What is Revenue Management?
Revenue management deals with the question of how services can be sold in a way that maximizes profits using price differentiation. Read here what revenue management means and how it works in the hotel industry, while learning about the difference to yield management and what key figures you should pay attention to.
Table of Contents:
- Revenue Management = Concept for revenue optimization through dynamic pricing → What is the definition of revenue management
- Avoid pricing decisions based on your gut feeling → What are the reasons for revenue management?
- Revenue Management in hotels is complex, considers many factors, and is implemented internally or outsourced (fully or partially automated) → How does revenue management work in a hotel?
- Yield management is a part of revenue management around the area of price differentiation → What is the difference between revenue management and yield management?
- Important key indicators include RevPAR, occupancy rate, average price, booking development and average length of stay → What are the most important revenue management key figures?
Definition of revenue management
The definition of revenue management is to sell the right product to the right customer at the right time for the best price through the appropriate distribution channel. The goal is to maximize the profit of the business. Synonymous with revenue management, terms such as profit management or turnover management are also used.
This concept is used in particular in the service industry, where products are offered that cannot be conserved. In other words, here it is even more important that the product is sold at a certain point in time. A hotel room that has not been booked for one night cannot be sold multiple times later to make up for the lost revenue. Pioneers in revenue management are therefore not only hotels, but also airlines and other transport and tourism companies.
In order to maximize revenue and make the best use of existing capacities, prices are adjusted dynamically. A variety of factors also play a role in the hotel industry, some of which we explain below.
What are the reasons for revenue management?
In order to maximize your revenue in a targeted manner, you need to keep an eye on the relevant key indicators and factors influencing demand in the hotel. If you succeed in doing this, all the clues for optimal pricing can be derived from this with a suitable revenue management strategy. Your benefit is that pricing is not based on your gut feeling and you sell your hotel room to the right guest at the best price.
Along the way, you will get answers to the most important sales questions:
- What demand will you achieve at what time?
- How price-sensitive are your guests?
- Which distribution channels are relevant for your hotel?
- What is the volume and margin of room sales via your own website vs. via online travel agents (OTAs)?
- Which guest segment shows what willingness to pay?
Strategic hotel revenue management helps evaluate these questions again and again, to achieve a maximum of profitability on a constant basis.
To optimally manage prices and availability, forecasts are typically formed from past data and interpreted in the context of current data. As we can see from the example of the pandemic period, the forecast from past data is not always useful. Therefore, at HotelPartner we also look in particular at future data such as pick-up figures to determine optimal prices.
How does revenue management work in a hotel?
In the hotel industry, revenue management practices are applied to room sales and event sales or MICE. Larger hotels or hotel chains employ their own revenue managers and operate entire revenue centres with control systems. Smaller and privately owned hotels, on the other hand, often rely on external solutions – if they are involved in revenue management at all – to adjust their prices to market dynamics.
These solutions are mostly purely software-based, which means that algorithms access standard market data and then submit limited price proposals. Often, these are no longer adjusted in a timely manner to current market developments.
Ideally, state-of-the-art technology is combined with the know-how of experienced revenue managers, as in our HotelPartner approach. This allows decisions made by algorithms to be questioned and adjusted according to the situation. Especially in times of great uncertainty in the market, the most can be gained from the combination of human and machine in revenue management.
Whichever solution is used, it is important that the management of prices and availability is preceded by a strategy that fits the hotel. Then you need a set of parameters to calculate your minimum prices. On the other hand, you need to keep an eye on the competition in your market for optimal pricing, as well as the booking behaviour of your guests.
Factors you should consider for your hotel revenue management include:
- the location, special features, and amenities of your hotel
- your competitors’ rates and occupancy
- your guest segments
- your positioning in the market
- your offered services and differentiation approach
- time of booking and lead times
- reasons for your bookings (events, seasonal or daily reasons)
- your fixed and variable costs
- the different dynamics per room category
- upgrades and special offers
- OTA handling
What is the difference between revenue management and yield management?
The terms revenue management and yield management are often used interchangeably, yet the concepts behind them differ upon closer examination.
Revenue management is to be understood more broadly and refers to the overall strategy for optimizing revenue. Basis on data analysis of the above-mentioned key figures, among other things, the booking behaviour of guests is modelled, and future forecasts are derived from this. Based on this, a long-term pricing strategy can then be developed that takes market dynamics into account.
Yield management, in turn, is a sub-area of revenue management and relates to the operational implementation of the defined pricing strategy. Here, too, the goal is of course to maximize (rooms) revenue. The focus here is on price differentiation. Yield managers make particular use of guests’ different willingness to pay, which means that different prices can be achieved for the same product. Click here to learn more about Yield Management.
What are the most important revenue management key figures?
To optimize your hotel’s revenue, you should monitor a number of KPIs (Key Performance Indicators). In addition to the above-mentioned factors influencing your revenue development, the following KPIs play a significant role in revenue management:
RevPAR
RevPAR (Revenue Per Available Room) provides information on revenue per available room. It is calculated either from your average daily rate (ADR) multiplied by the occupancy rate (OCC) or from the rooms revenue of one night divided by the total number of rooms. In revenue management, this metric can be used to consider how to increase revenue from individual rooms. An increase in RevPAR is achieved by increasing the average room rate and / or occupancy.
RevPAR = ADR * (OCC in %)
RevPAR = rooms revenue / total number of available rooms
GOPPAR
Gross Operating Profit Per Available Room, abbreviated to GOPPAR, refers to the gross operating profit per available room and, unlike RevPAR, also takes into account the costs of the logistics area. Thus, it shows another dimension for revenue managers, the adjustment of costs. This ratio is calculated by dividing the gross operating profit by the total number of available rooms. For gross operating profit (GOP), the hotel’s total expenses are subtracted from total revenues.
GOPPAR = GOP / total number of available rooms
ADR (Average daily rate)
The ADR (Average Daily Rate) indicator shows what your average room rate is per room sold and therefore indicates the average daily rate or average rate. It is calculated by dividing the total lodging revenue by the number of rooms sold. The ADR can be adjusted, in particular due to events in the area of your hotel, holidays, or package prices and discounts.
ADR = rooms revenue / number of rooms sold
OCC (Occupancy rate)
The hotel occupancy rate (OCC) provides information about the occupancy of the hotel at a certain point in time. It is calculated by dividing the number of rooms sold by the total number of available rooms and is an important indicator for optimization approaches by revenue management. The more guests you have, the more revenue you can generate in the F&B or spa area.
OCC = number of rooms sold / number of available rooms * 100
Pick-up (Booking trend)
The pick-up rate captures the daily booking development of the hotel. So every incoming reservation or cancellation changes the booking status for a certain period in the future. Retrospectively, conclusions can be drawn from the pick-up as to the lead time of bookings for certain conferences, holidays, or other events. This information is elementary for dynamic pricing strategies.
ALOS (Average Length of Stay)
The Average Length of Stay (ALOS) indicates how long a guest occupies a room on average. Many hotels already specify a minimum or maximum length of stay to provide better planning certainty. Each night sold by a stayover guest cannot be repriced in terms of revenue management. ALOS is calculated by dividing the total number of rooms sold in a period by the number of bookings.
ALOS = number of rooms sold in a period / number of bookings in the same period
Revenue management at a glance
Revenue management uses the differentiation of prices to maximize profits. It is important to include as many factors as possible that influence demand and to base forecasts not only on past data. Adjust your room rates dynamically based on how your metrics are performing.
If you want to be well-positioned, revenue management can be extensive and it’s easy to lose sight of the big picture. With the combination of state-of-the-art technology and expert know-how, we are happy to help you find the best price for your rooms per distribution channel and guest segment at any time. Simply contact us for a free consultation.
