hotel revenue management

WHAT IS HOTEL REVENUE MANAGEMENT ?

Defi ning the conceptBecome the architect of your own fortune

New dimensions with the evolution of technology

A BRIEF LOOK INTO THE PAST OF HOTEL REVENUE MANAGEMENT

Origins: Arising from airlines’ yield managementParallels to the Hotel Business

Evolution: Hotel Revenue Management comes into being

HOTEL REVENUE MANAGEMENT IN PRACTICAL USE

The Big DataApplying Hotel Revenue Management

ONLINE REVIEWS –A NEW APPROACH TO HOTEL

REVENUE MANAGEMENTAn increasingly obsolete concept

Times are changing – along with customer demands

USER-GENERATED CONTENT IN MODERN HOTEL REVENUE MANAGEMENT

A case study provided by SASApplying BCG to Hotel Revenue

Management – A depictionTop left quadrant – Rough and Rich

Top Right quadrant – Luxury ClassBottom left quadrant – Discounter

Bottom right quadrant – Low Price Quality

IN A NUTSHELL

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3 More on: www.customer-alliance.com/en/knowledgeTHE CONCEPT OF HOTEL REVENUE MANAGEMENT

“ Revenue Management has contrib-uted millions to the bottom line, and it has educated our people to manage their busi-ness more eff ectively. When you focus on the bottom line, your company grows.”-- Bill Marriott Jr., Chairman and CEO, Marriott International --

Defi ning the concept

A general and widely accepted defi nition of Hotel Revenue Management goes as follows:Selling the Right Room to the Right Client at the Right Moment at the Right Price on the Right Distribution Channel with the best commission effi ciency (Landman, 2011).

Thus, the main objective of Hotel RevenueManagement would be to maximize a hotel’s profi t by appyling knowlegde about various markets, competition and trends while at the same time monitoring, analyz-ing and reporting on demand patterns.

WHAT IS HOTEL REVENUE MANAGEMENT ?

Become the architect of your own fortune

In the end, Hotel Revenue Management is about becoming the architect of your own fortune, being proactive as opposed to being reactive. A hotel room is a perishable product since the number of hotel rooms is limited. As a result, customer satisfaction and pricing remain the most important dynamic variables, which are subject to Hotel Revenue Management. It is all about balancing demand and capacitiy by fore-casting prices for the purpose of maximiz-ing the eff ectiveness of hotels’ ressources.

New dimensions with the evolution of technology

The rise of Online Travel Agencies and Review Portals during the 21st century has added another dimension to this fi eld. On the one hand, this technological pro-cess has made traditional Hotel Revenue Management much more complex. On the other hand, it has provided new ways to cheaply and objectively measure both customer satisfaction and pricing.


Origins: Arising from airlines’ yield management

Hotel Revenue Management goes back to the concept of yield management, devel-oped in the late 1970s within the airline industry. In order to maximize revenues from a range of diff erently discounted air-plane seats, a mathematical approach was introduced, recognized as the beginning of revenue management as a science.

Parallels to the Hotel Business

As a matter of fact, hotel and airline busi-nesses are similar in a number of ways. Just like airline seats, hotel rooms are limited and have to be sold before a certain date – making the trade good a perishable product. In addition, both industries have to adjust their off ers to a constantly varying demand which depends on weekends, weekdays and holidays. Furthermore, airlines and hotels off er a range of priceand service rates for their customers to choose.

Evolution: Hotel RevenueManagement comes into being

This is why the concept of yield manage-ment eventually started to be applied on hospitality industry, during the 1990s. Because “yield” was a term that applied more to the airline industry, this practice started being referred to as Revenue Man-agement. Marriott International was one of the fi rst major player to draw large earnings by introducing the concept into its business strategies. Hotel Revenue Management has grown in importance ever since.

The international Hotel Association expresses it this way:

“ Yield Management is the must- have business planning tool for hoteliers in the 1990s and beyond. The computerized functioning [mathematical model] of yield management is complex, but the concept is simple: By using a combination of pric-ing and inventory control, a hotelier can maximize profits from the sale of rooms and services.”

A BRIEF LOOK INTO THE PAST OF HOTEL

REVENUE MANAGEMENT


HOTEL REVENUE MANAGEMENT IN

PRACTICAL USE

“ When you talk about Revenue Man-agement, people like the concept, but they have no idea how to eff ectuate the concept. There’s a market out there for Revenue Management that’s just unbelievable!”-- Herb Kelleher, Chairman and CEO, Southwest Airlines, Inc. --

The Big Data

As there are many aspects that must be taken into consideration, it is impossible to introduce eff ective Hotel Revenue Man-agement overnight. Hotels need to un-derstand and use all of the specifi c tools, products and services available to them. The most important thing to have, though, is signifi cant data tables about your prop-erty and its business environment. This includes information about basic factors like

• Past occupancy rates • General sales • Company target groups • Customer segmentation• Market(share) information• Customer satisfaction

but also about external infl uences such as

• Past weather conditions • Holiday and event information• Closing of nearby hotels • Competitor price information and similar circumstances that are likely to aff ect your business climate.

Applying Hotel Revenue Management

You can decide to either buy a Revenue Management System from a specialized company or to hire experts to build your own system, adjusted to the particulari-ties of your hotel. In both cases, you have to align your Hotel Revenue Management approach to your general company strat-egy as well as to other sectors of the ho-


tel. For instance, combining insights from your marketing department and revenue management will provide a clear picture of a customer’s purchase history or booking preferences. This is why a revenue man-ager should also be very aware of his hotel Marketing Plan (which you can learn more about in our article Hints for creating a succesful Hotel Marketing Plan). But even with all of that the booking site remains one of the most important opportuni-ties to increase profi t. A revenue manager should always be interested in increasingsales while simultaneously lowering

distribution costs; an effi cient website can off er both these advantages, as it is the cheapest booking source for bookings (learn more about it in our whitepaper Hotel Website Secrets).

However, the functioning of Hotel Revenue Management has fundamentally changed within the past decade. Demand patterns have become much more unpredictable while increasingly dependent on user gen-erated content, especially reviews. This is why we want to present a new approach to Hotel Revenue Management.


An increasingly obsolete concept

Todays’ markets have fundamentally changed, both when it comes to demandpatterns and purchase behavior. This is why most existing Hotel RevenueManagement approaches seem to beoutdated. Developped decades ago, theconcept behind yield and revenuemanagement is still a daily part of the hospitality business. Many revenue man-agers are working with systems that are not adapted, and therefore cannot keep up with the rapid social and technological changes we face. Online Travel Agencies have come into being, establishing large marketplaces which are widely used by cutomers nowadays. On the one hand, they generate demand for hotels, but on the other hand, they impose high commis-sions for their role as intermediaries.

Times are changing – along with customer demands

Hotel Revenue Management has become quite a complex fi eld. Today customer sat-isfaction is a key factor of success and bad reviews are quickly spread out... Long-lasting satisfaction is much harder to achieve when the market of potential guests is basically unlimited. However, online review portals and review analytic software (as provided by Customer Alliance) off er new and cheap ways to eff ectively measure customer satisfaction. Next to Revenue Management software, eff ective review management can help to more directly formulate and eventually achieve business goals. By using professional review analytic solutions, hoteliers can gath-er feedback that can help them determine appropriate pricing for their entire range of products and services, as well as for diff erent customer groups.

THE AGE OF ONLINE REVIEWS –

A NEW APPROACH TO HOTEL REVENUE

MANAGEMENT

–


A case study provided by SAS

The American analysis institute SAS (statis-tical analysis system) conducted a scenario-based online study, in order to investigate the general booking behavior of people searching for an accommodation via onlinechannels. The study’s participants were asked to select a four-star hotel in a particular city, where they might theore-tically spend a vacation with a friend. These are the key fi ndings of the online study:

“ • Reviews and price are the most impor-tant infl uencers of choice. While consumers did pay attention to aggregate ratings, TripAdvisor rank and, to a lesser extent, positive reviews contrib-uted the most to consumer choice behav-ior, closely followed by lower price.

• Negative reviews remove you from the choice set. Period.

Lower price or higher ratings do not over-come the impact of negative reviews. Consumers simply will not choose a hotel with negative reviews. Hotels that are in this unfortunate situation should focus on improving their reputation.

• Consumers prefer to pay a lower price. While consumers would go for a higher-priced hotel when the reviews and ratings were better than the alternatives, all things being equal, they will look for the lowest price. Hotels need to understand their position relative to their competition both on reputation and on price in order to take advantage of any pricing power associated with positive feedback.

• Consumers only notice high ratings and rankings.Results showed that consumers only notice ratings and rankings when they are as high as other compared choices. Consumers do not

USER-GENERATED CONTENT IN

MODERN HOTEL REVENUE

MANAGEMENT

SATISFACTION

PRIC

E

Rough and Rich

LuxuryClass

DiscounterLow Price

Quality


place any value on the comparison between low and mid-level ratings and rankings.1

The bottom line is that driving revenue and share in the hospitality industry is no longerjust about competing on price. Consum-ers are clearly turning to user-generated content to make their purchase decisions, in particular, reviews. This means that hoteliers must not only keep an eye on how they are priced relative to the market, but also on how they are positioned in terms of reputation.” 2

Applying BCG to Hotel Reve-nue Management – A depiction

As we prefer to present tangible results rather than ambiguous theory, we pre-sent a modifi ed version of the BCG-Matrix (a growth-share matrix developed by Boston Consulting Group). This graph should objectively position a hotel in relation to its price and customer satisfac-tion. The vertical line represents the price level while the horizontal line indicates

general customer satisfaction based on various selected factors (Customer Alliance off ers a signifi cant rating based on real reviews and ratings extracted from the main review portals within a Customer Satisfaction Index).

Top left quadrant – Rough and Rich

If your hotel is positioned within the top left quadrant, your prices are too high in relation to your online reputation. Thus, you should either concentrate on improv-ing your general quality – particularly with regards to your negative reviews’ main cri-tiques – or you should decrease your price level. Very few will still be successful while in this quadrant. In some special circumstance – you are well accepted by an exclusive niche, or you happen to have little competi-tion in your surroundings – your hotel might still be able to survive and thrive while in this category. However, such circumstances are likely to change sooner or later, so even if you are doing well, you should get ahead of

1, 2 Mc Guire, Kelly. Pricing in a Social World:

How consumers use ratings, reviews and

price when choosing a hotel. Retrieved on

22.05.2014, 11.27 CET from:

http://blogs.sas.com/content/hospitality/

2013/10/24/pricing-in-a-social-world2/


the game and already take the time to work on those areas which are subject to severe criticism. From the perspective of Hotel Rev-enue Management, it is always in your inter-est to improve your reputation.

Top Right quadrant – Luxury Class

You are off ering outstanding quality and being well accepted within an exclusive se-lection of guests. Your property is consid-ered a luxury hotel which customers are willing to pay a high price for. However, as Paul Kerr, CEO of Small Luxury Hotels of the World puts it, “The word luxury has certainly become an overused term … but that said, the standard of luxury is now defi ned by the consumer’s expectations and experience”. This being the case, you should continually ask yourself whether you are suffi ciently fulfi lling the demands of your customers to maintain the high price level.

If you are not truly fulfi lling your potential, you should defi nitely think about occa-sionally lowering prices and applying old fashioned Hotel Revenue Management approaches in order to sell out your rooms.

Bottom left quadrant – Discounter

Hotels in the bottom left quadrant fi nd themselfes positioned in the “discount market”. Your prices are low, and so is your quality. As a discounter, not meeting the highest demands is acceptable, to a certain extent. You should, however, be aware of what your negative reviews say about you.

As shown by the case study above, prices alone cannot make up for a very bad rep-utation. Thus, you should concentrate on those points of criticism that are impor-tant for your target groups (e.g. students, travelers, seniors). If you are well known for off ering at least moderate quality for small prices, people will overlook certain defi ciencies and your Hotel Revenue Man-agement concept will be worthwhile.

Beside that, you should always should always be on the look-out for cheap opportunities that might improve your reputation, driving additional demand to your property or allowing you to bring up your prices now and then.

Bottom right quadrant – Low Price Quality

You have done an excellent job building up a good reputation that goes hand in hand with fair pricing. People feel comfortable at your property, even if it isn’t luxury. You meet the necessary requirements to sat-isfy your guests and seem to know your customer very well. Some RevPar calcu-lations for your Hotel Revenue Manage-ment might provide you with some extra income. However, maintaining your good reputation should always be your fi rst pri-ority, since this is the key to success in the low-budget hospitality market.


The concept of Hotel Revenue Management originated from the airline industry’s yield management and was later adapted to the hospitality industry. Many revenue mana-gers initially concentrated on historical data rather than up-to-date demand. This is why the second part of this white-paper focuses on the fast technical and societal evolution that took place dur-ing the past decades. Travel behavior has fundamentally changed and opened up new dimensions within the fi eld of Hotel Revenue Management.

If ever a general conclusion can be drawn concerning the complex fi eld of Hotel Revenue Management, it should be a simpleone like the customer is always right!

In order for a hotelier to maximize revenue,it is crucial to accurately react to the demands of hotel guests. While this has always been important, today Hotel Rev-enue Management has to be even more dynamic and fl exible in terms of price struc-ture than it has been before.

Even though the presented model is limit-ed to two variables – price and customersatisfaction – it also can be used as a handy tool for Hotel Revenue Management to anticipate cash fl ows and make resource-allocation decisions.

Due to the rise of online travel research and online bookings, user generated con-tent such as reviews have become a – if not the – major decision factor for customers.

Thus, the correct combination of pricing and online reputation might be the key to driving customers to your property and eventually renovating the traditional con-cept of Hotel Revenue Management.

IN A NUTSHELL

About Customer AllianceCustomer Alliance is a Berlin-based company offering smart hotel solutions. Officially founded in 2009, we have over 3,000 customers from the hospitality industry in more than 35 countries.

Our core product is the Review Analytics software which helps hoteliers manage all their online reviews in one single place. We also help hoteliers actively generate more reviews both on external sites and their own website to strengthen their online reputation and increase visibility and direct bookings.

DisclaimerEvery effort has been made to make this manual as complete and as accurate as possible. However, there may be mistakes both typographical and in content. Therefore, this text should be used only as a general guide and not as the ultimate source of published information. Furthermore, this manual contains information that is valid only up to the printing date.

The authors, advisers and publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused or alleged to be caused directly or indirectly by the information contained in this manual.

Copyright © 2015 von Customer AllianceAll rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

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THE CONCEPT OF HOTEL REVENUE MANAGEMENT


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HOTEL WEBSITE SECRETS TOGETTING MORE RESERVATIONSFILLING MORE ROOMSAND TURNING ONE-TIME GUESTS INTO REPEATING CUSTOMERS

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