8 Key Concepts of Hotel Revenue Management Explained

Revenue management can be defined as " selling the Right Room to the Right Client at the Right Moment at the Right Price on the Right Distribution Channel with the best commission efficiency" (Landman, 2011).

But it can also be defined as the practice of maximising a company's revenues while selling the same number of products or services.

Below, we will look at the basic terms of revenue management we need to understand to succeed in this area.

Once we have a firm understanding of them, it will change how we view some hospitality-related products.

What is Fixed Capacity in Hotel Revenue Management?

As you know, every hotel or property has a fixed capacity. This means that there is a cap on how many guests it can host per room and how many rooms there are in total.

This provides us with the total number of guests who can lodge at the property at the same time. Hence, it helps understand the limitations, since it is impossible to host more than this number.

Is a Hotel Room a Perishable Product?

Hotel rooms are perishable products. It means that if the room remains empty overnight, we have lost that night's revenue. There is no way to recover it. We can’t sell that room the next day and make up for the lost revenue.

In the hospitality industry, every day is a new opportunity to sell our vacant rooms. However, what wasn’t sold for a night can’t be stored and sold later.

What is Advance Room Purchase?

A great thing about hotels is that they can be sold in advance. Rooms can be booked even up to a year in advance, 24 hours a day.

As we already mentioned, rooms can’t be sold later as they are perishable, but they can be sold beforehand, giving that competitive edge to build an occupancy base as far in advance as possible.

It also allows rejecting unprofitable bookings, reviewing the strategy, and adjusting pricing as bookings continue to come in to maximise revenue.

What is the difference between Fixed and Variable Cost?

A key requirement for revenue management is the high fixed cost and low variable cost.

It means that the rooms have a high fixed cost, whether or not they are occupied.

Hence, revenue loss is inevitable every time a room remains empty. Yet, providing additional service for extra rooms sold is very little. Therefore, variable costs come into play. This is where revenue management helps generate additional revenue by adding minimal extra expenses and making a difference.

What is Differential Pricing?

The good thing about rooms is that they can be priced differently based on amenities, such as extra services, views, room size, or anything that adds value to the customer.

Pricing will be covered in more depth, but it’s great to know that not everything needs to have the same price.

How is the Hotel Market Demand Evolving?

Customers change, seasons change, and so does the demand. Not every month or season has the same demand.

It is crucial to be familiar with the market to understand how demand changes with seasonality.

Identify significant events or holidays that drive demand, and the low season period when it is quieter, to set up the best strategy for the hotel.

Another variable that affects demand is pricing. If demand is price-sensitive, higher rates can really hurt it. Just as knowing the seasons is key to revenue management, understanding customers is key as well.

What is a Target Customer?

Every product is designed for someone, and it’s increasingly important to recognise the typical target customer.

We need to be able to answer the fundamental questions about them to generate the product or service they need. What do they value? The room itself, the amenities, location - the answers are unlimited. What would they pay for the room?

Identify the service, experience, or product they would be willing to pay extra for.

This takes us to the final point.

What is Market Segmentation?

The market can be segmented. There is one primary target customer, yes, but the hotel will not be filled with only that one type of customer. There will be families, business travellers, couples and solo travellers. There will be a healthy mix of all these, and they form the different market segments.

Every one of them needs to be targeted in some way, either with a service, with an amenity, or simply by location.

All the segments help achieve the revenue goal set out, and they are all equally valuable to the business. Most people forget that there are other segments, not just the ones that fill 60% of the hotel. Hence, they miss out on other potential customers.

Be open and inclusive, considering everyone who might want to stay.

Conclusion

These are the basics of revenue management, the pillars that need to be understood to build the correct strategy designated for the hotel.

Know how many guests can stay at the hotel, and understand that rooms can be booked up to 1 year in advance.

Understand market demand and adjust prices as needed. See the opportunity when it presents itself. Target all customers who can potentially stay at the property; don’t just focus on the ones who always come.

Broaden the opportunities, and the revenue stream will rise together with it.