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A quick overview of hotel revenue management
by Geofferey Pagel
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Whether your hotel is highly successful or struggling to get by, if you aren’t using revenue management techniques, you are leaving money on the table.
Still, only a few hotel operators put an effective revenue management system into place.
What is Revenue Management?
The term revenue management sounds a bit vague. Every business with revenue manages its revenue, right? Revenue management doesn’t mean balancing your books or weighing investment opportunities versus the need to save money.
Instead, it refers to a more specific, fine-grained control over the methods through which your hotel makes money. It takes the old, static way of setting room rates and managing bookings and replaces it with a data-driven dynamic method that aims to maximise the use of your property.
Let’s take a look at some of the major strategies used in a sound revenue management system (RMS) and how each can help increase your hotel’s bottom line. But first.
How is Revenue Management Different from Yield Management?
Yield management is a strategy used to maximise the number of guests who stay at a particular property by offering the right price at the right time to the right guest.
Revenue management looks at the hotel’s performance and identifies where it can increase revenue across the entire operation.
The most obvious way to maximise your revenue is to optimise your pricing.
There are several pricing strategies that a sound revenue management system can make use of. The most crucial factor is that your prices aren’t static.
Prices that don’t adapt to the situation in one way or another will not bring in the most revenue. Let’s look at three common ways that different prices are set in successful revenue strategies:
1. Dynamic Pricing
Prices are set by balancing supply versus demand. Intelligent hotel operators take advantage of this constant fluctuation in the hospitality industry.
Some hotels will certainly price differently for the busy season than they do for the slow season, and that helps.
With modern tools, we can go further to adjust to changing demand by setting flexible prices for specific services based on the current and specific market demands.
Modern revenue management tools do this by looking at the competitors' pricing in your area. Then the tool is able to adjust your pricing automatically, ensuring that travellers looking for the best price, in your area and on that particular day see your hotel.
Even without modern tools, you can make simple changes to your pricing that will increase your revenue streams.
Are your rooms close to being all booked up? Raise prices.
Struggling to get guests into the hotel? Lower prices.
You can update your pricing weekly or even daily using this simple metric.
When you combine that concept with the analytics that today’s hotel management technology puts at your disposal, you can adjust prices hourly if you want to.
The types of rooms people are using, the days they are using them the most, the channels that are doing the most or least business, all of these are variables in your supply and demand equation that are used to dynamically fit your prices to the real-time market demands of the hotel industry.
According to Xotels, by applying dynamic pricing, a 5* Luxury Grand Hotel in Italy, part of the Leading Hotels of the World, increased its ADR by 24% and RevPAR by 39%.
2. Guest-Segment Pricing
Dynamic pricing is something that every hotel operator should be using, but other techniques can be used in conjunction with it to extract additional revenue from your property.
Guest-segment pricing steps away from the demand on your hotel business and looks at the requirements of individual segments of your guest base.
Business travellers may be more likely to visit your hotel during one season, families in another, and single occupants in yet another.
The above example, and nearly any way you can divide up your customers into market segments, is a perfect way to further play with the amount you charge so you are getting the most you can from each booking.
You can see examples everywhere: Corporate guests will pay less for a room as they are more likely to book regularly and for multiple rooms. However, hotels will charge more for the same room when someone requests a sea-facing room explicitly, and walk-in guests usually pay the highest rates.
Airlines are the leading industry in excellent price segmentation; rarely do two passengers ever pay the same price for a ticket.
3. Length-of-Stay Pricing
You increase your chances of being fully booked when you book long-stay guests.
By giving a discount to guests who book longer stays, hotels can decrease the chances that they’ll have available rooms sitting idle instead of earning money.
Furthermore, these pricing bundles can group poorly performing days with better performing days to provide another incentive for guests to bring revenue into your hotel when rooms would otherwise sit idle.
Here you can see an example of how Hyatt Hotels & Resorts does this. The standard rate for Hyatt Centric Las Olas Fort Lauderdale in Miami is $179 USD per night, but if you book for a long-term stay, more than ten nights, the rate is reduced to $144 USD per night.
We’ve already discussed how corporate guests may be more likely to book hotel rooms during one time of the year than families or walk-in guests.
There’s an opportunity for revenue growth beyond adjusting prices for those segments during specific times.
Let’s say you have a conference or other big group that wants to book when your historical data suggests that walk-in business is the highest.
Is it in your best interest to take the booking, or will you be taking rooms out of circulation that could command a higher rate?
The process of determining whether a group booking is more or less likely to increase your total revenue based on the current prices and demand is called displacement analysis.
Doing this type of analysis before blindly accepting large bookings can help prevent you from accidentally causing your hotel to miss out on the chance for higher revenue.
Adjusting pricing depending on the duration of the stay can be combined with displacement analysis, knowing when it’s in your best interest to decline a booking.
Stay controls set restrictions on how long guests can book a room or when they can check in to a room.
Done correctly, this allows you to even out your occupancy, making the most of the available rooms. Good revenue management strategies use three common stay restrictions:
1. Minimum Length of Stay
If you are in a period of high demand, you can fragment your bookings and reduce your chances of reaching full occupancy if you take on too many guests for a single night or two.
It may make sense for your hotel to put a minimum length of stay in place during these periods.
It is imperative to keep up to date with demand, though. You don’t want to end up with empty rooms that could have been filled because external factors were not accounted for.
Promotions for minimum length of stay rate plans look like this; "Bookings available Monday to Friday and Friday to Monday only”.
2. Maximum Length of Stay
You may have a period of high demand, one that can command maximum rates, that you know will be short-lived.
This could happen, for example, if a big event in town brings in many people.
Suppose you have people booking at the usual low rate and extending their stay into this period, providing an opportunity for higher revenues. In that case, you’ll be missing out on crucial monetary gains.
Putting maximum lengths of stay in place can help to ensure that your hotel has rooms available when the higher-dollar bookings become available.
Example: Is there a football match near your hotel this weekend? Do you know if your hotel will get lots of direct bookings? Then limit new bookings to the Friday preceding the weekend. This ensures you can maximise queries.
City hotels also use maximum length of stay strategies to avoid long-stay ‘ghost’ reservations for obtaining a Visa or other shady practices. This will prevent your hotel from turning away paying guests for scammers with fake credit cards.
3. Closed to Arrival
This one is rarely used but can still present an opportunity.
If you are expecting a large number of guests to extend their stay, you can restrict check-ins so that you have available rooms for the expected extensions.
You are also reducing the workload on your front desk during extremely high-demand periods.
This control, even more than the others, must be used cautiously. Unless you know the demand for extensions is very high, you’ll lose revenue instead of increasing it.
Example: Let’s say your hotel has a conference booked and is in an excellent location for skiing. If your conference guests are all due to check out on Friday and there is a good snowfall forecast, they will likely extend their stay for one or two nights and hit the slopes.
So you close off a percentage of your rooms in anticipation of your guests extending their stay for a few extra nights, improving the guest experience and grabbing some additional revenue for the hotel business.
Every hotel has a certain percentage of guests that don’t show up for one reason or another. Each one of them represents lost revenue.
By overbooking for the amount you expect to lose out on, you’ll still be maximizing your occupancy.
Many hoteliers are rightly fearful of aggressively overbooking and the ramifications on social media these days.
If you calculate wrong and all the guests show up, someone has to be turned away, and this usually means paying to put the overbooked guest into a competitor’s hotel!
With modern technology such as business intelligence and revenue management solutions, it’s much easier to accurately forecast how many people will no-show.
Two categories of guests don’t pitch up for reservations: no-shows and cancellations.
1. No Shows
No-shows are people who don’t show up for their room when they are supposed to.
They usually catch you by surprise, and if you don’t overbook, they cause you to lose out on valuable room revenue.
No-shows should be calculated separately from cancellations, partly because they are a different type of missed booking and will involve different rates.
But they should also be treated separately because the heads-up you get from cancellations – may be a window of several days or more – gives you an opportunity to maximise revenue opportunities by booking those rooms out.
For example, if a company books a conference for 500 people at a large business hotel, 10% of the guests are likely to no-show (because they did not have to pay). Whereas, if you are a family resort with a strict no refund policy, no-shows are more likely to be around 1%.
Most hotels set a deadline for guests to cancel their reservations without incurring a penalty.
The most common deadline is 24 hours before check-in. However, management must make the decision that makes the most sense for your specific hotel.
Some hotels set a 48 or 72-hour deadline, and during peak periods some hotels require guests to cancel a week prior to their booked stay.
Hoteliers using revenue management software generally have a good idea of how many cancellations to expect based on their experience, market conditions and data respectively.
Upselling is a way for hotel owners to increase their revenue by offering travellers an upgraded room category, extra amenities, or customisations to enhance the guest experience.
Upselling is beneficial for both the guests and the hotel.
When executed correctly, upselling lets guests personalise their stay and increases the hotel's average guest spending and overall revenue.
It's also not always about selling.
Due to the staffing shortages during the pandemic, some hoteliers offered opt-out housekeeping - reducing labour, equipment and cleaning supply costs.
Today upselling is not about getting a higher price and sneaky hotel marketing; it is about offering genuinely customisable and tailored experiences to meet every guest's needs and thus improve their experience.
The Radisson saw an increase of 70% in breakfast sales and 40-50% in transportation revenue in some hotels due to upselling, resulting in €1.1 million in incremental revenue.
Online travel agencies can be a great way to sell unsold inventory, but they are less profitable than direct sales.
If your direct channels are doing well, you can scale back on the number of rooms you make available to OTAs.
Once you’ve used the OTA to book a guest, you should have a strategy in place to encourage that guest to book directly with you in the future.
Used this way, OTAs function as lead generators when you need them, rather than permanent strains on your revenue.
Using an OTA, the K+K Hotel Central in Prague increased year-on-year growth by 45% and hotel package sales by 140%.