“ Revenue management is nothing more than a simple equation between supply and demand: your prices are defined by guests, and not the other way around.”
Revenue management, also known as yield management, started being used around the same time that commercial flights became popular. During the early 70s, airlines, especially those in the United States, offered special rates for travelers willing to purchase tickets ahead of time. While this was a form of revenue management, due to government regulation, airlines could not employ more creative revenue management strategies. Then, in 1981, Jimmy Carter signed into law an act that suspended the regulation of rates. Rates became a free trade practice. It was at this point that Revenue Management started being widely employed. Airlines began to apply Revenue Management in more detail and in new variations. This spread to hospitality, where Revenue Management, spearheaded by multinational hotel chains, started to come into widespread use. In the 90s, its use accelerated beyond large hotel chains into independent hotels, B&Bs, hostels and even vacation rental properties.
With the surge in revenue management came a new concept that allowed hotels to think differently about their revenue; RevPAR. The concept of RevPAR (Revenue per Available Room) revolutionized the way hoteliers analyzed their hotels’ production. The definition of ‘good results’ changed from having a high Occupancy Rate and high Average Daily Rate to focus on the actual Revenue generated for each room available for sale. Hotel managers noticed that, similar to empty seats on an airplane, an empty room or bed for a specific date equated to lost revenue that can never be recovered. A friend of mine, one of the pioneers of Revenue Management in Brazil, Rogério Rubim (formerly Sofitel and currently at Coral Hotels, Dubai) told me once: “RM is nothing more than a simple equation between supply and demand: your prices are defined by guests, and not the other way around.” If we think about it, this concept is present everywhere in our daily lives; namely, soda is more expensive at that vending machine by the beach during summer, movie sessions on Wednesday afternoons are cheaper, and happy hour specials from 4pm to 6pm are meant to attract a different set of customers from the late night bar goers.
One of the great myths of Revenue Management is that it can only be used during the high season as a way to increase prices. On the contrary, it is during periods of low occupancy that we can get the most benefit of existing demand! Revenue management is not just about raising prices, as said by Robert Cross (CHM & CEO at Revenue Analytics, Inc., considered a RM guru by The Wall street Journal) it’s about “[Selling] for [the] right price, to the right customer, at the right moment“. He also points out in his analysis that the expected increase in revenue after RM implementation is between 3% and 7% in the first year.
Despite the misnomer that revenue management should only be applied at large hotels, it is especially easy to apply revenue management at small hotels. It’s not rocket science. It’s not a specific job or role, or an expensive technology system; rather, it’s a collection of management techniques to be used on a daily basis with the objective of increasing revenue. It does, however, take a lot of focus, discipline, a good database of your hotel’s historical rates and availability, excellent analytical skills and a drive for getting results. Some basic knowledge about marketing, eCommerce and distribution also helps.
Currently, no hotel can compete in the market without proper inventory distribution (channel management). It is extremely important to sell online under one’s own website and social networks, to offer exclusive promotions and packages and, of course, to be well-positioned in search results on Google, and to distribute to the hotel’s relevant OTA (Online Travel Agency) portals. It is important that on a basic level the above distribution channels are covered. There are affordable systems that can help with this as well as consulting firms that can get your property going in the right direction. One last crucial point for a proper and successful revenue management strategy is to involve the whole team so that no opportunity for maximizing revenue is missed.
You may, for instance, develop internal training on how to up-sell and how to use overbooking techniques for revenue management (yes, overbooking can actually make you more money). These techniques require direct participation of all the Front Desk crew. Oftentimes the sales strategy must be changed to steer away from the outdated perception that “the customer only wants low prices.” This involves participation of the management team, the reservations team, and the sales team.
Guests focus on the value proposition delivered by your hotel and they are comparing your value proposition to those of other hotels on the market. Regardless of the price of your rooms on a given date, services still need to be provided seamlessly throughout your guests’ stay. There are many guest touch points (points where your hotel’s staff and your hotel’s functions contact a guest). These are all opportunities to make your guests’ experience positive. Your guests will share good comments, writes good reviews, recommend their friends and hopefully visit your hotel again.
There is no doubt that persistence is needed from your whole team in order to properly implement revenue management. Cultural changes needed for revenue management are more difficult to implement than revenue management itself. It’s not necessary or even recommended that changes be made in a revolutionary way. It’s important to change the way small, everyday decisions are thought about and made.
Let this be an invitation for you to break paradigms and maximize revenue. I guarantee that pretty soon you will be asking yourselves: “How did our hotel exist without revenue management?!”
Enjoy great sales!
Article by: Ana Carolina Monteiro, Hotel Optimization Manager at Cloudbeds
Ana graduated in Tourism with a specialty in Revenue Management. She has 10 years of experience in multinational hospitality companies and has been involved in all aspects of a hotel including managing a customer service department, receptions, reservations and room service, human resources management, staff selection and training, strategic planning, distribution channels, marketing and revenue management.
