By Ira Vouk | Published on January 16, 2020
What is Revenue Management?
What if I told you that there was a relatively simple way to increase your top-line revenue by 20-30%. Would you believe me? Believe it or not, only a very small percentage of hospitality operators use revenue management strategies and are potentially robbing themselves of their own properties’ revenue potential. At the basic level, revenue management is the strategic use of performance data, local market data, competitor rates, and other applied analytics to help predict consumer demand in order to optimize pricing and distribution in a way that maximizes revenue and profits.
In this series, we will uncover revenue management strategies that are designed to help you realize optimal revenues and profit for capacity-constrained and perishable assets (rooms, in our case). If implemented correctly, a 50 room property can see an increase of $100,000 – $200,000 each year.
What Revenue Management is Not
It might be easy to believe that good revenue management is about simply following your competitors’ rates (comp set), chasing after occupancy goals, or accepting every piece of group business that comes your way. While understanding competitor rates and managing occupancy are part of revenue management, mindlessly following these particular behaviors can actually hurt your business. That is because you also need to account for:
- Specifics of your property (location, value proposition, etc.)
- Your booking dynamics (pace and speed of sales)
- Future strength of demand
- Guest price expectations
To get the most revenue, you can’t just “set it and forget it.” Revenue managers need to be both able to plan and forecast demand for the future (365 days out), and also be flexible enough to change their strategies if need be. This diligence helps prevent problems such as having too many unsold rooms or selling out at a rate much lower than it could have been.
Indexes used in the Revenue Management Science
Let’s look at some metrics you should already be familiar with:
Occupancy and ADR are often used as a shorthand way of measuring the success of a property, but these metrics alone are a poor measure of the sales volumes they generate.
A Better Measurement
A better measurement that takes into account the relationship between these figures is RevPAR (revenue per available room). This metric is useful for measuring the hotel’s productivity and for comparing properties inside of a market – it is a more accurate view of hotel performance as it combines both occupancy and ADR into one statistic.
Next, we’ll discuss how to create a dynamic pricing strategy.
Practicing Dynamic Pricing
Now that we’ve walked through a high-level overview of what revenue management means for hospitality professionals and why it is so important, we can jump into the first of five actionable strategies that you can get started on today to maximize profit. The strategies are listed in order of importance, beginning with the one that will have the most significant impact on your projected revenue potential. In your daily practice, I recommend that you start with dynamic pricing and proceed to the next strategy as you become more comfortable with the routine.
So, what is dynamic pricing? Dynamic pricing is the strategy of using flexible pricing for a product or service based on market demand, usually used to charge a higher price as demand increases. Now, it’s time to get out of your comfort zone. Think about the next 365 days, and chart out your property’s approximate demand. It’s important that you proactively think about what the demand will be because this reflects different levels of revenue potential. Seriously, just go for it, your predictions are probably more accurate than you might expect. Don’t fret if you aren’t sure, your predictions and ability to estimate demand will get better over time and you can always adjust your decisions later. The important part is that you must start somewhere.
The next part is more fun, take your anticipated demand and use it to adjust your daily rate. The basic concept behind Dynamic Pricing in Revenue Management is simple: a hotel room (or a hostel bed) should be priced based on supply and demand (your equilibrium price). In general, room rates should be increased when demand exceeds supply (to capitalize on ADR) and lowered when demand is weak (to increase occupancy). Note that this exercise is not about maximizing occupancy. That’s because the ultimate goal of any Revenue Manager should not be increasing your occupancy, but rather maximizing your profits, the bottom line. If you’re losing more in your ADR by chasing occupancy growth – this means you’re leaving money on the table because this ultimately drives your profits down.
Believe it or not, some revenue managers update their pricing daily – even hourly. How much time you invest should be based on the size of the opportunity. Regardless of your size, you should revisit your pricing decisions and occupancy estimates regularly (preferably daily). Demand constantly fluctuates, and so should your prices. You need to be flexible enough to be able to adapt to the ever-changing market conditions and react accordingly, by updating your prices on a regular basis.
A little bit of research and knowledge of upcoming events will help your estimates become even better and enable you to reach your revenue potential. It also doesn’t hurt to keep tabs on competitor pricing – this can help you better predict demand and give you an edge when deciding how you are adjusting your price.
There are tools available that can help you with making dynamic pricing choices. For example, Cloudbeds’ Pricing Intelligence Engine (PIE), gathers and displays market data in real-time. With competitive intelligence and an all-in-one dashboard, PIE can streamline complicated pricing decisions. Learn more.
Setting Stay Restrictions
In addition to establishing Dynamic Pricing, there are a few other non-pricing methods you can use to increase revenue and profits. One such method is setting stay restrictions and controls, which helps you maximize revenue potential through managing busy peak days and adjoining shoulder days. The two main restrictions used in the hotel industry are:
Minimum length of stay (MinLOS)
This restrictor requires that a reservation is made for at least a specified number of consecutive nights. It allows you to develop a relatively even occupancy pattern during high demand periods or special events. Specifically, the minimum length of stay restriction helps keep an occupancy peak on one day from reducing occupancy on shoulder dates.
MinLOS can also be applied with discount rates. For example, guests may have to pay rack rates for shorter stays but they can enjoy a discount on longer stays.
Closed to arrival (CTA)
This restrictor keeps guests from arriving on a specified date. You’ll use CTA in two cases:
- To limit the number of arrivals on a given day (to reduce the burden on your front desk, for example, in preparation for a large group arrival).
- In conjunction with MinLOS restrictions, to achieve even occupancy during peak demand dates that are longer than 1 night.
In general, stay restrictions allow hotels to filter less profitable clients during peak demand seasons, thus increasing the resulting room revenue. It is important to note that these restrictions should only be used when estimated sales flow is sufficient enough to achieve high occupancy without the loss of revenue.
Managing Booking Channels
Hospitality operators have various booking channels, including direct bookings, walk-ins, online travel sites, travel agencies, opaque channels, corporate contracts, and others. The purpose of booking channel management is to maximize your revenue by restricting certain distribution channels with different profitability margins at different times.
Different distribution channels are configured into a small number of groups, each managed simultaneously. As in the case of high demand, it may be beneficial for you to close less profitable distribution channels in order to maximize the resulting yield. This will slow down your property’s booking pace but will increase the resulting room revenue via the ADR growth.
How it works:
Booking channels are represented in a hotel’s Property Management System (PMS) or Channel Manager software through Rate Plans. Many of these rate plans are manageable (i.e. can be closed or opened at a specific point in time for a specific date range). For effective Revenue Management, it is important to have a full list of all rate plans with corresponding margins and discounts off of rack (also known as ‘the BAR rate’ or ‘Base rate’) then to group them into 3 or 4 categories based on their profitability level (or, their “proximity” to rack rate). After that, manage these by closing the more expensive (and least profitable) channels when demand and booking pace is high. Then sit back and watch your ADR go up during the high demand periods, which leads to a proportional increase in your profits.
Let me give you an example of effective channel management to illustrate how this works:
Let’s imagine that a hotel has 6 different rate plans (this is simplified for the sake of the example, as we know in actuality this number can go up to 20-30 or even 50 in some cases). The rate plans are: RACK, AAA (5% off Rack), AP (15% off Rack promo), OTA (20% off Rack), OPAQUE (30% off Rack), LASTMIN (35% off Rack).
Looking at these rate codes, one can see they’re not equal in the size of contribution to the bottom line profits. With that in mind, let’s group these plans into 3 different categories, based on their profitability level (from the least expensive and most profitable channels to the most expensive and least profitable):
RACK, AAA – group #1
AP, OTA – group #2
OPAQUE, LASTMIN – group #3
When this exercise is done, simply start managing your channels by closing groups #3 and #2 for those dates where you can sell your rooms via group #1 alone, without having to offer deeper discounts. I.e., if your weekends always sell out, you may try to restrict group #3 from booking those dates and see how this affects your occupancy and resulting ADR. For higher demand dates (special events) you can close groups #3 and #2 altogether. Group #1 will always remain open.
Make sure to check back periodically for cases when the channels need to be reopened if real demand turns out to be slower than anticipated.
There’s one more thing to keep in mind as you open and close these various booking channels. In some cases, you may be unwilling to close a particular rate code, due to contracts with different companies that require Last Room Availability, or brand policies, etc. Place those in category #1, which is not closeable. Everything else should be split among your other categories, according to profit margins, and managed as described above.
Overselling (or overbooking) is a technique used in Revenue Management to offset future cancellations and no-shows. In other words, if you expect 2 cancellations and 1 no-show, you oversell by 3. That’s the optimal strategy for maximizing your revenue.
Still, even as simple as this idea is, not very many hoteliers wholeheartedly embrace this practice. In fact, it’s very common for most managers (especially at smaller properties) to close out availability on all channels even before they reach the 100% occupancy mark for a certain day. In most cases, this decision is driven by the fear of having to walk a guest.
However, when overbooking practices are correctly implemented, the chance of having to walk a guest will be minimized while leading to a noticeable increase in revenue (as well as profits). One doesn’t need to have a lot of Revenue Management experience or knowledge to be able to achieve this goal.
Managing Group & Corporate Business
“Managing group and corporate business” means assessing the profitability of these booking channels and managing them to maximize revenue and bottom-line profit for your hotel.
To make the right choices, when deciding to accept or reject a group business opportunity, we need to run through an exercise called displacement analysis. We do this by comparing two alternatives. The first alternative is the potential of generating revenue from a group request or a corporate contract (which immediately benefits your hospitality business by adding revenue through rooms sold at a specific negotiated price, plus expected additional revenues generated from other departments). The second alternative is revenue generated from expected sales of the same amount of rooms to transient business (potentially, at a higher price) that this group/corporate contract would be displacing. You can determine the breakeven price to be quoted to a group or a corporate contract by finding the point where the potential revenue from both alternatives is equal, which means that the hotel won’t be at a loss by accepting the contract.
By performing a displacement analysis you may discover that, in order to improve profitability, sometimes it’s necessary to limit (or decline) a group business opportunity for one of the following reasons:
1) Your transient booking channels don’t anticipate the deep discounts that are normally offered to groups, resulting in a higher ADR.
2) You free yourself from the risk of having a large number of the group’s booked rooms canceled (even if you set strict group cancellation rules, this risk still exists, )
Due to these reasons, every group or corporate request needs to be analyzed in order to assess its revenue potential against the displacement of expected transient business.
Using Revenue Management Technology
Large hotels traditionally use a revenue manager to handle all of these strategies for them. What does a revenue manager do? He or she gathers and analyzes all of the data necessary to make the best pricing decisions to maximize profits. For smaller, independent properties – that’s easier said than done. Many small properties don’t have the budget to maintain a full-time revenue manager on staff. With the basics covered in this guide, you can start managing your revenue on your own – but there’s a better and reasonably affordable way to take control of your revenue management. This is where revenue management technology comes into play.
Revenue management technology has been a game-changer for independent properties because it does the job of managing your revenue for you. These tools will analyze the data for you and automatically make pricing changes based on preset rules or triggers. For example, you can create alerts that allow you to track your competitor’s pricing fluctuations in the market. That way you can take that information into account when making your revenue management decisions and make sure your rates are never too low or too high in comparison with your local competitors. A revenue management tool will also track industry data so you can stay up to date on local market changes and uncover new revenue opportunities. All of the data stays organized on one dashboard so you can keep track of your revenue management efforts at a glance and compare your results from year to year. The longer you use it, the better the tool will get at consistently making better pricing decisions for you.
What should you look for in a revenue management tool? Here are a few must-have features:
- It integrates with your property management system to ensure seamless data flow between the two systems
- It uses your property’s performance history and other data (i.e. key performance indicators) to give you the most accurate pricing predictions
- It makes automatic pricing and stay restrictions changes for you
- It provides relevant and detailed data about the market and lets you set alerts to track the competition’s pricing
As a revenue management professional and product manager for Cloudbeds’ revenue management tool called PIE (Pricing Intelligence Engine) I highly recommend making use of one of these tools for your property. It will change your business for the better and you won’t be able to imagine how you operated so long without one. For the most optimal revenue management, it’s critical to balance advanced technologies with the best revenue manager.
Revenue Management 101 Infographic:
As a recap, here is an infographic of the six strategies for managing revenue at your independent property. Be sure to keep reading below to learn a few secondary revenue management tactics to help support your primary efforts.
Other Revenue Management Tactics
In addition to the direct revenue management strategies we’ve covered so far, there are more practices you can use to help support your main efforts. An independent, holistic audit of the hotel can really help bring forward areas where revenue-generating improvements can be made. Below are additional tactics you can use to boost your revenue.
Obviously, marketing is a whole separate discipline and larger hotel properties and hotel management companies normally have a separate position -or even a whole department- dedicated to marketing strategies. However, I feel obligated to list it here because marketing needs to go hand in hand with Revenue Management, as timing, rates, and availability will ultimately determine what campaigns you run and when.
One of the biggest goals of any hotelier is to be able to shift business away from the OTAs to the hotel’s direct sales channels (which, as we know, happen to be the least expensive for the hotel and thus the most profitable). The truth is: this goal is hard to accomplish through the use of Revenue Management techniques alone. That’s why the marketing and sales departments are the best resources for any Revenue Manager trying to achieve more direct bookings.
Managing online reviews
TripAdvisor has been the undisputed leader in the world of online travel reviews. However, it’s also important to monitor and respond to the reviews posted on your own website (if applicable), all major OTA sites, as well as social media accounts.
There are SEO benefits, too. Adding original content to websites, such as reviews, is a great way to draw more traffic to your website.
Upsells in Revenue Management
Selling upgrades is an effective way of increasing revenue. Make an active attempt to sell additional services or amenities at the front desk, on your website or via email marketing campaigns. A caller/booker may be unaware of varying rates and amenities. Employees should be trained to listen to guests and make suggestions for appropriate accommodation upsells. There are various methods of upgrading: top-down (mentioning the higher-priced option first), rate-category-alternatives (trying to upsell from a lower-rate category to a mid-rate one), or bottom-up (mentioning the cheapest option first and introducing each following categories in increments, such as, “For only $19 more…”) There are also software tools that help hoteliers maximize their revenue through proper upselling.
Managing Room Type Differentials
Monitor and analyze the booking pace of different room types during different demand seasons and increase or decrease the difference in rates between them to maximize resulting revenue.
For example, during the summer season, 2-bedroom suites may be more popular if a hotel attracts more family business, whereas corporate clients (single-bed users) may book more frequently during winter. Analyze your booking patterns per room type before making decisions on the room type differentials.
Cloudbeds’ Pricing Intelligence Engine (PIE) can help you manage room types individually based on occupancy levels that are specific for those room types. Actually, PIE can help you tackle every opportunity to yield more revenue, including helping you compare rates with competitors and gathering real-time market data so you can make better pricing and distribution decisions.
Managing ancillary revenues
Many hotels have other revenue-generating departments, in addition to rooms. If those ancillary revenue venues are significant, it is also important to manage them to maximize the overall profitability of the hotel. This sometimes may mean discounting or even eliminating the costs associated with one department to increase the revenue from another one, thus increasing the overall bottom line. For example, hoteliers can consider offering free parking or a restaurant discount as an incentive for booking a large group or offer a discounted room rate to encourage guests to spend more in the hotel’s casino.
We hope you’ve enjoyed our series on Revenue Management 101 and start implementing these tactics at your property as a way to increase your profits. As you can see, there are a number of ways property owners can increase their revenue outside of more direct pricing and revenue management strategies. By far, the easiest way to manage your revenue is with a tool designed specifically to help you with your revenue goals.
If you need an extra hand to boost your revenue management strategy, Cloudbeds’ Pricing Intelligence Engine (PIE) is an all-in-one competitive intelligence dashboard made to help independent property owners and managers make better pricing decisions.