Revenue, cost and profit are among the numbers that a business must concern. In an entire business cycle, costs are compensated or regenerated and profit is created by revenue, making a premise for the next business activities. Therefore, revenue management is extremely necessary for a business’s existence.
Revenue management is a method to help predict consumer demand to optimize inventory and price availability in order to maximize revenue growth. In a simple way, it’s a “5-Right” implementation: selling the right product to the right customer at the right time with the right price through the right channels.
Revenue management started with the airline industry dating back to the 1980s. Gradually, it has been widely applied in other industries such as hospitality, car rental, train companies, cinema, restaurants, etc.
In essence, almost every industry will benefit in many different ways from revenue management techniques, including hospitality.
What is hotel revenue management?
Hotel revenue management is the method of applying scientific disciplined analytics to predict consumer behaviour at the micro-market levels and optimize product and prices in order to optimize revenue as well as profit for hotels each time.
For example, we will track market demand data to decide not to sell a room today at a low price and sell it tomorrow at a higher price, or to sell a room at low price today if you do not expect higher demand.
In Vietnam, revenue management has just been paid attention to and applied more in recent years in the development of tourism and the appearance of many international hotel brands.
Revenue management is not only maximizing demand in high periods, it also helps stimulate demand in low periods while avoiding pricing cannibalism. This is a long term strategy, taking all revenue with their profitability into consideration, we can sell at low rates even in high demand periods. That’s why understanding this philosophy will make a very important contribution to the hotel’s development.
What are the suitable conditions for hotels to apply revenue management?
- Fixed capacity
- Limited and perishable product
- High fixed costs and low variable costs, product can be priced differently
- Demand evolves
- Product can be sold in advance
- Market can be segmented
In order to apply effective hotel revenue management, a manager needs to concern and manage some important elements including Market segmentation, Historical demand, Future demand forecast and displacement, Pricing and inventory management, Overbooking, and Information systems.
Hotel revenue management process
One of the components needed to apply revenue management in hotels is market segmentation. It allows you to target a variety of consumer groups with different behaviors with an offer that matches their needs and budget level. Market segmentation will also help to identify the purpose of the trip is for business or leisure.
Market segmentation helps identify the trends of your business such as:
- Length of stay
- Day of weeks stays
- Total revenue per room, total revenue per client
- Lead time
- No-show ratio
Data collection and analytics
Revenue management should be based on the data collection that enables decision making, which transfers into price and distribution strategies. All the information related to customers and their purchasing habits is essential for revenue managers.
In the competitive market, customer information is essential, so hotels need to identify what their competitors are doing and what trends there are in terms of room rates via a rate comparison tool.
Moreover, nowadays, online reputation is one of the most useful features to get no vacancies status. The internet has gradually changed the decision making process of tourists. Therefore, it is also important to use tools that help you know what people are saying about your hotel.
The budget is the first thing to forecast based on elements including unconstrained demand, stay patterns and booking pace. The forecast will reflect the expected situation in the short term (from 1 to 3 months) and will be compared to the budget. New rates and selling strategies will be applied depending on the new revenue expectations to maximize revenue.
Besides the frequency of the budget review, hotels can implement a rolling budget that means keeping up constantly a 12 or 13-month strategy. It will give accurate and clear data to the budget or forecast for the same month next year.
Accuracy is decisive in demand measurement, which includes periods of peaks and troughs in activity. This forecast enables you to react when facing periods of low demand, design different rate levels, and choose the optimal distribution channels for the bookings management.
Pricing and distribution strategy
Everyone will care or consider the price whenever they buy something. Especially, in the current online market, the best price is still the top valued factor for customers to choose a product. Setting up the correct seasonal rates (high/low season based on market demand and competitor pricing), and supplements (person supplement, breakfast supplement, etc.) based on the previous analysis will help hotels achieve their forecast targets.
Regarding distribution, hotels’ official websites and Online Travel Agents (OTAs) are still the most popular channels. OTAs are the means to access certain groups of tourists. When dealing with the same price, they believe the purchasing experience with OTAs will be more satisfying. Hotels will also be able to control their sales, products or services.
Monitoring results through completing periodic reports is a key point in revenue management. Without an exhaustive analysis of results, it is hard to establish measures that allow hotels to optimise revenue management.
Hotels can review the results against the forecast, budget, last year’s data or competitors’. It will help identify what hotels need for further improvement and highlight the necessary changes in order to meet the right targets. It also shows what worked in the strategy and what can be further utilized to have better and better results.
Besides the above steps, hotels should also invest more in technology. With innovative technology, revenue management and forecast or analytics will be much more simple. Human resources also need to be cared for and developed, especially those who are revenue managers. Hotels can search for as well as experiment other suitable ways for their own models and properties.
In particular, while the Covid-19 epidemic situation is still complicated in both Vietnam and all over the world, hotels need to constantly “get along” in orientation of strategies as well as methods to execute those strategies. Ensuring plans to adapt and maintain operations, reviewing the strategies and impacting factors, and demand forecasting for effective revenue management are what businesses need to prioritize to recover and develop in the future.