revenue management hotel

revenue management hotel

Optimizing Revenue Management Strategies in the Hotel Industry

1. Introduction to Revenue Management in the Hotel Industry

Typically, revenue management involves managing and predicting demand, forecasting that demand, presenting the optimal price, and fulfilling and monitoring the execution of the sale. Because so many different factors influence price demand and opportunity, pricing decisions can only be approximations. This framework makes revenue management extremely important for the hotel industry. The term “revenue management” had its origins within the airline industry, where a radical new and successful technique for inventory control and pricing has emerged over the last fifteen years and resulted in significant financial benefits for both industry leaders and followers. These concepts and techniques have also resulted in improved efficiency and dependability for the airlines, putting situational responsibility on the users and providers of air travel and less dependence on the domestic economic cycle. Responding to the successes of the airlines, both in the financial and operational arena, other service-based industries have started to appreciate the potential benefits from revenue management and started to try to adopt the concepts and models used in the airline industry, specifically adapted to their business goals, products, and constraints. In the development of revenue management, there are a number of key drivers: deregulation of industries, advances in information technology, yield management systems, and greater flexibility in organizational structures useful for implementing and maintaining revenue management approaches. The time has come for the hotel industry to capitulate and pay greater attention to the concepts of revenue management, using it to enhance profitability and financial performance. The hotel operating environment is idealistic as it possesses the constraints faced by yield management in manufacturing, which includes fixed capacity, perishable inventory, uncertain demand, product homogeneity, last-minute sales environment, and the ability to match supply with demand using prices as the signal. Furthermore, hotel volume typically allows for economies of scale. Although both revenue management problems possess similar input sets, the nature of the product, demand patterns, and sales channel characteristics are different. It makes best sense to develop specific revenue management models for the hotel industry.

The hotel industry has experienced dramatic changes in the way potential customers purchase rooms. Since the invention of the internet and the subsequent availability to the public, room purchasers have been able to shop from many different suppliers on the internet at the same time. The numerous shopping excursions trigger a competitive struggle among hotels for guests. This situation is challenging for the hotel industry and highlights the importance of adopting and optimizing revenue management concepts. Revenue management is defined as “the application of disciplined analytics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth”. For hotel companies, managing revenue and pricing is difficult, challenging, and extremely important. The ever-present challenge is to meet customer service goals while maximizing revenue and profit. Given that rooms cannot be stored, production is time-constrained, and sufficient capacity may never be available to meet all demands. Because of this, accurate price positioning and allocation of capacity is essential at both the micro-level and the hotel level.

2. Key Components of a Successful Revenue Management Strategy

Revenue management tools make up the third key component in a successful hotel revenue management strategy. Over time, innovative tools have been developed to improve the overall Revenue Generation Performance in hotel properties. These tools are designed to help hoteliers compete through the adoption of automated methodologies, making it easier to execute sophisticated pricing strategies. However, as it relates to the hotel industry, some of these tools are more superior in design and functionality than others are. When this occurs, tools supporting the hotel’s decision-making process are often underutilized, leaving better strategies and opportunity profits on the curb. When it comes to strategic revenue optimization, hoteliers today need proven pioneering decision-support solutions to implement powerful processes to achieve optimal and sustainable results. Such tools include: tenant Whole Property Rates Management System, Price Optimizer/Increaser, Price Flexibility, and many more. If well executed, these tools will undoubtedly provide a property and the teams supporting it with strategic as well as operational competitive advantages. The operational and financial dimensions of a property’s resources are also greatly impacted and enhanced during the decision-making process, depending on the specific Revenue Management tool selected and the processes used to implement it within the hotel’s standard operating procedures.

Market segments are the main element of the second key component of a successful hotel revenue management strategy. Market segments are defined as categories of business upon which market demand is distinguished. They are the specific groups whose demands for guest rooms vary according to the general characteristics of different rooms. Hotel revenue management success requires a deep understanding of how the hotel’s demand pattern varies for the defined market segments. The room demand patterns of market segments differ due to different factors such as distribution channels used, duration of the stay, reservation lead time, potential revenue contribution, booking pace, cancel/no-show behavior, appropriateness of a negotiated rate, sales effort required into landing business, restricted/unrestricted nature of the rate, and competitive dynamics experienced, etc. The performance of these rooms can be maximized with a focused understanding of market segments. Market segments can also be tiered. Tiered segmentation is concerned with the identification of different layers of general clientele in the hope of lodging different products to satisfy them in a differentiated way and ensure an optimal operation of the hotel. Each hotel must develop its own tiered market segments. This principle is highly individual and belongs to the hotel’s product policy.

Enterprise Revenue Management (ERM) provides hoteliers with a proactive pricing contract that integrates demand forecasting to optimize both group and transient bookings to maximize revenue and market share.

The selling strategy plays an important role in a successful hotel revenue management strategy. This strategy consists of consistently handling incoming reservation inquiries and being particularly careful about protecting availability and developing premiums during high demand time periods. The selling strategy also includes tracking and coordinating all rate promotions and specials such as package deals and rate plans. Rate management directly impacts hotel occupancy and ADR performance.

A successful strategy entails maximizing revenue and market share by optimizing the pricing and inventory available at any given time. There are four key components to a successful hotel revenue management strategy. These are as follows: a clear selling strategy, understanding of market segments, a focused use of hotel revenue management tools, and a proactive market pricing approach. These components must work together for a higher revenue potential.

3. Advanced Techniques and Technologies in Hotel Revenue Management

This chapter focuses primarily on the future capabilities needed to design, implement, and manage market-driven, customer-focused, and high-performance organizations for hotel revenue centers. It is the responsibility of the hotel firm to deliver enhanced quality guest satisfaction that is all about convenience, personalization, and experiences at each customer touchpoint. From all the hotel departments, the importance of hotel revenue management is becoming more essential than ever before in order to generate and manage the hotel revenue and to survive and prosper in the market. The chapter discusses the integration of three strong and interdependent revenue management functions in the hotel industry: Information Management, Customer Relationship Management, and Revenue Management. Also, the new Strategic Revenue Management Integrative Model is presented to build a more practical approach and to generate a successful hotel business in the future.

The prevailing pattern in revenue management today for most hotels is a cutting-edge and highly fragmented approach to optimizing business across all major business areas of the hotel. Yet, the tools, techniques, and technologies most often employed make little use of the rapidly emerging capabilities that can incorporate advanced algorithms, decision support and analysis technologies, and operations research. In addition, the relationships between revenue management, information management, and customer relationship management do not leverage essential existing interdependencies, and today’s most successful firms are fully wedded to understanding and applying these vital components for realizing enhanced profitability. The 21st century is turning out to be a consumer-led revolution with technology transforming the retail environment and creating a world that is truly multitasking for individuals and consumers. Hotel firms cannot afford to be late adopters of this revolution.

4. Case Studies and Best Practices in Revenue Management for Hotels

4.1. The Vision Before giving more detailed insight into existing best practices, it is important to discuss the skills necessary to set up and maintain efficient revenue management procedures. Although not all employees involved with pricing set the optimal prices, some of the basic characteristics of an excellent revenue manager include – in addition to profound knowledge in the area – the ability to build trust and credibility, to clearly articulate a range of issues, to have a global focus, to create a learning alliance, and to be able to forge connections between people in their company. In addition, relationship skills are fundamental, as the ideal image of a company is not only the result of hotel and service branding, but also the result of relationships established with guests over time. Networking, personal treatment, facing the customer, making promises, and – most importantly – meeting expectations are key steps along the path leading to a long relationship and economic reward.

The examination of revenue management practices across companies, discussed in the academic literature, combined with the experience of running real projects, provides a good foundation for developing best practices. This knowledge is particularly valuable for companies operating in the hotel industry where market specifics reduce transparency of the real market, fuel competition, and make it difficult for participants to compare processes within different companies. Developing best practices helps to define prioritized areas of intervention and support investments in automating efficient and innovative methods. In this industry, there is a strong need for industry regulators who could help to implement standard procedures to achieve better revenue management. Best practices could be developed based on information collected during the review of academic literature on revenue management and on the analysis of secondary market data obtained from several large companies employing Revenue Management. Information from leading academic researchers and industry participants operating state-of-the-art systems was also gathered in complementary interviews.