Revenue management for hotels: what it is and where to start
Revenue management is how a hotel decides what to charge, for which room, to which guest, on which night and through which site, so its rooms bring in the most over time. It forecasts how busy each night will be and sets prices and conditions to match. Yield management is the older, narrower name for the same idea, mostly about rooms and prices.
Also called: yield management, hotel revenue management, RM, revenue manager.
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What it means
EHL Hospitality Business School calls revenue management the art and science of predicting swings in demand and responding in a way that protects or raises revenue. Its core, as EHL puts it, is selling the right product to the right customer at the right time for the right price.
Airlines began it in the late 1970s, EHL says, and hotels followed. Both sell something that is lost if it isn't sold on the day: an empty room tonight can't be sold tomorrow.
Revenue management and yield management
The two names are often used for the same thing. EHL draws the line this way: yield management is the narrower part, about getting the best mix of price and occupancy from one kind of stock, such as rooms; revenue management is wider, and takes in the guests you sell to, the sites you sell through, and everything a guest spends beyond the room.
For a small hotel the difference matters little. Start with rooms and prices, then look at which sites the bookings come from and what each one costs you.
What it covers
- Forecasting: how busy each coming night will be, from last year's bookings, your town's events and how fast rooms are selling now.
- Pricing: a price for each night, room type and kind of guest, which moves with demand.
- Conditions: minimum stays, non-refundable prices and early-booking prices, which let you charge different guests differently.
- Rooms and sites: how many rooms to offer on each booking site, and when to close a site on a busy night. EHL notes that giving too many rooms to booking sites costs commission, while holding too many back for direct guests risks empty rooms.
- Measuring: what each night, month and site brought in, against last year.
The figures it reads
- Average room rate: room revenue divided by rooms sold, what a sold room brought in.
- Occupancy: rooms sold as a share of rooms available.
- RevPAR: room revenue divided by rooms available, which takes in both.
- Booking pace, which EHL describes as the speed bookings arrive for a future night against the usual pattern: the earliest sign a night needs a higher or lower price.
- Length of stay: how many nights each booking lasts.
- Cost of each booking: what each booking site keeps in commission, against a booking on your own website.
A worked example
A 25-room hotel has 775 rooms available in December. Last December it sold 496 of them, 64% occupancy, at an average of ₹5,200: ₹25.8 lakh, a RevPAR of ₹3,328. This year it marks its ten busiest nights early and prices them higher. It sells 480 rooms, 61.9% occupancy, at an average of ₹5,700: ₹27.4 lakh, a RevPAR of ₹3,530. Fewer rooms sold, more money, and fewer rooms to clean.
Where a small hotel starts, step by step
- 1Write down last year's occupancy and average room rate for each month, and for each day of the week.
- 2Mark the busy nights for the coming months: festivals, weddings, holidays and events in your town.
- 3Set a price for each kind of night, and raise the busy ones.
- 4Check every week what the hotels around you charge for the coming nights.
- 5Check that the booking sites show your rooms at the prices you set, and no lower than your own website.
- 6Each month, compare RevPAR with the same month last year and ask what moved it: the price, the rooms sold, or both.
