Revenue Management in

practice

Hilary Freeman

Definition

“Selling the right product to the right kind of customer, at the right time, at the right price, so as to maximise revenue or yield”

Sheryl Kimes, Professor of Operations Management at Cornell University School of Hotel Administration

Also “through the right channel”

What is Revenue Management?

A unit of measurement providing a consistent indication of business performance

Traditional measurement by occupancy % and average rate (ADR) can be misleading

Growth in one area is often matched by reduction in the other – how do you assess the trade off?

What do we mean by “Yield”?

Assuming a hotel with 250 bedrooms

◦ Occupancy 50% - ADR £128◦ Occupancy 80% - ADR £80

◦ In both cases the yield is £64◦ Also known as Rev Par

Example: Which is better?

In both cases, the revenue earned is £16,000

ADR is revenue divided by the number of rooms sold

RevPar is revenue divided by the total number of rooms available

RevPar = Revenue per available room ADR multiplied by occupancy %

How is RevPar calculated?

Gives a true comparison of performance year on year

Enables true comparison with competitor hotels of a different size and business mix

Provides a consistent measure of business performance

RevPar is the preferred unit of measurement in Revenue Management

Why use RevPar?

• When a physically identical product can be sold to different market segments for different prices through different channels under different booking conditions

• In order to increase revenue from a fixed level of capacity

• Increased revenue = increased profits

What is Revenue Management in practice?

A group of customers with a pattern of buying behaviour

◦ Price sensitivity◦ Lead time of booking◦ Willingness to pre-pay◦ Need for flexibility, to cancel or modify without

penalty◦ Length of stay◦ Different perception of “value”

What is a market segment?

Different market segments may book through the same channels or different ones• Direct with the hotel• Through hotel website• Via a travel agent/GDS (business or high street)• Via a 3rd party website (Expedia, Booking.com,

Lastminute, etc)• Via a tour operator

Cost of sale varies by channel Rate parity for all public rates

What different channels are there?

Lead time Prepayment Limited or no flexibility – no cancellation or

modification permitted Length of stay requirements, minimum or

maximum Specific nights included Package rates, to include other elements Enable discounted rates to be “fenced”

What are the different booking conditions?

Analyse existing demand patterns Predict future demand patterns Match the right volume of rooms at each

rate level so as to maximise yield Minimise peaks and troughs to avoid

“wasting” inventory ie leaving rooms empty which could have been sold

The core process of Revenue Management

Forecast or Budget

Plan

Sell/DistributeReview

Adjust

Know your business

◦ Use historical data to identify demand patterns and trends

◦ Seasonal◦ By day of week◦ Lead time◦ No-show/cancellation rates◦ Unsatisfied demand, turnaways

Analyse existing demand patterns

Booking pace◦ Pick up reports, daily weekly, monthly◦ By market segment

Statistical/historical data on market segments – room nights, ADR

Data relative to past business performance, factors which may have contributed

Tools for data analysis

Know your market

Economic conditions Seasonal variations Local sources of business, corporate offices,

conference centres, entertainment venues, tourist attractions

Local events

Predict future demand patterns

Know your competition

Identify your competitors Benchmark your product Establish rate hierarchy Monitor their activities – pricing,

promotions, policies Changes in supply

Predict future demand patterns

Plan your preferred market mix based on expected demand levels by segment◦ How many rooms can you expect to sell to higher

rated market segments, and when?◦ How many rooms can you afford/do you need to

sell to lower rated segments?◦ What rate parameters/structure should you be

working within?◦ When will unconstrained demand lead to peaks

and troughs?

Plan

Monitor booking pace and occupancy growth - as bookings are received, update forecast and decide where changes need to be made

Monitor competition for pricing changes Monitor local demand levels Adjust strategy using all tools, not just

pricing Record all changes

Review and adjust

Pricing Discount allocation Duration control Capacity management Supply control May be applied differently when demand is

stronger or weaker

Tools of Revenue Management

There is no “right” price for your product It will have a different value for different

customers at different times Your competitors’ activities may influence

the customers’ perception of your value Know the difference between “great value”

and “cheap rooms”

Price versus Value

Ensure discounts are “fenced” with booking conditions to avoid dilution

Know when to stop selling discounted rates to avoid displacement

Use multi night offers to attract business on hard to fill shoulder nights

Discount allocation

Avoid peaks and troughs – empty rooms equal lost revenue, especially if avoidable

Use restrictions to avoid selling out on one night and having to turn away through bookings

Offer discounts/added value for multi night stays which include hard to sell dates

Duration control

Overbooking

◦ Identify probability of late cancellations and no-shows

◦ Manage overbooking, don’t let it happen by accident!

Capacity management

When demand is strong, sell to room type◦ Ensure you get premium prices for superior rooms

When demand is soft, oversell lower room categories and upgrade

Supply control

Time/resources available What rate management controls are available

in your PMS, and in your 3rd party partners? Which distribution channels do you use, and

would you like to use? What degree of connectivity can you achieve

between your PMS and distribution channels? Ideal is 2 way interface between PMS/hotel

website/GDS/3rd party partners/IDS

Factors to be considered

Any questions?