The right room and the right price…
Revenue management is the practice of selling the right room to the right client at the right moment for the right price through the right channel with the best cost efficiency (least cost spent on travel agents, booking agents, channels, commissions, booking fees, etc.).
Revenue management using sophisticated data and computer models was advanced by the airline industry, pioneered by American Airlines. Marriott was the first hotel company to adapt the practice. Bill Marriott Jr., Chairman and CEO, Marriott International once said:
“Revenue management has contributed millions to the bottom line, and it has educated our people to manage their business more effectively. When you focus on the bottom line, your company grows.” (HSMAI).
Revenue management is beneficial to hotels because, like airlines, hotels have high fixed costs and perishable inventory – once the night is over, that room night is gone. In theory, revenue management puts the consumer at the center of the equation and optimizes their “willingness to pay” the most a guest will pay for one room night. For full-service, resort and convention hotels, revenue management extends to a guest’s total spend on property rather than just room revenue.
With support and oversight of the brand, sophisticated computer models, the General Manager and sales team, revenue managers make decisions about market mix, channels and pricing. Their tools include STAR reports, reports from the property management system and reports from the brand marketing system as well as other business intelligence reports. As the owner, you track and encourage their performance using business intelligence reports and listening to their explanations.
Pace is the rate at which reservations are received. Pace reports compare future rooms revenue to the prior year so revenue managers can anticipate demand and set prices. To make pricing decisions, revenue managers can look at pace data by channel, market segment, client, length of stay, season/day of week, discounts, and other variables.
Logically, lower priced bookings are less profitable as are booking through channels that charge higher fees or commissions. So, revenue management looks at costs and profitability of bookings as well as pure volume. Revenue managers open or close lower profit channels depending on the strength of available demand.
According to Kalibri Labs, hotels keep 97.3 percent of payments from property direct bookings, 93.4 percent for brand.com bookings, 94.5 percent from group bookings and 83.4 percent from OTA bookings. That 83.4 percent is an average and some OTA bookings are considerably more costly. In addition, not all bookings result in revenue. Some channels have cancellation rates above 50 percent while bookings direct to the property typically have cancellation rates below 20 percent, according to D-EDGE.
Hotel prices are laid out 365 days in advance and the owner knows the structure and competitive level of that hotel’s pricing. However, markets are dynamic so rates are adjusted rapidly to optimize revenue and minimize expenses, sometimes minute-by-minute.
Every market is different, but some of the statistical benchmarks used in revenue management are:
- Length of stay
- Competitor room rates by day of week
- Competitor room rates by market segment and discount
- Group, contract, wholesale and corporate rooms blocked
- Inventory available to sell
- Demand for that night in prior years
- Demand pressure in the market – citywide conventions, major events, peak seasons
- Indices of occupancy, rate and RevPar compared the market by day of week
- Loyalty program contribution
- Booking lead time patterns
- Acquisition costs for channels or groups compared to other potential demand sources
- Booking pace in the market
- Forward bookings for the hotel and the competitive market
- Market forecasts
Revenue Management Systems
As an owner, you will check in with your revenue managers periodically and see their reports regularly. They will be crucial to your business success so their performance is something to track.
Revenue management is a service which is paid-for by the hotel. It can be contracted with the brand, the management company, or delivered by staff in-house. It is so important to the performance of the hotel that you may contract for some revenue management services at all three levels.
Revenue management used to be done by “gut feel”. Not surprisingly, in today’s complex and competitive markets, analytical tools dramatically improve results. An RMS (revenue management system) analyzes massive compilations of data to inform and optimize the revenue manager’s decisions. The technology continues to evolve and improve rapidly. With technology, revenue managers set rules and alerts so that their revenue management strategies can be implemented automatically by their systems.
A hotel’s revenue management should adhere to a strategy that plays to the hotel’s physical strengths, market, competitive position, and management. From there, it is a complex AI-enabled game yielding results in real dollars.