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Best Practices in Hotel Revenue Management Combining the use of traditional hotel management practices with a new waveof technology for optimum results

The Only Real-Time Revenue Management Software

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Best Practices in Hotel Revenue Management Combining the use of traditional hotel management practices with a new wave of technology for optimum results

The hotel industry, like many businesses is full of uncertainty. Sales can depend on a complex combination of factors that can be affected by anything from customer service to bad weather. Because of this, it is crucial to the success of a property that its owner and managers remain completely attentive—not to mention, strategic—when it comes to hotel revenue management practices.

Revenue management, also called yield management, in hotels is a practice that has evolved significantly in its rather short history. The practice was first implemented by hotels in the late 1980s, after the airline industry demonstrated great success using inventory, capacity and pricing to ‘manage’ revenue. Since then, revenue management has become one of the most essential and identifiable aspects of the hotel operating strategy. However, it is apparent that today’s brand of hotel revenue management differs considerably from that of 20, or even 10 years ago.

While strategies such as detailed historical analysis and emphasizing occupancy and ADR may have dominated revenue managers’ focus two decades ago, stock market-influenced algorithms and changes in the general approach to pricing strategy, channel management, inventory allocation and the use of information as pertains to revenue management have all greatly evolved.

With the advancement of technology, the best methods for optimizing hotel revenue management now include much more than the traditional practices of hotels in the past. In fact, in a recent industry survey undertaken by REVPAR GURU, just over 30 % of hoteliers indicated most of their business came from direct/phone reservations and just over 27% reported most of their business came from OTAs and online channels. This shows how the Internet is becoming an increasingly important channel when it comes to hotel bookings, which was not the case several decades ago. Because of this, using a combination of traditional hotel revenue strategies combined with practices that involve sophisticated automated software, allows hoteliers to strategically use up-to-the-minute information to give their property a competitive edge among other hotels and resorts. Additionally, adopting many stock market- based principles allows hoteliers to execute more effective revenue management. Strategic pricing, rate discipline, automation and smart computing are also integral parts of a successful hotel revenue management strategy.

Best Practices in Hotel Revenue Management


RevPAR

Strategic Pricing

Stock Market Pricing

Best Practice #1

Best Practice #2

Best Practice #3

In early revenue management practices, occupancy was key. The idea of more “heads in beds” was the main focus of hotel owners because it was believed that higher occupancy inevitably led to more revenue. Like many approaches in revenue management, this idea has changed significantly and continues to evolve.

With new metrics of the moment coming up every day—in fact, various analysts and experts are hyping ADR and even exotic constructions like GOPPAR (gross operating profit per available room) as the best yardstick for determining revenue management—RevPAR ultimately remains the best measure. RevPAR remains the only revenue management metric that a hotel can literally “take to the bank”- and as such keeping RevPAR at the forefront of any revenue management strategy is a best practice in the industry.

There is no doubt that pricing has always played a significant role in driving both occupancy and RevPAR. But in today’s economic climate, mainly because of unprecedented price transparency, rates have assumed an even greater role. Coming up with the most favorable rate to offer a potential customer—one that will stimulate enough demand to stimulate occupancy while not leaving a too-low ADR—has arguably become the single most important aspect of revenue management.

So, how does a hotelier determine what an optimal rate should be at any given time? Years ago, the answer would have been relatively simple. A hotel would merely look at historical pricing and from there, apply any rate discounts or increases to a predetermined rack rate. Today, particularly because of technology and the ever-growing number of online channels, it has become increasingly difficult for a hotel revenue manager to manually keep up with all sales channels. How can a hotel revenue manager solve this problem? Currently, the most effective revenue management systems actually rely on stock market principles to formulate complex algorithms that can generate with accuracy the optimal rate. These systems work in real time, fine-tuning rates at concise periods to sustain the best rate over time.

For many hotels, the principle of optimum pricing is an unfamiliar concept, but there is no reason this should be so. Optimum pricing ideologies have been used by financial experts, particularly those who work with commodities, for a long time. High-performing hotels have more recently used these principles in developing strategies that mirror systems in place at financial companies. These hotels utilize a comprehensive ...



revenue management system that sets prices based on both historical considerations and current market conditions, giving it a wider range than that of more traditional pricing strategies.

Just as most financial price-setting formulas use two decision makers for the highest level of effectiveness—with one system correcting and accounting for the other—sophisticated hotel revenue management programs do the same thing by offering a main program and a secondary program. The main program generates rates based on historical data, paying attention to account page positioning on online sales channels, competitors’ rates, inventory availability, as well as other variables, and then implements them across sales channels. The second program, meanwhile, monitors the first program in terms of effectiveness, and makes adjustments to its processes accordingly.

Because the two programs work off of one another, the entire system becomes adaptive, enabling these types of revenue management systems to time and again surpass traditional revenue management techniques, truly demonstrating the advantage of applying stock market principles to hotel revenue management.

The innovative nature of algorithmic and computational systems would be wasted without a significant measure of automation. Automation is the best practice that often makes or breaks a pricing strategy or the pricing aspect of a revenue management system. It is also perhaps the most visible advantage revenue management systems hold over the traditional approach to revenue management, yet few systems leverage automation to its fullest potential.

Most RMSs leave such time consuming tasks, like rate adjustments, to be performed manually, under the justification that they are too important not to be managed under the complete control of a human being. This is flawed reasoning because it actually requires a great deal of speed and response in order to achieve optimal results, an ability that any one person cannot attain simply because of their inability to work 24/7/365 days a year without breaks.

Automation is imperative to making up-to-the-minute, demand-based adjustments in pricing. An automated system can distinguish when demand for a room is too low for a particular price and drop the rate to encourage more buyers. Automated systems can also raise prices at the right time, recognizing high demand and therefore an acceptance for a higher rate. And the best part is that it can happen overnight and on weekends, even when the revenue manager is taking their well-deserved breaks. Automation allows a hotel to avoid leaving money on the table in the form of a room sold at a rate lower than a guest would ultimately be willing to pay. It can be that one factor that can take a hotel from 60% occupancy to 90% occupancy, sometimes even overnight.

Automation Best Practice #4



Determining which channel is selling inventory fastest is most often a minute-to-minute judgment, and that decision is best left to an automated system, which can make those decisions with less information than a human revenue manager. And although many systems claim that they are automated, most RMS usually only adjust once a day. A truly automated system will make many adjustments an hour, across multiple sales channels. An automated, algorithm-based computer program system of the appropriate sophistication, can recognize, by quickly combing data and by analyzing trends with a little less raw input, which channel is performing best, assigning inventory there at the appropriate price to generate the most bookings and the most money for each booking.

In today’s operating environment, one of the most visible aspects of revenue management is rate discipline. Two decades ago, rate discipline and its effects on brand identity and future room sales was barely considered, and still, the concept is subject to wide interpretation and can sometimes be at odds with other revenue management aims. So what exactly is rate discipline? This concept often comes up in reference to discounting or across-the-board rate cuts; it includes the theory that implementing deep discounts to boost occupancy or stimulate demand—a common practice during the recession—can actually depreciate the hotel’s brand image.

While sometimes hotels will have to lower rates based on demand—or, shall we say lack of—rate can run contrary to other important aims because sacrificing occupancy to maintain strict rate discipline can be as financially irresponsible as deep discounting. In fact, a rate discount negatively affects a hotel’s brand (unless, of course your hotel defines their brand by bargain prices). So how does a hotelier practice strategic rate discipline? It is by dynamically adjusting rates based on demand, without going too far in either direction.

Brands have immense value. Indeed, according to a 2002 Interbrand study, brand value accounts for approximately 38% of the value of the companies that own them. If discounting is damaging to a hotel’s brand, and maintaining one static rate is equally detrimental to RevPAR and occupancy, then the solution lies in variable rate, modified in real-time to best match demand conditions. Variable rates eliminate the predicament of whether or not to engage in across-the board discounting. Instead, the highest rate likely to generate a sale is presented to the right customer at the right time. This is feasible through the use of a sophisticated revenue management system, one that also manages multiple sales channels, administers room inventory, and optimizes page position on OTAs. To maximize occupancy and rate, however, we must go back to the practice of automation, where rates are modified subtly, in real-time, to avoid the pitfalls of wide-scale discounting.

In the end, just because a hotel offers a particular rate doesn’t necessarily mean a consumer will take that rate. Rate discipline through dynamic pricing provides a workable solution to this truism, and helps a hotel increase occupancy and RevPAR even in tough times.

Rate Discipline Best Practice #5



Using Real-Time Information

Price Prediction

Best Practice #6

Best Practice #7

As previously mentioned, the hotel industry has vastly changed over the course of a short time. And like everything else, it has entered the information age. Decades ago, a hotelier trusted a few dedicated individuals to keep track of competitors’ rates (call around), demand levels and booking pace. Certainly things have changed since then. The reason this valuable information is now widely available is due to the arrival of internet sales. Now, every hotel posts rates online through various sales portals and those rates can be monitored. Now, because of the staggering percentage of room sales made through the online channels, demand levels can be assessed minute to minute. And because hotels have unfettered access to this information through the Web, they can act on it in a quick and decisive manner. Unfortunately though, most hotels fail to adequately access this information, or if they do, they fail to leverage it effectively.

To keep track of this information effectively, especially as it is constantly changing, hotels need the right tools, which are most often found in a comprehensive, automated revenue management systems that can, among other things, accurately predict movements in hotel room price. Advanced revenue management system are not only capable of constantly consulting demand levels and monitoring competing hotels’ rates, they can also make adjustments to the rate being offered based on this real-time information.

Any hotelier can tell you that revenue management involves a certain measure of prediction. For this simple reason, it follows that any revenue management system will draw from other industries where prediction is at the core of their business. For instance, some revenue management systems use financial instruments to make predictions, or leverage emerging techniques like crowdsourcing or artificial markets. Meanwhile, others integrate option pricing principles to help generate optimal room rates. At any rate, the backwards-looking techniques currently in place at many hotels is fast becoming obsolete.

Predicting the direction of future prices may be a bit foreign to hotels, which often take a supply-side approach to rate setting. However, the most strategic approach to price prediction goes back to borrowing basic stock market concepts principles, which focus almost entirely on predicting what price the market will bear for a particular good in the near future. The hotel room, as a (relatively) uniform, highly perishable product, is as much a commodity as a barrel of apples. But as financial markets have methods to determine the optimal price of a particular good or service (futures markets, etc.), hotels tend to subjectively assign a rack rate, and modify the rate from there. A comprehensive revenue management system for hotels can set prices based on both historical considerations and current market conditions, giving it twice the range of more traditional pricing strategies.



Channel Management

Adapting For a New Era

Best Practice #8Channel management is an increasingly important practice as OTAs and third-party booking sites continue to thrive. In a sales environment that features more online channels than ever, the ability to manage rates across all OTAs is vital. When it comes to the hotel industry, there is currently a wide array of channel management systems available on the market and these are great tools to save time for revenue managers. However, each one of these systems lacks on key function—none are automated or integrated into a property’s pricing; they still require manual input, manual intervention and manual pricing decision to operate.

The ability to change rates and inventory allocation to various third-party booking sites individually is crucial, as each sales channel may exhibit different demand levels. The problem lies in the idea, which is still shared by many hoteliers, that a task such as channel management is far too important to delegate to a system or software. But the truth is, the only way to optimally manage the overwhelming number of sales channels is with the help of a comprehensive revenue management system that is capable of identifying demand levels on any one of hundreds of online portals where a hotel has inventory posted, then adjusting that rate or inventory allocation to maximize the revenue earned. Without automated channel management, this would be virtually impossible for even a talented team of personnel. Yet surprisingly, REVPAR GURU’s recent industry survey found an astounding 74.5% of hoteliers still rely solely on a human being to manage all aspects of their revenue management tasks, even in today’s fast paced industry, where information is changing every second.

As changes in approach to revenue management have flourished in the past few years, those approaches that work best have distinguished themselves as a special sort of best practices. These strategies integrate in real-time the automated distribution, allocation, pricing and yielding, while benchmarking against all competing hotels in a destination. These practices become achievable by a real-time RMS system that has fully-integrated channel management capabilities.

The best approaches to revenue management in general are those that use RevPAR as the dominant metric, and those that emphasize the usage of revenue management systems to enhance revenue managers’ efficacy, rather than making revenue managers take control of the minutiae of the never-ending calculations and pricing updates. In hotels displaying revenue management best practices, revenue managers think proactively, not reactively and focus more on optimizing processes and working with internal sales/marketing teams to develop and implement long-term pricing strategies that will complement the pricing updates handled by the RMS.




Survey Sidebar By conducting an industry survey over the past few months, REVPAR GURU set to find out how hoteliers are handling their revenue management, how they are being affected by today’s technological advances, and their thoughts on new generation automated hotel revenue management systems. Here are some of the results.

1. Which business source(s) is most effective for your property?

SALES



2. How does your property handle revenue management?

REVENUE MANAGEMENT



3. If you don't use an external RMS company, what concerns you most about implementing an automated RMS?

EXTERNAL RMS CONCERNS



4. Which metric do you feel is the most relevant to measure your RM efficacy?

RM EFFICACY

According to the survey results, the majority of hoteliers - 67% to be exact - have expressed that the most important factor of their revenue management efficacy, is maintaining RevPAR, yet only 11% of hoteliers are even using external revenue management systems in their daily operations. With Internet sales on the rise—34% reported the Internet as their most effective sales channel—it is more vital than ever to have an effective revenue management strategy to maintain business. Now is the time for hotels to become pioneers in the new age of the industry by implementing the use of a sophisticated, automated system that can perform all the best hotel revenue management strategies, leaving revenue managers time to do what they do best – develop strategy and oversee the system's operations.


Did you know that the REVPAR GURU system is the only technology solution available in the market that fulfills all of these very important best practices. So whether a bull or a bear market, the REVPAR GURU software solution (and the stock market principles upon which it was based) just makes good (dollars and) sense.

REVPAR GURU provides hotels around the world with an alternative revenue management software solution, designed to deliver maximum bookings and profits. As REVPAR GURU's custom-designed Yield Dynamic Price Engine is the only real-time revenue management software available on the market, it meets the rapidly changing needs of hotels in a very demanding business environment. REVPAR GURU’s solution offers dynamic rate optimization, real-time pricing, integrated internet and extranet yield channel management and GDS sales distribution, to increase a hotel's RevPAR intelligently and effectively, while maintaining rate integrity and automated rate parity. Since 2004, REVPAR GURU’s software solution has been used by hotels worldwide to increase occupancy and RevPAR.

Headquartered in Miami, Florida, additional information can be found at or by calling +1.786.478.3500.

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