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Hotel Revenue Management Strategies within the Industry

Donnchadh Tiernan

24 Nov, 2022

For many independent hotel managers or owners hotel revenue management or yield management is somewhere between Pandora’s Box and Aladdin’s Cave. It is the grail of the hospitality industry – the hotel business – but not quite as straightforward as a lot of people imagine it should be. Sure, there are bound to be wonders within but once you open it – that gradually getting dustier tome on your office shelf – you yourself are bound to follow through on whatever you learn there.

You’ve probably heard that nine out of ten Revenue Management software solutions are beyond complex. You might have heard that revenue management itself is somewhat incomprehensible. Well I’ve got good news and great news for you – which do you want first?

The good news is that yield management need not be the El Capitan of the mind that you’re making it out to be. There are a number of hotel revenue management strategies that could fit neatly into ones daily routine without much adjustment. Mostly, hotel revenue management strategies simply entail a bit of research here and a few parameters there and then you simply play the game.

The great news is I’ve put together a list of the most actionable hotel revenue management strategies I know of in order to set you off on the right path. It’s a path that leads to optimised demand, more of the right kinds of guests and more direct bookings.

Before we get going though, let’s try and answer some very basic questions.

What is a Hotel Revenue Management Strategy?

A hotel revenue management strategy is quite simply the most actionable means of making prize-winning dance partners of supply and demand when it comes to your business. It’s a data driven practice that aims to solve the problem of money left on the table when rooms don’t get sold.

In terms of the hospitality industry – and particular the hotel business it’s the only way to figure out a pricing strategy.

There are some that work well with others and others that like to stand alone but the bottom line of the whole concept is the use of data – often with the aid of technology – to get know your guests and property better in order to figure out the right room rates for the right time. If you get enough of them working for you – and working together – then you’ve got yourself a revenue management system and at that point there will be no stopping you.

What are the 3 strategic pillars of revenue management?

There’s a sturdy three-legged structure on which a revenue management system rests, if you can believe such a thing, and you don’t even need to be a revenue manager to understand it. Besides defying the laws of physics this foundation really offers you a sandbox to experiment within. Whatever you’re doing you need to ask yourself if what you’re doing falls within one of these three groups. If it’s working, it probably does.

1. Categorisation

As you’ll see later in this article when I begin to dish out the hotel revenue management strategies, assigning categories to various entities – guests, rooms, room rates, reason for travel – is very much the name of the game at the start.

Putting categories on potentially disparate elements puts a conceivable order on those elements. The action of building the categories for each thing involves a degree of research and getting to know that element better from top to bottom so that by the time you’re done whatever name you deign to give your category represents to you in a second all you’ve learnt in its formation.

If I’m trying to figure out the differences between big bananas and small bananas on a genetic level, you can be sure that by the time I’m done the words big and small will mean something slightly different to me. Like that, but with guests and rooms and room rates and reason for travel. It’s the essential starting point to any functional revenue management system.

2. Research

At a glance this one might seem very similar to point number one but give it a second and you’ll notice it deserves a point all of it’s own. Categorisation is the taking of entities that already exist – rooms, guests, etc. – and grouping them and labelling them. The research I’m proposing you get stuck into involves you getting to know the competition, looking into how you did last year and how you might do next year and how they might do. See what distribution channels worked for you in Spring and which didn’t, that kind of thing.

It interacts with point number one because whatever categories you land on for your guests and rooms will automatically fit into the contexts that emerge from your research. What about Hotel A makes them your competition in terms of the types of guests you get, for example. Do you think rooms like Room B will be in high demand during Musical Festival C next year?

It’s by examining the relationships between these entities that the real work of revenue management gets done in the hospitality industry.

3. Pricing

When I say the real work of revenue management I mean of course the setting of your prices – aka your pricing strategy. Why? Because not only is this the most crucial step of yours or any sales funnel in terms of consumer decision but it is the part that all going well makes you some money.

Remember before when I referred to revenue management as a dance between demand and supply? Well, pricing is the final move that might win you the competition. Sometimes the prize is a direct booking, sometimes it’s a booking through a distribution channel and sometimes it’s a loyalty program but if you know the steps well enough – if you run through the motions of the hotel revenue management dance on a nightly basis – and know how to pull off the pricing part you will see a difference in your takings and that’s where it counts.

What’s more is you don’t need to be revenue manager to make the right decisions in this regard, you just need the right strategy…

What are the strategies to increase revenue in a hotel?

It’s a very good and direct question. I can only presume it’s been on the tip of your tongue this whole time. And I’ve got good news for you with the answer. I’m not going to simply name some strategies. I’m going to name the best.

Best Hotel Revenue Management Strategies

1. Customer Segmentation

You probably know your typical guest better than anyone. Better again – you probably know your ideal guests better than anyone. By ‘ideal’ I’m not speaking about people who book your largest suites a year in advance and empty their mini-bars once a day. I’m talking about the kinds of people you like staying with you who you’d like to see more of and vice versa.

Customer segmentation is the practice of taking a broad view of your customer base – those in demand of what you can supply – and grouping it up into segments you can market and cater for specifically. You might give them a name, an occupation, an income bracket, hobbies – whatever you like. It’s hotel revenue management 101.

Imagine you have a regular customer type who are single retirees who enjoy hiking and dining well on their well-endowed pensions. They update their Instagram at every turn with photos of mountains and desserts. So there you have a personal profile, means, reason to travel, technology, social media, etc. Call them Biddy, market to them specifically and price your rooms somewhere in between what they could afford and what they would be willing to pay. There’s a sweet spot to hit with this approach – the right strategic decision that really makes it worth your while to get right, especially during slow season. It’s the perfect angle for you the supply to look the demand in the eye and tell them you have just what you need and the only way to find it is categorise your guests.

2. Room Categorisation

As with your guests so too with the rooms they stay in. Supposing Biddy sees a suite as out of her price range. There’s every chance she’s basing this on the presence of the word ‘suite’ and that alone. Imagine Biddy has a tendency to gravitate towards ‘standard single’ regardless of price? It’s her ‘demand’, so to speak. Wouldn’t it be worth your while to bring these two pieces of information together and to then price your standard singles at the maximum price you forecast Biddy as willing and able to pay.

I’d be the first to admit that at first glance strategising like this has a whiff of the predatory about it but the fact of the matter is you’ve got to price your rooms somehow – why else would you be researching hotel revenue management? The price of Christmas trees shoots up every November for a good reason. It’s a reason not too distantly related to the fact that Easter eggs are marketed to children. It’s supply and demand and you’ve got to know yours – both of them – inside and out.

We can continue down this route until I find myself paraphrasing the work of Adam Smith en masse but I’d rather not. The hotel revenue management I’ve promised to deliver to you is a simpler beast than that. I’m taking for granted everyone out there seeks to maximise revenue. I hereby advise any readers out there who aren’t up to speed with the basics of supply and demand to get themselves up to date and then proceed to figure out which room to sell to whom and at what price. Remember – empty rooms are perishable inventory and you should not consider it an option to let them go to waste.

3. Get to Know the Competition

If you’re knee-deep in hotel revenue management you’ve got to assume your neighbour is too, if they’re a profitable hotel at least. I should begin by emphasising that my concept of researching your competition is not to simply copycat and undercut how they price their rooms. Presuming you haven’t also copied their interior decoration and graphic design I’d advise you to keep in mind always that what you’re selling is the story your guests will tell when they leave your hotel. With no effort on your part whatsoever that will always be something different than that of your competitors because just as people are unique, so too are their hotels and stories. You are out to compete, not copy. That’s where yield management comes in.

The real ‘c’s’ to keep in mind are ‘compare’ and ‘contrast’ but before you even get near those you need to suss out who exactly your competitors are. Hint – it’s not always going to be the hotel across the street from you.

You could have competitors in other cities for all you know. You definitely have competitors with whom the only space you share is a distribution channel.

Suppose someone is planning to travel for the concert of a group stopping in your city and another four hundred miles away. Supposing the deciding factor is the hotel they’ll stay in because it is the only variable. In just a few chess moves you’ve gained a new competitor and the playing field is a day’s drive long. All it takes is the right time. Stranger things have happened.

In this case the best move might well be to undercut them slightly price-wise – if it’s the right time – but it could just as easily be to raise your prices and push your value. You’ll only know which move to make by knowing your segments and your competitors on equally good terms.

4. Get forecasting

Forecasting in the manner I’m recommending here doesn’t mean watching the behaviour of animals or saving your tea leaves, nor does it mean plugging into the stock market and emotional proclivities of housewives in the afternoon. The type of forecasting I’m recommending for you is more actionable and useful than any of that. For you, the independent hotelier, I’m recommending that you simply get in the habit of using the past to predict the future. More specifically, using your own past data to predict how your customer segments will behave in the coming seasons and in the current market conditions.

It’s both more involved than any other piece of advice I could give you and more straightforward than anything else on the list. To forecast accurately and efficiently you’ll need to create a demand calendar and adapt it daily. You’ll need to keep a keen eye on any potential for demand spikes in your area – local events play an important part – and move with them and against your competition to hit the sweet spot of your segments’ expectations and get them booking.

This part in particular is one that all hotel departments can help with because they’re all different types of people who live in the area and know the different things that will be happening. It’s a good idea to keep your door open to staff for this purpose. They also want a high occupancy rate, right? They too want a decent gross operating profit to go around, right?

If they don’t seem to be bothered remind them that the profitability of the hotel – whether good or bad – has a domino effect on everyone working there so it’s in everyone’s interests to share ideas as to when demand might spike.

5. Price vs. value

Knowing which side you land on is a crucial aspect of revenue management. It is the deciding factor in your pricing strategy. This choice will vary depending on the segment it’s aimed at, the room you’re trying to flog, the time of year and a multitude of other factors. That or you make a choice about what kind of hotel you are and stick with it for the most part – especially if you want to market to family holidays or packages.

Don’t get me wrong – the great majority of hotels will occasionally dip their toes in the other pool. That in mind, those same hotels will mostly stick with one type of self-promotion and it will nine times out of ten lean on price or value.

You can be a quick, economic solution to a fly-by’s need of a bed for the night or you can be the delightful surprise in the evening of someone who just needed somewhere to lay their head. If you’d rather be the latter – and you should – then you need to lean into it with how you talk about and promote yourself.

You should want to be a value-pusher for no other reason than your own self-esteem but there are business reasons too. The types of customers who seek value are less resistant when it comes to paying above the norm. As a matter of fact, many look for hotels priced above the norm on the assumption that the hotel will itself be better – one of my favourite subtleties of hotel revenue management as it happens.

It’s also a relatively safe assumption that a guest who follows price alone has no potential to be a loyal customer, and loyal customers are the ones you want if you seek to increase your direct bookings.

6. Promotions

Even after you’ve decided how best to sell yourself and who to and where you will run into seasons in the year when not even good old fashioned manipulation of your offer to your market segments will fill your rooms. Then it’s time to dip into the offer bucket and see what you’ve got to give.

One very important point to note is that a promotion does not necessarily mean a discount. As a matter of fact, more often than not it should be nothing to do with money. It should be a value-based offer.

The reason these are preferable requires more long-term thinking than short-term, but of course that is why you’re all here – you’re long-term thinkers.

You want the promotions you send out to gain you long term customers – ones who’d sign up for a loyalty program and be sure to take advantage of it.

4 Best Hotel Revenue Management Books

I’m only skimming the surface on this kind of strategy, and barely at that. If it’s whetting your appetite a little, why not check out one of these fine tomes that delves even deeper.

1. Revenue Management: Maximising Revenue in Hospitality Operations by Gabor Foracs

This one very much tackles the basics but it tackles them in depth. Take note of the end section when it suggests best management practices to work into your habit in order to succeed. One downside is this is a full-on textbook – beach reading this is not. However, for any of you reading this article and finding yourself wanting more this kind of book is exactly up your street.

2. Revenue Superstar!: The Simple Rules of Hotel Revenue Management by Johan Hammer

Johan Hammer spent ten years consulting on hotel revenue management before turning to writing. While this only really works as an introduction it’s fun and engaging to read.

3. Hotel Revenue Management: Factors to Consider When Pricing Your Room Nights by Shane Lambert

This one is short and sweet but highly actionable. You’ll read this in an hour or two and while for some it might be lacking the data to back up the claims for any willing to get past that – I was for sure.

4. Evolving Dynamics: From Revenue Management to Revenue Strategy by Kathleen Cullen

This is probably the most complete book on the topic that I’ve come across. It’s a little dense in terms of terminology – and that’s from the get-go – but if you’re looking for a bible going forward this might be it.

Hotel Revenue Management Courses

Just like with the range of books out there are quick and easy – and superfluous – routes to take and then there are deeper ones that might scramble your eggs a little. If you Google the best revenue management online courses you’ll find a decent list of options on the subject and just as with the books some will meet your needs and some will not.

They’ll all of them cost a lot – that I guarantee. They’re also all guaranteed to cover a lot more than you need to know if you’re running an establishment of fifty rooms or less. As a matter of fact, I’d venture to say you’d find some of it borderline useless but that’s neither here nor there.

This isn’t at all to say they actually are useless by the way. I’m simply encouraging a wariness in you is all. Each and every one of them will sell themselves as ‘essential’ but without being fully clued in on the beginner’s lingo you are likely in no position to make that call. What to do next then?

That’s not to say they contain no value by the way, simply that they’ll tend to sell themselves as essential up top – as we all do – but that without any way to fully comprehend the terminology you’re in no position to make the call yourself. How then to proceed?

I’d highly recommend heading over to The Hotel Club and checking out our totally free course on hotel revenue management right away. It will give you a good knowledge base on which to get started. Who knows – it might actually turn out to be all the knowledge you need.

Conclusion - Importance of having a Revenue Management Strategy

Hotel Revenue Management has now become the industry standard. For those in this business to make money it’s nothing less than an essential practice. For those in this business to make friends it’s even a pretty good idea because it’s the best way to get the kinds of people you want to deal with in the door – segments, remember?

It is well worth your while getting better acquainted with it. Your margins will thank you.

Donnchadh Tiernan

24 Nov, 2022