Everything You Need To Know About Revenue Management

What is Revenue Management?

As higher-level managers, you no doubt know all about revenue management and why it’s important for your organization. However, as technology rapidly advances, it can be increasingly difficult for even the most highly-experienced revenue managers to stay aware of the latest options.

Revenue management is evolving faster and faster, and it’s more important than ever to stay on top of industry trends and upgrade your strategies to ensure your business is remaining profitable. Whether you’re monitoring your revenue internally or you’re thinking of bringing on an expert team like Prosper Hotels, it’s time to review your revenue management strategy.

The Importance of Hotel Revenue Management

Managing your hotel revenue is about more than trying to break profit records. It’s about ensuring an even mix of bookings, maximizing your pricing strategy, and optimizing the entire system to earn as much as possible any time of the year.

It creates the ideal situation, with hotel rooms priced as close to the maximum possible amount without setting expectations too high or sending your potential guests to the competition. Effective revenue management means you’re selling the right product to the right customer at the right time, at different prices, based on various factors

Closely Monitor Key Metrics

Keeping an eye on metrics is important because knowing where you are now, can help you figure out where you need to go to achieve goals. With that information, you can create an optimization strategy to reach your goals faster. Metrics to monitor may include:

Revenue per Available Room (RevPAR): Blending occupancy with ADR, this metric helps demonstrate the impact of unsold rooms, allowing you to see profitability better.
Comp Set: Choosing the right set of competitors to compare your metrics against is crucial to getting accurate insights.
Market Penetration Index (MPI) or Occupancy Index: This compares your market share to your competition to show you how well you’re performing.
Average Rate Index (ARI): This measures your ADR against your competitive set to ensure you’re performing well.
Revenue Generated Index (RGI)/RevPAR Index: This blends MPI and ARI to provide a more comprehensive picture of performance compared to your competitors.
Cancellation rate: What percentage of people are booking rooms and canceling ahead of their stay? Are cancellations occurring with enough time to resell the rooms?

Analyze Seasonal Trends

It’s no secret that the hotel industry is seasonal, with more travelers booking rooms during the spring and summer when they’re likely to vacation from work. Destinations that are warm year-round are likely to see a surge during the cooler months elsewhere.
That’s not to say winter is completely dead — many skiers and holiday travelers visit family and friends during the colder months. That’s why it’s so important to know your market.
With the right management tools in place, you can better predict occupancy rates and market conditions to plan for an adequate number of rooms and prevent overbooking.

Must-Try Revenue Management Strategies

If you’ve been in the business a while, you may have already heard of or tried a few of these. And if you’re not already doing these things, it’s time to give these revenue management techniques a try and watch the results they bring. You may be surprised at what you find and how this can guide your future revenue management.

Construct Dynamic Pricing Models

The hospitality industry can be a bit price-sensitive based on availability and seasonality. Dynamic pricing models allow you to set the right price for your hotel rooms at the right time to encourage more bookings.

Using historical data and demand forecasting, you can estimate periods of high demand, where you can sell rooms at a higher price, and spot slower periods where you may need to offer incentives to book.

Some dynamic pricing models to consider are:

Time-based pricing: Use this approach when there is either a surge or decrease in demand based on a certain time. For example, you might offer a discount for a longer length of stay, or you may be able to increase your rates as you get closer to the day of arrival.
Segmented pricing: This establishes multiple prices for the same product based on the perceived value to the market segments. Different customers will pay a premium for the convenience of a hotel close to a concert or sporting event. This saves on parking and traffic hassle and is especially important for travelers who would otherwise have to pay for a rental car or a rideshare service.
Peak pricing: As demand increases, so does the price. For example, consumers already expect higher rates on game day in markets where major sporting events are played, and they’re often willing to pay those higher room rates. Holidays are often another especially busy time of year when peak pricing can be an essential strategy.

Essential Revenue Management KPIs

Chances are you’re already tracking various KPIs and benchmarks to measure your success, but here’s a good list in case you’re missing any.

Daily occupancy: Ideally, your daily occupant percentage should be above 95%. By achieving this high occupancy level, you can receive a reimbursement from the brand on loyalty bookings. This additional reimbursement aids in growing revenue.
Average daily rate (ADR): Averaging the various rates each guest pays helps determine the amount you’re earning on each booked room.
Average length of stay (ALOS): You’ll have a lot of one-off bookings, but some guests will stay longer. The longer your ALOS, the better, as it helps reduce your overall labor costs.
Perishable inventory: An unoccupied room from tonight cannot be saved for another night. Once a room goes unbooked for a period, that revenue is forever lost.
Booking window: By understanding the time between guests booking the room and when they stay, you can adjust your strategies at the right times to be most profitable.