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4 Basic Components of Careful Hotel Revenue Management

All professionals in hospitality industry agree that sound hotel revenue management is critical to the company’s success. No doubt, it is one of the most powerful tools available to managers, that allows to identify areas of success and failure of the hotel’s work, as well as trends related to demand and customer behaviour.

Definition of “revenue management”

Revenue management is a demand-based strategy aimed at maximising an organisation’s revenue through predicting consumer behavior, forecasting demand and optimising prices for several different types of products or services.

Revenue management is sometimes confused with yield management. Although the terms are very much interrelated, there are some differences. Yield management is concerned with using data to ensure the right room is sold to the right customer, at the right time, for the highest possible price. Revenue management has in its turn a wider focus – it also deals with maximising the revenue from hotel rooms, but at the same time it deals with money made from other sources, like food and laundry services.  

Historical background of revenue management

The first revenue management practices were launched after the deregulation of the US airline industry in the late 1970s. The result of these actions was strong business competition between airlines. To fill at least the minimum number of seats and to cover fixed operating expenses, the airline companies started a fierce price war. In order to survive through the war and get as much revenue as possible, the companies should be managed in a certain way – by using revenue driven tactics.

Nowadays Revenue Management is related not only to airline companies. It has been introduced to various other industries. The main of them are hospitality, food and drink, railroad and entertainment.

4 key principles of hotel revenue management

As the term “revenue management” is frequently misunderstood and used in the wrong way, it is important to know and understand its key principles and components. 

The first one is the market segmentation. The aim of segmentation in the hotel revenue management is to adapt your hotel business strategy to the customers’ interests. If a hotel wants to maximise its revenue, it’s necessary to divide all the clients into different groups. This will help the hotel to better understand its customers’ needs in order to apply different marketing strategies and price policies.

The second principle is the pricing policy. Correct pricing is, without doubt, one of the most critical success factors in hotel development. The prices should be adapted to each segment and vary from one to another. The right pricing strategy can help hotels get more bookings and increase customers’ loyalty. 

The next principle is the forecasting of demand. A hotel revenue management department tries to predict the future sales based on the results of the previous years or the seasonality of the services it offers. Demand forecasting helps hotel managers reduce risks, prepare the budget, make critical decisions and take corrective actions in time, if something isn’t right. Without an accurate forecast, hotels cannot be effectively managed.   

The fourth principle is the inventory management. It allows to coordinate the supply, storage and distribution of materials to make sure there is adequate quantities for the current needs without excessive oversupply or loss. Inventory control is also used to prevent losses or theft. According to the research done a few years ago by the American Hotel & Lodging Association, thefts cost hotels more than $100 million a year.

Conclusion

To sum up, revenue management is a relatively new type of business development strategies. It was born about 40 years ago in the airline industry and rapidly expanded to other sectors, including hospitality.

Hotel revenue management provides the opportunity to maximise the amount of money the hotel business generates. It allows decision makers to make informed choices and to respond quickly to various situations.

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