What is revenue management? Definition and concepts for hotels

what is revenue management?

If you’re serious about building a revenue management strategy, we believe that a core component of this strategy starts by understanding what is revenue management.

One of the primary components to revenue management is using data-driven performance information, predicting demand levels along with customer behaviours and making price and distribution decisions so as to optimise revenue.

We’ll give you a toolbox filled to the brim with a definition of revenue management, strategies, examples and tools that you can put into practice today.

With this knowledge, you can be on the crest of the wave of revenue management and make a meaningful impact on your hotel bottom line.

Let’s dive in.

What is revenue management?

revenue-management-definition

Looking for the definition of what is revenue management? This is the resource for you:

"Revenue management is selling “the right product to the right customer at the right time to the right price" (Robert Cross, 1997).

Revenue management is nothing new. Still, it remains one of the most popular revenue optimization tactics in the hospitality and airline industries.

History of revenue management

The idea of revenue management firs emerged as a concept in the airline industry, when Robert Crandall, former CEO of American Airlines, decided to use analytics-based inventory control and intensive demand forecasting to maximize American Airline's revenue.

Robert Crandall, the inventor of revenue management

In the company’s early days, Robert Crandall realized that anticipating consumer demand would help them implement a dynamic pricing strategy and improve the airline company profitability.

It soon became incredibly valuable for other industries such as the hotel and car rental business to implement their own revenue management strategies.

It turns out indeed that revenue management techniques are fully applicable to the hotel industry too.

That’s because hotel customers are willing to pay different prices at different moments in time for similar products.

Definition or revenue management

Revenue management is applicable in all the industries where customers accept to be charged different prices for similar products.

For revenue management to be applicable, it is necessary that only a limited quantity of a given item is available on sale. This product also need to get sold before a given date and loose all of its economic value.

Revenue management consists in practising dynamic prices and adjusting available inventory based on a wide range of parameters, such as weather forecast, expected demand, past data.

The way to carry out efficient revenue management is to forecast demand along with client spending habits and current market conditions such as competitor prices.

Once you know more about these elements, you can move onto adjusting your price and fine-tuning your available inventory.

There are a ton of revenue management support tools out there you can use to centrally monitor these data, whether it’s an all-in-one solution or a product tailor-made for yield management. Hotel Price Reporter is one of them:

logo of the Hotel Price Reporter revenue management platform for hotels

The Hotel Price Reporter platform gives hotel managers access to a full set of market information, such all of your competitors rates for the next 365 days and demand data forecast for your locality:

Note: you can read up more about revenue management and yield management in our previous articles about that topic on the Hotel Price Reporter website.

Why is revenue management important in hotels?

The right revenue management strategy can make a huge positive impact on your hotel bottom line.

Today’s top hotel brands know that revenue management is key to better allocate their room stock and improve their revenue streams.

One of the best ways to make more money at your hotel is to understand that a revenue management strategy can help you generate more value for every room you sell.

Many people believe a healthy hotel is a place that can fill all of its rooms — but is that really the case? Not necessary.

When creating a revenue management strategy, you may end up being better off by refusing certain clients and leaving some of your rooms empty.

The above example is a perfect illustration of that problem.

You could think accepting guest 2 and guest 4 bookings is the best way to allocate your rooms as this gives you a 100% occupancy rate and a total revenue of 750.

But if you pick guest 1 and guest 4 reservations instead, you generate a total income of 770 and you register a global occupancy rate of 75%.

By allocating higher priority to more financially rewarding reservations, you generate more income and ensure better allocation of your resources.

What is a revenue management strategy?

Picture of a hotel that applies revenue management strategies

When first building a revenue management strategy, start by implementing an overbooking policy, where you decide to sell more rooms than you actually do have in stock.

This is a great starting place because you make sure you don't end up with a last minute stock of unsold rooms following some no-shows. And it allows you to improve your occupancy rate and your hotel revenue.

Then, all you really have to do else is create minimum length of stay restrictions (MinLOS).

Simply by imposing a minimum length of stay at your hotel during pick periods followed by quieter periods, you will improve your occupancy rate along with your profitability as you start filtering more relevant and financial rewarding stays.

As your global profitability starts growing, it’s important to organise a market segmentation for your product too — otherwise you’ll likely loose money by not offering the best price to the most appropriate client at the right time.

That's why bundling your rooms with different options for different prices is crucial when you have multiple types of clients, ranging from business travellers to millennials.

Thanks for reading! Feel free to connect with our team at Hotel Price Reporter and to comment on the topic.