The Concept of Revenue Management

Revenue Management

Revenue management helps to predict consumer demand to optimize inventory and price availability in order to maximize revenue growth. The purpose of Revenue Management is not selling a room today at a low price to sell it tomorrow at a higher price. Revenue Management also means selling a room at a low price today if you do not expect higher demand.

Defining the concept

A general and widely accepted definition of Hotel Revenue Management goes as follows:
Selling the Right Room to the Right Client at the Right Moment at the Right Price on the Right Distribution Channel with the best commission efficiency (Landman, 2011).

Hotel Revenue Management is about becoming the architect of your own fortune. A hotel room is a perishable product since the number of hotel rooms is limited. As a result, customer satisfaction and pricing remain the most important dynamic variables, which are subject to Hotel Revenue Management. It is all about balancing demand and capacity by forecasting prices for the purpose of maximizing the effectiveness of hotels’ resources.

However, the rise of the internet during the 21st century (and with it the rise of Online Travel Agencies and Review Portals) has added another dimension to this field. This development has made traditional Hotel Revenue Management much more complex while providing new ways to cheaply and objectively measure both customer satisfaction and pricing.

Origins: Arising from airlines’ yield management

Originating from a mathematical sales model within the airline industry, the concept made its way into the hospitality industry as Hotel Revenue Management in the 1990s. Marriott International was one of the first major players to draw large earnings by introducing the concept into its business strategies. Hotel Revenue Management has grown in importance ever since.

Hotel Revenue Management in Practice

As there are many aspects that must be taken into consideration, it is impossible to effectively apply the concept of Hotel Revenue Management overnight. You need to carefully analyze and evaluate big data sets about your property and its business environment.

This includes information about basic factors like:

In earlier days, all these data were evaluated manually by the Hotel Revenue Management. Over the years, more and more elaborated Revenue Management Systems (RMS) were designed with the purpose of facilitating this process. However, the functioning of Hotel Revenue Management has fundamentally changed within the past decade. Demand patterns have become much more unpredictable, while increasingly dependent on user-generated content, especially reviews.

This is why, next to Revenue Management Systems, also Review Management Systems, working complementary to each other, have grown in importance. Customer Alliance offers a professional Review Management tool that is designed to effectively close the gap between Review and Revenue Management.

Revenue Management challenges the resources in the importance of gathering information about the market so that you can be proactive and not reactive. Use the information to divide your market and adjust your products through distribution, to the right customer at the right time and at the right price.

Revenue Management is a concept that not only maximizes in high period demand, but it also helps stimulating demand in low periods while avoiding pricing cannibalism. Revenue Management is long term strategic, takes all revenue with its profitability into consideration, can sell low rates even in a high demand period.

What makes hotels suitable to be able to apply Revenue Management

• fixed capacity
• perishable product
• high fixed costs and low variable costs
• the product can be priced differently
• demand evolves
• the product can be sold in advance
• the market can be segmented

• Hotels
• Car rental, Train companies
• Theatres, Cinema
• Now starts with Restaurants
• offers lower prices at the time of the week when demand is low