An Introduction to Revenue Management
Revenue management used to be as simple as just opening and closing availability and rates.
However, today it is much more complex than that. Revenue managers now have to analyse, forecast, and optimise hotel inventory through availability restrictions and dynamic rates and are now major players in the hotel's overall marketing campaign and wield considerable influence over strategy.
Why is Revenue Management so Complicated?
A number of complications can arise when a guest books a room:
- A guest requests a longer stay when you're fully booked.
- Nearby concerts and conferences causing an unexpected rush of demand.
- OTAs undercut your rate.
- No shows.
- New hotels open nearby that hits your demand.
- Bad weather hits your demand.
A Revenue Manager’s job is to manage all of these complications whilst optimizing the revenue based on demand, and to also to limit the risks for the management team, owners, and asset managers.
A Revenue Manager’s goal is to achieve the:“1. Right product to the 2. Right customer at the 3. Right time for the 4. Right price through the 5. Right channel.” - Robert Cross
How does a Revenue Manager Achieve that?
According to the team at SnapShot, there are three main controls or "levers" that the revenue manager can use to optimise revenue.
- Price: Raising or lowering the price is the most basic task of a revenue manager. By raising the price we increase revenue but potentially lower the number of bookings. If demand is high this is often the right strategy as there are enough potential guests willing to pay the high rates.
- Yield: Yielding is often misunderstood as raising or lowering the public rates, but historically, it is about turning away less attractive guests. To do this, we open or restrict the rates (segments), room types or channels. Setting a minimum length of stay is one way to do it. Adding or removing inventory for a channel is another option.
- Marketing: Marketing works a little differently than price or yield. That’s because marketing doesn’t run on the same clock as the other two- you can’t simply “turn on” marketing in the morning and fix today's problem. Yet marketing can be an extremely effective tool. Imagine that you forecast the next month will be lower than usual. Once identifying the cause of the problem, you can request more marketing actions in that area or channel.
In order to know which lever to pull at the right time, accurate forecasting is key:
How to Forecast
Referencing the team at SnapShot, there are two types of forecasting: “constrained” performance forecasting and “unconstrained” demand forecasting.
Constrained performance forecast is simply the estimated or expected performance and is “constrained” or limited by the number of rooms available for sale. This is what General Managers, banks, and investors generally mean when they use the term “forecast.” The other type of forecasting is used by the revenue manager as a tool to help make availability controls and pricing decision. This is the “unconstrained” demand forecast and tells you how many rooms guest would like to book; even if there aren’t enough rooms available.
- Constrained Performance Forecast: A performance forecast is an estimate of what revenues (rooms and rates) you will finally achieve. It’s what the rest of us usually think of when we hear the word “forecast.” Many Revenue Managers as well as General Managers have, after some experience, an intuitive feeling how a particular week or month will perform and this is usually supported by a review of historical data such as what happened last year, and adjusted based on current market conditions and the competitor position.
- Unconstrained Demand Forecasting: Far more mysterious is the Revenue Manager's unconstrained demand forecast. It is not an estimate of how many rooms you will sell, but instead an estimate of the demand for your rooms (how many rooms people would like to buy). The most important part of doing this forecast is to ignore the number of rooms you have.
Why do Revenue Managers create demand forecasts? According to SnapShot "even the best performing hotels are rarely sold out more than 100 days or so in a year. That means most days you have rooms left to sell and the last thing you want to do is turn someone away before the hotel is absolutely full (or even oversold). However, on those days where there is more demand than number of rooms to sell, you want to make sure that you decide who doesn't get the room. The unconstrained demand forecast helps you identify those days when you need to turn people away, and make sure you’re turning away the least profitable guests".
They go on to explain how you actually use these techniques in practice:
Model 1: Average Pickup
Let’s say we already have a number of rooms on the books for a particular date in two weeks’ time. From our historical pickup pace we might know that for a typical Wednesday we normally pick up about 50 rooms during the last two weeks prior to arrival. Especially, if we do this for each market segment, we can then have ourselves a good estimate.
Model 2: Pace Based Pickup
Average Pickup, though, ignores the current sales performance for that particular day. If you have currently already sold higher number of rooms than usual, you are on course over shoot your target for that day.
The key skill of a good Revenue Manager is to take these techniques and then adjust them to reflect local knowledge. Forecast consistently. Once you have a reliable forecast and understand your typical errors, you can start to leverage rate management, yield of segments, lengths of stays or channels and help focus marketing strategies. Only by having a systematic approach to estimating demand will you be able to strategically increase your hotel's revenue and bottom-line.
Revenue management is a vital skill set to have in your hotel to optimise revenue and generate demand for your hotel from the right channels. Without them, you're flying blind.