Hotels are complex businesses and their performance can be susceptible to a broad range of external factors, from Airbnb to exchange rates and local events, social media, the weather and user-generated reviews. Despite these challenges, hoteliers and general managers are often challenged with delivering maximum occupancy throughout the entire year in a quest to maximise their revenue potential. Consequently, shrewd hotel owners are deploying hotel revenue management strategies and tactics to ensure they remain competitive and reach their revenue targets.
In this article, we will guide you through the basics of hotel revenue management and how it can help your hotel realise its true revenue potential.
What Is Hotel Revenue Management?
Hotel revenue management is a process of using systematic computational analysis of data to assist in predicting customers’ behaviour and enable relevant pricing, inventory and distribution related decisions, for the purpose of maximising revenue, or, to put this more simply, to sell the right product, to the right customer, for the right price, via the right channel at the right time.
A Brief History Of Hotel Revenue Management
Hotel revenue management began in the late 1980’s, when it was officially introduced by Marriott Hotels as part of their business strategy.
Initially, hotel revenue management practices, such as tracking data, setting prices, applying inventory controls and more, were completed by hand, likely using pen and paper. Room availability was also counted manually, to ascertain how many rooms were available each day and reservations (and subsequent cancellations) were likely handwritten in a diary to generate accurate house-counts. Pricing was largely static and typically, just a small range of prices were set based upon room type and seasonality i.e. one price per room type per season, irrespective of any perceived demand-related fluctuations.
Today, hotel revenue management is more complex – we have online distribution channels, property management systems and revenue management systems, to merely name a few and automation to, for example, close and update channels, process payments electronically and adjust rates.
Why Is Revenue Management Important And What Are The Benefits For Hotels?
Hoteliers utilising an effective revenue management strategy are often leaders in their marketplace because they proactively seek to maximise revenue from their hotel, which, in turn, can help them to achieve higher profits. Below we outline why revenue management is important and the benefits it brings to hotels:
- Fixed Costs – Typically quite high for hotels, which means that each room also has a relatively high associated fixed cost, irrespective of whether it is occupied. If a room is not sold, that cost ensures you lose money, but if it is sold, because the cost of providing and subsequently servicing that room for customers is relatively small in comparison with the sales revenue likely generated, it enables hotels to cover those expenses and become profitable.
- Fixed Capacity – Hotels only have a limited number of rooms for sale each day – they cannot sell extra rooms (that they do not have) when demand exceeds their capacity – which is why it is crucial to extract maximum revenue from the rooms that are available.
- Perishable Inventory – If your rooms are not sold because, for example, they have not been priced appropriately, you will lose revenue that can never be realised again, because hotel bedrooms are perishable inventory – they only have value until such a time that they are eventually rendered worthless (i.e. once the day has passed).
- Segmented Markets, Willingness To Pay & Demand Variations – Hotels have guests with different characteristics, each with their own respective willingness to pay and demand that can frequently vary from day-to-day – detailed knowledge of these principles can lead to a more effective revenue strategy for your property.
- Increased Revenues & Profits – The application of revenue management principles is limitless and businesses employing such techniques often see revenue increase without considerable capital expenditure, which can lead to significant increases in profit.
How To Measure Hotel Revenue Performance:
It is essential that you establish objective metrics that enable you to accurately measure your hotel revenue management efforts and analysing the performance of your property is vital to measuring and monitoring your progress towards your goals, identifying opportunities for you to improve and for comparing your actual performance with expected performance, your competitors, the market and/or submarket within which your property is operating.
The following are just six key performance indicators (KPIs) that you can use for the purpose of analysing your performance:
- Average Daily Rate (ADR) – ADR can be calculated by dividing your daily room revenue by the total number of rooms sold. ADR = Daily Room Revenue / Total Number of Rooms Sold
- Average Length Of Stay (ALoS) – Average Length of Stay can be calculated by adding your occupied room nights and dividing that by the total number of bookings. ALoS = Total Number of Occupied Room Nights / Total Number of Bookings
- Occupancy (Occ) – Occupancy can be calculated by dividing the number of rooms sold by the number of rooms you have available. Occupancy = Rooms Sold / Rooms Available
- Revenue Per Available Room (RevPAR) – RevPAR can be calculated by dividing your room revenue by the total number of rooms you have available. RevPAR = Room Revenue / Total Number of Rooms Available
- Gross Operating Profit Per Available Room (GOPPAR) – GOPPAR can be calculated by dividing your gross operating profit (revenues minus costs) by the total number of rooms you have available. GOPPAR = (Revenue – Expenses) / Total Number of Rooms Available
- Net Revenue Per Available Room (Net RevPAR) – Net RevPAR can be calculated by dividing your net (after deducting marketing and sales expenses) room revenue by the total number of rooms you have available. Net RevPAR = Net Room Revenue / Total Number of Rooms Available
However, there are a plethora of different KPIs that you can choose from to use to help analyse various performance related aspects of your hotel that reflect what it is that you want to achieve.
Hotel Revenue Management Jobs:
There are a variety of revenue management roles with a range of salaries that are often experience and location dependent. However, a data driven mindset, a grasp of relevant technology and an ability to collaborate effectively with all departments are highly sought after at all levels.
- Revenue Analyst / Area Or Cluster Revenue Analyst (£20k – £40k) – Responsible for analysing and tracking historical data from a revenue perspective, for the purpose of making specific recommendations to improve revenue growth for one or more hotels.
- Revenue Manager / Area Or Cluster Revenue Manager (£30k – £70k) – Primarily responsible for implementing day-to-day revenue management processes and strategies, for the purpose of maximising revenue for one or more hotels. Role-specific tasks include the identification of revenue opportunities, leveraging technology to improve performance, providing regular reports and the management and selection of distribution partners.
- Director / Cluster Director Of Revenue Management (£50k – £100k) – Often an experienced revenue professional operating on a cluster or regional basis, responsible for creating and implementing revenue management strategy. Likely leading a revenue management team, though this role may, in addition, include all revenue management related tasks too, dependent on the scale of the business.
- Head Of/Vice President Of Revenue Management (£60k – £110k) – Typically, an ambitious, experienced revenue professional found within one of the large hotel brands. Operating as an organisational cheerleader, cultivating effective relationships that ensure revenue management remains at the forefront of the business whilst simultaneously managing several revenue managers within a large portfolio spanning multiple locations.
- Chief Revenue Officer (£80k – £140k) – Widely considered to represent the peak of a career in revenue management. A leader of revenue management within an organisation, seeking to maximise performance on a regional or global scale. An essential role that both creates and drives strategy to, at least, meet, but ideally, exceed, both revenue and profitability expectations.
The Risks Of Poor Revenue Management For Hotels:
When an effective revenue management strategy is not in place a hotel is not likely to reach its true revenue potential and may miss out on key commercial opportunities. Below are three of the most common pitfalls associated with poor revenue management:
- Limited Revenue & Profitability – Hotels that acquire business by offering cheap rates, engage in price wars with their competitors, offer a wide range of heavy discounts to an array of low-value customers, operate solely with fixed prices and lower rates unnecessarily, will severely limit their top-line revenues, which will lead to lower profitability.
- Higher Channel Costs – Hotels that are not selective regarding the channels in which they invest and do not use readily available, valuable market data to help determine their optimal business mix, based on demand and market positioning, will waste valuable resources.
- Higher Cost Of Acquisition – The cost of acquisition continues to rise, therefore, if this is not rigorously managed with appropriate performance analysis, based on metrics such as GOPPAR and Net RevPAR, these costs are increasingly likely to spiral out of control and profit margins are likely to be much lower too.
Maximise Your Hotel Revenue:
At MavREV, we empower independent hotels in the UK with remote revenue management expertise so that they can realise their true revenue potential, at a fraction of the cost associated with employing a hotel revenue manager. With over a decade of experience, we have a proven track record of helping properties to optimise their revenue. Are you ready to improve the revenue performance of your property? Book your free revenue management audit with MavREV today.
