Revenue Management

How do you maximise profit?

Increase the price

Increase rooms sold

Both

CRS

Computerised reservation system/ central reservation systems, are computerized systems used to store and retrieve info and conduct transactions related to air travel, hotels, car rental, or other activities.

GDS

Global distribution system eg. Amadeus, Sabre

Computerized network connecting travel service providers—like airlines, hotels, and car rental companies—with travel agencies and booking platforms in real time

-acts as a single digital hub where travel agents and corporate bookers can compare prices and check live inventory.

Historical Evolution of Revenue Management

Airline liberalisation - GDS/CRS - Internet - Revenue Management Systems

• Governments stopped controlling ticket prices. Airlines now competed with each other & low-cost airlines entered market.

• Marketing automation & product distribution through (CRS) and communication networks

• Revenue growth & improved customer service through guest history & marketing databases: enabling proactive distribution, revenue & targeted marketing management

• Minimizing denials & revenue losses through yield management systems and concepts

Yield management systems/ Revenue management

Managerial approach for the maximization of the use of our resources in the lodging industry

Revenue

The total amount of sales achieved in a specified time period, before deducting costs

RM Objectives

1) Maximize revenue per available time - based inventory unit

RevPATI = average rate × capacity utilization

Earn as much money as possible from each available unit (e.g., hotel room, restaurant table) during time it is available.

2) Gain higher market share percentage

Get a bigger share of the customers/revenue in your market compared with competitors.

3) Maximize use of resources

Make sure the resources you have are used as efficiently as possible. For example, if a hotel has 100 rooms but only 50 are occupied, half of its room capacity is unused.

For revenue management to work effectively, several conditions need to exist: (7)

Each condition creates a reason to change prices, or makes changing them possible. Take one away and revenue management either isn’t needed or doesn’t work.

1. Segmented demand: different customers pay different prices

2. Fixed capacity: can’t add rooms quickly

3. Perishable inventory: an unsold night is lost

4. Low marginal cost: one extra sale costs little

5. Booked in advance: bought before it’s used

6. Uncertain demand: hard to predict

7. Same product, different prices: e.g. one room type, business vs leisure rate

What is worse, cancellation or a no-show? No-show, why?

Revenue Management Myths (3)

• An info system is required - You can use basic tools such as spreadsheets, booking records, and manual analysis to monitor demand, prices, and occupancy.

• RM is only useful for large production - RM is useful for businesses of all sizes, not just large establishments. The key requirement is having limited, perishable capacity & ability to vary prices or availability according to demand

• A large historical database is needed - It is helpful, but not necessary to begin applying RM. Businesses can make decisions using current bookings, market trends, competitor prices, seasonality, and professional judgment.

Core Concepts of RM (7)

1. Price over cost when balancing supply and demand

2. Market-based pricing over cost-based

3. Sell to segmented micro -markets over mass markets

4. Save your products for yourmost valuable customers

5. Decisions based on knowledge over supposition

6. Exploit each product’s value cycle

7. Re-evaluate your revenue opportunities

5 stages of revenue management

1. Set prices - Determine optimal pricing strategies

2. Demand Forecast - Predict future customer demand

3. Manage inventory - Optimise room sales

4. Manage distribution - Ensure usage of right platform

5. Evaluate results - Analyse performance and adjust

Typical Revenue Manager Responsibilities

Full service resorts/ hotels - Guest rooms, meeting space, F&B operations

Limited service hotels - Guest rooms

Conduminiums - Guest units, F&B operations

Cruise ships- Cabins, F&B operations, activities

Commercial restaurants- F&B services, meeting space

Convention centres - meeting space, F&B operations

Sports & entertainment venues- Tickets, meeting & event space, F&B

Casinos- Guest rooms, F&B operations

Private clubs- Tea times, F&B, meeting space

Private clubs (dining/ social)- F&B + meeting space

RM Fundamentals of a revenue manager

Dimensions of Service - Use of Strategic RM Levers

Every service delivered to a customer has two key dimensions:

• Time: how long it takes to deliver or consume service, it’s fixed

• Price:what customer pays at end of service delivery/consumption, it is variable, so you manipulate this more

How Can You Manage RM Levers? How Can You Make Duration More Predictable? (4)

• Being clear about measuring a stay.

  • A guest checks in Monday and checks out Thursday → 3-night stay.

• Predict when & how many guests will arrive

  • Reservations & booking data help hotel predict these arrivals.

  • Why? Hotel can decide how many rooms to sell and at what price

• Predict how long guests stays.

  • Why? Length of stay affects future room availability and pricing decisions.

  • Use booking history, customer segments, minimum-stay restrictions & booking conditions to influence/predict LOS.

• Reduce timebtw one guest check out & next check in.

  • Why? Less downtime = more opportunities to sell room.

  • Make rooms available through housekeeping, early check-out procedures & better coordination btw reception & housekeeping

Managing price - Proper price mix

• Price elasticity→ How does demand change when we change price?

  • Hotel needs to understand how customers react to price changes.

• Competitive price→ look at what other hotels are charging.

  • Know your competitors' prices & position your price appropriately.

• Optimal pricing policies→ having rules for when to increase or decrease prices based on demand.

  • Don't have one fixed price; adjust price according to demand.

→ Logical mix of prices: Differentiation → a hotel doesn't necessarily charge everyone same price for the same room.

Classical RM vs. Customer-Centric RM

Key performance indicators (KPI)

Quantifiable measures a company uses to assess performance over time. 

• These metrics determine a company’s progress in achieving its strategic goals & to compare a company’s performance against other businesses within its indust to implement benchmarking strategies

Financial KPIs

• ADR

• Occupancy

• RevPAR

• TRevPAR

ADR (Average Daily Rate)/ ARR

TOTAL ROOMS REVENUE (OF THE PERIOD)/NUMBER OF ROOMS SOLD (OF THE PERIOD)

The average price a hotel receives for each room it sells in a day.

Occupancy %

TOTAL OCCUPIED ROOMS/NUMBER OF AVAILABLE ROOMS × 100

RevPAR

TOTAL ROOMS REVENUE FOR PERIOD/NUMBER OF ROOMS AVAILABLE FOR PERIOD 

Or

ADR × % Occupancy 

• Consider rooms “OOO” – Out of Order. They need to be deducted from total number of rooms available / number of rooms the hotel has

• Average amount earned from each available room - "How well did the hotel use all the rooms it had available?" 

TRevPAR (Total revenue per available room)

TOTAL REVENUE (ALL SERVICES) FOR PERIOD/NUMBER OF ROOMS AVAILABLE FOR PERIOD

• average total revenue a hotel earns for each available room, including money from more than just room sales.

Rooms available (100×100) Formula

Rooms in the hotel x days in the month

Occupied rooms

Rooms avl. (100×100) x Occ%

If ADR = RevPAR then…

That means the hotel has 100% occupancy

• If ADR > RevPAR, it means the hotel has some rooms that are empty

Visual Representation of Occupancy, ADR and Rev PAR

ARPAR (Adjusted RevPAR)

(ADR – Variable Cost per Occupied Room + Additional Revenue per Occupied Room) × Occupancy

Measures room revenue per available room after adjusting for certain costs, such as distribution commissions, booking fees, or other costs associated with selling rooms. The exact formula can vary by hotel or course.

PROFIT: GOPPAR (Gross Operating Profit per Available Room)

Gross Operating Profit: earnings before interest and taxes 

REVENUE – EXPENSES/NUMBER OF AVAILABLE ROOMS 

• You don’t do this as often because you have to wait until the end of the accounting period to collect the expenses

FMS (Fair Market Share) %

ROOMS AVL HOTEL/TOTAL ROOMS AVL. COMPETITIVE SET × 100

the percentage of hotel demand a hotel should receive compared with its competitors, based on its size and capacity.

AMS (Actual Market Share) %

OCCUPIED ROOMS HOTEL/TOTAL OCCUPIED ROOMS COMPETITIVE SET × 100

The share your hotel actually gets.

MPI (Market Penetration Index)

AMS/FMS

• AMS > FMS → the hotel has a larger share of occupied rooms than its share of available rooms.

• AMS < FMS → the hotel has a smaller share of occupied rooms than its share of available rooms.

• AMS = FMS → its occupied share is exactly proportional to its room share.

ARI (Average Rate Index)

• If the result is above 1, the ADR is above the comp. Set

• If the result equals 1, the ADR is in line with the market

• If the result is less than 1, the hotel’s ADR is under market.

RGI (Revenue Generation Index)

• If the result is above 1, the RGI is above market performance

• If the result equals 1, the RGI is in line with the market

• If the result is less than 1, the hotel’s RGI is under market.

Benchmarking

A measurement of the quality of an organization’s policies, products, programs, and strategies, compared with standard measurements or similar measurements of its peers/competitors.

Objectives:

• Determine what and where improvements are needed

• Analyze how other organizations achieve their high performance

• Use this info to improve our performance

Variables to benchmark:

• Product 

• Level of Service → Reviews

• Location → Amplify your location, transportation etc

• Distribution Channels → rate, cancellation policy etc

Tactical vs. Strategic RM

Strategic RM focuses on long-term goals such as identifying target markets and creating factors for differentiation from competitors. 

Tactical RM focuses on operations that should support strategic goals:

• Forecast demand → should be very detailed

• Application of rate structures

• Run scenarios for booking comparison

Demand definitions: demand, demand generator, drainer, unconstrained & constrained

• Demand (customer) → The number of potential buyers with the interest and ability to purchase the products sold by a business at the specific price offered 

• Demand Generator example: a major global event increases city-wide demand (e.g. a World Cup or large convention). 

• Demand Drainer example: a global crisis reduces travel demand industrywide (e.g. a pandemic’s impact on tourism) 

• Unconstrained Demand: the hotel can fully meet total demand. 

• Constrained Demand: the level of requested reservations rises above the capacity of the hotel, only a certain portion of the demand can be accommodated

What is a forecast and its charcteristics?

• A projection based on the data available at the moment of its preparation, an anticipation of units sold and revenue generated in the sale.

• Helps management anticipate periods of constrained and unconstrained demand.

• Foundation for making operational decisions, scheduling workers, purchasing supplies, managing cash flow and better pricing decisions

• Important relationship with budgets.

• The forecast is never static.

• The shorter the term, the more accurate the forecast

Historical, Current & Future data

Historical data: data describing events that have already occurred, also known as actual data or results data. Helps to learn from past performance.

Current data: data describing what is currently happening, up-to-date data. Helps to understand present.

Future Data: data describing events that might be happening in the future. Factor(s) affecting future demand:

• Demand generators: event increasing the demand ▪ Demand drain: event producing a decrease of demand

Types of forecasts and their charcteristics

When Do Segments Book?

• Price-sensitive segments generally book earlier: leisure travelers

• Less price-elastic, more time-sensitive segments tend to book later: individual and business travelers.

• Space needs to be protected for high-yield segments to avoid selling price-sensitive rooms to less price-sensitive clients.

Reservations Management

Lead Time

• The time in advance that bookings are made.

• Important to look at market segmentation for forecasting and rate controls.

Booking Pace

• How quickly reservations are coming into the hotel?

• If the booking pace is unusually fast, there might be an event.

• Best results come from looking at booking pace by market segment

Pick-up

Number of reservations picked up from a given point in time to a different point in time over the booking process.

• Main idea of the pickup method is to estimate increments of bookings to come, and then aggregate these increments to obtain a forecast of total demand.

Forecast formula

FORECAST = ROH + EXPECTED PICKUP

How do you find if your forecast is positive or negative?

Forecast - Target (Avg. Occ)

What to do when a forecast is positive

Maximize revenue and profit.

• Raise prices gradually

• Limit discounts and manage inventory

• Push direct bookings

• Prepare staff and supplies

• Upsell extras

• Watch competitor rates

What to do when a forecast is negative

Stimulate demand and protect profitability.

• Targeted promotions or packages, don’t automatically discounting every room.

• More marketing to key segments

• Work with agents, OTAs and corporates

• Create packages - bundle rooms + breakfasts, spa etc

• Control costs

• Analyze pace, cancellations and market

• Boost spend in F&B, spa and even