Whether your hotel is highly successful or struggling to get by, if you aren’t using revenue management techniques, you are leaving money on the table. Still, only a few hotel operators put a revenue management system into place. In this post, we’ll tell you what revenue management is and give you some concrete steps that you can take to ensure your property is operating at its maximum revenue potential.
What is Revenue Management?
The term revenue management sounds a bit vague. Every business with revenue manages its revenue, right? Revenue management doesn’t mean balancing your books or weighing investment opportunities versus the need to save money. Rather, it refers to a more specific, fine-grained control over the methods through which your hotel makes money. It takes the old, static way of setting prices and managing bookings and replaces it with a data-driven dynamic method that aims to always be maximizing the use of your property.
Let’s take a look at some of the major strategies used in a good revenue management system and how each of them can help to increase your hotel’s bottom line.
The most obvious way to maximize your revenue is to optimize your pricing. There are several pricing strategies that a good revenue management system can make use of. The most important factor is that your prices aren’t static. Prices that don’t adapt to the situation in one way or another are not going to bring in the most revenue. Let’s look at three common ways prices are set in successful revenue strategies:
Everyone knows that prices are set by balancing supply versus demand. But what few hotel operators take advantage of is that supply and demand are in constant fluctuation in the hospitality business. Some hotels will certainly price differently for the busy season than they do for the slow season, and that helps, but with modern tools, we can go further to adjust to changing demand by setting flexible prices for specific services based on the current and specific market demands.
Modern revenue management tools do this by looking at the pricing of the competitors in your area, then the tool is able to adjust your pricing automatically, ensuring that travellers looking for the best price, in your area and on that particular day see your hotel.
Even without modern tools, you can make simple changes to your pricing that will increase your revenue. Are your rooms close to being all booked up? Raise prices. Struggling to get guests into the hotel? Lower prices. Using this simple metric, you can update your pricing weekly or even daily. When you combine that concept with the analytics that today’s technology puts at your disposal, you can adjust prices hourly if you wanted to. The types of rooms people are using, the days they are using them the most, the channels that are doing the most or least business, all of these are variables in your supply and demand equation that are used to dynamically fit your prices to the real-time market demands of your business.
According to Xotels by applying dynamic pricing, a 5* Luxury Grand Hotel in Italy, part of the Leading Hotels of the World, increased their ADR by 24% and RevPAR by 39%.
Dynamic pricing is something that every hotel operator should be using, but there are other techniques that can be used in conjunction with it to extract further revenue from your property. Guest-segment pricing steps away from the demand on your business as a whole and takes a look at the demand from individual segments of your guest base. Businesses may be more likely to visit your hotel during one season, families in another, and single occupants in yet another. This example, and nearly any way you can divide up your customers into segments, is a perfect way to further play with the amount you charge so you are getting the most you can from each booking.
You can see examples everywhere: Student prices at hostels, senior discounts for cruises, people who use discount coupons, and so on. Airlines are the leading industry when it comes to excellent price segmentation; rarely do two passengers ever pay the same price for a ticket.
When you book longer duration stays, you increase your chances of being fully booked. By giving a discount to guests who book longer stays, hotels can decrease the chances that they’ll have extra rooms sitting idle instead of earning money. Furthermore, these pricing bundles can group poorly performing days with better performing days to provide another incentive for guests to bring revenue into your hotel when rooms would otherwise sit idle.
Here you can see an example of how Hyatt Hotels & Resorts does this. The standard rate for Hyatt Centric Las Olas Fort Lauderdale in Miami is $179 USD per night but if you book for a long term stay, more than 10 nights, the rate is reduced to $144 USD per night.
We’ve already discussed how corporate guests may be more likely to visit during one time of the year than families or other walk-in guests. There’s an opportunity for revenue boosts beyond adjusting prices for those segments during those specific times. Let’s say you have a conference or other big group that wants to come in during the time that your walk-in business is usually the highest. Is it in your best interest to take the booking, or will you be taking rooms out of circulation that could command a higher rate?
The process of determining whether a group booking is more or less likely to increase your revenue based on the current prices and demand is called displacement analysis. Doing this type of analysis before blindly accepting large bookings can help prevent you from accidentally causing your hotel to miss out on the chance for higher revenue.
The concept of adjusting pricing depending on the duration of the stay can be combined with the concept we just discussed about knowing when it’s in your best interest to decline a booking. Stay controls set restrictions on how long guests can book a room for, or when they can check in to a room. Done correctly, this allows you to even out your occupancy so you are making the most of the rooms you have available. There are three common stay restrictions used by good revenue management strategies:
Minimum Length of Stay
If you are in a period of high demand, you can fragment your bookings and reduce your chances of reaching full occupancy if you take on too many guests for a single night or two. It may make sense for your hotel to put a minimum length of stay in place during these periods. You must be careful not to misjudge demand though. You don’t want to end up with empty rooms that could have been filled because you botched an attempt to do the opposite.
Minimum stay rate plans are usually promoted by saying something like “Stay 3 nights get 10% off”.
Maximum Length of Stay
You may have a period of high demand, one that can command maximum rates, that you know will be short-lived. This could happen, for example, if a big event is in town that will bring in a lot of people. If you have people booking at the usual low rate and extending their stay into this period that provides an opportunity for higher revenues, you’ll be leaving money on the table. Putting maximum lengths of stay in place can help to ensure that your hotel has rooms available when the higher-dollar bookings become available.
Example: Is there a football match near your hotel this weekend? Do you know your hotel is going to get lots of bookings as a result? Then limit new bookings to the Friday preceding the weekend. This ensures that you can take maximum advantage of the queries you get from football fans.
City hotels also use maximum length of stay strategies to avoid long-stay ‘ghost’ reservations which are used for obtaining a Visa or other shady practices. This will prevent your hotel from turning away paying guests for scammers with fake credit cards.
Closed to Arrival
This one is more rarely used but can still present an opportunity. If you are expecting a high number of guests to extend their stay, you can restrict check-ins on that day so you have rooms available for those extensions and you aren’t adding to the already extremely high demand that your front desk will be facing. This control, even more than the others, must be used with caution. Unless you know the demand is very high, you’ll be losing revenue instead of increasing it.
Example: Let’s say your hotel has a conference booked and is in a great location for skiing. If your conference guests are all due to check out on Friday and there is a good snowfall forecast, they are likely to extend their stay for one or two nights and hit the slopes. So you close off a percentage of your rooms in anticipation of your guests extending their stay for a few extra nights. Keeping guests happy and grabbing some extra revenue for the hotel.
Every hotel has a certain percentage of guests that don’t show up for one reason or another. Each one of them represents lost revenue. By overbooking for the amount you expect to lose out on, you’ll still be maximizing your occupancy. Many hotels are rightly fearful of aggressively overbooking. If you calculate wrong and all the guests show up, someone has to be turned away, and this usually means paying to put the overbooked guest into a competitor’s hotel! With modern technology, it’s much easier to accurately forecast how many people will end up not showing. In addition to modern technology, it’s important to remember that there are two completely different types of overbooking technique: no shows and cancellations, explained below.
These are people who don’t show up for their room when they are supposed to. No shows catch you by surprise, and if you don’t overbook, they leave you with a room sitting idle when it could be bringing in revenue. These should be calculated separately from cancellations, partly because they are a different type of missed booking and will involve different rates. Treating them the same will increase the chances that you’ll have to walk a customer over to your competitor. But they should also be treated separately because the heads-up you get from cancellations – may be a window of several days or more – gives you an opportunity to maximize revenue.
Most hotels set a deadline for when a guest can cancel their reservations without incurring a penalty. The most common deadline is 24 hours before check-in. However, management should make the decision that makes the most sense for your specific hotel. Some hotels set a 48 or 72-hour deadline, and during peak periods some hotels require guests to cancel a week prior to their booked stay. Hoteliers and revenue management software generally have a good idea of how many cancellations to expect based on their experience and data respectively. For example, if a company books a conference for 500 people at a large business hotel, 10% of the guests are likely to cancel, whereas, if you are a family resort, with a strict no refund policy, cancellations are more likely to be around 1%.
Online travel agencies can be a great way to sell unsold inventory, but they are less profitable than direct sales. If your direct channels are doing well, you can scale back on the number of rooms you make available to OTAs. Once you’ve used the OTA to book a guest, you should have a strategy in place to encourage that guest to book directly with you in the future. Used this way, OTAs function as lead generators when you need them, rather than permanent strains on your revenue.
Revenue Management Technology
Revenue management comes down to three basic principles, know who your customers are, know when they are coming and then optimize your rates to maximize profits. With the right technology solution like protel’s end-to-end hotel management software, you can easily integrate to any one of several revenue management tools that will make optimizing your hotel’s revenue fast and simple.