Revenue management is critical for hotels to maximize occupancy and optimize pricing. I recently sat down with Scott Dahl, Professor and Director of the Master’s Program at École hôtelière de Lausanne in Switzerland, to discuss revenue management strategies and systems.
In this comprehensive guide, you’ll learn what revenue management is, why it’s so important for hotels, and how to implement revenue management tactics to boost your hotel revenue.
Whether you run a large hotel chain or a small independent property, you can benefit from revenue management. Scott provides actionable tips for forecasting demand, segmenting customers, utilizing length of stay restrictions, creating packages, and more.
Read on to get expert insights on how to “sell the right product to the right customer at the right time and the right price.”
What is Revenue Management and Why it Matters
Scott starts by defining revenue management:
“Selling the right product at the right price to the right person at the right time.”
In the hotel industry, revenue management is critical because hotel rooms are extremely perishable – unsold rooms can never be recouped.
Hotels operate on very tight margins. The difference between profitability and unprofitability often comes down to the last 10% of revenue. Effective revenue management can help squeeze out that extra revenue hotels desperately need.
Can Smaller Hotels Do Revenue Management?
Absolutely! Scott explains that revenue management may actually be more impactful for smaller hotels:
“I actually think it’s more important for a smaller hotel because the real upside in revenue management starts to kick in when demand exceeds supply. A 12 room hotel fills a lot more often than a 1000 room hotel. So I think smaller hotels have percentage-wise a larger upside available to them.”
The challenge is that smaller hotels have fewer resources. But the fundamentals of revenue management can still be applied on a smaller scale.
Forecasting Demand
The first step is forecasting demand to identify rooms you expect to sell vs. rooms you need to sell.
Large hotels require sophisticated forecasts segmented by market and day. Smaller hotels can start with a simple forecast:
“We always fill on Wednesdays.”
Understanding compression nights when you will sell out allows you to be more selective on other nights. A basic forecast gives you visibility into opportunities to sell more rooms.
Market Segmentation
Understanding market segmentation is key. Different customer segments have different willingness to pay.
When you lower rates across the board, existing customers pay less too. Discounts should be targeted only when needed to stimulate demand for need periods.
Identify the best segments to target during high demand vs. low demand periods. Focus on booking the most profitable business first before resorting to discounts.
Using Length of Stay Restrictions
Length of stay restrictions are a powerful revenue management tactic.
If Saturdays are peak demand, disallow 1 night stays on Saturdays. This forces bookings for 2+ nights, increasing revenue without sacrificing rate integrity.
Analyze arrival/departure patterns and use length of stay to maximize shoulder day bookings.
Packaging Rooms Strategically
Creative packaging can also boost revenue:
- High Demand Periods: Package rooms with other services (F&B, spa) to increase ancillary spend
- Low Demand Periods: Offer discounted packages without reducing rack rates. Maintain rate integrity for core customers.
Managing Distribution Costs
Many hotels pay high commissions to OTAs without realizing the margin impact.
Carefully manage distribution channels to reduce reliance on high-cost OTAs during peak periods. Use OTAs selectively during need periods if the incremental revenue exceeds the commission cost.
Which Tools Do You Need?
- Property management system data: Identify booking pace and compression nights
- Market data: Understand local events and competitors to optimize pricing
- Booking curve: Monitor booking momentum week-to-week to identify high-demand dates early
For small hotels, Excel can be enough to get started. There are also affordable, user-friendly revenue management systems like RoomPriceGenie designed specifically for independents.
When to Invest in a Full Revenue Management System
For large hotels, a robust RMS like IDeaS or Duetto is a must. But they are designed for complex, segmented forecasting that is overkill for smaller properties.
The key is finding a system that provides transparency into rate recommendations so you understand the logic. It should enhance your expertise, not replace it.
Conclusion
With the right revenue management tactics, any hotel can improve pricing, drive occupancy, and maximize revenue. Accurate demand forecasting, strategic customer segmentation, targeted packages, and length of stay controls allow you to “sell the right product to the right customer at the right time and the right price.”
Implementing even basic revenue management principles can have an outsized impact on your hotel’s bottom line. What revenue management strategies have you found most effective?