The concept of Hotel Revenue Management
Part 1, learn the basic principles of the concept and why it gained traction in its early days.
Hotel Revenue Management: What it’s all about
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. The 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 within the 21st century added another dimension to this field, namely Online Travel Agencies and Review Portals. This development increased complexity of traditional Hotel Revenue Management approaches while it also provided new ways to cheaply and objectively measure both customer satisfaction and pricing.
Arising from airlines’ yield management
Originating from a mathematical sales model within airline industry, the concept also found its way into hospitality industry as Hotel Revenue Management in the 1990s. Marriott International was one of the first major player that drew large earnings by introducing that concept into their business strategies. Hotel Revenue Management has grown in importance ever since.
Practical use of Hotel Revenue Management
In order to effectively apply the concept of Hotel Revenue Management, big data sets need to be analyzed and evaluated.
This includes information about basic factors like:
- Past occupancy rates
- General sales
- Companies’ target groups
- Customer segmentation
- Market(share) information
- Customer satisfaction
but also about external influences as
- Past weather conditions
- Holiday and event information
- Closing of nearby hotels
- Competitor price information and
- Similar circumstances being 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 for the purpose of facilitating the 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, foremost reviews.
Therefore, we want to present a new approach on Hotel Revenue Management in our next article:
>> go to next article
Download the complete Whitepaper here for free and learn how user generated content shifted the concept. Also take advantage of our modified version of the BCG-Matrix that can be used as an easy Revenue Management tool: