What is Revenue Management?

Revenue management deals with the question of how services can be sold in a way that maximises profits using price differentiation. Read here what revenue management means and how it works in the hotel industry.

Table of Contents:

• Revenue Management = Concept for revenue optimisation through dynamic pricing → What is the definition of revenue management?
• Avoid pricing decisions based on your gut feeling → What are the reasons for revenue management??
• Revenue Management in hotels is complex, considers many factors, and is implemented internally or outsourced (fully or partially automated) → How does revenue management work in a hotel?

Definition of revenue management?

The definition of revenue management is to sell the right product to the right customer at the right time for the best price through the appropriate distribution channel. The goal is to maximise the profit of the business. Synonymous with revenue management, terms such as profit management or turnover management are also used.?

This concept is used in particular in the service industry, where products are offered that cannot be conserved. In other words, here it is even more important that the product is sold at a certain point in time. A hotel room that has not been booked for one night cannot be sold multiple times later to make up for the lost revenue. Pioneers in revenue management are therefore not only hotels, but also airlines and other transport and tourism companies.?

In order to maximise revenue and make the best use of existing capacities, prices are adjusted dynamically. A variety of factors also play a role in the hotel industry, some of which we explain below.?

What are the reasons for revenue management??

In order to maximise your revenue in a targeted manner, you need to keep an eye on the relevant key indicators and factors influencing demand in the hotel. If you succeed in doing this, all the clues for optimal pricing can be derived from this with a suitable revenue management strategy. Your benefit is that pricing is not based on your gut feeling and you sell your hotel room to the right guest at the best price.?

Along the way, you will get answers to the most important sales questions:?

• What demand will you achieve at what time??
• How price-sensitive are your guests??
• Which distribution channels are relevant for your hotel??
• What is the volume and margin of room sales via your own website vs. via online travel agents (OTAs)??
• Which guest segment shows what willingness to pay??

Strategic hotel revenue management helps evaluate these questions again and again, to achieve a maximum of profitability on a constant basis.?

To optimally manage prices and availability, forecasts are typically formed from past data and interpreted in the context of current data. As we can see from the example of the pandemic period, the forecast from past data is not always useful. Therefore, at HotelPartner we also look in particular at future data such as pick-up figures to determine optimal prices.?

How does revenue management work in a hotel??

In the hotel industry, revenue management practices are applied to room sales and event sales or MICE. Larger hotels or hotel chains employ their own revenue managers and operate entire revenue centres with control systems. Smaller and privately owned hotels, on the other hand, often rely on external solutions – if they are involved in revenue management at all – to adjust their prices to market dynamics.

These solutions are mostly purely software-based, which means that algorithms access standard market data and then submit limited price proposals. Often, these are no longer adjusted in a timely manner to current market developments.

Ideally, state-of-the-art technology is combined with the know-how of experienced revenue managers, as in our HotelPartner approach. This allows decisions made by algorithms to be questioned and adjusted according to the situation. Especially in times of great uncertainty in the market, the most can be gained from the combination of human and machine in revenue management.?

Whichever solution is used, it is important that the management of prices and availability is preceded by a strategy that fits the hotel. Then you need a set of parameters to calculate your minimum prices. On the other hand, you need to keep an eye on the competition in your market for optimal pricing, as well as the booking behaviour of your guests.?

Factors you should consider for your hotel revenue management include:

• the location, special features, and amenities of your hotel?
• your competitors’ rates and occupancy?
• your guest segments?
• your positioning in the market?
• your offered services and differentiation approach?
• time of booking and lead times?
• reasons for your bookings (events, seasonal or daily reasons)?
• your fixed and variable costs?
• the different dynamics per room category?
• upgrades and special offers?
• OTA handling?

If you want to be well-positioned, revenue management can be extensive and it’s easy to lose sight of the big picture. With the combination of state-of-the-art technology and expert know-how, we are happy to help you find the best price for your rooms per distribution channel and guest segment at any time. Simply contact us for a free consultation.

Your HotelPartner Team