The concept of Hotel Revenue Management

Part 1, learn the basic principles of the concept and why it gained traction in its early days.

The concept of Hotel Revenue Management

Hotel Revenue Management: What is it?

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 —

 

Defining the concept

A general and widely accepted definition of Hotel Revenue Management goes as follows:
Selling the Right Room to the Right Client at the Right Moment at the Right Price on the Right Distribution Channel with the best commission efficiency (Landman, 2011).

Hotel Revenue Management is about becoming the architect of your own fortune. A hotel room is a perishable product, since the number of hotel rooms is limited. As a result, customer satisfaction and pricing remain the most important dynamic variables, which are subject to Hotel Revenue Management. It is all about balancing demand and capacity by forecasting prices for the purpose of maximizing the effectiveness of hotels’ resources.

However, the rise of the internet during the 21st century (and with it the rise of Online Travel Agencies and Review Portals) has added another dimension to this field. This development has made traditional Hotel Revenue Management much more complex, while providing new ways to cheaply and objectively measure both customer satisfaction and pricing.

Origins: Arising from airlines’ yield management

Originating from a mathematical sales model within the airline industry, the concept made its way into the hospitality industry as Hotel Revenue Management in the 1990s. Marriott International was one of the first major players to draw large earnings by introducing the concept into its business strategies. Hotel Revenue Management has grown in importance ever since.

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Hotel Revenue Management in Practice

As there are many aspects that must be taken into consideration, it is impossible to effectively apply the concept of Hotel Revenue Management overnight. You need to carefully analyze and evaluate big data sets about your property and its business environment.

This includes information about basic factors like:

  • Past occupancy rates
  • General sales
  • Company target groups
  • Customer segmentation
  • Market(share) information
  • Customer satisfaction

but also about external influences, such as

  • Past weather conditions
  • Holiday and event information
  • Closing of nearby hotels
  • Competitor price information and
  • Similar circumstances that are likely to affect your business climate.

In earlier days, all these data were evaluated manually by the Hotel Revenue Management. Over the years, more and more elaborated Revenue Management Systems (RMS) were designed with the purpose of facilitating this process. However, the functioning of Hotel Revenue Management has fundamentally changed within the past decade. Demand patterns have become much more unpredictable, while increasingly dependent on user generated content, especially reviews.

This is why, next to Revenue Management Systems, also Review Management Systems, working complementary to each other, have grown in importance. Customer Alliance offers a professional Review Management tool that is designed to effectively close the gap between Review and Revenue Management.

In light of these developments, we would like to present a new approach to Hotel Revenue Management. Read the second part of the article for more insights into Hotel Revenue Management strategies within today’s tech-savvy market.

Further reading