Revenue Management Strategies for the Hotel Industry

Hospitality may be the ‘happiness industry’, but if you are a hotel owner or operator it is a serious business, with staff, suppliers and lenders who must be paid on time, as well as investors/shareholders who must be rewarded.

Get the sums badly wrong and you will quickly go out of business. That is why the revenue management function is so crucial to the industry.

An effective revenue management strategy provides a roadmap to financial sustainability in the long term, through optimizing the commercial resources within the property – not only the rooms but all the other income generators too, from the coffee bar to the golf course.

In my view, the revenue management department should ideally sit between the sales and marketing, and operational functions, since it has a foot in both areas, and both play a big part in the success of revenue management strategies.

It is also for this reason that knowledge of revenue management strategies is an important element of a hospitality leadership toolbox. Over the past 10 years or so we have seen a change in the way general managers and other senior leaders are recruited, with a growing emphasis on having a sales or revenue management background.

From Revenue Management, to Total Revenue Management

The core approach to revenue management is to optimize the turnover of your hotel’s inventory at the optimal price. And by inventory, we mean everything you sell to a guest, including rooms, food & beverage (F&B), spa and wellness, a golf course if you have one, special events, and even car parking if you charge for it.

It is important to note here that ‘optimal’ price may not necessarily mean the highest price. For a successful business, there is often a balance to be struck depending on market conditions, including elements like seasonal demand – for example, in low season a hotel will generally focus on optimizing the use of its room inventory, whereas in high season or during demand peaks the revenue manager can look for revenue opportunities more focused on price.

Then we have ‘total revenue management’, which looks at the total business mix within the hotel. This is a natural evolution from the early years of revenue management, which tended to focus only on the property’s room inventory. 

As an example, if you have a hotel with a luxury spa that offers high-margin treatments, or with a Michelin-starred restaurant where you can charge a premium price for food and wine, these are huge potential income earners which you want to see being used as fully as possible. Therefore, a total revenue management strategy could involve sacrificing a little margin on the rooms so as to bring in guests who will use the spa or F&B offer.

Total revenue management is not restricted to the big rural resorts; nowadays we are seeing city-center hotels that offer the range of services needed to cater to business and leisure guests, notably spa and wellness, making them more akin to resorts albeit in an urban setting.

Excellence in Service Delivery, and Customer Loyalty

Balancing all these income-generating elements makes the role of a revenue manager today more complex, for sure, but also much more impactful, as the total potential growth that can be driven across a large resort will be significantly more than the room income in isolation.

The truth is that every hotel, or cluster of hotels, will need a bespoke revenue management strategy that reflects its unique characteristics in terms of specification, categorization (economy through to ultra-luxe), location and more.

However, what I emphasize to my students at Les Roches is that no matter what your revenue management strategy involves, it is nothing without excellence in service delivery. You can be the most skilled and creative revenue manager, with the best data at your fingertips and a mastery of the tools at your disposal, but your hotel will have to be able to deliver to your target audience with consistent high quality.

This is why I mentioned the revenue management function working alongside the operational teams. It is also why even though some of the revenue management tools and techniques are borrowed from the airline industry, we in the hotel industry cannot simply mirror that sector’s approach wholesale. This is because the essence of service on a plane is very different these days and the choice of providers is quite limited on many routes, whereas in a popular tourism destination the choice of hotels can be vast, making competition way more intense.

One of the biggest developments in revenue management strategy is an ever-deepening knowledge of customer behavior, especially among repeat guests. For this, we can thank the significant investment being made in loyalty schemes. Hotel operators see these schemes as a powerful weapon to fight back against the OTAs and other third-party platforms which grabbed such a sizable chunk of their direct bookings in the first two decades of the 21st century. With worldwide loyalty platforms like Marriott’s Bonvoy, or Accor’s, enhanced customer relationship management is feeding into personalized deals and packages which encourage direct booking, thus keeping the revenue ‘in-house’. 

Tools for Supporting Revenue Managers

In this age of digital transformation, it will not surprise you to learn that there is almost an unlimited array of revenue management software tools at the revenue manager’s fingertips. At the top of the pile are dedicated revenue management systems such as Duetto or IDeaS, which work off historical data to make suggestions for optimal pricing on given dates.

For benchmarking purposes, many revenue managers will refer to products from hotel industry data specialists like GCA. Some of the most exciting developments, meanwhile, can forecast future demand for countries or individual resort locations, helping the revenue manager to adjust his or her future strategies accordingly. An example here is the UK-based OTA Insight, which has launched the industry’s first predictive market intelligence solution that captures hotel booking intent in real time.

What this means is that revenue managers are increasingly able to automate their data gathering and reporting tasks, freeing up more time to drill into the numbers to create the optimal revenue strategy.

Technology is valuable, but there is a huge amount of human input to the role. Experience counts, and no revenue manager can be 100% effective without all the insights and knowledge he or she picks up along the way.

You are always learning as a hotel revenue manager. No two days, and no two revenue management strategies, are the same. There will always be new tools coming in, new trends to analyze, new revenue opportunities, and new generations of guests with different tastes and motivations to accommodate.

About the Author

Rocio Montero is a Senior Lecturer at Les Roches. She teaches both undergraduate and postgraduate programs, focusing on rooms division operations and revenue management-related topics.