What is Revenue Management?



In the hospitality industry, we often hear talking about revenue management but we do not always know exactly what it is, nor how useful can it be.

Revenue management had its origins in the airline industry in the late 1960s and was applied to other industries such as hotels in the mid-1980s. Today the concept has expanded to other fields such as restaurants, golf courses, ski resorts, etc.

Revenue management is the process that, through systematic application of analytical tools, helps us understand and segment our clients. And based on that understanding, allocate right room, at the right price, at the right time to the right customer with the objective of maximizing hotel revenue.

In other words, to apply Revenue management we must looks for relevant information about customers to segment them and understand their behavior. Forecast demand for each segment based historical information, competitive analysis, and market knowledge. And, based on the forecast, design and implement rate and availability strategies specific for each segment.

To clarify the concept a little bit more let’s analyze an example: A city hotel of 150 rooms. Let’s assume that on Tuesdays during the week that hotel sells an average of 60 rooms at a rate of $ 100, which generates $ 6,000 in revenue (100 X 60). The first thing that the hotel should do to apply revenue management is to study its clients and based on history, the market, and the competition, estimate their demand (see data represented in figure 1).

After studying its clients, the hotel identified two segments: corporate and leisure. According to this analysis, the hotel determined that leisure customers are more sensitive to price. Thus, the hotel has only been able to capture a small portion of the segment. To get more leisure business, the property could introduce a $ 50-dollar rate for leisure, which would capture 40 more rooms by increasing their revenue by $ 2,000. The question on the table is how to prevent corporate customers from booking the hotel at $ 50 dollar rates impacting revenue negatively.

An important aspect of a successful revenue management strategy is the application of fences. Fences are features, conditions or rules that apply to fare. They are generally utilized to prevent customers who are willing to pay higher rates from having access to a discount. In the example above, the hotel could apply a fence to the $ 50-dollar rate to prevent its corporate customers to book the hotel at leisure rates.

Studying its customer segments, the hotel identified that corporate travelers prefer the flexibility of being able to cancel without penalties and have breakfast at the hotel For leisure travelers these factors are not as important as price. The property could continue to offer a $ 100 rate including breakfast targeting the corporate market and a $ 50-dollar non-refundable rate without breakfast for the leisure segment.

Learn more about revenue management, it´s technics, and how to apply it to your business as soon as possible to maximize your profitability.

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