Many hotel managers react to changes in supply and demand in the market, but it's vitally important to also take advantage of the tools at your disposal to turn those reactions into a strategy. With the tools and principles of hotel revenue management, your property can begin crafting a strategy to reach the right guests with the right offers at the right time, and significantly increase your revenue.
What is revenue management?
Every hotel has different types of guests that they serve, with differing needs and desires. Revenue management is the process of maximizing the revenue you receive from each type of guest by understanding the maximum value of each guest, and then employing strategies to capture as much of that value as possible.
The guiding principle behind hotel revenue management is the measurement of supply and demand for your property’s rooms. This shifts the focus away from occupancy and instead focuses on the revenue coming in from various sources, including rooms, events, food and beverage, and other property facilities. By implementing a hotel revenue management strategy, you can significantly increase profits by boosting your revenue per available room (RevPAR) while gaining a better understanding of your guests and their needs.
How is revenue management changing?
Revenue management as a function used to be largely reactionary, responding (slowly) to trends in pricing and reacting (slowly) to the supply and demand of the market. But with the emergence of big data and advanced revenue management technology, hotel revenue managers can now take on a more strategic role helping to drive true revenue growth. Automated systems can now show managers how they're performing across market segments, channels, and properties on a daily basis. This huge amount of data, and the business intelligence that comes with it, gives hotel revenue managers the ability to understand which customers to target and when.
Explore some of the essentials of hotel revenue management:
1. Identify opportunities.
Your current revenue management, pricing, and booking processes may leave room for improvement. Here are a few questions you can ask yourself:
- Where do you see opportunity in your current strategy?
- Are you capturing enough business from the markets you're targeting?
- Do you have a strong group pricing strategy?
- Are you focusing on revenue as opposed to occupancy?
- Are you reacting strategically to pricing and discounts from your competitors?
- Do you have a deep understanding of how your location drives seasonal or event-based shifts in supply and demand?
All of these areas can be improved through revenue management with the right research, forecasting, and adjustments. And this post is a great place to start!
2. Analyze revenue by channel.
In order to manage your revenue, you first need to understand it. This involves accurately mapping all of your revenue streams, including direct bookings, OTA and third-party bookings, and group business. You need to understand which channels are contributing the most to your bottom line, and where you can make improvements. Those improvements could come in the form of a change in pricing strategy, yield, or marketing for any of the channels. A good hotel revenue management system can be a huge help in conducting this analysis and identifying your strongest channels.
3. Segment your guests.
Hotels that understand differences in guest preferences and values are in a much better position to capture business and maximize revenue from each group. To differentiate your messaging, you’ll first need to create relevant audience segments. But you don’t need to rely on traditional demographics or psychographics that marketers typically use for segmentation here. If you want the most useful segments for revenue management, you’ll need to focus on different factors. Your goal is to identify the customers who will spend the most on a hotel room, those who will stay longest, and those who will return to the property again and again.
You can use your CRM system and other data-driven tools to analyze past bookings and divide your guests into relevant categories. If you’ve asked guests about their preferences or travel type in a past survey, or gotten online feedback, these can also be great sources for segmentation information. You can set up your systems to incorporate this type of information and automatically assign guests to the right segment.
By setting a price strategy for each segment of guests, you’ll be able to minimize price disruptions and changes and therefore provide a better overall booking experience. You’ll also have much more specific and accurate messaging based on the goals and values of each segment.
4. Use demand forecasting.
Effective hotel revenue management relies on anticipating future demand and revenue correctly. You can use demand forecasting to accurately predict how demand for your rooms will change over time within each customer segment. The accuracy of your forecasts depends on high-quality data, which means you’ll need to keep track of past occupancy, room rates, and revenue.
You can then use this data to forecast in two ways; constrained or unconstrained. Constrained means that you analyze past data to understand how many rooms someone is likely to book, what occupancy will look like, etc. Unconstrained forecasting is a little more complex, but also has more potential to be useful for your pricing and yield strategies. This type of forecasting removes the number of rooms that you have available as a constraining factor, and instead forecasts pure demand. You can use this type of forecasting to understand how many rooms customers would like to book, regardless of how many are actually available.
Don’t forget to go beyond year-over-year data and take into account larger industry trends, competitor bookings, and any changes to your marketing or the customer segments you serve. These are important factors in your forecasts, and can make the difference between a good pricing strategy and a great one.
5. Experiment with pricing strategies.
Once you have an accurate forecast, you can start experimenting with different pricing strategies. Your customer segments are very different and require different pricing to match their needs and goals. You can therefore try a segment-based pricing strategy to offer different prices for different segments. This could include business traveler rates, repeat customer rates, advance purchase rates, and higher rates with more cancellation flexibility.
You can also give dynamic pricing a try. This system uses certain conditions to make dynamic changes to a base rate (usually your Best Available Rate). For instance, you might offer a discount on the BAR to OTAs, or to loyal customers. You can also set a condition to close certain channels when you reach a percentage occupancy, or to raise rates when you hit that threshold. Because you set up the conditions ahead of time, your dynamic pricing system can react on the fly and make changes in line with the pricing strategy you have set up.
There is no one pricing model that will work for all hotels. In order to find the pricing strategy that works for you, you’ll need to use data, experiment, and analyze how changes are affecting your occupancy rates and revenue.
6. Emphasize direct bookings.
OTAs are a useful channel for getting the word out about your business, but the audience interest you capture on an OTA may never truly be “yours.” Your hotel website is more than just a booking engine. It has all the potential to deliver powerful messaging to key customer segments, capture contact information from potential guests, and reinforce your branding and values. Your website will always be the most accurate and up-to-date source of information for guests, and is your best chance to communicate with them prior to their stays. This is one of the many reasons you should emphasize direct bookings as part of your hotel revenue management strategy.
Many hotels offer a guarantee that their lowest price will always be through direct booking on their website. This not only emphasizes this channel for potential guests, but improves the relationship with customers by establishing trust.
7. Use data to respond to RFPs.
Group business is an important revenue source for many properties. There are lots of ways to use revenue management to better understand your group business and set up the appropriate pricing and messaging to capture that business. One of the best ways is to use revenue management to write better responses to RFPs. Your Revenue Management System (RMS) gives you the data and business insights you need to create a bid that takes into account your competition, seasonal fluctuations, and your demand forecast. By accurately segmenting the potential group business based on past events, you can also adjust your messaging and pricing to better match their needs and values. Good data is key to a powerful RFP response that wins you group business.
Put these hotel revenue management strategies to good use today!
However, the best pricing won’t get you far if you don’t get the word out about your hotel. Check out some must-know venue marketing ideas to gain more visibility in your market. Also, explore a handful of hotel revenue generating ideas to help boost your business.