Revenue Management, what it is and why I need it

Reading Time: 5 mins. 22/11/2017

Revenue Management is focused on optimizing business decisions based on understanding and predicting demand. Through this article we want to help you understand what the revenue management is and thus improve the profitability of your establishment.
The pioneer in what we call revenue management was American Airlines, who in the 70s started offering at cheaper prices those seats they thought wouldn’t be sold. Their goal was to start competing with low-cost airlines and thus increase profit margins.
Like airlines, the hotel industry has certain peculiarities that make revenue management a very effective technique to maximise profit per room and benefits.
  1. Hoteliers offer a limited product, that is, there are no endless rooms available.
  2. It’s a perishable product. Rooms that haven’t been sold today cannot be sold tomorrow.
  3. There is the possibility of early selling.
  4. We can make a market segmentation since there are different clients with different needs.

To summarise, revenue management consists of developing a series of strategies to sell the right product at the right price to the right customer at the right time, through the right channel and with the most profitable commission.

Essentially, revenue management consists in adjusting rooms and services rates based on demand, booking anticipation, probability of the sale, average price, RevPAR (Revenue Per Available Room) of the hotel and the fixed costs, in order to maximise revenue and benefits trying to influence consumer behaviour.
This technique is based on obtaining historical data regarding the activity of the hotel. By analyzing them, revenue management allows us to interpret trends, calculate forecasting and use this information to apply strategies that lead us to sell the hotel units in the most profitable way possible, in the appropriate distribution channel and with the best commission efficiency, as well as establishing the appropriate pricing policies according to the demand, the customer segment, etc.
It’s all about predicting the behavior of the demand in order to optimise inventory and rates, maximizing the growth of the income. We could say that this helps us make the decision not to sell a room today at a lower price if we can sell it tomorrow at a higher price, or to sell a room today at a lower price if it’s not likable to sell it at a higher price in the future.
Revenue management doesn’t only consist of raising and lowering prices according to market demand, competitors or any of the factors that will be mentioned below. It also consists of creating a variety of products that cover different types of clients.
One of the main factors to have in mind is the management of distribution channels available for our products. It is essential to take into account the commissions we pay to each channel since it’s not the same to give your availability to your own website than to an OTA: the difference in benefits can reach 14%.

Distribution channels must be carefully set up to maximise results while minimising costs associated to third parties at the same time. Therefore, it is important to identify purchase patterns of clients according to the channel used to make the purchase. In our last pill “How do travellers behave on the web” we could see some essential data to consider in order to improve sales results.
Finally, one of the most important steps to optimise income is the review of the sales results. Evaluating the results of the decisions made helps us improve the quality of the future decisions. The reviewing process must be constant and ongoing, always assessing the efficiency of the decisions taken. We must now if we are achieving the results we had marked.
Revenue management should be the base of the basis of the commercial management of the business. It is focused on optimising commercial decisions based on understanding and predicting demand. A good management of this technique will not only have a positive impact on revenues and margins, but will also allow a greater efficiency in marketing and sales actions.

Revenue Manager Dictionary
  • ADR (Average Daily Rate): Calculated by dividing the income of rooms by the number of occupied rooms.
  • RevPAR: (Revenue Per Available Room): It is the result of the income from the sale of rooms by the number of rooms available. Its difference with the average price is that RevPAR takes all rooms into the equation, while the average price refers only to the occupied rooms.
  • TRevPAR: It is the total income of the hotel multiplied by the number available room.
  • GOPPAR: (Gross Operating Profit Per Available Room): Gross income per available room.
  • Lead time: The average time between the booking and the check in date.
  • Forecasting: Future prediciton of the demand through the use of statistical tools.
  • Overbooking: A revenue management technique to optimise sales. It consists on selling more rooms than the hotel capacity. The goal is to fill the hotel taking into account, for example, that there will be cancellations.
  • Competitive Set: Comparison carried out with 3 or 4 hotels selected as competitors. Here we must compare the offered rates, occupation, ADR, RevPAR, On Line Reputation and market share.
  • Upselling: Sales technique that pursues the sale of a room category or a product superior to the one that the client has initially requested.
  • Cross-Selling: It is a tactic through which a seller tries to sell complementary products to those the consumer has bought or requested.