Managing Hotel Revenue - Essentials with Practical Guide
Want to boost your revenues? Find out about the essentials for managing hotel revenues and increase profits using this Practical Guide.
Creating memorable experiences is fundamental to your hotel’s success. However, increased competition has made revenue growth and profitability equally important.
That’s why we’ve created this guide, which brings together tips for creating the right revenue strategy for your establishment, so that you can devote more time to offering great service to your guests.
With the right revenue, you can be sure that your hotel is growing in the right way and that you are offering your guests the best possible experience. Read this guide to find out how to create a revenue strategy that is both profitable and memorable.
What is hotel revenue management?
Hotel revenue management is a complex task involving several factors. Firstly, you need to predict demand, i.e. know the profile of potential customers and their buying habits.
Secondly, you need to adjust prices and inventory according to this demand, in order to get bookings from the most interesting travelers for the hotel. All this is done with the aim of increasing the establishment’s gross revenue.
As a result, hoteliers are finally adopting revenue management as a central concept for setting prices. Revenue management is a flexible pricing approach that considers the perishability of inventory and the value of each traveler.
This concept naturally applies to hotel inventory, which is also perishable. A room that becomes vacant today cannot be sold tomorrow. Likewise, a room sold today cannot be sold at a higher price tomorrow.
The airline industry was quick to adopt and improve the concept of revenue management, but the hotel industry was slow to do so. The main reason was that fragmented systems and ownership models made it difficult for hoteliers to compile and analyze the right data.
This is changing now, as hotel management systems become more integrated and data analysis algorithms become more robust. As a result, hoteliers are finally embracing revenue management as a core pricing concept.
Why is revenue management important?
Every day, hoteliers face rising operating costs and competition. The good news is that with a revenue management strategy, it’s possible to maintain profitability and increase revenue, even if it’s not possible to increase the number of rooms.
Introduction to revenue management
To manage your hotel’s revenue, it’s essential to keep track of supply and demand for your rooms. There is no single “right” way to manage revenue. Depending on the circumstances, it may be interesting to study these possibilities:
- Keeping track of room supply and demand: this means monitoring the number of rooms available and the number of guests you have. If demand is greater than supply, you can increase prices. If supply is greater than demand, you can lower prices to attract more guests.
- Offer discounts and promotions: one way to increase demand is to offer discounts and promotions. This can be done according to the time of year or for guests who book in advance.
- Manage length of stay: another way to manage revenue is to control the length of stay of guests. If you have a hotel in a tourist area, you can offer discounts to guests who stay longer.
- Offer extra services: another way to increase revenue is to offer extra services, such as parking, laundry, babysitting, etc. These services can be charged separately or included in the price of the room.
- Manage the occupancy rate: the occupancy rate is the proportion of occupied rooms in relation to the number of rooms available. It is important to monitor the occupancy rate to ensure that the hotel is always well occupied.
- Offer packages: another way to manage revenue is to offer packages to guests. These packages can include accommodation, meals, extra services, etc.
- Manage room availability: room availability is another important factor in managing revenue. If you have a lot of rooms available, you can lower prices to attract more guests. If availability is low, you can raise prices to maximize revenue.
- Offer differentiated rates: another way to manage revenue is to offer differentiated rates to guests. For example, you can offer a discount to guests who book in advance or to guests who stay longer.
- Manage capacity: capacity is the maximum number of guests the hotel can accommodate. It’s important to manage capacity to ensure that the hotel doesn’t become overcrowded.
- Offer differentiated services: another way to manage revenue is to offer differentiated services to guests. For example, you could offer a free breakfast to guests who book in advance or a free dinner to guests who stay longer.
Introduction to revenue management
A key element of any revenue management strategy is to divide the market of potential guests into groups based on their various characteristics. Some travelers prefer to book luxury rooms in advance, while others try their luck with last-minute deals.
Some customers are difficult to attract, while others are a regular source of business. Understanding the behavior of traveler segments will help you select the right guests for each season and predict how their stay will affect your hotel’s profitability. Start by considering:
- Length of stay
- Days of the week
- Total revenue per room
- Total revenue per guest
- Booking period/window (how far in advance reservations are made)
- Cancellation rate (how often reservations are canceled)
- No-show rate (how often guests don’t check in)
Demand forecasts for the hotel
Restricted demand is the number of guests you can serve in a given period. For example, if your hotel has 100 rooms, your restricted demand is 100 guests per day.
Unrestricted demand is the total number of guests who would be willing to stay at your hotel in a given period if the supply (number of rooms) were unlimited. Competitive baskets are the groups of products and services that guests consider equivalent and are willing to buy instead of others.
For example, a guest might be willing to buy a hotel room that includes parking and Wi-Fi, rather than a hotel room that offers neither of these services.
What is a competitive market basket?
A competitive basket is a group of hotels in which your direct competitors are considered and which you can use as a benchmark.
The information in the competitive basket can help you anticipate the strategies of other establishments in order to make the appropriate adjustments. The competitive basket is made up of those hotels that offer the same services and products as yours, to the same target audience.
It is important to consider the location, type of structure and services offered by competitors, as well as the rates charged. Information on the competitive basket can be obtained through market research, analysis of historical data and customer feedback.
Analyzing this competitive basket is important so that your hotel can differentiate itself from the competition and gain more market share.
How to identify a competitive market
To get the most out of your competitive basket, it’s best to select competitors that are similar to your establishment.
We recommend that you include five to ten competitors in your basket. However, you can have several competitive baskets for different purposes, such as seasons.
How to anticipate demand
To identify opportunities in different periods of demand, you need to make forecasts by day and by segment. Whether you’re working with historical data or complex computer algorithms, the key to accurate forecasting is to use reliable numbers.
We suggest using data from all channels, including your hotel’s website, booking sites and your Channel Manager, if you have one. Some booking sites offer technologies that help you predict demand, so remember to check out the tools you have at your disposal.
In addition, collecting data for past customer stays can be an asset both for demand forecasting and for your staff, as this information helps to improve customer service at reception and offer a personalized experience to guests.
Managing inventory
Managing a hotel’s room inventory is a complex process that requires a lot of attention and control. You have to decide how many rooms to allocate to each sales channel, how and when to restrict business and which customers to accept.
All of this must be done in such a way as to maximize the hotel’s profit, while still meeting the needs of guests.
Managing inventory and financial success
The financial success of a hotel depends on a balance between high-yield guests in the short term and low-yield guests in the long term.
If you turn away low-yield guests, you could end up compromising important relationships for your establishment. Without these solid relationships with guests, you may struggle to fill rooms and generate revenue in periods of low demand.
Managing inventory and guest experience
Poor inventory management can have a negative impact on the guest experience. If you don’t manage reservations well, you can end up overbooking and consequently having to relocate a guest to another hotel. As well as being costly, this can affect the relationship with the guest.
Hotel performance measurements
The most important metrics for monitoring a hotel’s performance are:
- ADR (Average Daily Rate): the average rate per available room;
- RevPar (Revenue per Available Room): total revenue divided by the number of available rooms;
- GOPPAR (Gross Operating Profit per Available Room): the gross operating profit divided by the number of available rooms;
- Cost per Available Room: the fixed and variable costs divided by the number of available rooms.
- These metrics are important because they help you monitor the performance of your revenue management strategy. They show whether you are managing to increase the average rate per available room (ADR), increase total revenue (RevPar) or decrease costs (Cost per Available Room).
In addition to these metrics, you can also monitor occupancy rate, average occupancy rate and maximum occupancy rate. These indicators help you understand the demand for rooms in your hotel and whether you are managing to meet demand.
To get the best results, you should monitor these hotel metrics regularly and make adjustments to your revenue management strategy as necessary.
What is occupancy tax?
Hotel occupancy rate is an important metric for evaluating your establishment’s performance.
If your occupancy rate is low, it could indicate that guests are finding better options for a similar price or that your hotel is not being well advertised. Whatever the reason, a low occupancy rate is a problem that needs to be addressed.
How to calculate your occupancy rate
To calculate your hotel’s occupancy rate, simply divide the number of rooms sold by the number of rooms available.
Occupancy rate (%) = rooms sold / rooms available x 100
For example, if your establishment has 100 rooms and you sell 80, your occupancy rate will be 80%.
80/100 x 100 = 80%
What is an average daily rate (ADR)?
The average daily rate is the average amount paid per room per day during a specific period. It indicates the average revenue from an occupied room.
This indicator does not include complimentary or free rooms or the revenue you receive from other services, such as food and drink. The average daily rate helps you understand your current operating performance in relation to that of previous periods or similar hotels.
You can then make informed decisions about strategic pricing and promotions. However, as the average daily rate does not take into account other income or expenses, it is not useful for giving you an idea of your overall performance.
What is RevPAR?
RevPAR, or Revenue Per Available Room, is a key metric in the hospitality industry used to measure a hotel’s ability to fill its available rooms at an average rate. It’s calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate. Alternatively, it can also be found by dividing the total room revenue by the number of available rooms. RevPAR helps hotel managers evaluate their performance compared to competitors, optimize pricing strategies, and maximize revenue.
How to Determine if Your RevPAR is Good
To assess whether your RevPAR is strong, consider the following factors:
Benchmarking Against Competitors: Compare your RevPAR with that of similar hotels in your market or competitive set. A higher RevPAR relative to competitors typically indicates a stronger performance.
Historical Trends: Analyze your RevPAR over time. An increasing RevPAR year over year or month over month can signal effective pricing strategies and improved occupancy.
Market Conditions: Take into account the overall market conditions, such as demand, seasonality, and economic factors. A good RevPAR should align with or exceed market expectations.
Profitability: Ensure that your RevPAR growth aligns with overall profitability. A high RevPAR doesn’t necessarily mean higher profits if operating costs are not controlled.
By regularly monitoring these aspects, you can better understand and improve your hotel’s performance.
What is GOPPAR?
GOPPAR stands for Gross Operating Profit Per Available Room. It’s a financial metric used in the hospitality industry to measure a hotel’s profitability by considering both revenue and expenses. Unlike RevPAR, which focuses solely on room revenue, GOPPAR takes into account all revenue sources (like food and beverage, events, etc.) and subtracts the operating expenses to determine the gross operating profit.
To calculate GOPPAR, you divide the gross operating profit by the number of available rooms during a specific period. This metric provides a more comprehensive view of a hotel’s financial health, as it reflects the efficiency of both revenue generation and cost management. It’s especially useful for hoteliers who want to assess the overall profitability of their operations, beyond just room sales.
What is TRevPAR?
TRevPAR stands for Total Revenue Per Available Room. This metric is used in the hospitality industry to measure the total revenue generated by a hotel, divided by the number of available rooms. Unlike RevPAR, which only considers room revenue, TRevPAR includes all sources of income, such as food and beverage sales, spa services, and other amenities.
To calculate TRevPAR, you take the total revenue from all departments and divide it by the total number of available rooms. This metric provides a holistic view of a hotel’s revenue performance, helping managers understand the overall financial impact of their operations and identify opportunities for maximizing income across different areas of the business.
How to Implement Dynamic Pricing
Implementing dynamic pricing in the hospitality industry involves adjusting room rates based on real-time market demand, competition, and other influencing factors. Here’s how to effectively implement dynamic pricing:
Understand Your Market:
- Analyze historical data, including past occupancy rates, seasonal trends, and local events.
- Identify your primary competitors and monitor their pricing strategies.
Utilize Revenue Management Software:
- Invest in a revenue management system (RMS) that can automate price adjustments based on real-time data.
- The software should factor in occupancy rates, booking patterns, competitor rates, and demand forecasts.
Segment Your Customers:
- Differentiate pricing based on customer segments (e.g., business travelers, leisure travelers, group bookings).
- Offer tailored rates and packages to different segments to maximize revenue.
Set Rate Floors and Ceilings:
- Establish minimum and maximum pricing thresholds to prevent rates from dropping too low or skyrocketing beyond market tolerance.
- Ensure that your dynamic pricing aligns with your brand positioning.
Monitor Competitor Pricing:
- Continuously track your competitors’ rates to stay competitive.
- Adjust your pricing strategy based on their movements, but focus on maintaining your unique value proposition.
Incorporate Demand Forecasting:
- Use historical data and predictive analytics to anticipate future demand.
- Adjust prices in advance based on expected occupancy rates and external factors like holidays or events.
Communicate Value:
- Ensure that customers understand the value behind fluctuating prices. For example, higher rates might reflect peak season amenities or special events.
- Highlight the benefits and inclusions that justify the price.
Monitor and Adjust Regularly:
- Continuously analyze the impact of dynamic pricing on occupancy, RevPAR, and overall profitability.
- Be prepared to tweak your strategy based on market feedback and performance metrics.
By effectively implementing dynamic pricing, you can optimize revenue, improve occupancy rates, and stay competitive in a fluctuating market.
What to Avoid When Making Pricing Decisions
When setting or adjusting hotel prices, it’s crucial to avoid common pitfalls that could harm your revenue or brand reputation. Here are some key things to avoid:
Relying Solely on Competitor Pricing:
- Avoid copying competitors’ rates without considering your unique value proposition, costs, and market position. What works for them may not work for you.
Ignoring Customer Perception:
- Don’t neglect how price changes might affect your brand image. Sudden or extreme price hikes can alienate loyal customers, while significant price drops may suggest declining quality.
Overlooking Cost Structure:
- Avoid setting prices without accounting for your operating costs. Ensuring profitability means understanding all expenses, not just room costs.
Neglecting Market Conditions:
- Don’t ignore external factors like economic downturns, local events, or seasonality. Pricing decisions should be flexible and adaptable to changing market conditions.
Inconsistent Pricing:
- Avoid frequent and unpredictable price changes, which can confuse and frustrate customers. Consistency helps build trust and reliability in your pricing.
Failing to Segment Your Market:
- Don’t apply a one-size-fits-all approach to pricing. Different customer segments (e.g., business vs. leisure travelers) have different willingness to pay, and your pricing should reflect that.
Underestimating the Impact of Distribution Channels:
- Avoid ignoring the role of OTAs, direct bookings, and other distribution channels. Prices need to be aligned across these channels to avoid undercutting or overpricing.
Ignoring Long-Term Impacts:
- Don’t focus solely on short-term revenue gains at the expense of long-term profitability. For example, heavy discounting might fill rooms today but can damage your pricing power in the future.
Lack of Data Analysis:
- Avoid making pricing decisions based on gut feelings or outdated information. Data-driven decisions are crucial for optimizing revenue.
Overcomplicating Your Pricing Structure:
- Avoid making your pricing too complex for customers to understand. Clear and straightforward pricing helps in building trust and facilitates quicker booking decisions.