Revenue management: What it is and what it’s not
Let’s start with a few basic revenue management concepts before we look at how to increase revenue with the right KPIs, strategies and platforms.
Revenue management vs yield management
The terms revenue management and yield management are often used interchangeably, but they are actually very different concepts.
Put simply, revenue management within the hotel industry is all about selling the right room, to the right client, for the best price, through the right distribution channel, in the most cost-effective way possible. And all this ultimately comes down to one core strategy: using performance data and analytics to accurately predict demand and consumer behaviours. The aim is to use this data to anticipate market trends and make strategic decisions that optimise your hotel profit margin and distribution channels so that you can generate the highest possible rate of revenue growth.
Yield management, in contrast, is a variable pricing strategy based on the concept of understanding, anticipating and influencing consumer behaviour. Rather than looking at your overall revenue, yield control focuses on specific revenue streams (rooms, minibar, hotel restaurant, etc.) and how you can influence consumer behaviour and find the right balance between profit and fair pricing.
The purpose of revenue management
The ultimate purpose of revenue management is to maximise the money your business generates. It’s all about creating a more profitable business through effective budget management and data-driven strategies that focus on anticipating and reacting to market trends. And this has never been more important, especially given the fluctuating and unpredictable nature of the market since the start of the Covid-19 pandemic.
In fact, revenue management is now being recognised as one of the key levers of business success, to the extent that stakeholders and shareholders are demanding updates in their QBRs and annual reports. Business owners understand that the secret to remaining competitive is responding effectively to these market fluctuations and using the right data to make informed decisions relating to business, staffing, and budgets.
And all this means that revenue management is the key to maximising profit and building a successful business.
How to calculate revenue
When it comes to revenue management, data is your most valuable asset. The right metrics and analytics can help you understand your market and identify demand trends and opportunities for improvement. They can help you make accurate and informed strategic decisions based on data that boost the revenue that your hotel generates.
Let’s take a look at some of the most valuable KPIs that you should be tracking on a daily basis as a revenue manager or hotel owner.
RevPAR stands for revenue per available room, and it is the most important hotel metric for a revenue manager. The formula helps you understand how many rooms you have sold at any given time, and how much revenue your bookings are generating for your hotel. Tracking this metric can help you maximise your revenue per room and optimise your hotel’s overall performance.
There are two ways to calculate RevPAR.
Either divide your total room revenue by the number of rooms:
Total room revenue / Total rooms available
For example, if there are 90 sold rooms (90% of your availability) with an ADR of $100 gives you a total revenue of $9,000, divided by the 100 total available rooms, resulting in a RevPAR of $90.
$9,000 / 100 = RevPAR $90
Or multiply your occupancy rate by your ADR:
Occupancy rate x ADR
For example, if there are 100 rooms available with an occupancy rate of 90% and an average daily rate of $100, the formula would be.
0.90 x $100 = RevPAR $90
Revenue management KPIs
As valuable as the RevPAR formula is, you should always use it in combination with other revenue management KPIs to get a fuller picture of your hotel’s performance (as RevPAR doesn’t take other factors into consideration such as expenses).
This should include:
- Occupancy rate: the number of available rooms in a hotel that are occupied at any given time
- ADR hotel: your average daily rate
- TRevPOR: revenue per occupied room (takes into account all revenue generated from an occupied room, including room service and laundry service, for example)
- TRevPAR: total revenue per available room, regardless of whether those rooms have actually been occupied. Also includes money spent in the restaurant, at the bar, etc.
- NRevPAR: net revenue per available room, which takes into account distribution costs associated with selling a room.
- ARPA: average revenue per account, used to show the average amount of revenue generated per customer account over a given period.
- GOPPAR: gross operating profit per available room, regardless of whether they are occupied or not.
- EBITDA: earnings before interest, taxes, depreciation, and amortisation, used to measure a hotel’s overall financial performance
Total revenue is the total income that your hotel generated from all sales, including rooms and ancillary services. This KPI is vital for measuring the overall financial health of your company. The larger your total revenue is, the more money your hotel is generating.
The formula is simple:
total revenue = (average price per service sold) x (number of services sold)
All the metrics and KPIs we’ve just seen ultimately serve to paint a picture of the overall rate of revenue that your hotel is generating. Understanding each revenue KPI and knowing what adjustments you need to make, and when, is the key to revenue generation.
It’s important to understand that the most effective revenue generation strategy is built around data. It’s all about knowing that every action you take has a corresponding reaction. By understanding these reactions you can create the right strategy to get the results you want: maximum revenue.
Revenue maximising: strategies and how to do it
We’ve looked at the importance of having the right data. Now let’s take a look at some of the revenue management strategies you could use, in conjunction with this data, in order to maximise the revenue that your hotel generates and achieve better financial results.
The following strategies all rely on a range of methods including forecasting, competitor analysis, market segmentation, and pricing strategies.
Tactical vs strategic
The first important step, before you can implement any revenue management strategies, is understanding the difference between strategy and tactics.
A revenue strategy is a plan you design in order to reach a specific goal. This might be increasing direct bookings, improving conversions, attracting new markets or shifting segmentation, for example.
Tactics, in contrast, are concrete actions you take in order to achieve the goal you establish in your strategy. This might be relaunching your website or exploring alternative booking channels, for example. Basically, it is the specific steps you need to take as part of your wider strategy.
We bring this up because a common pain point for revenue managers is finding the time to focus on long-term strategy rather than tactics.
How much time do you spend on strategy vs tactics?
Tools like Beonprice can help you shift the balance so that you can reduce the time spent on tactics and focus more on your strategic vision, instead. More on this shortly. First, let’s take a look at those all-important revenue management strategies.
An effective strategy for optimising your prices is market segmentation. This is where you divide your customer base into different demographics, analyse their behaviours and booking habits, and then attempt to create tailored segment pricing for each customer type. For example, you could charge business guests lower room rates because you know you are likely to recoup your money from their use of your corporate facilities.
In the end, you need to identify your most profitable guest. You don’t need to create services for all your potential segments, but focus on the most profitable for you in terms of customer acquisition costs, distribution costs, as well as behaviour, average spend, lead time, RevPAC, etc.
Competitor analysis can be another great strategy for boosting your revenue. Basically, this strategy involves evaluating the strengths and weaknesses of your competitors and adapting your own strategy in order to gain a competitive edge. This helps you find your position in the market and the data you collect gives you the insight you need to make smart revenue management decisions. For example, you might identify a gap in the market and then create upselling or cross-selling strategies to address this opportunity and boost your revenue streams.
Forecasting is one of the most important tools on a revenue manager’s belt. Put simply, it’s the process of analysing past and present customer trends in order to make future demand predictions. You can then use your revenue management forecasts to make strategic decisions that align with anticipated behaviours and predicted levels of demand. For example, if your forecast predicts that there will be a spike in demand over the next month, you can adjust your housekeeping and restaurant budgets accordingly in advance.
One of the core objectives of revenue management is price optimisation. This means creating a fair pricing strategy that attracts customers to your hotel but also makes you a profit.
There are many different types of pricing strategies.
This includes strategies based on:
- Competitor pricing
- Guest type
- Loyalty programmes
- Length of stay
- Hotel cancellation policy pricing strategies
- Upselling, cross-selling, and rate-parity strategies
Your pricing strategy also needs to be fluid. It needs to take into account market supply and demand, time of year, your different segments and your competitors. For example, you need to know when demand is going to be high so that you can charge more but allow for discount pricing when demand is low so that you still fill your rooms. It’s all about finding the sweet spot at any given time. This is where the right pricing tool or pricing optimisation software can prove invaluable. More on this shortly.
Revenue optimization software: types and how to choose the best one
Let’s finish this guide by taking a look at the revenue management tools and software solutions that will help you collect the data you need in order to create a strategy for maximising revenue and profits.
Most revenue managers use an RMS (revenue management system) connected to a PMS (property management system), but there are other software solutions that can also have a positive impact on hotel revenue.
Revenue management system
A revenue management system (RMS) is a form of hotel management software that enables you to collect all the data you need in order to make informed strategic decisions that generate maximum revenue for your hotel. The right system enables you to track performance data in real time and create realistic and accurate forecasts so that you can anticipate demand and make the necessary adjustments to your pricing strategy in order to maximise the revenue that your hotel is generating.
What to look for in an RMS system:
- Forecasting management tools
- Pricing systems
- Integrations with third-party software
- Channel management
- Cloud-based reporting
- Data visualisation
It’s important to pick an RMS that understands the changing nature of the hospitality industry. For example, we are now seeing a shift to a new type of revenue management model known as total profitability. Our Total Profit Platform has been designed in response to the hospitality industry’s need for more advanced revenue management tools focused on this concept of total profit. That is why our Total Profit Platform includes a state-of-the-art revenue management solution for hotels, as well as a selected set of partner applications, allowing you to analyse and optimise beyond a simple revenue per room calculation, taking into account additional streams from each and every touchpoint during a guest’s stay, such parking, lounges, meeting spaces, restaurants and spas.
Beonprice’s RMS relies on an advanced algorithm that understands how weight should be given to historical data at any given time, in line with changes in customer behaviour and predicted demand trends. What’s more, our HQI™ (Hotel Quality Index) takes into account the strategies and behaviours of your competitors, providing you with improved price elasticity and more detailed forecasting abilities.
Property management system software
Having access to a reliable property management system (PMS) is another vital element of effective revenue management. A PMS is a centralised software application that you use to organise, schedule and perform the day-to-day functions and transactions involved in selling accommodation. In other words, it streamlines your reservation and administrative processes so that all data is centralised, and everything runs more smoothly and efficiently. Common features include tools for front-desk operations, reservations, channel management, housekeeping, rate and occupancy management, and payment processing.
Hotel rate shopper
A hotel rate shopper is a software solution used to monitor online room rates. It allows you not only to compare your pricing strategies to those of your competitors, but also identify and monitor any rate disparity in your distribution channels. This includes both the rates that third-party platforms are offering for your own hotel, as well as those being offered by your main competitors.
Hotel pricing data is collected from a variety of sources, including major OTA platforms (such as Booking.com and Expedia), metasearch engines, price comparison engines, and hotel-branded booking engines.
Other hotel management software that impacts revenue
There are many other hotel management software solutions on the market that can help you generate optimised revenue for your hotel. This includes central reservation systems, log and event manager software, channel management software, housekeeping management software, accounting and finance software, online hotel booking systems, and HRIS systems, upselling and cross-selling software, direct sales tools, amongst others.
All these solutions can give you access to the internal and external data you need in order to understand market supply and customer demand and, ultimately, calculate the ideal rates for your rooms. However, without a doubt, the solution that can provide you with real-time access to the widest variety of data and analytics is revenue management software.
At Beonprice, we understand that true, long-term success depends on creating the right conditions for your revenue management model to succeed. This means having access to the right data for your revenue team to analyse on a daily basis so that you can stay ahead of forecasted market trends, build the right revenue management culture, and create effective revenue procedures that leverage your data and help you create long-term revenue strategies built for success.