Revenue Management is increasingly becoming a topic of interest for hoteliers around the world. No matter how big or small a hotel is, revenue management can help to dramatically improve its bottom line. In this article, we tell you what hotel revenue management is and how to apply tactical revenue management in your small property to run a successful and profitable business.
What Is Revenue Management?
The first definition of revenue management came in 1997 from Robert G. Cross, the theorist behind airline revenue management, who explained it as ‘selling the right product to the right customer at the right time at the right price’.
Adding other parameters into that definition, one of the most widely accepted definitions of Hotel Revenue Management right now is ‘selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission efficiency.’
Why Is Revenue Management Important for a Small Hotel?
The hotel industry has some peculiar characteristics, like fixed capacity, high fixed cost, variable costs, perishable product, demand fluctuations, advance bookings, price differentiation, market segmentation. All these characteristics make it difficult for hoteliers to match supply with demand.
This is where revenue management can help. Hotel’s revenue management is the process to dynamically adjust your hotel rates based upon demand and occupancy – while increasing revenue, tapping into new markets, predicting consumer behavior, delivering products and services to customers effectively and efficiently, and maximizing the effectiveness of hotels’ resources.
It’s been noted in Revenue Management in Hotel Business that, “Revenue Management helps hotels take an informed, scientific approach in understanding market dynamics, applying the right marketing strategies and channels, and converting bookings at an optimal value.”
While revenue management is crucial for every type and size of the hotel, it’s much more important for small hotels to rate their rooms with caution because of the limited inventory as well as resources. Every room counts in a small hotel. Larger hotels can hide their rating mistakes in volume. But, for a smaller hotel, it is going to be much more noticeable. This means if you price your rooms in a small hotel incorrectly, this will have a much more visible impact on your revenue and performance.
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What Is the Best Revenue-Management Strategy for My Hotel?
The scope of revenue-management strategy in a small property includes, but is not limited to, measuring, forecasting, and pricing.
Running key performance metrics and paying attention to them can significantly improve your hotel’s performance and increase your revenue and profits. However, the amount of data available to you, as a hotelier, might make this seem daunting.
Thus, here’s a list of key metrics that you should track to extract the most crucial information. This list has been compiled with inputs from Prof. Dr. Legrand and Dr. Delgado-Krebs from the Department of Hospitality, Tourism, and Event Management at iubh.
Here are the most important hotel’s KPIs:
- Occupancy Rate: It’s one of the most high-level indicators of success. You can run and apply this metric to any specific period you want to analyze – daily, weekly, monthly, or yearly.
Calculation: Total No. of Occupied Rooms / Total No. of Available Rooms
- ALOS (Average Length of Stay): It shows for which period you are accommodating more one-night stays than usual.
Calculation: Total No. of Room Nights / Total No. of Bookings
- ADR (Average Daily Rate) Report: This indicates the average realized room rental per day and can be done daily or monthly.
Calculation: Total Room Revenue / Total No. of Rooms Sold
- RevPAR (Revenue Per Available Room) Report: It provides a convenient snapshot of how well a hotel is filling its rooms and can be done daily or monthly.
Calculation: Total Room Revenue / Total No. of Available Rooms
- TRevPAR (Total Revenue Per Available Room): Closely related to RevPAR is TRevPAR that uses total hotel revenue instead of room revenue only.
Calculation: Total Net Revenue / Total No. of Available Rooms
- GOPPAR (Gross Operating Profit Per Available Room): It provides deeper insight into the actual performance of a hotel as it also factors in the operational costs.
Calculation: Gross Operating Profit / Total No. of Available Rooms
In addition to the above KPIs, a well-balanced revenue management strategy requires a thorough evaluation of the competition. Here are the most common competition benchmarking KPIs:
- MPI (Market Penetration Index): This hotel performance metric measures how a hotel’s occupancy compares to a competitive set.
Calculation: Hotel Occupancy % / Market Occupancy %
- ARI (Average Rate Index): It measures how a hotel’s average daily rate compares to a competitive set.
Calculation: Hotel’s ADR / Hotel Market ADR
- RGI (Revenue Generated Index): It measures how a hotel’s RevPar compares to its competitive set.
Calculation: Hotel’s RevPar / Hotel Market RevPar
- MCPB (Marketing Cost Per Booking): This tracks actual production vs. the cost of each channel.
Calculation: Room Revenue – Distribution Channel Costs
- ROAS (Return on Advertising Spend): This shows the proportion of room revenue generated relative to advertising costs.
Calculation: Revenue / Cost
- Website Conversion Rate: This calculates the number of unique website visitors that convert into bookings.
Calculation: Total No. of Conversions / Total No. of Unique Visitors * 100.
- Net Sentiment Score: This helps the hotelier monitor online reputation and may alert the hotelier of possible insufficiencies.
Calculation: Positive + Neutral Conversations – Negative Conversations / Total Conversations for the Brand
Using the data collected from measuring the above KPIs, you can make informed business decisions that we are now going to talk about in the next sections.
Forecasting helps hoteliers make critical decisions regarding promotion, distribution, and pricing based on anticipated demand and performance. It also helps hoteliers estimate the number of arrivals and departure, number of room nights, number of breakfasts, etc. – information that is vital for the smooth functioning of front desk and housekeeping and is also useful for the estimation of cost and revenue.
Prof. Dr. Legrand and Dr. Delgado-Krebs conclude, “Forecasting is the heart of revenue management. Most historical, current, and future data should be used to compare a hotel’s performance against itself for a particular time frame as well as a hotel’s performance against its competitors.” Thus, it is essential to collect and measure data, both against yourself in the past and your competition. This is possible by measuring the KPIs mentioned above.
This is the stage wherein you can make informed business decision of assigning your rooms an optimal rate. The above two steps of measuring KPIs (using historical as well as competitors’ data) and forecasting trends (anticipating demand and willingness to pay) will help you in doing so.
With an effective pricing strategy, you can charge different room rates for the same or similar rooms according to customer’s needs, characteristics, and willingness to pay, and also, seasonality, competition, and market trends. Thus, the above measured KPIs will form the basis of setting the prices to your rooms.
Where Can I Learn More about Revenue Management?
Here are the links to a few online resources and books to learn more about hotel revenue management:
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The above revenue-management tips can help you in understanding your market and your guests, forecasting trends, and setting prices to improve your hotel’s financial results. Feel free to leave a comment below if you have any questions.
Featured image: Sabine Peters on Unsplash