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Revenue management in practice
The document outlines key concepts in revenue management for hotels, emphasizing the importance of selling the right product to the right customer at the right time and price to maximize revenue. It introduces essential metrics such as average daily rate (ADR) and revenue per available room (RevPAR), which allow for accurate performance comparisons and informed decision-making. Additionally, it discusses market segmentation, demand forecasting, and competitive monitoring as critical components to optimizing hotel revenue management strategies.
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Revenue management in practice
- 1.
- 2. Definition “Selling the rightproduct to the right kind of customer, at the right time, at the right price, so as to maximise revenue or yield” Sheryl Kimes, Professor of Operations Management at Cornell University School of Hotel Administration Also “through the right channel”
- 3. A unit of measurement providing a consistent indication of business performance Traditional measurement by occupancy % and average rate (ADR) can be misleading Growth in one area is often matched by reduction in the other – how do you assess the trade off?
- 4. Assuming a hotel with 250 bedrooms ◦ Occupancy 50% - ADR £128 ◦ Occupancy 80% - ADR £80 ◦ In both cases the yield is £64 ◦ Also known as Rev Par
- 5. In both cases, the revenue earned is £16,000 ADR is revenue divided by the number of rooms sold RevPar is revenue divided by the total number of rooms available RevPar = Revenue per available room ADR multiplied by occupancy %
- 6. Gives a true comparison of performance year on year Enables true comparison with competitor hotels of a different size and business mix Provides a consistent measure of business performance RevPar is the preferred unit of measurement in Revenue Management
- 7. • When aphysically identical product can be sold to different market segments for different prices through different channels under different booking conditions • In order to increase revenue from a fixed level of capacity • Increased revenue = increased profits
- 8. A group of customers with a pattern of buying behaviour ◦ Price sensitivity ◦ Lead time of booking ◦ Willingness to pre-pay ◦ Need for flexibility, to cancel or modify without penalty ◦ Length of stay ◦ Different perception of “value”
- 9. Different market segments may book through the same channels or different ones • Direct with the hotel • Through hotel website • Via a travel agent/GDS (business or high street) • Via a 3rd party website (Expedia, Booking.com, Lastminute, etc) • Via a tour operator Cost of sale varies by channel Rate parity for all public rates
- 10. Lead time Prepayment Limited or no flexibility – no cancellation or modification permitted Length of stay requirements, minimum or maximum Specific nights included Package rates, to include other elements Enable discounted rates to be “fenced”
- 11. Analyse existing demand patterns Predict future demand patterns Match the right volume of rooms at each rate level so as to maximise yield Minimise peaks and troughs to avoid “wasting” inventory ie leaving rooms empty which could have been sold
- 12. Forecast or Budget Adjust Plan Review Sell/Distribute
- 13. Know your business ◦ Use historical data to identify demand patterns and trends ◦ Seasonal ◦ By day of week ◦ Lead time ◦ No-show/cancellation rates ◦ Unsatisfied demand, turnaways
- 14. Booking pace ◦ Pick up reports, daily weekly, monthly ◦ By market segment Statistical/historical data on market segments – room nights, ADR Data relative to past business performance, factors which may have contributed
- 15. Know your market Economic conditions Seasonal variations Local sources of business, corporate offices, conference centres, entertainment venues, tourist attractions Local events
- 16. Know your competition Identify your competitors Benchmark your product Establish rate hierarchy Monitor their activities – pricing, promotions, policies Changes in supply
- 17. Plan your preferred market mix based on expected demand levels by segment ◦ How many rooms can you expect to sell to higher rated market segments, and when? ◦ How many rooms can you afford/do you need to sell to lower rated segments? ◦ What rate parameters/structure should you be working within? ◦ When will unconstrained demand lead to peaks and troughs?
- 18. Monitor booking pace and occupancy growth - as bookings are received, update forecast and decide where changes need to be made Monitor competition for pricing changes Monitor local demand levels Adjust strategy using all tools, not just pricing Record all changes
- 19. Pricing Discount allocation Duration control Capacity management Supply control May be applied differently when demand is stronger or weaker
- 20. There is no “right” price for your product It will have a different value for different customers at different times Your competitors’ activities may influence the customers’ perception of your value Know the difference between “great value” and “cheap rooms”
- 21. Ensure discounts are “fenced” with booking conditions to avoid dilution Know when to stop selling discounted rates to avoid displacement Use multi night offers to attract business on hard to fill shoulder nights
- 22. Avoid peaks and troughs – empty rooms equal lost revenue, especially if avoidable Use restrictions to avoid selling out on one night and having to turn away through bookings Offer discounts/added value for multi night stays which include hard to sell dates
- 23. Overbooking ◦ Identify probability of late cancellations and no- shows ◦ Manage overbooking, don’t let it happen by accident!
- 24. When demand is strong, sell to room type ◦ Ensure you get premium prices for superior rooms When demand is soft, oversell lower room categories and upgrade
- 25. Time/resources available What rate management controls are available in your PMS, and in your 3rd party partners? Which distribution channels do you use, and would you like to use? What degree of connectivity can you achieve between your PMS and distribution channels? Ideal is 2 way interface between PMS/hotel website/GDS/3rd party partners/IDS
- 26.
Editor's Notes
- #3 Distribution is an integral part of revenue management
- #7 Others gaining ground eg GOPPAR
- #8 Not a new concept – has been practiced for generations. Most hoteliers do it to some degree. Better to be systemised, enables skills to be shared, effective strategies to be repeated.
- #9 Business vs leisure
- #10 Growth of internet as a booking channel has blurred some of the tradition distinctions between market segments and created more transparency.
- #11 These are conditions we can use to allow us to charge different prices to different groups of people under different circumstances
- #12 Who is involved? Everyone! Revenue management goes hand in hand with sales.
- #13 Budget = revenue management on a large scale. Establishes ideal business mixMonthly forecast leads to adjustment of business mix according to actual bookings received, and management of available demand. Day to day adjustments usually focussed on the transient segment.
- #15 Keep records. Monthly management reports detailing results against forecast and budget, factors which affected results – local events, new business openings, adverse weather. Note which will repeat.Handouts.
- #17 Competitors can vary by day of week and seasonally – a high end corporate property may offer deep discounts at weekends and holiday periods.Establish a rate structure to act as a framework. Don’t go below your floor rate. Don’t be greedy, it doesn’t pay in the longer term.
- #18 Budget > forecast > daily adjustment
- #19 This is day to day revenue management. Handouts – competitor rates, selling strategy.
- #20 It’s not just about price.More aggressive when demand is strong = LOS restrictions, more “encouraging” when demand is weaker – LOS promotions. Temper revenue management decision with sales considerations – a long standing relationship with a regular client has more value than just the rate paid on one night.
- #22 To avoid customers trading down who would have been happy to pay a higher price.
- #23 Does not mean sell at any price. Weigh up 3 nights at a low rate against 1 night at a high rate.
- #26 Manual processes can be time consumingDifficult to keep up with changes in demand and availabilityRevenue management software is available at a costFunctionality in some 3rd party extranets can limit your options.3rd party sites need to be managed – content kept up to date, reputation management, social mediaPMS provides a single point of control with instant distribution to all channelsReservations are downloaded immediately and availability is kept up to date, enabling correct decision making