What is revenue management and how does it work?

There’s no way around it – a proper revenue management strategy is vital when you’re looking for hotel profitability. This article will explain it – in a simple way.

What is revenue management?

It is a strategy that involves predicting future demand and customer behavior based on the hotel’s historical data and real-time market data. From there, hoteliers optimize rates to maximize hotel profits.

Its concept originates from the airline industry. American Airlines have noticed the added value in optimizing prices to the specific market conditions. It took a bit of time for hotels – well, late into the 1980s, to grasp this concept. Marriott took the airline pricing strategies and implemented them into the hotel world.

Now that you know the “what,” how about “how”?

If you want to build a strategy, you need to know the rules. That’s why we encourage you to read our post on the basics of revenue management.

Revenue managers forecast the future demand and set the rates accordingly. “Forecasting” – as this process is called – is the essential element. To make the forecast close to the truth, you need the following data:

• hotel’s historical data, 

• information about important events,

• real-time market data 

Real-time data includes hotel cancellations and new reservations, competitors’ moves, booking trends in flights and hotels, and even weather changes. Before, you needed past property data, as it was enabling finding the patterns in the booking pickups and the most profitable booking channels.

However, this data became obsolete due to the fast-paced market and unpredictability caused by Covid-19 restrictions. Real-time data emerged as vital in optimizing prices and creating demand forecasts.

The amount of data you need in RM can sound overwhelming. Luckily, technology comes to your help. Nowadays, revenue management systems use artificial intelligence, scanning the real-time market and hotel data and optimizing prices further. 

Based on all this information, hoteliers (or revenue managers) build and optimize pricing strategies.

Why is revenue management important?

As owner or manager, you want your hotel to profit – that’s why you need to know how to price rooms. But there’s more: 

• It helps hoteliers make the most out of available inventory
• It optimizes the operational costs like room cleaning.

• It allows decision-makers taking well-informed decisions.

Although very often these terms are used alternately – they’re not entirely the same.

Yield management means selling the right room to the right customer through the right channel at the right time and at the right price. Typically when hoteliers use a yield management strategy, they increase rates when the demand is high, and once it’s low, they decrease them.

The difference between these two is that yield focuses only on maximizing profits from room inventory. Meanwhile, the concept of revenue management applies across different departments and industries.

Revenue management strategy helps increase revenues in food & beverage, spa, and other services offered by hotels.

Conclusion

Revenue management plays a significant role in the hospitality industry. There’s a difference between yield and revenue management. While the former focuses on maximizing revenues from rooms, the second one applies across all the departments. RM is the best way to maximize a hotel’s profits.

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