Hotel revenue management is the art of selling your rooms under the right conditions to the right people at the best rates. It blends customer segmentation, budgeting, market research and demand forecasting to help you propel your business to new heights.

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In this article, we’ll explore various strategies and hotel management software you can use to maximize your business’s occupancy and profitability. We’ll also help you determine if you need to hire a revenue manager or do it yourself and what your training and education options are in such cases. Let’s dive in!

Article Roadmap

• What Is Hotel Revenue Management?
• Hotel Revenue Management Strategies
  • Customer Segmentation
  • Demand Forecasting
  • Yield Analysis
  • Pricing Strategies
  • Distribution Management
• Role of a Hotel Revenue Manager
• Best Practices
• Popular Hotel Revenue Management Software
• Next Steps

What Is Hotel Revenue Management?

Hotel revenue management is the process of strategically pricing and distributing your rooms and services across online channels to boost topline revenue in different market conditions.

It’s the art and science of identifying customers who need your rooms the most. Then you can set optimal pricing that’s high enough to ensure adequate compensation but not enough to dissuade customers and send them packing to cheaper competitors.

It involves tracking and forecasting the supply and demand of different market segments to determine the most value you can offer at the best rates. Each traveler has a willingness-to-pay (WTP) quotient, and hotel revenue management is all about capturing the maximum revenue without letting much slip through third-party fees and commissions.

Here’s why revenue management is important in the hospitality industry:

• Maximizes hotel profitability by optimizing pricing and inventory.
• Enhances revenue forecasting to promote data-driven decision-making.
• Improves customer segmentation and targeting for effective marketing campaigns.
• Efficiently utilizes distribution channels for increased bookings and revenue.

Key Strategies

Many moving variables at the micro and macro market levels affect your business’s revenue at a given time. You must analyze each component to craft the best strategy for your business. Here are the main elements of hotel revenue management:

Customer Segmentation

Knowing your customers is the hallmark of any successful business. You can divide your audience into segments to track and identify the needs and preferences of each group more intricately. This allows you to design specialized strategies, packages and pricing to offer personalized experiences and ensure profitability.

Not only that, but knowing how a segment behaves can help you determine which ones are profitable, enabling you to strategically target the right segments for different seasons.

Based on segments, you can optimize pricing, choose distribution channels and launch marketing campaigns that maximize your business’s visibility at the right time to the right people. It helps create an optimal business mix for your hotel, ensuring occupancy and profitability throughout the year.

Some of the common criteria you can use to segment your audience are:

• Demographic status like age, gender and geography
• Purpose of trips (whether it is business, entertainment, family vacation, wedding or something else)
• Length of the stay
• Booking channel
• Cancellation rates
• Guest status (whether they are new customers, returning guests or regular audiences)

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Demand Forecasting

The demand for accommodation is not static and fluctuates based on seasons, customer segments and macroeconomic conditions. Demand forecasting lets you analyze historical data, market trends and upcoming events to estimate how much revenue each customer segment will generate in a year.

For example, if there’s a music festival happening near you, you can consider blocking your rooms for individual travelers during that month. And during off seasons, you can offer discounts to corporate group bookings to fill your rooms.

You can estimate demand manually on spreadsheets by comparing competitors’ datasets against your business’s historical data on constrained and unconstrained demand. Or, use demand planning tools that use algorithms to automatically analyze data and provide you with a breakdown of upcoming opportunities and threats to your business.

Yield Analysis

Yield management is the process of pricing your rooms based on availability and demand to ensure and control profitability. Although it sounds similar to revenue management, they’re not the same.

Revenue management is a broader concept that deals with all your business’s revenue sources, including ancillary income via spa, buffet, breakfast and other services. But, yield analysis is a subset of the revenue management process only concerned with room pricing. The goal is to find the optimal pricing point and strategy based on travelers’ demands for maximum profitability.

For example, accepting early bookings during low-demand periods is a good way to ensure occupancy. But during high-demand periods, people tend to have high WTP, especially for last-minute bookings. You can avoid taking early bookings during peak seasons as a strategy to attract high-yield guests to your hotel.

Some of the key metrics you can use to track and fine-tune your hotel’s yield are:

• ADR: Average daily rate is the average amount guests pay for your rooms in a specific period. You can compare your current ADR with historical and competitors’ ADRs to gauge your hotel’s performance.
• Occupancy Rate: This metric tracks the percentage of total rooms occupied on a given night.
• Average Length of Stay (ALOS): It tracks the average number of days a typical guest spends at your hotel.
• RevPAR: Revenue per available room is a great KPI to analyze how well you’ve managed pricing and inventory to maximize revenue. It evaluates the daily performance of a hotel room based on occupancy rate and ADR.
• GOPPAR: Gross operating profit per available room is a metric to track the average profit generated by available inventory. You can calculate it by dividing your gross profit by the number of available rooms.
• TRevPAR: Total revenue per available room is a broader version of RevPAR that considers a hotel’s ancillary revenue and income to paint a comprehensive picture of total income in a given time frame.

Here are a few unique strategies you can use to increase your hotel’s yield:

• Implementing a maximum length of stay can help you limit guests from using discounted or promotional rates.
• You can use a minimum length of stay policy during low-demand periods to encourage longer visits.
• Allotting a pre-negotiated number of rooms at a discounted rate to wholesalers, travel agents and event organizers can ensure occupancy.
• You can sign contracts with businesses frequenting your hotel to fix rates and allow them to make last-minute reservations for business trips.

Pricing Strategies

Selling rooms is the primary source of income for hotels, and the goal should be to increase revenue, not just occupancy or rates. Pricing is a major factor in achieving this target as it impacts a traveler’s decision to choose your hotel.

You need to analyze customer and market trends to set optimal pricing structures in advance. It helps you accommodate early bookers and stay proactive for late appointments.

Here are the best strategies you can consider to offer optimal pricing for your inventory:

• Dynamic Pricing: Change rates regularly based on external factors like competitors’ prices, weather and booking trends, as well as internal factors like customer segmentation, marketing campaigns and add-on services.
• Length of Stay: You can have minimum duration requirements or offer discounts for longer stays to improve occupancy and boost ancillary sales.
• Value-Added: You can offer packages with meals, airport transfers and spas or partner with external agencies to provide special packages.
• Cancellation: Set higher rates for customers that want a bigger refund for last-minute cancellations and vice-versa.
• Proactive vs. Reactive: Proactive pricing involves the analysis of historical data and market trends to shape pricing strategies preemptively. On the other hand, reactive pricing refers to adjusting strategies based on current market trends. For example, a reactive approach is when you undercut your nearest competitor by 5% whenever they change pricing and strategies like penetration pricing.
• Open Pricing: AI-powered revenue management software can offer personalized pricing to individual customers without relying on supply and demand analysis like dynamic pricing. It considers each customer’s unique situation to set the best rate based on your rules. You can adjust pricing for every segment based on trends, demand and season.

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Here are a few common pitfalls you can avoid while creating your pricing structure:

• Not analyzing upcoming events.
• Setting low early booking rates for high-demand seasons, which leads to a loss of potential revenue.
• Pricing intuitively without considering public holidays, weather and local events.
• Creating a rigid pricing structure that can’t adapt to the ebb and flow of supply and demand.
• Reacting to a single competitor changing their pricing structure instead of relying on a competitive set to base your decisions.
• Adjusting prices manually across channels for every segment and missing out on opportunities outside business hours. Consider using hotel reservation software and RFP systems to automatically adjust prices per custom rules.

Distribution Management

Distribution or inventory management enables hotels to control and monitor room allocations across sales channels like personal websites, online travel agencies (OTAs), global distribution systems, bed banks and metasearch engines.

You must carefully analyze each channel’s characteristics, types of customers and seasonal behavior for room allotments. You should also decide on lead times and overbooking strategies for all channels to maximize profits.

The aim is to find the perfect mix of high-yield, short-term guests with long-term, low-yield businesses to maintain a healthy revenue structure throughout the year. Here are the key factors you should consider while devising an inventory distribution strategy:

• Business Objectives: Are you a new business aiming to improve your brand visibility and drive sales? Or an established hotel chain looking to increase the number of high-yield guests on your properties? Distribution strategies differ depending on business objectives.
• Target Audience: It’s crucial to find out where your target customers are and increase your business’s visibility on that channel. For example, a motel on the highway won’t appeal to luxury travelers, and it doesn’t make sense to market it on wellness tourism channels.
• Channel Metrics: After identifying the right channels, it’s important to compare each channel’s performance metrics to find the balance of room allocations. Some channels improve visibility but may offer a lower profit margin due to high commissions. The goal is to find the perfect mix of visibility, profitability and brand messaging.

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Role of a Hotel Revenue Manager

In his book, The Lessons of History, Will Durant said, “History reports that the men who can manage men manage the men who can manage only things, and the men who can manage money manage all.”

You can say the same about hotel revenue managers. Their roles and decisions have a ripple effect on your operations. They are the glue between your sales and marketing departments, ensuring you get the most out of your assets across all market segments, seasons and conditions.

Here are the major roles that a hotel revenue manager performs:

• Develop and implement a strategy to maximize a hotel’s profitability.
• Analyze trends, customer behavior and competitor performances to forecast demand patterns and optimize room rates and inventory distribution.
• Collaborate with marketing teams to design campaigns targeting the right customer segment at the right time.
• Monitor KPIs to evaluate yield and fine-tune strategies.
• Stay updated with trends, technologies and software to improve data handling processes.
• Foster cross-departmental collaboration to align each team to a common goal and strategy.
• Conduct regular audits and update strategies based on market dynamics and customer preferences.

Should You Hire a Manager or Do It Yourself?

Revenue management is more of a skillset than a job title unless we’re talking about a large hotel chain operating across locations and borders. Most small and medium-sized hospitality businesses either use consultancy services or revenue management software for in-house operations.

That said, here are crucial factors you should consider to determine your business’s course of action:

• Cost: Hiring a full-time employee helps your business to stay more nimble and adjust strategies in a way machines or software alone may not accomplish. They make decisions based not only on data but also context, experience and expertise. But it’s a costly affair, and you should make sure you have the budget for it. Otherwise, the extra money a revenue manager generates may be offset by the cost of hiring them.
• Size: Smaller hotels can focus their strategy on easy-to-track factors like customer preferences, competitor’s rates and local events. But larger hotels have more complex needs. They need to consider internal events and conferences, various types of rooms, multiple customer segments, and a large competitive set to devise strategies. Such hotels can benefit from an in-house revenue manager who can make informed decisions in an ever-changing environment.
• Market Segments: Similarly, the number of customer segments affects the complexity of a business’s revenue management processes. For example, a typical motel doesn’t need to adjust its prices frequently. But a five-star resort with a business conference, a public holiday celebration and a local event on the same day will need to adjust their pricing in real time to cater to different customer profiles visiting their hotel. Having a dedicated revenue manager helps in such situations.
• Time: While adjusting your strategy is important, you don’t want to get bogged down with market analysis and pricing decisions all the while. Revenue management is a time-consuming process, and depending on the size and efficiency of your on-ground staff, you should choose whether to do it yourself or hire someone. Otherwise, you’ll be left adjusting your pricing structure while guests leave your hotel with a bad experience and a foul taste in their mouths.

Training and Education

Revenue management is an analytical role that requires a good foundation in statistics and math. If you’ve decided to manage your business’s revenue in-house, here are a few training and education options for you:

• Cornell offers an online hotel revenue management certification program that you can complete in three months.
• The HSMAI Academy offers a certified revenue management executive (CRME) certification course. But you need to be an industry professional with a certain level of expertise to be eligible. For beginners, they offer a certificate in revenue management that teaches the basics of forecasting, segmentation and pricing.
• The American Hotel and Lodging Association has a six-month certified hospitality revenue manager course for beginners.
• Coursera provides a complete hotel management course with specializations in revenue, demand and distribution management. This course, taught by a professor from ESSEC Business School in partnership with Snapshot and Duetto, can be completed in four months.

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Best Practices

Here are a few additional tips that can help you boost your business’s topline and improve strategies:

• Don’t just focus on optimizing your pricing structure. Try to maximize the value you offer customers with efficient customer services, food packages, parking services and other value-added amenities that make a guest’s stay at your hotel memorable.
• Set unique pricing structures for low and high-demand periods. Define trigger points to adjust room rates based on demand, season and local events.
• You must have an overbooking strategy during high-demand periods to offset last-minute cancellations and sell all your rooms. You should also build a guest relocation program for instances when all your bookings show up.
• Make it a habit to analyze your sales and marketing channels’ statistics daily to optimize your inventory distribution strategy.
• Direct bookings are more profitable than accepting bookings through an OTA or a GDS because it doesn’t require you to pay commissions and fees to the booking channel. Consider designing branded websites for your hotel and connecting the website to a hotel reservation software to accept bookings directly through your site.
• Maintain an organized record of marketing, booking, maintenance and management data, as it helps expedite audits and promotes organizational transparency and accountability. You can use central reservation systems and hotel management software to centralize your business data under a unified platform.
• Track hotel benchmarks to identify areas for improvement in your workflows and revenue management strategy.
• Chatbots are a good way to boost ancillary revenue. Bots can answer queries 24×7, cross-sell or upsell services and help customers design dynamic tour packages without having to reserve each service separately.
• Loyal customers are the backbone of a successful revenue management strategy. You should consider programs that incentivize repeat visits and create a loyal customer base.
• Centralizing and analyzing data to forecast demand is faster and more efficient with software, irrespective of whether you hire a revenue manager or decide to handle it yourself. It’s important to remember that software and automation support operations and don’t replace human intelligence.

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Popular Hotel Revenue Management Software

The best hotel revenue management software depends on your business needs. There isn’t a platform that can fit every business type and size. You must look internally to identify the problems and prioritize the hotel management software features that can help you solve them.

Start by gathering your business’s decision-makers to create a checklist of your company’s requirements from the new platform. Then match the list with the best platforms to identify solutions that fit your business needs. To kickstart the journey, here are some of the most popular hotel revenue management solutions available:

CloudBeds

CloudBeds is an all-in-one hotel management platform with a powerful pricing intelligence engine (PIE) that adjusts and controls your revenue strategies based on custom rules and automation. It analyzes customer behavior, competitor rates, local events and other market conditions to set open pricing structures.

You can define a competitive set, and the PIE forecasts demand and sends you alerts whenever a competitor makes changes, allowing you to be proactive and reactive to the market. It lets you track distribution channel performances from a unified dashboard. The platform also offers:

• Booking engine
• Channel manager
• Maintenance services
• Native payment processor
• Digital marketing solution

Mews

Mews is another hotel management software with intuitive revenue and rate management features. You can define custom rules for base prices, trigger points, special deals, dependencies and restrictions. It lets you create multiple room categories, specify dates to override custom rules and offer specialized pricing.

You can also create dynamic tour packages with built-in rates for different services to improve cross and upselling opportunities. A native BI module helps streamline reporting with customizable templates and visualizations that let you analyze your business’s financials and make better decisions. Its other features include:

• Native payment processor
• Booking engine
• Central reservation system
• Front-desk operations
• Housekeeping
• Open API

IDeas

IDeas is a dedicated hotel revenue management software that helps you analyze market conditions, adjust pricing, forecast demand and promote cross-departmental collaborations. It offers simple tools to automate decision-making without human intervention, influenced by demand, competitors and market volatility.

The system can make intelligent minimum length of stay requirements updates based on demand forecasts and customer sentiments. It also helps streamline overbooking strategies by estimating the number of no-shows or last-minute cancellations according to historical data. This robust platform requires proper training before you can get the best out of it. Some of its other offerings are:

• Data visualization
• Reporting templates
• Meetings and events strategy
• Car park management
• Revenue management consultancy services

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Next Steps

Hotel revenue management plays a pivotal role in maintaining profitability and minimizing missed opportunities for your business. However, achieving effective revenue management requires the right tools and strategies.

You must analyze customer segments, guest experiences, business positioning, demand patterns, and other micro and macroeconomic factors to devise a strategy that fits your business. Whether you choose to handle revenue management in-house or hire a manager, leveraging the power of software can greatly enhance your efforts.

You can use our free comparison report to find the best solution that aligns with your requirements. It lets you analyze the industry’s top products based on custom criteria.

We’d love to hear your thoughts and experiences. How do you currently manage your revenue? Have you considered implementing revenue management software? What strategies have worked well for you? Share your insights, and let’s start a conversation below!