HOTEL REVENUE MANAGEMENT
EFFECTIVE REVENUE MANAGEMENT is a key element in a successful hotel business. This guide will explain the fundamentals of hotel revenue management and demonstrate how the application of timeless revenue management principles will lead to intelligent decision making and greater profitability.
Part 1 - What is Hotel Revenue Management?
Hotel revenue management involves forecasting demand by understanding the unique characteristics and buying behaviours of prospective traveler segments, then matching that demand by optimising prices and inventory to secure their bookings. In other words, attracting the right travellers by selling rooms at the right time, for the right price and thus increasing profitability.
Nearly four decades ago, airlines developed the concept of revenue management—a flexible pricing approach that addresses inventory perishability and the individual value of each traveler.
The concept extends naturally to hotel inventory which is also perishable. A room left empty today cannot be sold tomorrow. Similarly, a room sold today can’t be sold for a higher rate tomorrow.
The airline industry was quick to adopt and refine the concept of revenue management, but the hospitality industry lagged. Mostly because fragmented systems and ownership models made it difficult for hoteliers to compile and analyse the right data.
How has hotel revenue management evolved?
Today, the challenges of data sharing have diminished, and more hotels are adopting a data-driven approach to pricing and distribution to generate growth. Having a hotel revenue strategy means understanding your market and traveler demand, then strategically optimising your prices and inventory to capture profitable bookings.
In the high season, you may opt to leave a room unsold to secure a higher rate the next day. At periods of low demand, you may sell a room at a discounted price. Measuring and monitoring the supply and demand of your hotel rooms will help you make confident decisions that drive revenue and profitability.
It’s not just your room revenue that benefits from implementing a strategy. Many other hospitality services are perishable too, such as restaurant reservations, meeting spaces, or spa appointments. Understanding your guests’ travel patterns and desires allows you to make informed pricing and staffing decisions. Anticipating on-property spend means that you’ll be able to staff your departments cost effectively so they always meet your guests’ expectations.
Why revenue management matters
Every hotelier, regardless of size, is facing rising operating costs and increased competition. Having a revenue management strategy allows you to maintain profitability and achieve revenue growth even though you can’t physically increase the number of rooms you have to sell.
Getting started in hotel revenue management
Tracking the supply and demand of your rooms is the foundation of revenue management. There is no single, “right” way to approach revenue management. Depending on your circumstances, you may want to explore one of the following:
1. Hire or train a revenue manager
If you’re in a position to hire a revenue manager, it’s an excellent skill to have in-house. Alternatively, you can invest energy in up-skilling your existing team through professional Revenue Management courses.
2. Invest in optimisation software
There are many technology systems that eliminate the need to manually collect data and build individual reports. These solutions increase accuracy, simplify data comparison and make it easy to spot opportunities.
3. Leverage existing resources
If software investments aren’t in your budget, explore the services offered by your other system providers and partners. For example, many OTAs offer price comparison tools that eliminate the need to gather rate data from nearby hotels.
With the right approach for you identified, the next step is to understand market segmentation, forecasting, inventory management, hotel KPIs and pricing strategies. All this sounds complicated, but we’ve broken each topic down so you can get started right away.
Part 2 - Market Segmentation
Dividing the market of potential guests into groups, based on their different characteristics, is a cornerstone of every revenue management strategy. Some travellers prefer to book luxury rooms early, while others take their chances with last-minute deals. Some are costly to attract, while others provide steady business. Understanding how your traveler segments behave will allow you to strategically target the right guests for each season and forecast how their stay will impact your hotel profitability.
Start by considering the following:
Length of stay
Day of weeks stay
Total revenue per room
Total revenue per guest
Lead time (how far in advance bookings are made)
Cancellation rate (how often bookings are cancelled)
No show rate (how often guests failed to check in)
Ways to segment your market
Once you know how your guests behave, you can divide your customer base into groups (segments).
Tip! Use information you’ve collected and our market segment worksheet to determine the characteristics of your property’s segments.
Below are examples of typical traveler segments, how they behave and how they might affect your business. Remember, market segments are unique to your property type and market. That means an airport hotel will likely identify different market segments to a luxury hotel in a large city.
Market segments
Leisure individuals
✓ Highest rate
✓ Book public rates
These travellers often book through OTAs, which means you'll pay a compensation on them.
Leisure groups
✓ Low rate
✓ Large groups
Tend to have a longer booking window, so you can secure some business early.
Business individuals
✓ High rate
✓ Often book last minute
Great for filling rooms at the last minute.
Business groups
✓ Good rate
✓ Little additional spend
Reasonable rates help your ADR.
Corporate negotiated rates
✓ Low/good rate
✓ Steady business
You can rely on this type of business to cover your costs during slow periods.
Conference groups
✓ Low rate (including conference room hire, wi-fi, meals, and rooms)
✓ High spend in other departments
Have a large impact on additional on-property spend.
Airline crew
✓ Good rate
✓ Very steady business
Great business when you have very slow days of the week
Wholesale and tour operators
✓ Low rate
✓ Potentially high volume
✓ Often these rooms are packaged up and sold as part of a holiday including excursions and flights, for example.
They often pre-pay and bring in customers from distant locations.
Part 3 - Hotel Demand Forecasting
After you’ve identified your low-yield (lower rate) and high-yield (higher rate) segments, it’s time to think about demand, and how that changes throughout the year.
Forecasting involves estimating how much business you think you can get from each segment and the value of that business, so that you can drive incremental revenue by prioritising high-yield over low-yield business. Essentially, you want to be confident enough that there is more high-yield business that you can turn down low-yield business and still sleep at night!
Understanding your upcoming demand allows you to price rooms appropriately according to demand, and can also help to inform other operations, such as staffing and marketing. For example, during low-demand periods, it’s generally good practice to accept early bookings at lower rates (as long as you can cover your costs). During high-demand periods, guests generally expect to pay more—especially at the last minute. If you fill your property too early, you’ll likely miss the opportunity to capture these high-yield guests.
Before you can start forecasting demand, you’ll need to understand the following concepts: constrained demand, unconstrained demand, and competitive sets.
What is constrained and unconstrained demand?
✓ Unconstrained demand is how many rooms could be booked on a given day if you had an unlimited number of rooms. For example, although your property may only have 50 rooms, during a large event there could be 40 more travellers who want to stay at your property. That means your unconstrained demand would be 90 rooms.
✓ Constrained demand is the maximum demand for the amount of rooms you have. For example, if your property has 50 rooms, your demand would be no more than 50 rooms.
Tip! If your unconstrained demand is higher than your capacity, you may want to increase the price of your last room or apply length of stay restrictions.
What is a competitive set?
A competitive set is a group of hotels that you see as direct competitors to your own hotel that you can use to benchmark yourself against. Competitive set information can help you anticipate other properties’ strategies so that you can make your own adjustments.
How to identify a competitive set
To get the most from your competitive set, it’s best to select competitors that are very similar to you. We recommend limiting the number of competitors to less than ten. However, you can have multiple competitive sets for different purposes, such as seasons.
Tip! Remember to review and update your competitive set regularly. New competitors and newly renovated properties might mean that your competitors change.
When you select your competitive set, consider:
✓ Location. Competitor properties should be located near your property. A property 20 miles away is unlikely to target the same market as you.
✓ Property type. Select competitors that offer a similar property type. For example, a 5-room bed and breakfast will attract a very different clientele to a 100-room hotel.
✓ Property category. Competitor properties should be a similar standard to yours. For example, you wouldn’t include a 5-star luxury property if your property was a 3-star motel.
✓ Property facilities. Select competitors that offer similar facilities. Does your property have business facilities for corporate guests? Or is it more suited to leisure travellers?
How to forecast demand
To identify opportunities in different demand periods, you’ll need to forecast by day and by segment. Whether you’re working with historical data or intricate computing algorithms, the key to an accurate forecast is to use reliable numbers.
We suggest using data from all channels, including your hotel website, OTAs, and your channel manager, if you have one. Some OTAs even offer technology that helps you forecast demand, so be sure to check what tools you have available. For smaller properties, collecting data on whether regular guests plan on staying at your property in the future will transform your front desk into a valuable data source.
How to forecast demand - step by step
Identify transient and group “on the books” reservations
The more reservations you have, the more accurate your forecast will be.
✓ PMS (Property Management System) or other system used to track reservations
Identify anticipated unconstrained transient reservations
How many rooms you could sell, if you had an unlimited number of rooms.
✓ Public/bank holidays
✓ School holidays/vacation
✓ Exceptional demand indicators, such as events
✓ Competitors’ fully booked dates, seasonal rate periods, new properties, and renovations (some OTAs provide competitive set data)
✓ RevPAR last year (Revenue per available room)
Identify anticipated group reservations
How many rooms you could sell to groups, if you had an unlimited number of rooms.
✓ Considerations as per unconstrained transient reservations
✓ Groups or events from last year or previous year if they are bi-yearly
Part 4 - Inventory Management
Hotel inventory management is the process of monitoring and carefully controlling your room inventory. You’ll need to decide how many rooms you’ll allocate to each of your channels, how early you restrict business (you might make a channel unavailable) and who you’ll accept business from.
Although it might be tempting to sell rooms as quickly as possible so you can rest easy, selling out too early might prevent you from reaching your revenue potential or affect the guest experience.
Inventory management and financial success
Some segments will provide business year-round, while other segments tend to be more seasonal. To succeed financially, it’s important to balance short-term, high-yield business with long-term, low-yield business. Turning down business from low-yield guests could potentially damage key relationships.
Without these strong guest relationships, you may struggle to fill rooms and generate revenue in low-demand periods.
What to consider when managing hotel inventory
✓ Distribution: Opening and closing channels
How much business do you want to drive from each of your channels? Think about the cost of bookings for each channel, for example, there’s no compensation on a direct booking, but corporate rates are generally lower than a leisure traveler.
✓ Lead times: When to accept bookings
What is the lead time (booking window) for travellers who book through each channel? Historical data can help you understand your travellers behaviour and inform your decisions about when to accept low-yield group bookings and when to wait.
✓ Overbooking: When to say no to bookings
Are you willing to run the risk of overbooking and potentially upsetting a guest? Try to determine the probability of no shows and decide what margin of error you’re willing to accept. Remember, you’re liable for the cost of relocating your guest to another hotel and it may affect your relationship with the guest. Equally, if you can sell that room for more than the cost of relocation, it may be worth it. You need to decide what’s best for your property.
Part 5 - Hotel Performance Metrics
Monitoring key performance indicators (KPIs), also known as hotel metrics, helps you to identify demand trends, opportunities for improvement, and areas of success. Performance measurement in the hotel industry involves countless acronyms, including ADR, RevPAR, GOPPAR—and the list goes on. But what do they mean, and how can they help you measure and improve the results of your revenue management strategy?
To help you get started, we’ve broken down the fundamental metrics in this guide and created a revenue management glossary for definitions of more advanced terms. And if you need a reminder about calculations, check out our acronym guide.
What is yield management?
Revenue management and yield management are related terms, but they are, in fact, different. Revenue management is your overall strategy including data analysis, market segmentation, and forecasting, while yield management is the price optimisation aspect of your strategy.
What is occupancy rate?
Hotel occupancy rate is the percentage of available rooms that were occupied (sold) during a specified period of time. Put simply, it tells you how full your property is.
While high occupancy is generally desired, a very high occupancy rate might indicate that you are pricing your rooms too low. In some cases, you might be able to achieve the same revenue with an 80% occupancy rate by pricing your rooms slightly higher. And that means fewer rooms to clean!
How to calculate occupancy rate
Occupancy rate (%) = Rooms sold / Rooms available x 100
For example, if your property has 100 rooms, and you sell 80, your occupancy rate would be 80%.
80 (rooms sold) / 100 (rooms available) x 100 = 80% (occupancy rate)
What is average daily rate (ADR)?
Average daily rate is the average amount paid per room, per day, during a specified period of time. It tells you the average income of an occupied room. It does not include complimentary or free of charge rooms, nor revenue from other departments, such as food and beverage.
ADR helps you understand your current operating performance in relation to your historical performance or other similar hotels, so that you can make informed, strategic pricing and promotional decisions. However, because ADR doesn’t consider other revenue or expenses, it can’t give you an idea of your overall performance.
How to calculate ADR
Average daily rate (ADR) = Room revenue / Rooms sold
For example, if your room revenue for a day is $8,000, and you sold 80 rooms, your ADR would be $100.
$8,000 (room revenue) / 80 (rooms sold) = $100 (ADR)
What is RevPAR?
RevPAR is the revenue per available room. Calculating RevPAR allows you to evaluate daily performance based on occupancy (how many rooms are sold) and ADR (the average daily rate). It does not consider specific room types and rates, or actual occupancy (guests who checked in).
RevPAR is a great KPI for helping you quickly assess your financial performance. In other words, how well you’ve managed your inventory (rooms) and rates (prices) to optimize revenue.
How to calculate RevPAR
RevPAR = Occupancy x ADR
For example, if your occupancy rate is 80% (you sold 80 of your 100 rooms) and your ADR is $100, your RevPAR would be $80.
80 x $100 = $80
What is a good RevPAR?
RevPAR is a way of judging your own performance, and that means it will differ for each property. Generally, a good RevPAR is higher than the historic RevPAR you’re comparing it to. Be sure to select a date with similar demand for the best insight.
What is GOPPAR?
GOPPAR refers to gross operating profit per available room. GOPPAR considers revenue and expenses from all areas of the business. That means it’s a good metric for measuring your hotel performance as a whole.
To calculate your gross operating profit per available room (GOPPAR), subtract your gross expenditure from your gross revenue, then divide it by the number of available rooms in your hotel.
GOPPAR = Gross revenue - Gross expenditure / Available rooms
For example, if your gross revenue from all areas of your hotel is $1,000,000 for the year, your gross expenditure is $450,000 for the year, and your hotel has 25 rooms available 365 days per year, your GOPPAR would be $60.27.
$1,000,000 (gross revenue) – $450,000 (gross expenditure) / (25 x 365) = $60.27
What is TRevPAR?
TRevPAR is total revenue per available room. TRevPAR indicates the overall financial performance of your property because it considers revenue from all departments (RevPAR only considers room revenue performance).
TRevPAR is particularly helpful for properties that generate considerable non-room revenue from other services, such as all-inclusive hotels or resorts. However, it does not consider costs incurred by the hotel, nor actual occupancy.
How to calculate TRevPAR
TRevPAR = Total Revenue / Total available rooms
For example, if your total net revenue from all areas of your property is $1,000,000, and your hotel has 25 rooms available 365 days per year, your TRevPAR would be $109.59
$1,000,000 / (25 x 365) = $109.59
Part 6 - Dynamic Pricing
The goal of revenue management strategy is to maximise the revenue you make per available room (RevPAR), not just your room rates or occupancy rate. That’s why it’s important to consider the concept of supply and demand when developing a hotel pricing strategy.
What is hotel pricing strategy?
Hotel pricing strategy is how you decide to price your rooms. Dynamic hotel pricing, also known as demand pricing, time-based pricing, or surge pricing, involves changing room rates daily, or at multiple times during the day, based on real-time market demand data.
When demand is high, prices usually increase. For example, during New Year’s Eve, rates rise due to an influx of festival-going tourists. When demand is low, prices usually decrease, for example, a hotel in a small beach town will likely drop their rates during winter.
What to consider when developing a dynamic hotel pricing strategy
✓ Overall room availability in your area
Are there any important events happening that will increase demand?
✓ Competitor availability
How are your competitors tracking? If only a few rooms are available, you can increase your rates, which will help you increase your average daily rate.
✓ Cancellation policies
Will you offer non-refundable rates?
✓ Inventory management
Who are your desired guests (segments)? What channels do they book through, and what are the costs of using intermediaries?
✓ Cost per room
Be sure to calculate the cost per occupied room to ensure your rate includes a profit margin. Consider staff/housekeeping costs, cleaning supplies, consumable amenities such as shampoo and conditioner, laundering of bed and bath linens, utilities such as electricity, and booking fees and compensation. It’s also a good idea to allocate an amount towards future renovations.
What to avoid when making pricing decisions
✓ Accepting reservations too early
Not all guests are created equal. Accepting a large group with a heavily discounted rate during a period of high demand means you can’t sell those rooms to higher paying customers. If you do accept early reservations, be sure to charge a premium rate.
✓ Pricing intuitively
Data is always more reliable than a gut feeling. Always consider factors that could drive or reduce demand, such as weather forecasts, school holidays, or local events.
✓ Keeping your rates static
Keeping your rates fixed is likely to result in missed revenue opportunities. Be sure to adjust your rates based on supply and demand to drive the most revenue from your rooms.
✓ Limiting pricing decisions to business hours
No one wants to start the day with the news that you’re overbooked! Make sure you have people and systems in place to make pricing changes when your revenue manager can’t.
✓ Closing your channels
Closing availability means that travellers using those channels won’t be able to find you. Rather than closing discounted channels as demand increases, try decreasing the discount. That way, you’ll be able to keep the channels open while maximising yield.
✓ Reacting suddenly to competitor prices
Competitor pricing gives you a better idea of demand in your market, but you should never react on just one competitor’s rates. They may be adjusting their rates based on their occupancy or even intuition. Always consider your competitive set as whole before changing your prices.
Conclusion
Connecting with guests, helping them have extraordinary experiences and create lasting memories is at the core of why we work in hospitality. Every day we see properties around the world delivering exceptional service to travelLers. Our hope is that this guide will help you navigate the complications of increased competition and rising costs. Having revenue management strategy that reflects your unique market, guests, and property will give you a strong, lasting foundation for a thriving business.