Everything You Need to Know About Revenue Management in Hotels

Stephen Alemar
Stephen Alemar
May 22, 2024
January 24, 2023
Everything You Need to Know About Revenue Management in Hotels

Believe it or not, the foundations of today’s hotel revenue management practices were first used by airlines

With the Airline Deregulation Act of 1978 — a law that allowed airlines to set their own fares and routes — airlines got more intelligent with their pricing.

This led to a concept called “yield management”, revenue management’s precursor. American Airlines began tiering their pricing based on specific conditions like discounts for tickets booked more than 21 days in advance. 

It was all about getting the highest yield by pricing inventory dynamically. And once Bill Marriott Jr., Chairman and CEO of Marriott International, picked up on this lucrative model, the hotel industry was transformed forever. 

And that’s where it all began. 

But what is revenue management in hotels today? How does it work? How has it changed over the years? And what are the best modern strategies and tactics for increasing a hotel’s revenue?

What is Hotel Revenue Management?

Hotel revenue management refers to a property’s pricing strategies to sell perishable inventory. It is based on the behavioral economic concept of “willingness to pay”, which is the maximum price a consumer is willing to pay for something. 

In a hotel’s case, it’s how much a guest is willing to spend on their whole stay (room, food, amenities). The main goal of hotel revenue management is to outperform competitors, increase profits, and optimize hotel performance. 

By looking at factors like past occupancy rates, customer satisfaction, and competitor pricing, revenue managers determine rates and distribution strategies to maximize their hotel revenue. 

With revenue management, you’re selling to the right person, at the right time, through the right channel.

Why is Hotel Revenue Management Important?

The importance of hotel revenue management is summed up nicely by Bill Marriott Jr.:

“Revenue management has contributed millions to the bottom line, and it has educated our people to manage their business more effectively. When you focus on the bottom line, your company grows.”
Bill Marriott Jr., Chairman and CEO, Marriott International

Simply put, revenue management is essential to a hotel’s success. With the right systems, strategies, and software, you can maximize revenues and hit your key performance indicators (KPIs) faster.

Not only that, but it helps you better manage resources & roster the right number of staff based on predicted occupancy levels. 

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What Is the Role of a Hotel Revenue Manager?

Traditionally, hotel revenue managers made decisions relating to rates, occupancy, and lengths of stay. Today, hotel revenue managers often lead all hotel revenue management efforts, and have a far greater influence on what happens within the company. 

Hotel revenue managers manage room rates, negotiate commissions on distribution channels, handle budgeting and forecasting, identify new revenue opportunities and more.

Better data, new management systems, and ever-expanding technological capabilities have revolutionized the revenue manager role, but also presented new challenges. Some of these challenges include: information overload, working with too many systems, and complex distribution. 

What is a Revenue Management System (RMS)?

A revenue management system (RMS) takes the guesswork out of determining what room rates should be. An automated RMS analyzes hotel and local market data in real time and determines the best price for your rooms. 

This allows you to maximize revenues by selling at the right price, at the right time throughout the year. Good systems will provide easy-to-read graphs and real time analytics. Also, modern RMSs will be able to connect to your property management system (PMS), channel manager and any online travel agencies you utilize. 

In short, a revenue management system helps hoteliers:

  • Avoid human error 
  • Maximize revenues & yields
  • Save revenue managers a significant amount of time
  • Understand your guests & competitors better

What KPIs & Metrics Are Most Important for Tracking Revenue Management?

Hotel metrics or key performance indicators (KPIs) will help you understand what’s going right and wrong within a hotel. 

While there are a myriad of metrics, like the ones listed below, KPIs are specifically associated with goals. Measuring these metrics and creating KPIs out of them will help you improve the performance of your hotel — and your employees.

Some of the most important metrics include:

  • Occupancy rate
  • Average daily rate (ADR)
  • Revenue per available room (RevPAR)
  • Average length of stay (ALOS)
  • Market penetration index (MPI)
  • Revenue generated index (RGI)
  • Gross operating profit (GOP)

How To Choose & Track Your Hotel’s Competitive Set

Choosing the right competitive set for your hotel is essential in hotel revenue management. While it is not the only way to track performance, consistently measuring and tracking your compset can help you understand the way in which consumers might view your prices.

While you don’t want to copy everything they do, it’s important to understand how your pricing compares to competitors. That way, you’ll be better able to find that pricing sweet-spot.

Having the right compset helps you get higher quality metrics when assessing your performance. The best metrics to assess your position in the market are:

  • Market Penetration Index (MPI): MPI = Hotel Occupancy / Market Occupancy
  • Revenue Generation Index (RGI): RGI = Hotel RevPAR / Market RevPAR
  • Average Rate Index (ARI): ARI = Hotel ADR / Market ADR

When choosing your comp set, you want to pick hotels that are similar to yours based on factors like neighborhood, type of hotel, number of rooms, meeting space, facilities, location, ADR, and more. 

To track your comp set, hotels can:

  • Subscribe to STR reports 
  • Read competitor websites & blogs
  • Set up Google Alerts 
  • Use compset business intelligence 

Hotel Pricing Strategies

Pricing strategies differ by hotel, which means that no one strategy will work perfectly for you. There are a number of strategies. The most common two are dynamic pricing and open pricing.

  • Dynamic pricing: This strategy uses the metric Best Available Rate (BAR) as a guide to adjust pricing. Factors such as supply and demand, competitor pricing, seasonality, among others are used to determine prices. Revenue management systems are helpful with dynamic pricing as it analyzes all available hotel and market data. 
  • Open pricing: An increasingly popular strategy; this method allows hotels to pitch rates and services at different price points along a demand curve. With open pricing, you can price all room types, channels, and dates independently of each other. Put simply, this model means never saying no to a customer.

Here are a few other strategies you can look at:

  • Skimming: Positioning your hotel among the most expensive. 
  • Price per segment: Differing your product prices based on market segments. 
  • Penetration pricing: Positioning yourself as the cheapest in the market. 
  • Value-added pricing: Pricing more expensively than the competition and offering addons at no extra cost.
  • Length of stay: Setting a minimum length of stay when demand overtakes supply. 
  • Discount pricing: Lowering base rates in order to boost periods of low-occupancy.

Hotel Budgeting & Forecasting

Hotel budgeting and forecasting is important in order to yield as much revenue as possible throughout the year. It will help you prepare, and give you room to adjust strategies if need be. By determining demand throughout the year, you’ll be able to set prices and make other preparations ahead of time.

In order to budget and forecast, you need strong historical data such as occupancy levels, revenue, room rates, spend per room, and market trends. 

Five Ways To Increase Hotel Revenue 

1. Find More Ways To Upsell

When we talk about driving hotel revenue, finding new ways to upsell should be first on your list. While you can begin offering new amenities and services (recommended), you should first focus on how to improve the way you upsell those that already exist.

Implementing technology like Canary Upsells is a great way to improve your upsell success. As well as relying on staff to upsell in-person, hotels can use this powerful solution to push customized packages, room upgrades and other add-on services at key moments of high buyer intent. For example, Canary Upsells integrates seamlessly into a mobile-friendly contactless check-in flow enabling guests to enhance their own experience before they even set foot on the property. 

Once you have an upsell system in place, then it’s time to think about what new services and packages can be added to it.

New hotel upsell ideas include:

  1. Room upgrade packages
  2. Early check-in or late checkout
  3. Parking 
  4. Daily housekeeping 
  5. Pet fees 

2. Partner With Local Businesses

Want to earn more money and help out local businesses? 

It’s likely that guests will be looking for experiences to fill their time when they visit. Partner with local businesses so that you can offer their services at a reduced rate, and get commission on every referral. 

3. Showcase & Sell Hotel Decor

Believe it or not, hotels such as The W Hotel and Sheraton Hotels have started selling their decor, furniture, and linens through branded eCommerce stores. And you can too!

If your hotel has a unique style, consider creating your own eCommerce store. You could even sell large versions of loved in-room amenities like body-lotion or shampoo behind the concierge. 

You could also display and sell the work of local artists for a small commission.

4. Improve Your Hotel’s Reputation

Improving your hotel’s reputation seems like an obvious step, but what are the best ways to go about it? A good start would be to analyze your online reviews. Finding out the most frequent complaints will help you discover patterns and areas for improvement. 

Then, improve your social media strategy. Everyone and their dogs are on platforms like Facebook, Instagram, TikTok, and LinkedIn. Choose which platforms are best for your business, then figure out a posting schedule. 

Will you post videos or images? What style of post suits your brand? These are a couple of key questions to ask yourself as you develop a social media presence. 

Additionally, be sure to leverage technology solutions that help hoteliers boost their ratings and rankings on review sites like Tripadvisor and Google. 

For example, Canary’s Contactless Checkout product pushes a mobile-friendly survey to every guest at the end of their stay. Any guest that leaves 5 stars is then prompted to share their experience on Tripadvisor and Google. Anything 4 and below is directed to hotel staff members so they can make one last attempt to turn a frown upside down. 

Want to increase 5-star reviews for your hotel by 350%?  

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5. Prevent Fraud & Chargebacks

It’s been estimated that of all instances of credit card fraud, 55% occurs within the hospitality industry. The two most common types of fraud include card-not-present and friendly fraud. 

Unfortunately, however, many hotels still rely on outdated practices and technologies. Given the frequency of fraud and the financial damage it can cause, hotels need to have appropriate protections in place, such as:

Want to reduce chargebacks & fraud? 

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Hotel Revenue Management Books

If you are looking for more help, guidance, and wisdom where hotel revenue management is concerned, we’ve compiled four books that could help you up-skill and impress.

  1. Elastic by Leonard Mlodinow. Recommended by Hotel Tech Report, this book will help revenue managers remain resilient and adaptable, no matter the situation. 
  2. Travel Industry Economics by Harold Vogel. This book will help you understand industry economics so that you can “speak the business of travel”. 
  3. Revenue Superstar!: The Simple Rules of Hotel Revenue Management by Johan Hammer. A fun read, designed to help you improve your revenue management process. 
  4. Evolving Dynamics: From Revenue Management to Revenue Strategy by Kathleen Cullen. A detailed, well-rounded guide to revenue management. It’s also the official study guide for the Certified Revenue Management Executive (CRME) certification exam.

The Future of Hotel Revenue Management

Hotel revenue management has changed a lot over the past decade or so. While the hotel industry is typically slow when it comes to the adoption of tech, competition and a need for strategy are now driving forces where revenue management is concerned.

Hospitality woes during COVID-19 and high customer acquisition rates, in addition, have reinforced the need for effective revenue management. Technology advances such as automation, AI, and advanced revenue management systems, are likely to be adopted by more and more hotels across the world.

As Pablo Torres, Hotel Consultant for TSA Solutions says, “There are no more excuses for most hotels to keep leaving money on the table: resources are plenty and available, it’s about the mindset now.”

Final Thoughts

Technology is evolving faster than anyone could have predicted, and impacting every facet of our existence. Hotel revenue management is no exception. Hotels everywhere are looking for more ways to incorporate software, AI, and new technology into their hotel revenue management practices. 

Improving your hotel revenue management through the use of the right tools will help your hotel stay competitive and improve performance continually. 

Next up, discover 17 hotel improvement ideas that every hotelier should consider.

Learn How Canary Can Help Your Properties Thrive

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