Revenue management in the hotel industry- Basics

Summary

This 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

00:00

🏨 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.

05:02

📈 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.

10:04

📊 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.

Keywords

💡Revenue Management

Revenue management is a strategic approach used by businesses, particularly in the hospitality industry, to optimize profits by managing the price and availability of products or services. In the context of the video, it specifically refers to finding the optimal price for hotel rooms each night. The video emphasizes the importance of applying revenue management to maximize a hotel's revenue, which is critical for independent properties that may not be using it effectively.

💡Optimal Price

The optimal price in revenue management refers to the best possible price at which a product or service can be sold to maximize revenue. The video discusses how revenue management aims to find this price for every room for every night. It's about balancing supply and demand to ensure that rooms are sold at a price that maximizes profit without leaving potential revenue on the table.

💡Perishable Goods

Perishable goods are products that cannot be stored and have a limited shelf life, such as fresh food or, in the case of hotels, a room for a specific night. The video uses this term to illustrate the urgency of selling hotel rooms, as an unsold room for one night cannot be sold the next day, unlike a physical product that could be stored for future sale.

💡Fixed Inventory

Fixed inventory refers to a limited and non-adjustable supply of a product or service. In the video, hotel rooms are described as having fixed inventory because the number of rooms available does not change rapidly. This concept is crucial for understanding why revenue management is necessary—to match the fixed supply of rooms with the variable demand.

💡Time Variable Demand

Time variable demand indicates that the demand for a product or service can change over time based on various factors. The video explains that hotel demand fluctuates due to seasons, holidays, weather, and events, which necessitates the use of revenue management to adjust prices and strategies accordingly.

💡Segmented Market

A segmented market is one where customers are divided into groups based on their distinct needs, motivations, or behaviors. The video discusses how revenue management can be used to target different market segments, such as business travelers versus families on holiday, allowing hotels to tailor their offerings and pricing strategies to meet the specific needs of each segment.

💡High Fixed Costs

High fixed costs are expenses that do not change with production volume or the number of units sold. For hotels, these include overheads like rent and utilities. The video mentions that revenue management is critical in the hotel industry because it helps distribute these high fixed costs across as many paying guests as possible by maximizing occupancy rates.

💡Right Product

The 'right product' in the context of the video refers to offering the most suitable accommodation options that meet the specific needs and preferences of different customer segments. It's not just about the room itself but the entire package of services and experiences that can be tailored to enhance the guest's stay.

💡Right Channel

The 'right channel' in revenue management refers to the most effective sales and distribution channels through which a hotel can reach its target customers. The video discusses the importance of using the right channel to reach customers at the right time, such as online travel agencies, direct bookings, or corporate partnerships.

💡Right Price

The 'right price' is the optimal price point at which a product or service should be sold to a specific customer segment through a specific channel at a particular time. The video explains that setting the right price is a complex process that involves understanding customer willingness to pay, competitive pricing, and market conditions.

💡Right Time

The 'right time' in the context of revenue management for hotels refers to the optimal moment to sell a room to a customer. The video discusses how understanding booking patterns and lead times can help hotels adjust their pricing strategies to capture the highest possible revenue for each room.

💡Occupancy Rate

Occupancy rate is a measure of how frequently a hotel's rooms are filled with guests. It's calculated by dividing the number of rooms sold by the total number of rooms available. The video uses this metric as one of the key indicators of a hotel's performance, highlighting its importance in revenue management.

💡Average Daily Rate (ADR)

Average Daily Rate (ADR) is a key performance metric in the hotel industry that represents the average price at which a hotel sells its rooms. The video explains that ADR is calculated by dividing the total room revenue by the number of rooms sold, reflecting the hotel's ability to sell its rooms at a profitable rate.

💡Revenue Per Available Room (RevPAR)

RevPAR is a crucial metric in revenue management that combines both occupancy rate and ADR to provide a single figure representing the total revenue generated per available room. The video emphasizes RevPAR as a key indicator of a hotel's financial performance, as it reflects both how well a hotel is filling its rooms and the rate at which they are being sold.

💡Technology

Technology plays a significant role in modern revenue management, enabling hotels to collect, analyze, and act on data to optimize pricing and demand. The video discusses the use of decision-making tools and revenue management systems (RMS) that can automate and simplify the complex analytical processes involved in setting room prices.

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)