Revenue management in the hotel industry- Basics
Summary
TLDRThis video script focuses on the fundamentals of revenue management in hotels, aiming to optimize room pricing for maximum profit. It traces the history of revenue management from the airline industry to hotels, emphasizing the importance of understanding demand, forecasting, and segmenting customers. The script discusses the role of perishable inventory, fixed costs, and variable demand in shaping pricing strategies. It also touches on the balance between data-driven analysis and the 'art' of managing relationships with guests, suggesting that technology can aid in decision-making but should be used judiciously to maintain guest satisfaction and brand reputation.
Takeaways
- 💡 Revenue management is about finding the optimal price for every room, every night.
- 📈 It combines art and science to sell the right product to the right customer at the right time, through the right channel, at the right price to maximize profit.
- 🏨 The concept originated in the airline industry and was later adopted by hotels.
- 🚫 Hotel rooms are perishable goods; unsold rooms cannot be sold again, emphasizing the importance of revenue management.
- 🔒 Fixed inventory means that the number of rooms is constant, so demand must be managed to match supply.
- 📊 Time variable demand indicates that hotel demand fluctuates based on season, holidays, weather, and events.
- 🎯 Segmented markets allow for tailored sales strategies to different customer groups with varying motivations.
- 💼 High fixed costs in the hotel industry necessitate high occupancy rates to distribute costs effectively.
- 📅 The timing of bookings relative to stays creates opportunities for revenue management strategies like reservations and cancellation policies.
- 📊 The pickup curve is a valuable tool for visualizing booking patterns and adjusting pricing and availability accordingly.
- 🖥️ Technology, especially revenue management systems (RMS), plays a crucial role in automating and simplifying revenue management processes.
Q & A
What is the primary goal of revenue management in hotels?
-The primary goal of revenue management in hotels is to optimize profit by finding the optimal price for every room for every night.
How does revenue management differ from yield management?
-Revenue management and yield management are often used interchangeably. However, historically, yield management was the term used in the airline industry, while revenue management is the term used in the hotel industry to describe the same practice.
What industry did revenue management originate from?
-Revenue management originated from the airline industry in the United States, where deregulation led to fierce competition and the need to manage prices effectively.
Why is revenue management impactful for hotels?
-Revenue management is impactful for hotels because rooms are perishable goods; if a room is not sold for a particular night, it cannot be sold again. This creates a high willingness to sell rooms at lower prices rather than keeping them empty.
What are the key traits that make revenue management applicable to the hotel industry?
-The key traits that make revenue management applicable to the hotel industry include perishable goods, fixed inventory, time variable demand, segmented markets, high fixed costs, and the disconnect between booking and consumption times.
How does demand forecasting play a role in revenue management?
-Demand forecasting plays a crucial role in revenue management by allowing hotels to predict future demand based on past data and other factors such as seasonality, holidays, weather, and events. This helps in setting prices and adjusting inventory accordingly.
What is the significance of guest segmentation in revenue management?
-Guest segmentation allows hotels to identify and target different groups of consumers with similar needs and wants, enabling more targeted and personalized selling strategies. This can range from simple segmentation based on travel purpose to more complex micro-segmentation using AI and new technologies.
How can hotels optimize their distribution and channel management?
-Hotels can optimize their distribution and channel management by focusing on cost-efficient channels, diversifying sales channels to target specific segments, and using tools like GDS for corporate rates or promotions and packages to attract specific segments.
What is the role of the right product in revenue management?
-In revenue management, the right product refers not just to the room but also to the overall value proposition, including payment and cancellation conditions, promotions, packages, minimum lengths of stay, and even attribute-based selling, which allows guests to select what adds value to their stay.
How does the pickup curve help in revenue management?
-The pickup curve helps in revenue management by visualizing guest booking patterns over time. It shows the relationship between lead time and hotel occupancy, allowing hotels to adjust their selling and pricing strategies to aim for 100% occupancy on the day of arrival.
What are the three critical indicators for revenue management in hotels?
-The three critical indicators for revenue management in hotels are occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR). Occupancy rate measures how busy the hotel is, ADR measures the average room price, and RevPAR combines these to show overall hotel performance.
What types of technology tools are available to assist with revenue management?
-There are two main types of technology tools for revenue management: decision-making tools that provide data and visualization to help set prices, and revenue management systems (RMS) that make specific price suggestions and can automate pricing. These tools range from those designed for large hotel chains to simpler, more affordable options for smaller or independent hotels.
Outlines
🏨 Introduction to Revenue Management
This paragraph introduces the concept of revenue management in the hotel industry. It emphasizes the goal of finding the optimal price for every room for every night. The speaker, Elisha from Hotel-Spider, explains that revenue management is both an art and a science, aiming to sell the right product to the right customer at the right time, using the right channel, at the right price to maximize profit. The origins of revenue management in the airline industry are discussed, along with its adaptation by hotel chains. Key traits necessary for effective revenue management are highlighted, such as perishable goods, fixed inventory, and time-variable demand. The importance of understanding market segments, high fixed costs, and the disconnect between booking and consumption times is also discussed.
📈 Forecasting and Segmentation in Revenue Management
This paragraph delves into the forecasting aspect of revenue management, explaining how understanding predictable patterns in demand can help set prices. It discusses the concept of segmenting guests into groups with similar needs and wants to sell to them more effectively. The use of AI and new technologies for micro-segmentation and personalization is mentioned. The paragraph also touches on the importance of identifying guests and reaching them through meaningful channels. The challenge of allocating costs to channels and the impact of diversifying sales channels on profitability are also discussed. The role of the right product, including payment and cancellation conditions, promotions, packages, and attribute-based selling, is explored in the context of revenue management.
📊 Critical Indicators and the Role of Technology
The final paragraph discusses three critical indicators for revenue management: occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR). It emphasizes the importance of these metrics in measuring a hotel's performance. The paragraph also addresses the role of technology in revenue management, distinguishing between decision-making tools and revenue management systems (RMS). It highlights the evolution of RMS tools from those designed for large hotel chains to simpler, more accessible options for smaller and independent hotels. The importance of connecting RMS to property management systems (PMS) or channel managers for optimized pricing is also mentioned. The speaker concludes by encouraging further learning through video content, livestreams, and an introduction course offered by DCT Online Academy.
Mindmap
Keywords
💡Revenue Management
💡Optimal Price
💡Perishable Goods
💡Fixed Inventory
💡Time Variable Demand
💡Segmented Market
💡High Fixed Costs
💡Right Product
💡Right Channel
💡Right Price
💡Right Time
💡Occupancy Rate
💡Average Daily Rate (ADR)
💡Revenue Per Available Room (RevPAR)
💡Technology
Highlights
Revenue management aims to find the optimal price for every room for every night.
Revenue management focuses on independent properties to optimize their prices.
Revenue management is defined as the art and science of selling the right product to the right customer at the right time, using the right channel, at the right price to optimize profit.
Revenue management originated in the airline industry due to deregulation and competition.
Perishable goods, fixed inventory, and time variable demand are key traits for applying revenue management.
Segmented markets allow selling the same product to different customers with different motivations.
High fixed costs in hotels make it critical to keep occupancy high to distribute costs.
The disconnect between booking and consumption of hotel rooms adds levers for revenue management.
Forecasting demand is crucial for setting prices in revenue management.
Different guests show different willingness to pay, which can be leveraged through segmentation.
Identifying and reaching guests in a meaningful way is critical for effective segmentation.
Cost-efficient channels can significantly impact profits in revenue management.
Diversifying sales channels helps target segments more accurately and create fences around specific rates.
The right product includes not just the room but the overall value proposition, such as payment and cancellation conditions.
Attribute-based selling allows guests to select what adds value to them and what they're willing to pay for.
The pickup curve is a tool to visualize guest behavioral patterns and optimize pricing and availability.
Revenue management combines art and science, with a focus on relationships and guest experience.
Three critical indicators for revenue management are occupancy rate, average daily rate, and revenue per available room (RevPAR).
Technology plays a significant role in revenue management, with decision-making tools and revenue management systems (RMS).
RMS tools can be connected to property management systems or directly to channel managers for optimized pricing.
Transcripts
- In this video, we're talking about the basics
of revenue management for hotels.
(upbeat jazz music)
The discipline of revenue management
aims to find the optimal price
for every room for every night,
and in this video, we want to cover the basics
of this very large field in our industry.
We're looking at the theoretical framework
and we'll focus on the application of revenue management
for independent properties,
because I still see a lot of hotels out there
that are not driving their revenue
and are not applying simple tactics
to optimize their prices.
Hello, and welcome to another Hotel Techie video.
I'm Elisha from Hotel-Spider,
and if you're looking to get
your hotel tech-related questions answered,
you're in the right place.
On this channel we share
our know-how about hotel tech with you.
Let's start with a definition that I personally like.
Revenue management is the art and science
of selling the right product to the right customer,
at the right time, using the right channel,
at the right price,
with the goal of optimizing your profit.
Now, let's take this rather complicated definition,
let's go take it apart and look at the individual elements.
But first, let me give you
a little bit of history and context.
Revenue management,
or back then mostly referred to as yield management,
was developed for an industry
that shares a lot of traits with hospitality:
the airlines.
Deregulation in the airline industry in the United States
led to fierce competition,
mostly driven by prices,
which gave rise to revenue management.
The discipline was then picked up
by hotel chains that adapted it.
But revenue management can also be applied
to many other industries
that share some of the following traits.
First, perishable goods.
Any hotel room that does not get sold tonight
can never be sold again.
Unlike a product, you cannot just keep them on inventory
and sell it tomorrow.
So as we cannot sell a room night again tomorrow,
the cost of not selling every room,
or let's turn it around,
the willingness to sell the room for a lower price
rather than keeping it empty is very high.
This in turn makes revenue management really impactful.
Second is fixed inventory.
Adding or taking away from hotel rooms
isn't really done overnight,
so as supply is relatively fixed
in any given destination for hotel rooms
and it only changes really slowly over time,
we need to find other ways to manipulate demand
to match it to the already existing supply.
A third element needed is time variable demand.
If demand for hotel rooms would be constant all year round,
then it would be really easy
for supply to just adjust to that level,
but that's clearly not the case for hotels.
We have a big variety in demand
depending on a lot of different factors,
such as season, holidays, but also weather and other events.
In addition to already mentioned characteristics,
there are other traits that can strongly influence
how impactful revenue management can be
in any given industry.
Segmented market make it possible
for you to sell the same product to different people
that want it for different reasons
and have different motivations.
Somebody booking a last minute business trip
has different factors influencing his purchasing decision
than a family booking their annual holiday.
High fixed costs makes it really critical
to keep occupancy high
in order to distribute these costs
across as many rooms and paying guests as possible.
The disconnect between when you book
and when you actually stay at the hotel,
or in other words when you consume the good,
also adds many more levers
that you can use in revenue management.
For example, you can work with reservation
and cancellation conditions,
but also payment conditions and overbooking.
Now that we have some more context,
let's get back to our definition from the beginning
and let's take it apart.
Revenue management is the art and science
of selling the right product to the right customer,
at the right time, through the right channel,
at the right price,
in order to optimize your profit.
The last part should be quite easy.
We're focusing on getting more profits
for your organization, so more money.
In economics, price is a function of supply and demand.
As our supply is basically fixed,
we have one element we don't really have to worry about.
We can really focus on the demand side
when it comes to setting a price.
We never really know demand until basically it's too late,
but what we can do is we can forecast demand into the future
and base our pricing on that.
This can be done to really a very wide range of complexity.
You can look at past data
and then forecast demand for every individual room type
for every day for the next 365 days or even further out.
And then you can add other factors such as pickup patterns,
competitors, airport arrivals, weather,
but also website traffic and many more.
But you can also make it much simpler.
Knowing that in winter your rooms
always sell out on the weekend four weeks in advance,
this is a forecast.
Demand generally follows predictable patterns,
and at whatever level is relevant for your property,
you can use this information to predict,
to forecast, and then to adjust your price.
Different guests show different willingness
to pay for your product.
By segmenting them into groups of consumers
with similar needs and wants,
you can reach them and sell to them
in a much more targeted and personalized way.
This can be done down to a very granular level
and with a high amount of complexity.
Using AI and the right new technologies,
you can go even so far
and start working with micro segments of one,
completely individualizing and personalizing
the price and the offer.
But again, here with segmentation,
it can be done much simpler,
and you can, for example, look at why are they traveling?
What's the reason?
What's the activity they're doing in your destination?
Is it for business?
Is it for leisure?
You can also look how they're traveling,
as a family, solo, or as a couple.
But also are they traveling by car or by train?
But you can also focus on whom is traveling
by looking at the age of your guests,
at the demographics, or geographic differences.
So really there's a large amount of element
that you can use to segment your guests.
But no matter how you decide to segment,
one element is really critical.
You have to be able to identify your guests
and you have to be able to reach them in a meaningful way.
As every channel has different costs related to it,
driving traffic to the most cost-efficient channels
can really have a big impact on your profits.
But allocating the right costs
to the right channel can be challenging.
With commission models, this is fairly easy,
but if we're looking at allocating
the right amount of labor cost to a phone booking,
that gets more difficult.
Diversifying your hotel sales channels
can really help you to target your segments more accurately,
and it also helps to create fences around specific rates.
On GDS, for example,
it's common practice to leave it corporate rates,
but you can also use promotions and packages
to limit and attract specific segments
to specific offers that you want them to see.
Where and when what offer and price is exactly displayed
is critical in revenue management
and is also where it moves into
distribution and channel management.
For the right product,
I really think it's critical to think not just room.
Clearly, the room a guest is staying in
will strongly influence his experience,
but it's not the only lever that you have.
Think of the overall value proposition that you're making
and what you can use to change and vary that.
Payment and cancellation conditions, for example,
can be used to offer flexibility,
and promotions can be used
to incentivize the same flexible traveler
to use different dates.
If we're looking at packages,
they can be used to either increase the value
without reducing the price,
but it can also be used to create
a premium product for your guests.
If you're looking at minimum lengths of stay,
we can fill shoulder days
and increase our overall stay revenue
without changing a price.
If you want to take this even further,
you can consider attribute-based selling,
where every aspect of the stay and the room
can become an attribute with a price tag.
This way the guest can exactly select what adds value to him
and what he's willing to pay for,
or in other words, the first steps
to unbundling the hotel experience.
Different guest segments can book
at different moments in time.
So defining when you start selling and on what channel,
but also when you change your prices
and conditions can be critical.
A great tool here is the pickup curve
that helps to visualize the guests' behavioral pattern.
The pickup curve has lead time on one axis
and the occupancy of the hotel on the other.
It can either be created for a specific day in the future,
but it can also be used as an aggregate
to understand more global booking behaviors.
The goal would be to get to 100% occupancy
only on the day of arrival.
This way you can get a premium price
and you don't sell out
if there is still demand in the market.
Art and science.
This part might be slightly controversial.
Most definitions only focus on the data-driven,
rigorous analytical aspect of pricing,
and I completely agree that that is the base,
that's where we have to start.
We have to gather as much data as possible,
we have to transform it into actionable information,
and then use that as a decision base.
But I think there is more to great revenue management
that is less tangible.
The art part for me refers to the relationships.
We work and we host humans
in this beautiful industry of ours,
and I think it's important that we never forget that,
not even when calculating prices.
Even if you could charge five times more
for your room during a Taylor Swift concert,
should you do that?
If you purely look at matching supply and demand,
optimizing your prices probably should,
but what's gonna be the guest experience
and also what's gonna be the long-term impact
on your reputation?
Do you really quote the 30% higher price this year
to a longtime loyal guest
just because he cannot arrive on Sunday
or do you compromise with him?
These are just a couple of examples,
but I think it's important to keep them in mind
and see if we can also allow
a little bit of art in this area of the hotel.
Now that we've looked at the definition,
here are three critical indicators for revenue management
that you should know.
The occupancy rate looks at how busy your hotel is.
You take the sold rooms and you divide them
by the total available rooms in the same period.
The average daily rate looks at on average
how well you could sell the rooms.
You take the total revenue that you made
and you divide it by all of the rooms sold.
The revenue per available room, or RevPAR,
is really a great basic indicator
for your hotel's performance,
and it is created by combining
the two elements from before.
It's calculated by taking all of the room revenue
and dividing it by all the available rooms
from the same period.
Last but not least, let's talk about technology.
We can't really talk revenue management
without discussing tech.
Many of the data-heavy, rigorous analytical parts
can be greatly simplified and even automated
with software tools.
I would separate the tools on the market into two types.
We have decision making tools
that are here to provide data and visualize it
and help the hotelier to set prices.
This is an absolute must,
because without data from your organization,
but also from the market, you can't make any decisions.
The second type are revenue management systems, or RMS.
They differentiate themselves from the first type
because they actually make specific price suggestions
and even allow for full automation.
Again, here there is a big range
of different tools on the market.
Just like revenue management system as a discipline,
also the softwares were often developed
initially for big hotel chains.
This is also clearly reflected in the market,
because there are a lot
of very big, powerful tools out there.
They might, however, not always be easy to use,
but also manage and pay for
for smaller or independent hotel properties.
Over the past years,
we've seen a lot of RMS tools come into the market
that are clearly focusing
on a simpler approach to price optimization
and that are targeted to smaller hotel organizations.
One way they do that
is by focusing on future and market data.
In a classic configuration,
the RMS would be connected
to the property management system of the hotel,
where it can get the past and future data
and push back the generated prices.
And then in turn, the PMS would forward these prices
to the channel manager and onto the online world.
A different approach that is especially interesting
for properties working with legacy PMS
is to connect the revenue management tool
directly to the channel manager.
This implementation will allow you to be online much quicker
and benefit from optimized pricing.
However, it is limiting the data you're using
and also excludes the PMS from the price updates.
Revenue management is such a large topic,
and I'm sure any of the points we mentioned today
could be its own video.
So if you're still curious and you wanna learn more,
you could check out our video content and also livestream,
but I can also highly recommend
the introduction course that DCT Online Academy offers.
I'll put the link down below.
Thank you for watching.
That's it.
I appreciate you and I'll see you in the next one.
(upbeat jazz music)
(music fades)
5.0 / 5 (0 votes)