Welcome to the Revenue Journey, your comprehensive guide to mastering Revenue Management in the hospitality industry! Our step-by-step approach simplifies the complexities of implementing effective revenue strategies, enabling you to sell the right room to the right customer at the right price, time, and channel. Whether you're just starting out or looking to refine your existing processes, our resources cover everything from understanding the importance of pricing and forecasting to establishing a robust distribution infrastructure and cultivating a successful revenue management culture. With insights on leveraging technology and the human element in revenue management, we empower you to maximise revenue and enhance profitability sustainably. Join us as we embark on this transformative journey together!
Part 1 – Taking the Plunge
Revenue management isn't a new concept. We’ve all experienced fluctuating airline ticket prices based on a myriad of factors, including flight demand, class of service, and routing options. About 25 years ago, hotels began to recognize the benefits of these principles. At that time, yield management, as it was called, emerged as a powerful tool to boost a hotel's topline revenue.
Following hotels, car rental companies and parking facilities joined the fray. However, the adoption of revenue management principles in other sectors has been relatively slow. Many industries remain hesitant, mistakenly believing that revenue management doesn't apply to their business model or that customers won't embrace it.
History, however, teaches us that revenue management can be effectively implemented to enhance revenue while still being customer-friendly.
What Is Revenue Management?
-
At its core, revenue management is a structured approach aimed at:
-
Creating detailed demand forecasts.
-
Utilizing and interpreting these forecasts to make informed pricing and inventory decisions.
-
Pricing is a pivotal element in maximizing revenue from your offerings. Furthermore, in scenarios where product availability is limited, strategic inventory management becomes crucial to optimizing returns.
-
Is Pricing Really That Important?
Absolutely! Pricing is the cornerstone of effective revenue optimization. When you base your pricing decisions on comprehensive demand forecasts, you can enhance your business volume and avoid losing revenue on high-demand days. This initial step is vital for any revenue management strategy aimed at boosting revenue.
But Isn't Revenue Management Only for Certain Businesses?
Not at all! Revenue management can be applied across various industries—provided there’s fluctuating demand, customers are able to purchase in advance, and there’s a perishable inventory that risks losing revenue if not sold in a timely manner.
Airlines, hotels, and car rental companies are prime examples. Next in line could be theme and amusement parks, which have the opportunity to implement variable pricing based on low, shoulder, and peak demand days, while also allowing advance ticket purchases. Additionally, safety regulations often necessitate maximum capacity limits, further underscoring the need for effective revenue management.
Where Else Can Revenue Management Be Beneficial?
Recreational parks and campsites serve as another excellent illustration. With a limited number of spots available for reservations and advance booking options, these businesses can significantly benefit from revenue management. Bowling alleys also fit this mold, as they feature a finite number of lanes available for reservation.
Other industries ripe for revenue management include bungee jumping, bridge climbs, glass-bottom boat excursions, movie theates, and water parks. The opportunities are vast; the question remains whether you believe it can work for your enterprise.
Still Unsure?
-
Consider these straightforward questions about your business:
-
Does demand for your product vary?
-
Can customers book your product before consumption?
-
Do you offer a limited-capacity, perishable product?
If you answered "Yes" to at least two of these questions, it's clear that revenue management principles can be adapted to your business model, presenting a strategic pathway to enhancing revenue.
Begin Your Revenue Management Journey Today!
Maximising topline revenue is essential, as it plays a crucial role in driving profits for your business. Don’t hesitate to explore the possibilities—revenue management could be the key to unlocking your company’s full financial potential!
Part 2 – Navigating The Journey
Having taken the plunge into revenue management—see The Revenue Journey Part #1: Taking the Plunge—it's time to chart your course through this transformative process. While some individuals may have a natural aptitude for certain skills, most people enhance their abilities through learning and practice. The good news is that revenue management can be straightforward and systematic. By taking a step-by-step approach, you can effectively navigate this journey.
Assessing Your Current Situation
As the CEO, VP of Operations, or manager of a cluster of hotels, it's essential to evaluate where you currently stand in your revenue management journey and where you aspire to go.
Whether you operate theme parks, attraction parks, movie theaters, cruise ships, campsites, or hotels, it’s clear that leveraging revenue management principles can significantly boost your revenue.
But what are the necessary steps to kickstart your revenue management journey in the right direction?
Mapping Your Journey
-
Every journey begins with three key questions:
-
Where am I today?
-
Where do I want to go?
-
How do I plan to get there?
-
Understanding Your Current Position
To assess your starting point, ask yourself the following questions:
-
Is revenue thinking deeply embedded across all departments within your organization? When tackling profitability challenges, do you prioritize revenue generation, or do you tend to focus on cost-cutting first?
-
Are the right tools in place to monitor and understand your current performance? Do you have a comprehensive dashboard that provides critical revenue management insights? Are you aware of your current pace and the distance you need to cover?
-
Do you have the right team in place to drive your revenue management efforts? Are you placing the responsibility in capable hands, or are you letting inexperienced individuals handle critical decisions?
If any of these questions have made you pause for thought, it’s time to conduct a thorough review of your organization’s revenue focus. Establishing a revenue-centric mindset is crucial for the success of any business.
Defining Your Destination
Determining where you want to go can often present challenges. Consider these important questions:
-
Do you aim to outperform your competitors? By what margin?
-
Is surpassing your budget a priority?
-
Do you aspire to become a preferred employer in your industry?
These questions aren't arbitrary. Your customers, owners, and employees are key stakeholder groups in your organisation and play a vital role in your revenue management journey. As you embark on this path, it’s essential to align their objectives with your revenue management goals to ensure their satisfaction.
Next Steps
The concepts discussed apply to many industries. In upcoming posts, we will guide you through specific steps to implement revenue management in a structured and effective manner. Get ready to take actionable steps that will lead your organisation toward sustained revenue growth and success
Part 3 – Fundamentals
The cornerstone of any successful revenue management journey lies in establishing a strong organisational foundation with the right team members. These individuals will be responsible for implementing revenue management strategies and executing various components throughout the journey, including process alignment, consultant engagement, and software evaluation. They will also help cultivate a revenue management culture within the organization. This crucial step is essential across all industries, whether in hotels, parking facilities, amusement parks, movie theaters, or beyond. Without the right team, your journey is at risk of veering off course.
Identifying Decision Makers and Influencers
Understanding the distinctions between revenue decision makers and revenue influencers is vital, as both groups play important yet different roles in the revenue journey.
Revenue Decision Makers are responsible for setting prices, deciding on inventory allocations, and either accepting or rejecting business opportunities. They create the overarching strategy for driving revenue, and typically include roles such as the Director of Revenue, Director of Sales, and General Manager.
Revenue Influencers can be divided into two categories: direct and indirect influencers.
Direct Influencers are those who help generate demand, such as sales managers, reservation agents, and personnel managing electronic distribution channels.
Indirect Influencers comprise operations team members. Their primary responsibility is to ensure a positive customer experience, ultimately leading to favorable online reviews. Positive reviews are essential components of any successful revenue strategy.
Regardless of whether they are decision makers or influencers, all team members have crucial roles to play during the revenue journey.
Team Roles
At the helm of the revenue journey is the Director of Revenue or Revenue Manager. This leader coordinates the team, keeps the agenda on track, and ensures consistent progress toward goals.
Team navigators, such as the e-commerce manager, marketing manager, sales manager, and business analyst, bring their expertise to the table. They stay attuned to market trends and can validate insights derived from data analysis, helping the leader make informed decisions about the direction of the strategy.
The Executive Sponsor, typically the General Manager or a CEO/Chairman at the corporate level, sets the strategic direction and provides support to the team throughout the journey. They help eliminate obstacles and resolve conflicts, ensuring that the team can move forward cohesively.
Determining Team Size
A common question arises about when to hire a Director of Revenue. As a guideline, businesses generating R1 million or more in revenue should consider hiring a Revenue Manager. If revenue exceeds R10 million, it is advisable to have both a Director of Revenue and a Revenue Analyst. At the R30 million mark, an additional team member should be added.
As business size and complexity increase, the team may require further expansion. For companies with multiple business units in close proximity, such as within a city, appointing a Cluster Director of Revenue can be beneficial. This role focuses on maximising opportunities across the entire cluster rather than optimizing individual properties.
Experience Matters
Another frequently asked question concerns the experience required for revenue management positions. A successful Director of Revenue should possess a strong analytical understanding of the business and be able to formulate and communicate a clear revenue strategy.
Typically, this role requires a master’s degree, preferably in Business or Statistics. The Director must communicate effectively with various stakeholders, including senior company management, board members, and owners.
The distinction between an average revenue manager and a great one—capable of fostering a revenue-driven culture and effectively optimizing revenue—can lead to a significant impact on revenue performance, potentially varying by 5% to 15% in either direction. Therefore, selecting the right candidate is crucial for success.
In Part 4 of the Revenue Journey, we will explore the creation of your distribution infrastructure.
Part 4 – Fundamentals
With your revenue team in place, it’s time to focus on the distribution infrastructure of your property. Successfully selling a product requires a well-designed infrastructure that enables customers to access and purchase it. This infrastructure consists of systems, manual processes, or a combination of both.
In many cases, establishing this setup is relatively straightforward. Typically, an efficient infrastructure includes a property-level system connected to a central system that links to various distribution channels, such as Online Travel Agents (OTAs), Global Distribution Systems (GDS), and Central Reservations Offices (CRO). Each channel presents your product to potential buyers, and maximizing revenue from each of these channels is essential—provided you have chosen the right infrastructure components.
Revenue Management Levers
To fully optimize revenue for a property with limited inventory and a perishable product, you need to focus on two key areas:
-
Pricing Strategies: Various pricing strategies can be implemented, including:
-
Length of Stay Pricing: Rates based on arrival day and length of stay.
-
Daily Pricing: Different rates for each night of the stay.
-
Continuous Pricing: A dynamic pricing model that allows any price to be sold within specified lower and upper rate boundaries.
-
Inventory Management: This involves two critical factors:
-
Length of Stay Controls: These may be applied at the property level or for specific room types and rates.
-
Overbooking Practices: This should be managed not only at the property and room type levels, but also at the rate level for optimal revenue potential.
Choosing Infrastructure Components
The next step in establishing your infrastructure is to analyze booking statistics and data. Consider the percentage of bookings coming from OTAs, GDS, or CRO, alongside direct bookings to your property. Understanding how business reaches you is crucial for optimising revenue.
For instance, if a significant portion of your bookings comes directly through reservations, you should ensure that your Property Management System (PMS) can effectively manage revenue levers. Conversely, if a notable percentage of your business is generated through OTAs, selecting a channel manager capable of integrating with your revenue management system is vital.
Investing in infrastructure components can represent a significant expenditure, so it’s crucial to evaluate all available options. Assess factors such as the ability to manage revenue controls, user-friendliness, and the quality of available interfaces. The various components need to function harmoniously, and as you plan to implement a revenue management system, it is important to ensure your infrastructure can support that integration seamlessly. You want to avoid having to reconfigure your distribution structure later on.
Evaluating Opportunity Cost
After considering the functionality of different infrastructure components, it’s essential to reassess your pricing strategy. A common reason cited by property General Managers or corporate revenue managers for choosing a specific component is budget limitations—often stemming from an owner's reluctance to invest more. However, it's crucial to consider whether the opportunity cost was taken into account when making that choice.
So, what exactly is opportunity cost? Let’s break it down with an example. Suppose you run a hotel with 100 rooms, achieving 80% occupancy and an Average Daily Rate (ADR) of $100. If 40% of your business comes through OTAs, the revenue generated via OTAs can be calculated as follows:
-
Rooms sold per day: 100 x 80% = 80 rooms
-
Rooms sold via OTA: 80 rooms x 40% = 32 rooms
-
Revenue generated via OTA: 32 x $100 = $3,200
When implementing a revenue management system, typical revenue uplift ranges from 5% to 15%, depending on pre-existing manual revenue management efforts. For a conservative estimate, we’ll assume a 5% uplift. This means if OTA revenues cannot be effectively managed, that additional revenue potential is lost, which is termed the opportunity cost. In this example, the opportunity cost can be calculated as follows:
-
Opportunity Cost: $3,200 x 5% = $160 per day
-
Monthly Opportunity Cost: $160 x 30 days = $4,800
Continuing with our example, let’s say the property is evaluating two channel managers: Option A, which doesn’t integrate with a revenue management system, at a flat fee of $500 per month; and Option B, which offers full integration at a rate of $2 per booking. Based on the current booking volume, Option B costs:
-
Cost for Option B: 32 rooms x 30 days x $2 = $1,920
At first glance, Option B appears to be more expensive than Option A. However, when factoring in the opportunity cost of $4,800, it becomes clear that Option B is the more advantageous choice.
Summary of Infrastructure Considerations
Assembling your distribution infrastructure requires careful thought. Choose components that can effectively handle revenue management controls and integrate seamlessly with other systems through robust interfaces.
Part 5 – Processes
Creating a Revenue Management Culture at your property requires significant effort from the revenue team, as outlined in Revenue Journey #3: Starting with the Foundations – People. This cultural shift is an ongoing commitment in any revenue-driven organisation. It entails implementing processes and Standard Operating Procedures (SOPs) that are essential for executing revenue management effectively.
Tailoring Processes to Your Business
Each business operates differently and exists within its unique market. While many processes and SOPs may share similarities, they must be customized to fit the individual needs of your organization. This is why many companies engage consultants to assist in this important tailoring process.
Processes That Support Decision Making
As previously discussed, various roles exist within the Revenue Journey, and processes should be established for each of these roles. For revenue decision-makers, processes must empower them to make impactful decisions that enhance revenue. These processes should facilitate revenue generation rather than merely serve as controls.
One of the most critical processes is holding regular revenue meetings. In these discussions, past decisions are briefly reviewed, and guidance is provided for future revenue-generating strategies. This guidance should then be communicated to all revenue influencers.
Revenue meetings should be held consistently—preferably weekly—on a designated day and time. These meetings are essential to the success of your property, as decisions made here can determine whether you meet your budgetary goals.
Participants in these meetings should come prepared and actively engage. The core attendees typically include the Revenue Manager or Director, the Director of Sales, and the General Manager. While others may occasionally join, it’s vital that only key revenue decision-makers participate in these discussions.
Processes should also ensure that only designated revenue decision-makers are responsible for determining pricing and inventory management. Pricing guidelines need to be established during the weekly revenue meeting, with all group quotes validated and approved by the Revenue Manager or Director. Pricing for other segments—including online business, packages, and wholesale—should also be set in these meetings.
Additionally, the team should discuss inventory management and implement controls that further optimize revenue. By definition, the Revenue Manager or Director is responsible for preparing the revenue budget, with input from other stakeholders. If your Revenue Manager is not currently handling this responsibility, it may be time to reassess their experience and role.
The Revenue Manager is also responsible for preparing revenue forecasts, which will be explored in greater detail in future articles.
Processes for Revenue Influencers
Revenue influencers are typically on the front lines, engaging directly with customers. They require the right tools and guidance to proactively drive demand for the property. It’s essential that these influencers understand the rates and benefits they can offer while having clear guidelines regarding their sales boundaries and instances where authorizations or validations are necessary.
However, these processes should not overly burden the revenue decision-makers, preventing them from focusing on optimising overall revenue. In properties that manage revenue manually, it is helpful to implement selling calendars, rate grids, and established selling guidelines, including ceiling and floor rates for group sales.
Additionally, a group evaluation tool—either through Excel or a revenue management system—can assist revenue influencers in preparing accurate group quotes.
Essential Processes to Formalise
The number of processes that need to be formalized will vary based on the size of the hotel or business, whether it’s a hotel, parking facility, or attraction park. At a minimum, the following processes should be established:
-
Regular revenue meetings, complete with an agenda and decision communications.
-
Revenue budget preparation processes.
-
Revenue forecast preparation procedures.
-
Selling guidelines and calendars for sales teams.
-
Group evaluations and quote protocols.
-
The telephone selling process for reservation teams.
-
A review process for evaluating past decisions.
-
Distribution processes for various channels.
This list represents just a few of the critical processes that a property should have in place, and many additional ones can be developed. In the next article, we’ll explore forecasting, a fundamental aspect of effective revenue management decision-making.
Part 6 – Forecast
An accurate forecast is the cornerstone of effective revenue management decision-making. Without a reliable forecast, it becomes impossible to make informed revenue-driving decisions, which could potentially harm the business instead of promoting growth. It is essential that everyone involved understands the objectives clearly and that the different types of forecasts are not conflated.
Types of Forecasts
There are two primary types of forecasts: financial forecasts for business planning and revenue management forecasts for operational decision-making.
Financial Forecasts:
The main purpose of financial forecasts is for business planning, with the budget serving as the primary forecast. It represents the financial commitment that the operator makes to the property owner. To ensure compliance with this budget, operators prepare monthly forecasts to identify any variations from the initial budget. These monthly forecasts include projections for occupancy, average daily rate (ADR), and revenue by market segment, as well as forecasts that support various other departments within the property.
While financial forecasts are crucial for ensuring the property is on track to meet the owner's expectations, they do not provide the granular detail necessary for making pricing and inventory management decisions. Typically, these forecasts consist of aggregated monthly figures.
Revenue Management Forecasts:
The revenue management forecast is specifically designed to guide pricing and inventory management decisions. Unlike financial forecasts, which may present monthly data, revenue management forecasts are more granular and must be calculated on a daily basis, segmented by market.
Key standards for a revenue management forecast include:
It should be prepared weekly for the next 90 days and monthly for up to 365 days.
The forecast must include daily figures, broken down by segment, covering occupancy, ADR, and revenue forecasts.
Avoid the use of "regrets" and "denials" during forecasting; these are often inaccurate and can negatively impact forecast reliability. Instead, forecasts should be developed by segment and then aggregated into a total daily forecast—this is referred to as the unconstrained forecast. The process of “unconstraining” is a mathematical exercise in data analysis.
A revenue management forecast should never be artificially adjusted to fit the financial forecast. Inaccurate revenue management forecasts can lead to poor pricing and inventory decisions, resulting in revenue losses.
Given the extensive data required for an accurate revenue management forecast, utilizing a sophisticated revenue management system with advanced forecasting and optimization capabilities is essential for any hotel of a reasonable size and complexity. This will be discussed further along the Revenue Journey.
The Forecasting Process
Creating a reliable forecast involves several crucial data sources:
Historical Data: Initially, if no current booking data is available, historical data will serve as the foundation for the initial forecast. Patterns related to the day of the week and seasonality from past data will be projected forward to establish trends. Special events that occur in the upcoming period should be included, while any past events that won't recur should be removed.
Recent Trend Data: Analyse recent performance trends for weekdays. For example, if the last eight Mondays saw an average of 50 room bookings at the Best Available Rate (BAR) from OTAs, with a typical variation of about five rooms, you can reasonably expect similar results unless impacted by special events.
On-the-Books Data: Once the hotel enters its booking cycle, current booking data is incorporated into the forecast. Combining this with historical data and recent trends helps establish an "expected pace" for bookings. Comparing this expected pace with the on-the-books data will reveal whether bookings are progressing faster or slower than anticipated, prompting necessary adjustments to the forecast.
Competitor Rate Data: Keeping an eye on competitor pricing is also crucial. If competitors are raising their rates, it may indicate increased market demand, suggesting that bookings could exceed initial expectations. In this case, the forecast should be adjusted upward. Conversely, if competitors are lowering their rates, it might signal a weakened market, and the forecast should be reduced.
The most important aspect of any forecast is that it should be as realistic and accurate as possible; it should not be manipulated for "political" reasons. Pricing, inventory management, and other critical business planning decisions hinge on the reliability of the forecast. A distorted or unrealistic forecast can lead to poor revenue management decisions, ultimately resulting in subpar performance—which must be avoided at all costs
Part 7 – Pricing
Once you've prepared your forecast, it’s time to put it into action. The forecast serves as the foundation for two crucial aspects of revenue management: pricing strategy and inventory management strategies. In this article, we will focus on pricing strategies, while inventory management strategies will be discussed next week. Together, these components create a comprehensive approach to revenue management, which should not be confused with Total Revenue Management.
Objectives of Pricing Strategies
The primary goal of pricing strategies is to maximize both rates and room sales for specific time periods, whether that’s for a particular day, season, or specific products like suites or villas. Pricing must manage the buyer's perception while simultaneously maximizing revenue for the property. Remember, pricing is just one critical element of revenue management; it must be paired with effective inventory management strategies to optimise the property’s revenue potential.
Inputs to Pricing Strategies
Several key inputs influence pricing strategies:
Forecast Data: As outlined in Revenue Journey Part 6, the forecast serves as a foundational element for pricing.
Price Elasticity: This reflects how sensitive customers or customer segments are to price changes. Price elasticity is typically calculated using a revenue management system and requires substantial data. If a property isn't utilising such a system, it’s advisable to gauge price sensitivity through continual testing rather than attempting complex calculations.
Competitor Rates: Customers often compare prices among hotels before making a purchase decision. If your property is well-regarded in terms of product and service but your competitors are pricing significantly higher, you may be leaving revenue on the table. Your pricing strategy should clearly define your position relative to competitors.
Reputation Data: If you have access to an online reputation management tool such as ReviewPro, TrustYou, Revinate, or GuestRevu, leverage this data in your pricing strategy. Positive online reviews compared to competitors can present an opportunity to increase rates. Conversely, if your reputation is lacking, it might be wise to maintain your current pricing rather than lower it.
Additional Inputs: Other factors may also be relevant, but their effectiveness in shaping your pricing strategy should be evaluated cautiously.
Developing the Pricing Strategy
The components mentioned above work together to form your pricing strategy. It involves a complex puzzle of incorporating various prices, room types, arrival dates, and lengths of stay. Each room type, rate rules, payment requirements, and price create a unique product offering.
As a result, a property may offer multiple products, which could cater to various market segments. Within each segment, it’s essential to maintain clear and logical pricing structures to avoid confusing potential buyers, which could result in lost sales. Testing your pricing strategy is advisable.
When implementing public pricing on your property website, select a date (or multiple dates) and evaluate how the pricing strategy is presented. If you can explain the pricing logic clearly, it has passed the test. If you find it difficult to rationalise, it may need to be reevaluated.
Price sensitivity and potential upselling to higher room categories should also be considered, as price elasticity can vary significantly between room types and may fluctuate by day or season. This means that pricing increments between room types should not be static or uniform.
If you’re considering a revenue management system, ensure it has the capability to handle this level of detail and flexibility in pricing. Many systems rely on preloaded increment amounts, which may not account for the varying price sensitivities associated with different room types. Understanding these sensitivities will also help you establish appropriate upgrade paths and determine how many complimentary upgrades to offer before transitioning to paid upgrades.
Detail of a Pricing Strategy
The necessary level of detail in your pricing strategy is contingent on your specific business and its operational dynamics. A strategy should reflect the volatility of the inputs mentioned earlier.
For instance, if demand fluctuates significantly based on the day of the week, the corresponding pricing should exhibit that variability. Conversely, if demand is relatively stable, your pricing strategy can afford less frequent changes.
A minimal price difference (such as $1) is unlikely to substantially affect customer price sensitivity. Thus, you can typically utilise broader rate bands that require infrequent changes while still maximizing rates and capitalizing on customer sensitivity. For example, a typical city hotel may function well with 10-12 BAR (Best Available Rate) levels plus associated derived rates such as advance purchase discounts. Resort properties might perform optimally with around 5 or 6 levels.
Channel Pricing Strategy
In today's market, multiple channels are available for selling hotel rooms. With consumers having greater visibility into rates through the internet, discrepancies between different channels can lead to distrust. When customers see lower rates offered on one channel, they may seek even better deals on others, potentially losing sight of your property entirely and booking with a competitor.
To maintain trust and integrity in your pricing, it’s vital to execute consistent pricing across all channels. While some properties may close out all channels to sell exclusively through direct channels during periods of high demand, overall pricing integrity should be maintained.
Part 8 – Complete Revenue Management
In the previous article of the Revenue Journey, I discussed pricing strategies and their role in complete revenue management. While effectively setting prices is critical, the second, even more vital component, is managing your inventory.
Achieving revenue increases through a well-executed pricing strategy is significant. However, the true potential for additional revenue lies in inventory optimization. Here’s an example to illustrate this point:
Imagine you have a busy Wednesday, and you’ve raised your Best Available Rate (BAR) from $180 to the highest level of $200. Selling your last available room at this higher rate nets you an extra $20 in revenue. Now, suppose you’ve conducted a thorough revenue management forecast (remember, it’s segmented by day) and identified demand for a two-night corporate booking at a rate of $150 per night. If you only manage your pricing, you might stick with the BAR rate of $200, collecting that $50 premium for Wednesday night by declining the corporate booking. However, if you also manage your inventory, you can make a more advantageous choice.
By accepting the two-night corporate booking, you secure occupancy for Wednesday night at $150, and you gain an additional $150 for the Thursday night. Although you forgo the $50 premium on Wednesday, you ultimately generate an extra $100 in revenue overall. This integrated approach, which considers both pricing and inventory, defines complete revenue management—not to be confused with Total Revenue Management, which we will explore in a series in 2017.
Understanding Inventory Management
Successful inventory management encompasses several critical components. The primary goal of your Revenue Journey is to maximise revenue—not just to raise rates or fill the hotel, but to achieve the best possible mix of business, which includes an optimal combination of average rate, occupancy, length of stay, and room type distribution.
For instance, if you operate a small hotel with only five rooms, managing inventory manually may be feasible. However, when that same hotel has varying market segments and different booking lengths—such as one-night and two-night stays—the complexity of revenue optimization dramatically increases. When managing a property with 100 rooms, the challenges become even more pronounced, especially when considering the probability of different segments to materialize (which relates to business uncertainty), competitor rates, and the added value of bookings with ancillary spend at the property.
Inventory Management Controls
If you are managing inventory manually, the inventory management controls you employ will depend on your Property Management System (PMS) and how you operate across different channels. Here are some key inventory management controls to consider:
Minimum Length of Stay: This control helps maximize occupancy on shoulder nights, increasing revenue by ensuring bookings on less busy days before and after peak periods. It applies to all arrivals on the day the control is enacted.
Maximum Length of Stay: Use this control when you want to limit reservations for extended periods, either to avoid taking lower rates ahead of a busy period or to enforce specific rate plans that mandate shorter stays (e.g., two nights).
Close to Arrival: This control can enhance occupancy on the nights leading up to a busy day. However, it may have adverse effects on longer-staying guests with higher value, so it's typically best to use this setting with caution. It impacts all bookings arriving on the date the control is set.
Stay Through: This setting requires that any booking crossing a specified day complies with the established minimum stay requirement. For instance, if a minimum stay of three nights is set on a Saturday, only bookings of three nights or more will be allowed for that night.
Hard Close: This setting prohibits all bookings on a specific day when closed, regardless of the booking’s value or length. Use this option only as a last resort.
Room Type and Rate Type Settings: All of the previously mentioned settings can also be applied at the room type and rate code level, giving properties the flexibility to fully optimize their inventory.
Reserved Inventory: Specific numbers of rooms can be allocated for particular rates, room types, companies, or travel agents. This might be due to commitments made or optimization calculations indicating that capping certain rates is necessary for maximizing revenue, while still keeping space available for higher-rate bookings.
Complete revenue management encompasses all rates and room types, fully optimising every aspect of the property’s inventory. By utilising both pricing and inventory management controls, a savvy Director of Revenue can generate substantial revenue increases. In advanced revenue management systems, this level of inventory control is referred to as "full pattern length of stay," which is an incredibly powerful tool for revenue optimisation.
Next Steps
Now that you have explored the Revenue Journey from Part 1 to Part 8, reviewed your processes, and implemented various revenue management components on a manual basis, it’s time to assess whether a revenue management system is appropriate for your property.
In the next article in the Revenue Journey, we’ll delve into how to evaluate and choose a revenue management system that best suits your type of property.
Part 9 – Revenue Management Systems
As we advance in the Revenue Journey, the focus shifts towards enhancing all elements of revenue management through technology. Imagine having a tool that allows you to set the optimal price for each market segment, channel, and time frame with just the click of a button.
The primary goal remains clear: to maximize revenue for each segment, and a robust revenue management system can significantly aid in achieving this goal.
It's essential to recognise that a revenue management system is designed to support experienced revenue managers—not replace them. Intuition and market insight will always play crucial roles in revenue management.
Benefits of a Revenue Management System
A revenue management system offers various advantages that enhance overall performance:
Dynamic Pricing: The system consolidates competitor pricing strategies in real-time and suggests the most accurate rates for each segment during specific timeframes. While this can be done manually, it is often time-consuming and prone to errors. Additionally, a revenue management system can facilitate group pricing strategies by rapidly analyzing complex data patterns through displacement analysis. This not only helps ensure the correct group rates but also maximizes overall revenue and hotel profits.
Error Reduction: An important benefit of using a revenue management system is its capacity to update prices across all channels in real-time, significantly reducing the likelihood of manual errors. In an expanding distribution landscape, the costs associated with manual errors extend beyond lost revenue—they can also damage your brand and undermine the hotel's credibility. A revenue management system can substantially minimize errors, leading to greater business efficiency.
Data-Driven Decisions: A revenue management system utilizes sophisticated algorithms to analyze data, enabling it to automatically interpret historical trends. This capability aids in crafting pricing strategies that provide a competitive edge.
Effective Inventory Management: Given that most hotels offer multiple room types with various complex restrictions (as discussed in Revenue Journey Part 8), a revenue management system helps manage inventory by clearly indicating which restrictions to apply and at what prices. This enables complete inventory optimization, resulting in improved occupancy, Average Daily Rate (ADR), and Revenue Per Available Room (RevPAR).
Supporting Revenue Managers
While a revenue management system serves as a powerful tool for enhancing decision-making, it does not replace the expertise of revenue managers. Here are several key ways a revenue management system supports revenue managers:
Guided Pricing: By combining system-generated pricing guidelines with a revenue manager's experience and intuition, you can expect to see an increase in RevPAR.
Time Efficiency: By automating pricing and rate distribution tasks, a revenue management system saves time, allowing the revenue manager to focus on analyzing various business aspects and implementing improvements.
Centralised Dashboard: A revenue management system provides a centralized dashboard, consolidating all the information a revenue manager needs to make informed decisions. This results in quicker decision-making and better responsiveness.
Enhanced Forecasting: With complex forecasting algorithms built into many revenue management systems, these tools can serve as a valuable resource for validating forecasts. Improved forecasting practices lead to more effective business planning.
Comprehensive Reporting: Most revenue management systems include extensive reporting capabilities, which not only save time but also enable revenue managers to make more accurate decisions that maximize revenue potential.
Filling Inventory: Every revenue manager aims to achieve full occupancy. Understanding the importance of pricing each room category is crucial, and a revenue management system assists managers by optimising prices based on demand. This ensures better inventory control and, ultimately, a higher likelihood of achieving 100% occupancy.
Remote Accessibility: Many revenue management systems are web-based and offer mobile applications, allowing revenue managers to make quick adjustments in response to market changes. The quicker and more dynamically a hotel can react, the more likely it is to gain market share.
Boosting Confidence: By providing data-driven insights, a revenue management system helps revenue managers feel more confident in their decision-making. This newfound confidence can significantly impact the hotel’s future business success.
In summary, a revenue management system serves as an invaluable tool that supports your revenue manager and enhances the overall decision-making process, particularly in pricing and inventory management. With various revenue management systems available, it’s crucial to conduct thorough research to identify the one that best aligns with your business needs. By doing so, you’ll be better equipped to maximise revenue and drive success.
Part 10 – Still Not Convinced?
Revenue Management can be defined as selling the right room, to the right customer, at the right moment, for the right price, via the right channel, all while maximizing commission efficiency. While this definition may seem complex and daunting, the implementation of an effective revenue management strategy can be streamlined through a clear process.
The Revenue Journey provides a step-by-step guide to make this process easier. If you're not yet convinced of its value, you undoubtedly will be as you progress.
Getting Started
The first step in the Revenue Journey outlines the types of businesses where revenue management can be effectively implemented. It’s straightforward: if you answer "yes" to any of the following questions, you are ready to cultivate a revenue management culture in your organisation:
-
Does demand for your product fluctuate?
-
Can customers book your product in advance?
-
Do you have limited, perishable inventory for sale?
If you still need convincing of the importance of integrating revenue management into your business, refer to the first article in this journey: The Revenue Journey Part #1 – Taking The Plunge.
Once you recognize the necessity of revenue management in your business, you may find yourself wondering where to begin. The answer is simple: carefully outline your journey by addressing three fundamental questions: Where am I today? Where do I want to go? How will I get there? Honesty in assessing your current situation is crucial, as taking the first step is often the hardest.
If you need assistance in making this decision, check out the second part of the journey: The Revenue Journey Part #2 – Navigating The Journey.
Building the Right Team
Now that your business is mentally prepared to embrace a revenue culture, it’s essential to find the right “driver” for your journey. The human element in revenue management is vital for a successful strategy. It is advisable to identify an experienced revenue manager who can streamline the various aspects of assembling a team, as several factors need to be considered.
-
Here are some fundamental questions your driver should address:
-
Who are the decision-makers and influencers?
-
What is the appropriate size for the revenue management team?
-
What level of experience is required for team members?
As you can imagine, navigating the human element can be complicated. For clarity, refer to part three of this journey: The Revenue Journey Part #3 – Fundamentals.
Establishing Your Distribution Infrastructure
With your team in place, it’s time to determine the right distribution infrastructure for your business. Selling a product requires a robust infrastructure, which may include systems, manual processes, or a combination of both. The costs associated with this infrastructure should be evaluated carefully, as choosing a cheaper option could prove costly in the long run.
To better navigate this process, read The Revenue Journey Part #4 – Choosing Infrastructure.
Instilling a Revenue Management Culture
As you continue on the Revenue Journey, you've mapped your course, identified a driver, and established a solid infrastructure. The next step is to embed a revenue management culture within your organization. Successful revenue management hinges on consistency and requires a defined set of processes to instill this culture. While the list of necessary processes can be extensive, each revenue manager may have a unique approach. Consider this diversity carefully to ensure a mutually beneficial situation for the business.
For more details on the required processes, refer to The Revenue Journey Part #5 – Processes.
Importance of Accurate Forecasting
A reliable forecast is critical to the revenue management decision-making process. Without an accurate forecast, it is impossible to make informed revenue-driving decisions. Understanding the various types of forecasts and their importance is vital. As the revenue manager spends more time analyzing hotel data, forecast accuracy improves, leading to better business outcomes.
To enhance your forecasting, read The Revenue Journey Part #6 – Forecasts.
Strategic Pricing Considerations
Next, you’ll need to grasp the significance of pricing, which can often be intricate, particularly in the hospitality industry. The ultimate goal of strategic pricing remains consistent: to maximize rates and room sales for specific periods.
-
Breaking it down, the essential components of pricing are as follows:
-
Forecast: What price should I set to achieve my forecast?
-
Price Elasticity: Am I charging the right amount? How can I maximise my revenue?
-
Competitor Rates: How do our prices compare to those of our competitors?
-
Customer Perception: What do customer reviews tell me about my value?
-
Understanding these elements will put you on the right path to successful pricing.
For a broader understanding, revisit The Revenue Journey Part #7 – Pricing.
Complete Revenue Management
Complete Revenue Management blends pricing strategies with effective inventory management controls, optimizing all aspects of your property’s inventory. This comprehensive approach is more demanding than traditional revenue management but can lead to substantial revenue increases when executed effectively.
To learn more about this concept, read The Revenue Journey Part #8 – Complete Revenue Management.