Wednesday, August 20, 2014

What Is Hotel Revenue Management?


Long practiced by the airline industry since the 1980’s, revenue management has since become increasingly utilized by the hospitality industry as well. In the case of hotels, revenue management is a tool designed to maximize revenue earned by any given room. It accomplishes this goal by charging the highest room rate that any particular type of customer in question would be willing to pay during a specific time frame. Ultimately, the goal is to book every room for the right price, at the right time, to the right customer.

Using the basic economics of supply and demand as a foundation to gain the optimal rate for each guest everyday, revenue management is a great fit for the hospitality industry. Hotels only have a fixed number of rooms available at each property. Each of those rooms can be thought of as being a perishable commodity, almost like fruits and vegetables at a supermarket. If a room goes unsold on a given day that revenue cannot be made up again, it is lost forever.



Another factor in play is the varying priorities of different types of travelers. Market segmentation is the decisive first step in hotel revenue management. For example, a business traveler needs to be able to book last minute hotel stays, while at the same time have the flexibility to cancel without facing large penalties. The leisure traveler on the other hand may be more concerned with price, the amenities and features of a hotel room, and whether a particular room has a view. Vacationers are willing to pay more for the things which will enhance their experience and the enjoyment of their time for relaxation. There are various ways a hotel can segment their customer base, all based on what best suits the revenue goals of each individual property.

Additionally, seasonal fluctuations in demand play a crucial role in hotel revenue management. Obviously, during times of historically high demand, room rates can be raised in order to capitalize on that particular time frame’s level of demand. When the spike is over, rates can be lowered to help increase room utilization in off times. In this way even a single independent hotel practices revenue management, even if they don’t realize the fact.

Revenue management for hotels entails compiling large amounts of data against complicated formulas to extract the maximum rate possible for a given customer, on a given day. Smaller, independent hotels may not feel the need to practice extensive revenue management. However, any size hotel can clearly benefit from these techniques. In the next part in this series we see why hotel revenue management is important for the entire hospitality industry. 

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