Where dows revenue management come from?
Today we review the main aspects that gave birth to what we know today as revenue management.
Revenue Management is formed by the word “revenue” and the word “management”. Though there is a Spanish translation, gestión de ingresos, the English term is used as is in the hotel sector.
WHAT IS IT?
Revenue Management consists of selling the right product at the right price at the right time to the right client through the right distribution channel. This set of techniques, whose main manifestation is price discrimination according to demand, arose in the airline sector at the end of the ‘70s. Today, it is successfully used in the hotel sector, mainly leading to an increase in the hotel’s revenue. In RM, it is necessary to work on key points of the company, such as segmentation, product definition, pricing strategy, competitive analysis, demand forecasting, and management of distribution channels. Ultimately, the aim is to optimise and increase our hotel’s revenue.
WHAT CHARACTERISTICS DO HOTEL COMPANIES WHO USE RM HAVE?
All the companies have similar characteristics. We’re talking about:
- Fixed Capacity
- Perishable Inventory
- High fixed costs and low marginal sales costs: It is essential to know the importance of your costs (both fixed and variable) as part of Revenue Management strategies.
- Possibility of segmenting demand
- Advance product sales
- Seasonal Demand
WHAT METRICS ARE WE USING?
Normally, hoteliers focus on occupation or on average price, though the majority choose occupation as a point of reference. The metric that is really going to reflect if we are generating more or less revenue is the RevPAR ratio, which is always measured in monetary units. This ratio is the combination of occupation and average price, that’s to say, revenue per available room.
RevPAR attempts to balance these two variables. There are two methods of calculating it, yielding the same result in both cases. On the one hand, we can multiply the occupancy ratio by the average price. On the other hand, we can divide revenue from accommodation by available, unoccupied rooms.
COMPONENTS OF RM
Within Revenue Management, it is important to take into account a set of components in order to increase our revenue.
- Demand Forecasting: This is the key component. It’s that uncertainty there is between the reservation date and the date of the client’s arrival. Therefore, it’s necessary to think ahead so that we can optimise fixed capacity. This helps predict demand behaviour with the goal of optimising inventory and prices, maximising revenue growth.
The rest of the components are different topics that RM also focuses on. They are the following:
- Product: Product definition, product diversification to be able to segment the price.
- Segmentation: Who our clients are.
- Price: What price we assign to each product for each client. In other words, the price based on demand behaviour that allows for optimisation of the hotel’s capacity.
- Competition: Know who our competitors are, as this sector is more and more competitive each day. For this, we must define our “Competitive Set.” This set is chosen based on location, services, quality, brand, type of product, and price range. A very practical way to determine who our competitors are is to log on to Booking or TripAdvisor and see the hotels that they consider to be competitors based on what clients have searched for. To monitor the competition, there is another tool called Benchmarketing. This tells us what type of products are sold, what price they are sold at, what channels they are sold on, what my clients think of my competition, and more.
- Distribution: Nowadays, control of all distribution channels is very important not only for increasing revenue, but also for increasing profits. There are certain tools that work as “Channel Managers”. With these, you register all the rooms and all the channels you work with and in just one click, you can lower or raise rates.
Revenue Management also includes “Total Revenue Management”. That’s to say, applying RM not only to the hotel rooms, but also to other spaces such as golf courses, restaurants, and more.