What is the Importance of Revenue Management in Hotels?
Recenctly we asked some of the longtime clients of Xotels this question, the answer was simple, 25% or even more …
Meaning that by implementing best practices in revenue management and proven techniques we are delivering at least 25% incremental revenue to hotels.
Wow, and that is just on top line room revenue. Can you imagine what the additional spending in ancillary revenue streams (i.e. breakfast, bar, restaurant, parking, spa, gym, etc) could be.
And how do you think this will impact the bottom line of a hotel?
In short, we are talking about a lot of money that can be created by implementing revenue management properly in a hotel.
But what is Revenue Management?
It is essentially nothing different from what is called business analytics and pricing strategies in other industries. The concept of revenue management boils down to the optimization of financial results. By analyzing sales trends and forecasting results, using historical scenarios, price strategies are adjusted to maximize revenues.
It originated in the airline industry in the 1980’s, as they were trying to optimize their financial results. Dynamic pricing was introduced to grow revenue potential and financial results, through anticipating and influencing consumer behavior and applying price discrimnination. Robert Crandall, former CEO at American Airlines, who first introduced revenue management, called it the “the single most important technical development in transportation management since we entered deregulation.”
Some of the definitions used to describe revenue management are:
Selling the Right Room to the Right Client at the Right Moment at the Right Price
The art of turning away business
Matching supply and demand
Is Revenue Management and Yield the Same?
Close, but not quite. The difference between revenue management and yield lies in technicalities and definitions.
Revenue management is the overall strategy, including in-depth analytics and forecasting, Yield management is the actual price optimization part.
It is a theoretical detail which is not relevant enough for us to spend more time on.
How to Generate Results in Hotels with Revenue Management
Now this is a much more interesting topic. The one that really
Having been in this field since 1997 (wow that even took me by surprise, am I getting old? Let’s just say I have some years of experience under my belt) I realize there is that one key element which is crucially important to be able to drive results via revenue management in hotels.
And that is STRUCTURE …
Structure is at the core of success. Structure comes in many different forms:
Structure in Data
Structure in Reporting
Structure in Analysis
Structure in Rates
Structure in Systems
Structure in Strategies
Structure in Methodology
Structure in Communication
Structure in Focus
Having worked in various hotels and worked on many projects, I think that the nature of hotel operations being reactive, responding to guest requests, is one of the factors that poses a fundamental challenge or threat to this required STRUCTURE.
In a general a hotelier tends to have a more reactive and intuitive approach or management style (please don’t get offended I am making a rough generalization based on the nature of our industry, there are many exceptions of course)
However, revenue management is a technique, a scientific approach to analyze your results and sales trends. It required a methodical work method which is consistent, accurate, precise, organized and planned.
Logically the skill set and profile for someone to execute such tasks and responsibilities varies enormously from the average hotelier. It’s another world.
We have seen a lot of change in the last 9 years since we have launched Xotels (no we are not claiming all the glory, merely an observation). The industry has a changed a lot and recognizes the importance of revenue management.
More hotels have either set-up a dedicated position for revenue management, and hired professionals with a background more fitting of this scientific art (which some also call yield management).
Opportunity for Improvement
However we do still see quite a lot of hotels who have not yet made the leap in driving their direct sales and bottom line profit. This is where the real challenge lies for revenue managers in the next few years.