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Why is revenue management is important

Bridget Holmstrom - Saturday, February 21, 2015

The importance of revenue management

Revenue management is usually defined as selling the right room at the right price to the right customer at the right time.   Having originated in the airline industry when companies realised that customer demand for same flight differed according to the purpose of flying, the time of year and time of flight.  Now common in the hotel industry, revenue management is expanding to restaurants, conferences and meetings and recreational facilities such as spas and golf courses.  The key element that all these products have in common are that they are highly perishable, if a hotel room is not sold tonight then it is lost.  It cannot be held in stock.  This means that the hotel owner must ensure that the revenues achieved from each nights rooms sales is optimised.  Failing to do so means that the hotel loses out on revenue and accordingly profit.

It can lead to a 10% average increase per available room rate which leads to a dramatic increase in profitability.  The larger the hotel the more dramatic the improvement in the profits although revenue management is important even to the smallest operation.

There are a number of benefits for using revenue management.  These include:
  • Increasing hotel revenues and improving profits
  • Reducing the time and costs associated with traditional pricing tactics
  • Improving demand forecasting
  • Gaining competitive intelligence and market awareness
Failing to properly revenue manage the hotel rooms inventory can result in a loss of profits.  There are a number of things that the hotel owner can focus on to ensure that the profit does not leak away.  

Firstly the business should not sell out all the rooms immediately, for example at a time of unconstrained demand, selling all the rooms immediately rather than increasing the room rate incrementally means that it is possible that there will be empty rooms left however, if the room rates have been increased carefully then it is better to have an 80% occupancy at a higher rate than a 100% occupancy at a lower rate.  Not only will the hotel generate more revenue but also profit will be improved because operational expenses will be less.

Secondly, rather than applying science, evidence and logic to revenue management, hotel managers can rely upon gut instinct.  Gut instinct can be a very valuable way of responding to business activity and can be very useful when looking into the long future.  However as a foundation for revenue management it is a highly flawed approach and will cause the hotel to miss out on potential revenue and profits.

Another common mistake is that revenue management stops when the revenue manager goes home.  Instead the important pricing decisions are left to the hard pressed front office staff and duty management who may not be aware of the pricing strategy developed by the hotel.

Revenue management is an important aspect of the hotel business and should be approached with great care and respect.

For more information contact Bridget at bridget@bh-financial-tuition.co.uk.