The art and science behind Revenue Management

Revenue Management is known as the art and science of forecasting demand. It also signifies the simultaneous adjustments of price and availability of products to match that demand. A product can be anything, from an airline seat or a hotel room to a rented office space. 

Background

Revenue Management or RM (going further) was first used in the airline industry. Even before the emergence of RM, BOAC (now British Airways) offered several capacity controlled “Early Bird” discounts to stimulate demand. They experimented with differentiated fare products along high demand sectors to increase profitability and ensure maximum occupancy inside the aircraft. 

Robert Crandall, former chairman and CEO of American Airlines took it a step further. He excelled in an area called yield management which focused on maximising revenue through analytics-based inventory control. Under his leadership, American Airlines continued to heavily invest in yield management’s forecasting and inventory control capabilities and post record profit year after year. 

Several industries took note of American’s success and later, J.W. Bill Marriott Jr., CEO of Marriott International discussed the success of yield management with Robert Crandall. It seemed Marriott International faced many similar issues that airlines did. Most commonly, some of the issues were perishable inventory, customers booking in advance, extreme competition and unpredictable demand. Marriott International and many others began calling this practice as “Revenue Management”. Slowly there were several segments in the hospitality industry, such as restaurants, spas and clubs which started to implement and execute RM techniques. 

Traditional inventory-centric RM vs. Modern customer-centric RM

As per Noone et al. (2011), traditional inventory-centric RM targets optimization of inventory, that is, to sell the right number of rooms at the right time at the right rate; whereas customer-centric RM analyses customer data to yield insight into the most valuable customers and fill the demand continuously and cost-effectively. With the rapid advancements of technology-based tools, such as social media and digital marketing, a completely new branch has been added to RM. 

In today’s age we can analyse consumer behaviour by looking at trends such as shopping patterns, browsing history, locations visited and their areas of interest: such as food, travel, lifestyle, etc. This huge chunk of information forms the basis of RM strategies of several high-end hotels. They can target specific room rates and/ or packages to specific geographical locations or age groups. Hotels also go above and beyond to provide an out of the world experience to the target group. 

With the increase in use of technology, there comes several opportunities and challenges for a hotelier. 

Key steps for effective Revenue Management

Effective Revenue Management comprises of several steps out of which the below mentioned are crucial:

  • Market Segmentation
  • Booking Behaviour & Historical Patterns
  • Demand Forecast & Displacement Analysis
  • Pricing
  • Overbooking
  • Information Systems

RM professionals must use appropriate tools specific for the industry they are in. Most hotel Revenue managers work with two strategic levers i.e., duration control and pricing management. Duration control or inventory control works on the pace of customer arrivals as well as the length of stay (LOS) restrictions. With duration control, a revenue manager can offer a particular room type for ‘x’ number of days at ‘x’ amount. Whereas, Pricing management involves setting best available rates for certain types of target customers. It involves the development of the best set of prices for various customer segments and the determination of rules that determine who pays what price and the perceived fairness of those prices. 

Revenue Management is multi-faceted in nature

Many folks associate RM with quantitative techniques such as forecasting, optimisation and overbooking, however, I truly feel it is multi-faceted in nature and has more to it. Also being completely dependent on a RM system/ software doesn’t guarantee success. For a company to be successful with RM, it must understand the needs and wants as well as the price sensitivity of its target segment. It must fully integrate its RM systems with its PMS (Property Management Systems) and it should be ready to properly train and encourage its workers and managers to have a revenue driven mindset and quickly react to competitive pressures from other hotels and distributions channels.

How can Key Hospitality help you with Revenue Management?

We work on a project basis with each project having a definite purpose and aim. Our service focuses on many areas of your business including understanding your needs, market positioning, pricing and segmentation, forecasting, educating and coaching your team as well as deep dive into your systems and procedures.

We believe every hotel should have competent staff who has proper knowledge about Revenue Management. To encourage fellow hoteliers to have a revenue-based mindset, we also conduct training programs. Our training comprises basic, intermediate and advanced level Revenue Management, where we emphasise on creating a revenue culture within your team and your company. You can request an individual or group training. We also offer you a tailor-made program according to your needs.

For further enquiries, please contact us and we will be happy to help!