Revenue is important in any business, and in hotels and hospitality, it can be hard to keep track of revenue due to the constantly-shifting nature of the business. If you are looking at a career in hotel management, it is vitally important to know the right metrics for measuring hotel revenue, as well as knowing how to improve your hotel’s income.
In this article, we’ll go over everything from the history of revenue management to the different ways you can assess revenue in a hotel. If you want to learn more about revenue management and how vital it is for the hospitality sector, try our hospitality degrees, which give you all the skills and knowledge you need to work in hospitality.
A short history of hotel revenue management
Revenue management as a whole started in the airline industry in America. The idea was first addressed properly in 1953 and came about because of the need to sell as many seats as possible before a plane takes off while working within the limited number of seats on the plane. Revenue management has evolved since then and has become much more complex, with specific branches tailored towards certain fields, including the hospitality industry and hotels.
What is hotel revenue management?
The basic idea of revenue management works for any industry where there are certain overheads and running costs regardless of the income that the company is getting, as well as a limited amount of products that can be sold and a deadline by which they must be sold. In the hotel industry, this mostly refers to the maximum number of rooms the hotel has, which all ideally have to be sold by the end of the night. All of this is weighed against the costs of running the hotel, and managers have to properly analyze and predict trends in order to maximize profits.
The key basics involved with revenue management in the hotel industry are:
- Knowing the market – Having good market intelligence is vital because it helps managers know who their target audience is, helping them tailor their advertising and offerings more
- Knowing the competition – This helps managers figure out how to improve their market share by looking at what does and doesn’t work for competitors, as well as showing possible gaps in the market
- Segmentation – Considering different target audiences as distinct groups
- Demand – Looking at when demand is higher or lower and changing pricing and advertising appropriately
- Making the most of marketing – This includes making sure you are visible as well as using the best platforms possible for your target audience
As well as this, there are plenty of specific strategies that hotels can use for their revenue management, which we will go over later in this article.
Of course, there are other ways that hotels make a profit as well, and these have to be considered in a hotel revenue management strategy as well. This includes restaurants, bars, and other ways that guests spend their money at a hotel business.
Why is revenue management important for the hotel industry?
Having effective hotel revenue management can help in many ways, such as:
- Increasing income
- Selling rooms for the highest values possible
- Minimizing unsold rooms
- Reducing waste products such as food and drink
- Managing resources better
- Having the right amount of staff working at any time
Since there are always costs for running a hotel regardless of how many guests you have, it is vital to try to reduce outgoings while increasing the number of rooms you sell and the total spend of each guest.
What are the revenues of a hotel?
The main revenues of a hotel are:
- Rooms – This is the most direct way for hotels to generate income. This is the money from guests renting rooms, and it is offset by the expenses of paying for the building, staff wages, and utilities.
- Restaurants and food services – This is often overlooked, but it is potentially a big revenue earner for hotels. This includes restaurant food and room-service meals, and it is weighed against staff costs, utility costs, and food costs.
- Alcohol – With most hotels having a bar, drinks income can be significant. Again, this has to cover the costs of staff and ingredients before a profit can be made.
- Events – Events such as weddings, conventions, or conferences can be high earners for hotels, as they will often book conference rooms as well as blocks of rooms. This can make it more reliable for those dates compared to simply renting the rooms as normal.
- Parking – For hotels with a car park, parking can be an additional way to bring in money, though not all hotels charge for this.
- In-room services – Such as mini bars, telephone services, TV, and Wi-Fi options.
- Ancillary services – This includes a lot of options that not all hotels offer, such as laundry service, concierge service, a spa, or other recreational facilities.
- Renting to other businesses – While a lot of hotels have their own restaurants, bars, and other services, another option is to have other businesses that pay rent to operate inside the hotel.
In order to be successful, most hotels have a mix of all these revenue types. It is important for a revenue manager to learn how to balance all these and make sure that they are maximizing the potential of the business.
Who is responsible for revenue management in a hotel?
The title given to the person who handles a hotel’s revenue is the Revenue Manager. Depending on the size of the hotel, this might be the only role someone has, or it might be something done alongside other managerial duties – though there are some reasons why hotel management in particular benefits from studying hospitality vs a business degree.
Looking at hotel revenue management as a career? Studying hospitality revenue management can help give you all the skills needed to work as a revenue manager, whether that’s for a smaller hotel or for a large chain of hotels.
This world-leading program teaches you everything you need to know about driving revenue through technology, data, and analytics.
What are the most important revenue metrics for a hotel?
When you are looking at revenue management for hotels, there are several different metrics that can be used. Some of the main ones are:
Average daily rate
Hotel pricing can vary and fluctuate a lot based on seasons, weekends versus weekdays, special events, and other factors that can impact demand. On top of this, occupancy will also change the income day-by-day. Using the average daily rate (ADR) can help make sure that you can look at the revenue the hotel is getting without it being skewed by these changes. The higher the ADR is, the more money a hotel is getting from occupied rooms and other services, meaning that you can also tell if you need to work on occupancy or total guest spending during their stay to maximize revenue opportunity.
Occupancy
Looking at the occupancy rate will help tell a revenue manager how well their available space is being put to use. Used in conjunction with the ADR, this can help show where the weaknesses are in their revenue strategy. However, the occupancy rate isn’t always easy to assess. This is because achieving 100% occupancy isn’t always going to be the most profitable for the company. Having a higher occupancy usually means lowering the room rates to entice more sales. This could actually decrease the overall profit from the rooms and lower the ADR — this is why the two must be used together to calculate the success of your revenue strategy.
Revenue per available room (RevPAR)
This measurement lets you look at revenue without having to calculate the average daily rate and occupancy rate. The revenue per available room is important because it doesn’t just show how much you are making in total, but also considers the shortfall based on rooms that are unoccupied. This can also be used alongside an aim of how much a hotel needs to get per room per night in order to make a profit.
Why use metrics?
Using metrics is important because it helps to show how well a strategy is working to improve revenue. This helps a revenue manager improve their strategies and narrow down what works or doesn’t work for their hotel — all things which can be learned during a hospitality degree.
What are the strategies to increase revenue in hotels?
There are lots of different strategies that people can use in order to increase the revenue growth of a hotel. Let’s take a look at some of the more common ones.
Forecast-based pricing
This is where hotels adjust the price of rooms based on what they expect the demand will be. For example, this could be increasing prices during the holiday season to get a higher income. Alternatively, it could be offering discounted rooms during weekdays when demand is likely to be lower.
Rate parity
This means making sure that prices are consistent across different booking platforms. While this might not seem like a way to maximize revenue, it works because it helps to build confidence and trust with customers, which can lead to more bookings.
Segmented pricing
This means selling rooms at different prices to different types of customers. For example, having frequent-customer discounts or lower rates for business customers who might offer more bookings long-term.
Discounts for direct bookings
Discounting direct bookings can encourage customers to book directly, helping you avoid paying booking fees to third-party websites.
Package deals
Offering multiple rooms for a reduced price can also help ensure more bookings, which is vital if the occupancy rate is low.
Summary: revenue management
Revenue management for hotels is vital because it links to how much the hotel makes versus the outgoings. This helps ensure the best use of the hotel’s resources and the most efficient gain of income through revenue management strategies. There are plenty of effective revenue management strategies, which can be learned in our hospitality management degrees such as the digital transformation program.
