Getting ahead with Revenue Management: an independent hotelier’s guide to the basics

Introducing Revenue Management: them and us?

As an independent hotelier, you’re running a hotel, and you don't always have the luxury of sophisticated analysis.

But it doesn’t need to be them and us, the big chains versus the plucky independents. At least, not when it comes to the fundamentals of Revenue Management.

Yes, it can take years to master the finer points, and when you’re responsible for hundreds of millions of dollars of revenue across dozens of properties, these levels of nuance can make the difference between glory and dismissal.

But for smaller players, those with fewer than 100 rooms at their single property and who might be operating without the bells and whistles of a sophisticated tech stack, there are quick wins to be made.

Adopting smart Revenue Management strategies means it’s not quite a case of them and us.

Understanding the basics of Revenue Management

Before we go into detail about the components of Revenue Management, let’s take a quick look at the what and the why.

What is Revenue Management?

Hotel Revenue Management is a strategic, data-led approach to pricing rooms and services with the aim to maximize total revenue.

It factors in variables such as demand, competition, customer segmentation, and distribution channels – all of which we’ll look at in this guide.

Revenue Management is critical to the commercial operation of a hotel for a number of reasons, such as:

• It can provide a competitive advantage through the understanding of trends and market behavior, enabling you to outperform competitors

• Through the use of demand forecasting it can help you plan operations more efficiently, leading to cost savings and improved guest satisfaction

• Hotel rooms are a perishable commodity – unsold rooms don’t generate revenue if empty – Revenue Management ensures consistent occupancy.

By adjusting prices based on these variables you can maximize your revenue per available room (RevPAR), leading to sustained profitability.

As a result, getting your room prices right is your biggest Revenue Management priority, so it pays to have an effective strategy in place.

While independent hoteliers rarely have the resources to put the most sophisticated elements of Revenue Management into practice, the broad principles apply to them as much as anyone, and taking a ‘Revenue Management Lite’ approach can change your fortunes.

The importance of Revenue Management in the hotel industry

Revenue Management was pioneered in aviation, a sector, like hospitality, in which there is a natural cap in supply per flight. Hotels were quick to catch on once consumers started using the internet to shop around and compare prices.

With so many choices for guests in the internet era and all of their options a few clicks away from execution, the importance of Revenue Management for a hotel’s profitability, sustainability and even basic viability cannot be overstated.

It’s not a question of whether, it’s a question of how – as we go on to discuss.

Rather than read a pile of statistics on the importance of Revenue Management – and the software that supports it – dip into these case studies at your leisure to get an idea of how Revenue Management improves commercial performance.

Key components of hotel Revenue Management

Dedicated revenue managers can spend years honing their craft, but, in essence, there’s only a handful of components, all governed as much by common sense as science, and a grasp of the basics is enough to make a big difference to your bottom line.

In the rough order in which you might consider them when devising your strategy, these are:

• Market segmentation

• Demand forecasting

• Pricing strategies

• Distribution channel management

They’re interconnected, of course, but we’ll look at them each in turn.

Market segmentation

Different travelers have different needs and buying habits. In other words, their motivations for traveling are different. This is why it’s so important to know the traveler segments you’re attracting to your hotel, and tailor your pricing and marketing strategies to each one.

For example, corporate travelers are willing to pay a higher rate but the problem is they tend to book travel at the last minute. So should you hold a few rooms for your corporate business, or give it to the leisure traveler who is paying less, but with a longer lead time?

Understanding these buyer behaviors puts you in a better position to make decisions.

Traditional segmentation

In the past and still to an extent, hoteliers would segment their business into the following categories:

• Transient business: public; best available room (BAR) rates such as on Brand.com and OTAs; negotiated rates; wholesale individual rates; discounted rates; consortia rates; other rates, such as complementary and house rates.

• Group business: company meetings; conventions by companies or associations; social, military, religious, fraternity, or sport groups; group tours for leisure; ongoing group business, e.g. flight crews.

As an independent hotelier, many of these approaches might appear irrelevant, but some wisdom across the sector remains in these ways of thinking. It shouldn’t live in isolation, though, which brings us to modern segmentation.

Modern segmentation

Technology has changed travel in every way, becoming part of the entire traveler journey. Thanks to the internet, it’s all at your fingertips, no matter where you are.

This means hoteliers must think about marketing to the individual, rather than bucketing everyone into a segment. Each ‘segment’ should be turned into a ‘persona’, a representation of your typical guest from that segment. This means that you don’t just use demographics, but also behavioral factors:

• Purpose: why are they traveling?

• Benefits sought: what do they value?

• Channel: how do they make their booking?

• Time: when do they travel?

• Loyalty and frequency: how often do they travel, and how often do they stay with you?

By combining both traditional and behavioral segmentation to personalize your pricing, promotion, distribution and policy strategies, you can stay ahead of the game.

Demand forecasting

As detailed at length in this blog post, demand forecasting is all about predictions. But how?

Broadly, it’s based on three areas:

• Forward-looking data – including search data of related services, such as flights

• Historic data and previous patterns

• Known variables

Clearly, the higher the demand, the more you can charge for your rooms while remaining competitive and when there is lower demand you need to incentivize bookings with pricing and promotional tactics. So by recognizing high and low demand periods well ahead of time, you can proactively focus on revenue generating activities that boost your market position and RevPar.

This is what makes demand forecasting such an integral part of Revenue Management. So what can independent hoteliers do to incorporate demand forecasting into their work?

You’ll have much of this data at your disposal:

• Past years’ results

• Future events

• Planned promotions (or your own or your distribution channels)

• Reduced or increased competition

• Weather

• Seasonality

• Day of the week

But making sense of it requires a lot of time or the right software (which also has access to less easily obtainable data like flight searches) or both.

As a time-starved independent hotelier, the right software – the type designed to reduce the complexity of decision-making – is crucial, and we cover it lower down. Such software will also combine pricing strategy, the subject of our next section.

Pricing strategies

Discussed in more detail on our blog, there are a number of pricing strategies you can take to set room rates that will optimize revenue at your property.

There is no standardized approach to room pricing but we firmly believe dynamic pricing is the most effective strategy for smaller independent properties. In such a competitive market place the flexibility of dynamic pricing allows you to capture the right customer at the right time, at the right price.

Dynamic pricing

Dynamic pricing is increasingly popular as it’s highly flexible. Room rates aren’t fixed but are adjusted based on market demand, competition, time of booking, customer behavior, and other factors that influence booking patterns.

Prices change dynamically using real-time data to optimize your revenue and maximize occupancy rates, by taking into account all of the elements above. This delivers the most accurate room prices for any given time, delivering better ADR or occupancy.

It’s simply not feasible to collect, collate, analyze your data to deliver effective dynamic pricing before the data is outdated.

That’s why there are now intuitive tools, created specifically for independent hoteliers, which leverage AI-driven rate recommendations to easily allow you to maximize your bookings and revenue, with automated dynamic pricing.

Distribution channel management

How do you get your product or service to market?

This fundamental question is asked by anyone going into business, not just hoteliers. And, however you cut it, it always comes down to a trade-off: reach (and greater occupancy) versus profit.

Big players in the digital space can publicize your property far and wide through their economies of scale, brand recognition and SEO/SE, but they take a cut.

The answer, of course, is to spread your risks between:

• Your own website, generically referred to as ‘Brand.com’ in this space

• Online travel agents (OTAs) – OTAs include your property in relevant searches and then take an agreed percentage of the price of the room

• Wholesalers – wholesalers typically buy a number of rooms in bulk for a big discount, so dedicating a portion of your inventory to wholesale allows you to hedge and guarantee some occupancy, albeit at a lower profit

• Aggregators – Tripadvisor, being the most significant example, these sites point travelers directly to Brand.com sites or via OTAs

Of course, you can reject all but Brand.com, but the loss of reach with a small marketing budget could be catastrophic, so we’d recommend an ‘if you can’t beat them, join them’ approach. Work out how to work with these channels, not whether to.

But watch out for rate parity issues! Though OTAs do often undercut, contractually they shouldn’t unless you’ve agreed to a particular promotion.

Implementing Revenue Management strategies at your independent hotel

What’s 1,145 x 5,674? Quickly!

a) 2,398

b) 6,496,730

c) 10,984,573,120

Chances are you chose B) not because you bothered to do the mental arithmetic but because you had an intuitive feeling that multiplying something a bit higher than 1,000 by something a bit lower than 6,000 would yield something in the region of 6,000,000.

If you wanted to work it out yourself and you had a pocket calculator to hand, you’d probably use that rather than work it out by hand.

You don’t need to know how a calculator’s circuitry works to rely on it, but if you wanted to do a sense check on the answer, being able to is dependent on a basic understanding of simple mathematics.

For an independent hotelier, this is analogous to choosing the right simple software for making pricing recommendations.

You don’t need to know how its AI- and data-enhanced algorithms work but if you have a sense of the thinking behind it and its likely suggestions, you can trust its recommendations and put them into practice.

Let’s investigate.

What are automated pricing recommendation tools?

An AI-driven room price recommendation tool allows you to capture more revenue opportunities by optimizing your prices, with tailored and transparent recommendations, without diverting you from your other day-to-day responsibilities.

Tools like this are crucial to independent hoteliers who don’t have access to this wealth of data and the luxury of time to analyze it, to enact the correct pricing decisions. Instead, a dynamic pricing strategy is automated at your property.

Playing to the ‘Revenue Management Lite’ approach we champion above, they’re much less complex than other solutions on the market.

The benefits of using a pricing recommendation tool at an independent property

Some of the benefits to the independent hotelier of using a pricing recommendation tool are self-evident but it’s worth spelling others out, including that:

• You don’t need to be a Revenue Management specialist to use one

• They’re much simpler than other solutions and have no unnecessary bells and whistles

• User-friendly interface allows you to visualize pricing at a glance and easily customize your pricing decisions

• They tap into diverse and trusted sets of historical, real-time, and forward-looking data

• By automating your dynamic pricing strategy you get valuable time back in your day

• Never miss out on revenue opportunities again as pricing adjusts in real time

The bottom line is that busy jacks-of-all-trades need one simple and reliable tool for their pricing decisions, not many complex tools.

How to select the right pricing tool for your hotel

There’s no one size fits all approach to getting your room rates right. However, as mentioned above, we feel dynamic pricing is the best course of action for independent hoteliers.

Therefore, you will want a tool that can automate this pricing strategy at your property.

Tools on the market vary but crucial features to look for include:

• Recommendations for next 365 days

• Personalized settings

• Flexible compset

• Customizable pricing calendar

• Comprehensive events calendar

• Forecasted market demand

• The option of two-way PMS integration

Lighthouse’s Pricing Manager ticks these boxes – and more.

Revenue Management challenges for independent hoteliers

Independent hoteliers face many challenges. But, by many measures, the sector is in rude health. This is because the savviest operators have turned their weaknesses into strengths. We’ll review their two biggest challenges.

1. Limited resources:
   
   As we’ve already acknowledged, it’s not economically viable for independents to have a body of staff with granular responsibilities. Similarly, there’s no head office to manage decisions centrally.
   
   But this leanness can be turned into agility. If you succeed in installing the right software, you can achieve miracles.
   
   

2. Market competition:
   
   There’s no getting around it. Hospitality is a crowded market, and therefore often a buyer’s market, even in times of high demand.

   The simple truth is that if you identify your competitor set wisely and factor those hotels’ prices into your own pricing strategy as part of a wider Revenue Management strategy, you can make your property the hotel of choice. Think:

   • Right prices

   • Right promotions aligned to your segments

   • Good forecasting

   • Play to your strengths – don’t underestimate the unique characteristics and personal touch offered by independents

Conclusion

As we’ve seen in this post, effective Revenue Management requires a handle on concepts such as market segmentation, demand forecasting, pricing strategies and distribution channel management.

But putting it all together can be tricky when you’re strapped for time and unfamiliar with the subtle nuances of the discipline.

So what to do?

As a small hotel operator who doesn’t want a complex solution needing training and detailed knowledge, ultimately you need software that automates dynamic room pricing at your property with the least effort.

Such software should be easy to implement, intuitive, simple to understand and provide transparent recommendations – and, with a better grasp of Revenue Management, those recommendations will make perfect sense as part of your renewed strategy.