What is Hotel Revenue Management - Everything you Need to Know, Tips & Strategies
- Gavin Hughes
- Jun 30
- 4 min read
Contents
For a long time, Revenue Management was considered only a supplemental offering or an additional business process in the hospitality industry. However, times have changed, and hoteliers have realised the importance of good revenue management strategies.
Nowadays, revenue management is one of the core areas that impacts sales and growth.
Pricing, strategy, operational management, and almost everything else take into account revenue management to gain a competitive advantage, offer a better guest experience, and drive more revenue.
Definition of Revenue Management for Hotels
Revenue management is the strategic pricing and distribution of a property's rooms, facilities, and amenities to the right audience at the right time.
In both the short- and long-run, revenue management helps in boosting sales and revenue.
Revenue management measures what different customer segments are willing to pay. This can only be done by measuring and monitoring the supply and demand of the hotel rooms, eventually breaking it down into various factors.
History of Revenue Management in Hospitality
Revenue management originated in the aviation industry, and the concepts of inventory management and price optimisation subsequently spread across other segments of the hospitality business. Revenue management is also extensively used in different sectors. The most vital change came from a tactical inventory management approach to evolve into a more strategic marketing approach.
In the past, hotels didn’t consider the importance of acquiring new market segments to fill slow-demand periods or of determining whether the prices they were offering were ideal.
Based on the airline industry’s yield management, the hotel industry started to apply revenue management strategies in the late 1980s, as the products shared similar characteristics, such as perishability, fixed capacity and the need for segmentation based on customers’ levels of price sensitivity.
Why is Revenue Management Important in Hotels?
Revenue Management is critical for hotels as it’s a service, not just a product on the shelf. Demand varies by day of the week and season, and there are many services hoteliers can add or package to a simple room night to capture the interest of different types of customers. These may range from business travellers and solo tourists to couples and families.
Finding the best tailor-made solution for the specific property requires a dedicated Revenue Manager who will analyse the competitor set and the market to find the best opportunities for the hotel.
If pricing is not correct, well-thought-out, and backed by data, a hotel could lose significant potential revenue.
Revenue Management versus Yield Management
While revenue management includes predicting consumer behaviour across market segments, forecasting demand, and optimising prices for various product types, yield management focuses explicitly on maximising revenue through inventory control.
There are three essential conditions for yield management to be applicable:
There should be a fixed number of products available.
Perishable products (with a time limit for selling the resources, after which they cease to be of value) should be available.
Different customers should be willing to pay different prices for the same product.
There should be high fixed costs and low variable costs – every additional revenue will contribute to the overall profit
Revenue Management Strategies, Tips, and Examples
There are six basic revenue management strategies that every hotel must implement. These are the pillars of success.
1. Understanding Your Market
It's essential to know the season's peaks and lows. You also need to consider which days of the week are busy and which are slower. Knowing the market trend can put you ahead of the competition and help you maximise revenue.
2. Segmentation and Price Optimisation
It’s critical to understand the market and know what type of customers are staying at the hotel. It's also essential to figure out who is willing to pay how much.
3. Knowing Your Competitors
The competitors in your area are your main rivals. They have the best opportunities to take business from you. Hence, you need to familiarise yourself with their products, pricing and any advantages that they might be using. It's good to use this information as a benchmark to see what you need to improve.
4. Choosing the Right Pricing Strategy
Pricing is the key, and understanding your market and segments helps you choose the right price points to maximise revenue.
5. Forecasting
To understand future demand and set the right pricing strategy, you need a forecast to anticipate what you can expect in specific segments. This helps you prepare for the future. Looking ahead is key in Revenue Management!
6. Incentives for Direct Bookings
Direct bookings are essential in building guest loyalty. You need to make sure customers know they can get the best price on the hotel website, rather than through third-party channels, where you end up paying commissions.
Outsourcing Revenue Management
Having an in-house Revenue Manager is good, but the distractions don't help. In a hotel, there is always something happening, and someone needs to lend a hand.
Having a Revenue Manager on-site can take time away from core revenue management. The person may just be involved with a lot, and you might end up losing opportunities to impact revenue.
Hence, outsourcing revenue management is a good idea, as it frees up a team member to focus on the operational part of the business. This creates an outstanding guest experience, while the 'offsite' Revenue Manager can work on maximising the revenue.
Revenue Management as a Competitive Advantage
Overall, Revenue Management is critical for maximising a hotel’s revenue. Every market is getting saturated with more and more hotels opening up, and in order to gain competitive advantage, you need to use revenue management to its full potential.
As mentioned, Revenue Management is not just about pricing. There is much more than the room rate. It makes you consider demand, budget, forecast, and everything else to make the most of the opportunities and reservations.
It’s not just the hotel room anymore, but also the added amenities and everything included at a certain price point. Setting the correct rate is just the beginning.
Utilising Revenue Management and its software, such as Revenue Management Systems (RMS) or Rate Shopping & Market Intelligence Software, to assist you, brings your property to the next level by broadening the horizon and helping you reach your goals.
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