In our last article , “What Can We Do to Improve Our Hotel’s Average Rate?”, we introduced you to the concept of hotel revenue management. This time, we’ll discuss the culture of revenue management in general and focus on how to implement the right strategy step by step to achieve the best results.
The Origins of Revenue Management: Sabre
We’ll start with the origins of revenue management, which date back to the 1970s and 1980s in the aviation industry. Revenue management emerged primarily for two reasons:
- The Deregulation of Air Travel
- The Emergence of the GDS (Global Distribution System).
The father of revenue management was Robert Crandall, then CEO of American Airlines. It was he who began offering seats he assumed would not sell at lower prices. He sought to compete with low-cost airlines and thereby increase profit margins.
At the same time, American Airlines created in the early 1970s Sabre, a new type of computer-controlled reservation system. By the middle of that decade , more than 75 travel agencies were already connected to it. This allowed them to save on telephone and telex costs.
In response, United Airlines created Apollo, while British Airways, Alitalia, KLM, and Swissair developed Galileo to compete with Sabre. Finally, Lufthansa, Iberia, and Air France developed the Amadeus system.
Later, these reservation systems were introduced into other types of services, such as car rentals and hotels.
What exactly does revenue management mean?
In short, it is the practice of optimizing revenue. Essentially , it is a combination of techniques that analyze the market, the product, and demand, and seek to influence consumer behavior in order to maximize the hotel’s profits.
I’d like to make a comment on this section. I’m referring to the difference between yield management and revenue management. These terms are often confused, which is why I think it’s important to specifically mention this.
In my opinion, yield management is a (less developed) technique within the field of revenue management. As mentioned earlier, the basic idea behind revenue management is simply to achieve the highest possible profitability over the long term. How? Well, by selling the right product to the right customer at the right price, at the right time, and through the most appropriate channel.
This valuable strategy should always be focused on customer satisfaction. In this way, we ensure that the optimization is sustainable. I would also like to add that all departments should be involved in the strategy to be followed. Otherwise, its effectiveness would be virtually nil.
Revenue Management Strategy for Hotels: Key Steps.
- Analysis of the situation. The situation of our business, our competition, demand, the market, and our target audience.
- Decision-making. Now that we understand our current situation, we need to make a decision (we need to know what we want).
- Implementing the Strategy. Once we have defined our goals and the actions we intend to take, we should begin implementing them. At this stage, it is very important to involve the entire hotel team.
- Monitoring. There must be ongoing monitoring to assess the effectiveness of the actions and strategies that have been implemented. We need to know whether we are meeting the goals we have set for ourselves.
- Feedback. For feedback to be effective and lead to continuous improvement, it must flow in all directions. The entire team, regardless of hierarchy, is part of this process.
Key metrics for comparing results
- RevPAR. Revenue from lodging per available room.
- TrevPAR. Total revenue per available room.
- GopPAR. Gross profit per available room.
- RevPAG. Revenue from lodging per available guest.
- TrevPAG. Total revenue per available guest.
- RevPASH. Revenue (used in bars and restaurants) per available seat per unit of time.
- RevPAM. Revenue (used in event venues) per available square meter.
- RevPATI. Revenue per inventory unit. Can be applied in various ways; you just need to adjust the formula.
Total Revenue Management: The Right Strategy
All hotel staff should be trained, motivated, and supported, and should participate in regular meetings. From this point on, we can refer to this as Total Revenue Management.
Revenue management should not be limited to rooms. There are many other services and products where a good revenue management strategy can make a difference, provided it has a positive impact on the income statement.
These services and products depend heavily on the type of hotel where we work. Some examples include: restaurants, spas, meeting rooms, paid activities organized by the entertainment team, etc.
Finally, this section should also emphasize that, when setting goals for each department, care must be taken to avoid establishing goals that could lead to conflicts of interest between departments. This would have a negative impact on the achievement of the overall goal of the institution in question.
Unfortunately, a lack of involvement and training among all hotel staff, a lack of goals, and conflicting objectives are two scenarios frequently encountered in some hotels. These hotels are victims of a poor implementation of a revenue management culture.
We hope you enjoyed this brief article and that it helps you establish a culture of revenue management and improve the profitability of your establishment. Always keep in mind the satisfaction of your guests and the involvement and training of your entire hotel or resort staff.
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