What is Revenue Management?

What if I told you that there was a relatively simple way to increase your top-line revenue by 20-30%. Would you believe me?
Believe it or not, only a very small percentage of hospitality operators use revenue management strategies and are potentially robbing themselves of their own properties’ revenue potential. In this series, we will uncover revenue management strategies are designed to help you realize optimal revenues and profit for capacity-constrained and perishable assets (rooms, in our case). Implemented correctly, a 50 room property can see an increase of $100,000 – $200,000 each year.

What Revenue Management Is Not

It might be easy to believe that good revenue management is about simply following your competitors’ rates (comp set), chasing after occupancy goals, or accepting every piece of group business that comes your way. While understanding competitor rates and managing occupancy are part of revenue management, mindlessly following these particular behaviors can actually hurt your business. That is because you need to account for:
• Future strength of demand
• Guest price expectations
• Future competitor actions
• Outside events (for example, economic situation, changes in gas prices or airfares, construction next door)

To get the most revenue, you can’t just “set it and forget it”; Revenue managers need to be both able to plan and forecast demand for the future, (365 days out), and also flexible enough to change their strategies. This diligence helps prevent problems such as having too many unsold rooms or selling out at a rate much lower than it could have been.
Indexes used in the Revenue Management Science

Let’s look at some metrics you should already be familiar with:

Occupancy and ADR are often used as a shorthand way of measuring the success of a property, but these metrics alone are a poor measure of the sales volumes they generate.

A Better Measurement

A better measurement that takes into account the relationship between these figures is RevPAR (revenue per available room). This metric is useful for measuring the hotel’s productivity and for comparing properties inside of a market – it is a more accurate view of hotel performance as it combines both occupancy and ADR into one statistic.

In our next post we’ll discuss how to create a dynamic pricing strategy.