Learn How to Rev Up Your Revenue
In our latest guide, we cut through the noise to provide the essentials every independent hotelier should know about revenue management. Get answers to the following topics and more.
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Revenue Management Essentials for Independent Hotels
If you ask 10 hoteliers what revenue management is, you will probably get 10 different definitions. Some may be so complex they make your head spin.
Here we make things easy for you. We answer the most important questions owners and operators of independent properties have about revenue management.
Whether you operate a boutique hotel, guesthouse, hostel, campsite, vacation rentals, or some other fabulous property, you will learn essential ways to boost revenue today.
What Is Hotel Revenue Management?
At the risk of creating yet another definition, we’ll take a stab at it. Revenue management is the practice of managing hotel room inventory, pricing, and distribution to maximize revenue from available demand. It’s that simple.
Why Is Revenue Management Important?
The more revenue a hotel earns, the more it has to spend on property upkeep, staffing, and the guest experience. These investments produce happy, loyal guests who write rave reviews and come back – a virtual circle that is extremely healthy for business.
Revenue management is particularly important for accommodation operators because they are different from other businesses in three key ways.
- Room inventory is finite. When demand exceeds supply, a hotel can’t manufacture more rooms (well, not overnight). To increase revenue, it must increase prices.
- Room inventory is perishable. When a room sits empty, the opportunity to sell it that night is gone forever. An unsold room is a lost opportunity.
- Many hotel costs are fixed. Hotels must pay fixed costs no matter how many rooms are occupied. The more rooms a hotel sells, the more profitable it can be.
For small, independent properties, every room counts. With smart revenue management, you can better compete with large, chain hotels, capturing your fair share of bookings – and then some.
Who Is Responsible for Revenue Management?
Whereas most large properties employ a full-time revenue manager, smaller properties often don’t have that luxury. Instead, tasks may be handled by the front office manager, marketing manager, or general manager. Or duties are shared.
Ideally, one individual should manage all revenue responsibilities. This helps create accountability, ensure consistency, and reduce errors. The person should be good with numbers, super organized, a stickler, a strategic thinker, and an effective communicator who can rally the whole team to support revenue strategies. In short, a revenue champion.
What Are the Main Functions of Hotel Revenue Management?
Revenue management can be divided into six key areas.
1. Inventory Management: What Are You Selling?
One of the first tasks of a new hotel is to assign room categories with names and descriptions that will appeal to travelers and set expectations. For example, which of the following are you more likely to book?
- A Standard Room OR a Standard Garden View Queen Room
- A Deluxe Room OR a Deluxe Ocean View King Room
- A Suite OR a Spacious One-bedroom Suite with Double Beds and a Kitchenette
Essential Stay Restrictions
Rather than sell rooms on a first come, first served basis, the revenue manager implements stay restrictions to control which rooms are available and on what terms. The goal is to maximize revenue for all nights, not just nights of high demand.
Here are a few examples of effective availability controls.
- A minimum length of stay (LOS) requirement
- Closing a date to arrivals or departures
- Tightening the cancellation policy
- Overbooking to protect occupancy from cancellations and no-shows
Total Revenue Management
While the main focus of revenue management is on rooms – typically the most profitable asset for hotels – the ultimate goal is to maximize total revenue and profitability.
You can help advance this goal by:
- Promoting ancillary services like your restaurant and spa
- Creating packages that include breakfast or parking
- Applying revenue strategies to function space, food & beverage, parking, and other revenue streams
- Controlling costs and factoring costs into pricing decisions
2. Pricing: What Rates Will You Charge?
Pricing is one of the most important tasks of revenue management. If your property is priced too high, you will miss out on bookings. If it is priced too low, you will miss out on revenue. The goal is to find the sweet spot that brings in the most revenue.
Pricing involves three main tasks:
- Establish an annual rate schedule. Assign minimum and maximum (also called “rack”) rates for each room type, along with a schedule of discount tiers.
- Set up rate plans. Create rate plans to appeal to different types of travelers, such as advanced purchase, corporate, wholesale, group, packages, and special offers.
- Price dynamically. Adjust rates up or down by season and day of week, during events and holidays, and when demand, market conditions, or competitor pricing changes.
Essential Pricing Strategies
- Charge a premium for desirable features such as a king bed, view, or extra space.
- Offer discounts for longer stays, early-bird bookings, and last-minute bookings.
- Offer discounts for advanced purchase (non-refundable) bookings.
- Use percentages rather than fixed increments to price room types and rate plans.
- If premium rooms and suites often go unsold, try reducing pricing percentage differences to boost sales.
3. Market Segmentation: Who Are Your Guests?
Rather than lump all guests into the same category, hoteliers group guests into segments based on shared behavior or characteristics. Segmentation helps hoteliers:
- Understand the business mix.
- Identify the most profitable segments.
- Be more targeted in marketing.
- Be more personalized in guest communications.
Types of Segments
Market segments may vary by the size and type of property, but common ones include:
- Retail. Transient guests who pay BAR or discounted rates.
- Corporate IT. Guests who work for a company that has a corporate agreement with the hotel.
- Wholesale. Guests who are booked through a wholesaler or bed bank that has a net rate agreement with the hotel.
- Consortia. Guests who book through a travel agency network that has negotiated rates with the hotel.
- Package. Guests who book a package such as bed & breakfast or romance.
- Group. Guests who stay under a block of rooms with a negotiated group rate, typically at least six to 10 rooms per night.
- Subgroups. Larger hotels may have subsegments of groups such as corporate, incentive, association, and SMERF (social, military, educational, religious, and fraternal).
- Distribution channel. Some hotels segment guests according to the channel they book on, such as OTA (online travel agency), direct, and promotions.
4. Distribution: Where Will Travelers Find You?
Distribution is the process of making hotel rooms available for sale on booking channels. Popular channels include:
- Direct (hotel website, call center, walk-in)
- OTAs like Expedia and Booking.com
- Specialty OTAs like Airbnb and Hostelworld
- Metasearch platforms like Tripadvisor and Trivago
- Wholesalers and bed banks like HPro Travel and Hotelbeds
- Global distribution systems (GDS) like Amadeus and Sabre
Essential Distribution Strategies
- List on multiple channels. Increase exposure by maintaining a diverse distribution mix. Travelers often discover a property on an OTA and then book directly.
- Prioritize direct bookings. Direct bookings tend to be the most profitable because the hotel doesn’t pay a commission or fees to a third-party site.
- Manage channel availability. On dates when demand is high, close out lower-value channels like OTAs and wholesalers.
5. Forecasting: How Will You Know What Prices to Charge?
Forecasting is the process of trying to predict future demand for hotel rooms by analyzing the booking pace, historical patterns, market trends, and competitor behavior.
When hoteliers know how busy (or not) the property will be on future dates, they can better manage:
- Pricing and inventory controls to bring in more revenue on busy dates.
- Sales, marketing, and revenue activities to boost demand on slow dates.
- Operational planning such as scheduling staff and ordering supplies.
Ideally, the forecast is created monthly and updated at least weekly to ensure strategies reflect current conditions.
6. Performance Tracking: How Will You Know If Your Efforts Are Working?
Hotels use three key performance metrics (KPIs) to track revenue performance, evaluate the success of activities, and determine future strategies.
- Occupancy. The average number of rooms occupied within a given period such as a day, month, or year. It is calculated by dividing the number of occupied rooms during the period by the number of available rooms and multiplying by 100.
- Average Daily Rate (ADR). The average price guests pay for a room within a given period. It is calculated by dividing room revenue by the number of rooms sold.
- Revenue Per Available Room (RevPAR). The average revenue earned by rooms within a given period. It is calculated by dividing room revenue by the number of available rooms.
Other Important Revenue Metrics:
- Rooms on the Books (OTB): How many rooms are currently sold.
- Pickup: The number of bookings within a certain period.
- Booking Pace: The rate at which reservations are made for a certain date or period.
- Booking Window: The average number of days in advance of arrival reservations are made.
- Average Length of Stay (ALOS): The average number of nights guests stay per booking.
- Cancelation rate: The percentage of bookings canceled by guests prior to arrival.
- No-show rate: The percentage of bookings that do not arrive and do not cancel.
- TRevPAR: Total revenue per occupied room (all revenue, not just rooms).
- GOPPAR: Gross operating profit per available room (revenue minus costs).
- Profit Margin: The percentage of total revenue that is net profit.
Revenue Management Technology: What Tasks Can Be Automated?
If all this sounds a bit overwhelming, you’ll be happy to know that revenue software can automate many of these tasks for you. For independent properties, two solutions are essential:
- Automated Pricing Solution. Manages day-to-day pricing, dynamically adjusting rates based on booking patterns and market conditions to maximize revenue.
- Channel Manager. Enables hotels to manage room availability and pricing on multiple distribution channels from one centralized platform.
How Can You Find Out More?
Now that you know the essentials of revenue management, it’s time to dig deeper into some of these topics. To learn more, check out RoomPriceGenie’s Content Library.
About RoomPriceGenie
RoomPriceGenie is the easiest way to ensure that your rooms are priced right, every night. Purpose-built for the independent hotelier, RoomPriceGenie is fast to implement, intuitive to use and simple to understand. In an uncertain world, it’s revenue that you can count on. To find out more about automated pricing, start your free trial today.
