Revenue management is an important practice within the hospitality industry, as it allows hotel owners to predict demand and maximise supply and pricing to achieve the best revenue and profits for the business.
The history of revenue management rooted in the airline industry back in the 1980s. Airlines started to incorporate a practice known as dynamic pricing to maximise financial performance. Businesses like American Airlines have achieved significant success in applying the methods of price discrimination and predicting customer demand.
Generally, revenue management is the art and science of forecasting consumer demand in real-time at a micro-market level and maximising prices and availability of the products. It is about selling the right amount of products to a certain level of prices based on the consumers’ willingness to pay for the price. What is usually explained in traditional economics is that you look at the cost of production, what margin you want to have and on that basis, you need to set the price for your consumers. However, revenue management turns the idea around and looks at what the consumer is willing to pay for a specific product or service, what margin you want to have and on that basis determines how much the product will cost. Now putting it into the context for the hotel industry, revenue management works when the hotel manages to “sell the right room to the right customer at the right moment, for the right price, through the right distribution channel, with the best cost efficiency.” For example, when a hotel fails to get a room rented on a particular date, the room will have the slightest chance to be rented again, it will lose its income. The aim of revenue management is not about selling a room at a low price today and begin selling it at a higher price tomorrow. It focuses on selling a room at a low price today because you expect the demand to be lower.
Revenue management becomes a challenge to the resources when it comes to understanding the information about the market. The best way to increase hotel revenue is to use your expertise to do changes on your business and change the way you sell out your services through a quality distribution of revenue management. Revenue management is a strategy that not only will maximise demand in high periods, but it will also help increase the demand during low periods. This strategy typically works for a long term plan, whereby it takes all revenue and profitability altogether. There are many ways on how you can increase your hotel revenue. You need to create careful tactics, which exclusive of raising prices and playing with the rates. Here are some of the tips you can consider to practise to your hotel business: 1. Make your own online booking 2. Create a revenue culture 3. Highlight your hotel services and facilities 4. Offer hotel packages with visits to local events and attractions You need to understand the importance of key performance indicators (KPIs) as you make use of the tactics above so that you can turn them all into good revenue. Once you know what to search for, you will be able to analyse the data and build ways to benefit from the analysis you did. The main principle is you should remember to determine the real-time market conditions and adjust to your business accordingly. These are some of the metrics you can take a look at: Occupancy rate ADR (Average daily rate) RevPAR (Revenue per available room) TrevPAR (RevPAR + ancillaries) GOPPAR (Gross operating profit per available room) RevPASH (Revenue per available seat hour) – useful if you have a hotel restaurant The best strategy for hotel revenue management is to understand the fluidity of hotel pricing which can vary. It's important that any hotelier build a revenue management plan that can be tailored to the current conditions. Every business plan for hospitality has to understand the customers at heart. How do travellers handle themselves? How do they book and travel? What are their experiences? Which is it they need? What are the expectations? If you want to get the most value out of each guest who enters your hotel, it's important you have an understanding of the questions above. The better you know about the customers, the more you can create their satisfaction, which is highly necessary for recurring revenues. If you know you've got a certain number of guests coming back every year, that's more rooms you don't have to think about so you can concentrate more on upselling or cross-selling. Here are the specific strategies you can apply to your hotel industry:
Every property must take into account the pricing strategy or strategies that work best for their particular brand. A sales manager must spend a great deal of time reviewing data and other contributing factors ensuring that the company operates with the best possible ability to optimise sales. The examples are value-added pricing, discount pricing, the price per segment, length of stay, positional pricing, penetration pricing and skimming. Check out how Mobiversa supercharge your hotel payment cash flow! Register here.
Segmentation is a crucial component of revenue management. This helps you to differentiate between the travellers who come to your hotel and to establish specific strategies for them all. The approach you take with young explorers, for example, would be somewhat different from that of a business professional. But segmentation is more nuanced than just business vs leisure, and you can use it to identify trends in your hotel industry. Discover the customers’ length of stay, days of the work of stays, lead time (how long before the arrival do they book), cancellations, no show ratio.
Forecasting is relevant not only for the setting of prices but also for budgeting purposes. Precise and efficient forecasting requires a solid base in historical evidence. You'll have plenty of flexibility and opportunity to make changes to the plan by budgeting and planning in advance. Some of the components of forecasting are occupancy, revenue and room rates.
All industries are competitive. Many businesses with high fixed costs have to pay many expenses no matter how strong the firms show themselves in the market. Revenue management uses a technique for sales optimisation that helps companies in some industries harness the characteristics of their market to generate incremental sales and higher productivity. Revenue management contributes to creativity, both in the production and pricing of new goods and services. This invention may lead to a rise in revenue from sources that companies might not have explored before. Revenue management usually values for three to six per cent of a hotel's income, although some hotels have a much higher impact. A business must calculate a variety of factors in order to obtain the maximum benefits of revenue management. Such indicators are market-based but in any case, it will show how effectively an organization uses revenue management to affect the bottom line. A culture of calculating, comparing and making changes spills over to other business areas, making the overall organization more effective, bringing down costs and increasing profits.