help with both hotel revenue management and corresponding marketing efforts, HMBB is happy to help create a strategy using hotel management consulting, beginning with a comprehensive marketing audit.
Have more questions? Be sure to join our Hoteliers Elite Facebook group, we will be happy to help you!
An overview of pricing models for revenue management
Each hotel requires an individual pricing strategy, which is how you convey your uniqueness to your customers. Forecasting, competitor comparisons, and KPI analysis all influence pricing models. Two of the main pricing models are dynamic and open pricing (explained below), as well as:
- Value-added pricing
- Discount pricing
- Price per segment
- Length of stay
- Positional pricing
- Penetration pricing
For an overview of the above points, please take a look here.
A dynamic pricing strategy adapts room rates based on real-time market statistics. This can mean price changes occur regularly, even daily. The process involves looking at the balance between supply and demand and makes consequential financial decisions to maximize revenue. Nowadays, this is the most popular pricing model that hotels use.
Open pricing models provide hotels flexibility to set pricing based on target markets and distribution channels used (often across the globe). This pricing model can be used to balance high and low season bookings, as well as attract a hotel’s potential target market by changing pricing based on customer expectations.
Important to note: hotels typically do not stick to one pricing model. The most strategic pricing model will include elements of many or even all of the above pricing models. Each pricing model should be developed per individual hotel and needs to be based on a comprehensive data analysis.
Hotel revenue segmentation
Segmentation involves the process of putting all your customers into different categories based on a variety of factors so you know how to approach them in terms of sales and marketing. The benefit of doing this is that it makes efforts to reach them to run more efficiently, inevitably saving time and costs.
Segmentation factors can include:
- Reason for travel
- Length of stay
- Lead time (how many days in advance of arrival they book)
- No show ratio
- Demographic factors (group size, age, gender, language, business, families, etc.)
Overall, segmentation helps to determine patterns in your business so that you can emphasize your efforts on your target market. As a result, you can determine which types of customers to offer discounts to, whether to focus on mobile or direct bookings (or both), promote packages for business people or solo travelers, as well as which partnerships to search for (such as travel agencies and other hospitality-related businesses).
Tips for hotel revenue forecasting
As mentioned above, one of the major advantages of using hotel revenue management is that it provides an educated foundation that enables sales forecasting. Consequently, you can plan out budgets over the long-term, including issues like salaries, hiring, marketing expenditures, purchasing or selling properties, pricing models, and more.
Hotel forecasting predicts data such as:
- Occupancy rate
- Room rates
- Reservation tracking (customers who are denied or turned away)
- Spend-per room
- Total reservations completed
- Additional market trends
In general, these factors could be forecast, for example, between 30 to 90 days in advance. They provide a way to benchmark your sales efficiency over time and can be compared across multiple years.
Types of important historical data
For accurate forecasting, it’s extremely important to base your information on concrete historical data.
Types of historical data include:
- RevPAR over time
- Types of customer segments
- Demand levels (i.e. high and low seasons)
- Holidays (public and school)
- Patterns for periods of increase in demand stemming from other factors
- Another important hotel KPIs (see below)
Overall, comparing these two data sets for historical data and forecasted data provides the foundation for creating accurate hotel revenue forecasting across the board.
Further hotel revenue management best practices
Hotel revenue management not only involves a deep analysis of numerical data but also includes useful strategies for increasing revenue in general. These include a combination of sales strategies, pricing models, as well as marketing and promotion that come together to maximize profits.
Conduct a complete analysis of hotel KPIs
Hotel revenue management should always include a comprehensive investigation into all the important hotel KPIs. Put together, these KPIs provide concrete data on expenses, room pricing, external financial factors, and more.
The top hotel KPIs include:
- Hotel occupancy rate
For an overview of these KPIs and their purposes, take a look here.
Do competitor comparisons
The only way to gain insight into whether your hotel has the correct market positioning is to do competitor benchmarking.
Benchmarking means comparing yourself to your competitors based on factors such as that competitors:
- Are located in a similar region
- Offer similar services (budget, luxury, families, etc.)
- Have similar KPIs (average daily rate, occupancy rate, RevPAR)
- Distribution channels (booking platforms or website offerings)
Focus on profit and flexible pricing models
The goal of hotel revenue management is not simply to gain more bookings. Conversely, the goal is to focus on how to maximize bookings in comparison with your available resources to gain the highest profit. Using data gathered from KPIs and then creating flexible pricing models will help you to achieve this. Again, hotels can never just have one permanent price.
Use online marketing methods
Furthermore, utilizing flexible pricing models is just one piece of the puzzle. Hotels also should harness the power that online marketing methods can provide. In addition to the importance of being listed on all major local booking directories (Booking.com, Expedia, TripAdvisor, etc.), hotels can boost their revenues using online marketing methods such as:
Find reputable partners
Finally, a hotel can also boost revenue by finding appropriate partner businesses. These can be travel agencies and tour operators, which provide a stable influx of customers that you can always plan on. Besides, offering discounts for customers to book with other hospitality-related businesses is an easy win-win. Nearby restaurants, spas, and tourism activities are great potential business candidates.