What is revenue management?
In the past four decades, revenue management has revolutionized the way that businesses within the airline and hospitality industries sell to their customers. And the benefits of revenue management are being realized and embraced throughout other industries as well.
Rather than simply assigning static prices to products and services and waiting for customers to make a purchase, revenue management empowers businesses with a more analytical approach to supply and demand. It allows organizations to take all of the available data into account to accurately predict the demand at a given time, and then adapt availability and pricing accordingly. The end result? Improved returns and optimal product and revenue stream management, despite fluctuations in demand.
But before we get into the details of revenue management and how to implement it in your hospitality business, let’s take a look at where it came from.
History of Revenue Management
Revenue management can trace its origins back to the 1970s and 1980s. Back then, many airlines were hemorrhaging money due to unsold seats on flights. To counter this, they began to offer special discounts to customers who were willing to book flights in advance.
This helped sell seats that might otherwise have gone unclaimed, but it also created a need for more accurate customer analysis; customer response to the discounts was heavily influenced by a number of factors (such as season, time of day, destination, etc.), and airlines needed to understand the possible impact of these factors before they could determine which discounts were likely to be profitable.
Incorporating analytics with air-fare pricing resulted in the concept of ‘yield management.’ In 1978, deregulation brought airlines into the free market, and yield management became much more widely used. Within a decade, yield management as a concept had been adapted for use in the hospitality industry as well.
Today, yield management has evolved past an inventory-focused approach, to become revenue management: an all-encompassing concept designed to produce optimal revenue potential through every market condition.
Revenue Management: Definition
‘Revenue management’ describes the modern economic discipline that combines expansive statistical analysis with price and product segmentation to predict customer behavior and optimize price and availability for increased revenue.
Revenue management exists to align the price of a commodity as closely as possible with the maximum amount a customer is willing to pay for it at a given time. Or, to put it more simply: revenue management is selling the right product to the right customer, through the right distribution channels, using the right tools, at the right time, and for the right price — all to optimize potential revenue.
Revenue management is applied to perishable, or limited-time inventory. Let’s use the hospitality industry as an example:
Every night that a hotel room remains vacant, the hotel loses potential income. At the same time, hotels (and other businesses) have fixed costs, regardless of how much income is being generated. It is therefore vital that the hotel do everything in its power to book available rooms, even during periods of low demand. To do this, a hotel may offer special reduced prices.
The reverse is also true; periods of high demand should be reflected in pricing to maximize revenue. Knowing when to sell a room at a discount, and knowing when to leave a room vacant so that it can be sold at a higher rate the next day is at the heart of hotel revenue management. And its effectiveness depends on the quality and availability of relevant data.
Revenue Management Strategies
Increased data availability has erased many of the barriers to effective analytics, and as such, more and more businesses are adopting revenue-management strategies.
The hospitality industry in particular is heavily dependent upon effective revenue management. This is because hotel pricing is extremely fluid, fluctuating significantly from day to day. Therefore, adapting prices to current conditions is essential for hoteliers who wish to remain competitive.
To do this, hotels and other hospitality-centered businesses need a clear understanding of customer activity and perception across each customer segment. What do they expect? How do they travel? What channels do they use to book rooms? And perhaps most importantly, how does the current landscape affect their behavior? Developing a clear understanding of these and related factors helps businesses not only generate the most possible revenue from their customer base, but also allow them to do so while promoting a positive customer experience and growing brand loyalty.
With this in mind, let’s take a look at several proven revenue-management strategies designed to help you grow your hospitality business.
Possibly the most important factor in hotel revenue-management is an effective pricing strategy. Demand, customer segmentation, and other factors should all play roles in determining room rates. However, it’s worth noting that not every pricing strategy is a good fit for every business. Determining which strategy or strategies will best match your client base, connected channels, and distribution partners demands ongoing analysis.
Hospitality accounting solutions can help provide the necessary customer and property visibility you need to find and implement the right pricing strategy for your business. Likewise, working with a professional revenue-management analyst may offer deeper insights.
With this in mind, here is an overview of the most widely used revenue-management pricing strategies:
- Dynamic PricingPerhaps the most popular hotel pricing strategy is dynamic pricing. Dynamic pricing allows hoteliers to increase or decrease room rates at any time in response to real-time data. When supply exceeds demand, rates drop, and when demand surpasses supply, rates climb.In other words, when most of your rooms are being used, dynamic pricing allows you to charge more for the few rooms that are still available. Conversely, when you have many open rooms, dynamic pricing charges less so as to attract more bookings. By constantly realigning rates to match demand and other factors, you are more likely to generate maximum revenue for every room, every day.
- Open PricingOften considered an extension of dynamic pricing, open pricing further empowers hoteliers to set rates for room types, channels, and dates, completely independently. Open pricing allows for better forecasting, and can help ensure that even high-end seasonal hotels enjoy steady revenue during otherwise-unprofitable off seasons.
- Forecast PricingUsing detailed historical data, many hotels choose to implement a forecast-pricing strategy. This attempts to accurately predict room availability at a future date by reviewing recent occupancy data as well as data for the same season of the previous year.Forecast pricing can help you set reliable rates well in advance, but isn’t always able to take into account unexpected events or competitor actions, which could impact the accuracy of your forecast.
- Guest-Segment Pricing Guest-segment pricing (also called ‘price-per segment’) allows businesses to offer the same product at different rates for different segments of customers. Depending on the age, tastes, needs, occupation, lifestyles, etc. of your various market segments, you can predict which rooms will be most in-demand by which segments at which times, and then set your rates accordingly.
- Length-of-Stay Pricing Some hotels choose to make changes to room rates based on the guest-arrival date as well as the total duration of stay. Guests pay a single rate for their entire stay, and are obligated to stay a minimum number of days. By providing a better discount per day for a longer duration stay, hotels not only decrease overhead costs, but can also bundle together low-demand days with high-demand one, ensuring consistent revenue.
For each of the above strategies, you need a clear picture of where your revenue is coming from, and how your expenses are affecting your bottom line. Cash management software can provide insight, while also helping you charts and manage your day-to-day cash activities in real time.
Market Segmentation Strategies
Segmentation takes a deep look at the customers who support your business, and allows you to distinguish between them for the purpose of creating targeted strategies. By segmenting your customers into defined groups, you will be able to better market towards them based on their behavior, needs, and budgets.
To do this, you will need to look at several segmentation factors, including the following:
- Reason for travel
- How the reservation was made
- Business or leisure travel
- Length of stay
- Time of stay (season, month, days of the week)
- Cancellations and no-shows
With a clear picture of your market segments, you can then begin to decide which groups are worth your focus, when you should be marketing to them, and what kinds of opportunities are available to increase revenue with each.
Pricing Forecasting Strategies
Another important aspect of a hotel’s revenue-management strategy is the ability to forecast demand and availability far in advance. Of course, the further out you forecast, the more reliable customer and market data you will need to ensure that your predictions align with reality.
A forecast strategy begins with identifying those days with the highest demand. Referencing your most recent historical data, make note of the room rates, occupancy, spend per room, number of reservations, overall revenue, and any notable market trends for each of those time periods. With this information, you can begin forecasting demand and creating a budget. Budgeting and planning software can provide the valuable tools and resources for this stage of your forecasting strategy.
Remember, the more accurate and reliable your data, the more accurate and reliable your forecasting will be. Creating a demand calendar that covers every day for the next 30 days, and every week for next 90 days will give you a clearer idea of what kind of revenue and expenses you should be expecting in the near future. You can then extend your forecasting even further.
At its heart, revenue management is a system for anticipating customer actions to optimize the availability and pricing of perishable products. Hotels especially have come to depend on revenue management to accurately gauge demand for rooms at specific dates. As a result, they are able to increase and decrease room rates accordingly, ensuring the best possible revenue for every room, every day of the year.
But revenue management isn’t as simple as applying historical data to future dates; it’s a complex, extensive concept that incorporates a range of possible strategies. Businesses that are interested in incorporating revenue-management solutions should be aware of where the concept originates, the benefits and challenges it brings to the table, and the best practices for ensuring success.
Recommended Next Read
Cash versus accrual accounting: what is the difference?
Subscribe to our Sage Advice Newsletter
Get our latest business advice delivered directly to your inbox.
Ask the author a question or share your advice