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Revenue Management:
Back to Basics: The Importance of Revenue Management Principles

By Jean Francois Mourier 
January 14, 2011

Ask any hotel general manager (and certainly every revenue manager) and they’ll explain exactly how important revenue management is to running a profitable lodging enterprise.  Yield management, as it was once called, reflects a proactive approach to the business of making money through the sale of rooms, and mitigates some of the unavoidable complications arising from the fixed and highly perishable nature of hotels’ core products.  Though relatively new (revenue management has only enjoyed widespread use within the hotel industry since the early 1990s), most hotel executives would find the notion of operating a hotel without a comprehensive revenue management strategy inconceivable.
And rightly so.  Revenue management has revolutionized the hotel industry, taking the post-and-pray nature of static rack-rate pricing out of the picture, helping to unify disparate strategies, and forging beneficial linkages between crucial hotel operating departments.  Running a hotel without it would be returning to the crude tools of yesteryear. 
But because revenue management is a complex practice that incorporates many different disciplines and stretches across many distinct departments within a hotel, it’s sometimes easy to overlook the basics concepts that undergird it.  At its core, revenue management is about understanding, anticipating and influencing customer behavior, with the end goal of increasing revenues for a property.  Focusing exclusively on the supporting functionalities of revenue management- like pricing, channel management, or inventory control- and neglecting the principles that serve as the foundation of revenue management is like not seeing the forest through the trees. 
This is not an isolated occurrence; many managers and executives dwell on the details of revenue management. A 2008 Cornell Hospitality Report survey found that revenue management is largely viewed as a technical and quantitative process, with pricing strategy as a strong element.  But the technical aspects of the process are nothing without an aim to guide them- and that aim is a little more nuanced that making more money.
So let’s go back to the basics of revenue management.  The most logical starting point is a definition.
What is Revenue Management?
To use the American Hotel and Lodging Educational Institute’s definition, revenue management is “a set of revenue maximization strategies and tactics meant to improve the profitability of certain businesses.”  This definition purposely leaves the complex multidisciplinary aspects of the process vague, to emphasize its ultimate goal: improving profitability.  It is complex because it involves several aspects of management control, including rate management, revenue streams management, and distribution channel management, just to name a few. Revenue management is multidisciplinary because it blends elements of marketing, operations, and financial management into a highly successful new approach.
Perhaps the best definition is Wikipedia’s: revenue management is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations).  This encapsulates both the overarching goal of the process, and its crucial relationship to consumer behavior.  What is revenue management except a means to mold consumer behavior in a way that benefits the hotel?
The first step in this long and ongoing process of encouraging consumer behavior that is beneficial to the hotel is understanding consumer behavior in the first place.  What motivates a potential guest to book a room at one hotel as opposed to another, or at one price and not another is an essential concept to grasp.  Though this can be conjecture, the relationship between pricing and booking pace (and that of a hotel’s competitors) is easily measured, and elucidates the same set of behaviors.  Selling a room to a guest at the right price to both maximize occupancy and the revenue it generates is impossible without first considering what will prompt a consumer to make the purchase.  It is very easy to understand the consumers buying habits if you are able to collect a property’s purchasing data, analyze it and then read and interrupt the data in real time. This is easier said than done, but very possible if you have the right system in place.
Once an understanding of consumer behavior is gleaned- both in a general sense and specific to the property and the property’s competitors- then management can begin to anticipate that consumer behavior.  This is where the real challenge or revenue management emerges: being as accurate with this anticipation as possible, through forecasting, modeling, and exhaustive research.  Only when consumer behavior is at least partially anticipated can a hotel hope to sell and distribute their room inventory effectively, which is how revenue management leads to higher revenues and profitability. Once all of the data is collected and analyzed a pattern will begin to form. This pattern will constantly change and evolve just like any market. The key is to have a system in place with Artificial Intelligence (AI) that can understand and adapt to these changes in real time.
The last, and most critical aspect of revenue management, is actually influencing consumer behavior.  If a hotel can understand and anticipate a consumer’s decision, then the next logical step is to guide that decision in a direction that is beneficial to the property.  In terms of selling rooms, exerting influence is largely a function of presentation and sales channel distribution, in an effort to display a room to a customer at the price most likely to incite them to buy (while simultaneously being the price that earns the most revenue for the hotel in that situation).  The process of influencing consumer behavior is the capstone of revenue management; it is supported by understanding and anticipating consumer behavior, but in the end it is all the only visible result of a revenue management strategy. Once you have collected and analyzed all of the data, it will be simple to implement the findings into your revenue management processes.  By doing so, it will provide you with a huge competitive advantage in the market, thus helping you capture a bigger share of the market.
Of course, being capable of executing the technical aspects of revenue management is crucial to the success of any revenue management strategy.  The ability to modify prices in a real time environment, effectively manage inventory, balance and optimize sales channel distribution and facilitate cross-departmental cohesion are important nuts and bolts of the revenue management machine; it won’t function without them.  But neither will it work without an understanding of the fundamental principles of revenue management.
So remember: Understand, anticipate and influence.  These are the fundamentals of revenue management and the keys to a hotel’s financial success.

And looking forward to the next article in the revenue management series from REVPAR GURU & Hotel-Online…

System Underload
Perhaps since revenue management is a fairly new discipline, its potential has yet to be fully harnessed. Many hotels have implemented systems and hired capable RM managers to oversee them, but still they fall short in moving rooms and bringing in revenue. Why is this? Often, it’s because their system is underpowered, and doesn’t cover the full scope and complexity of revenue management.
The next article in the series details the eight areas all RM systems should cover; if yours doesn’t stretch across all of these, it might be time for a technology rethink.  Look for the story on Friday, January 28, 2011.

Jean Francois Mourier is CEO & Founder of RevPar Guru, a company that has developed an alternative type of revenue management and real-time pricing solution (combined with automated online distribution) to help hotels maximize occupancy and increase their profits. The company’s Yield Dynamic Price Engine, an integrated revenue management and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving managers more time to run their hotels. You may reach him through or by calling +1.786.478.3500. 

786-478- 3500


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Also See: Revenue Management: Profiting from the Industry’s Growth in 2011 / Jean Francois Mourier / January 2011

Home For the Holidays: Tending to Hotel Operations When Your Revenue Manager is on Vacation / Jean Francois Mourier / December 2010

The World of Revenue Management: Past, Present & Future; Looking back on hotel revenue management in 2010 and what the industry is expecting for 2011 / Jean Francois Mourier / December 2010

All Science, No Guesswork: The Benefits of Algorithms in Hotel Revenue Management / Jean Francois Mourier / November 2010

The Great Debate: Humans vs. Automated RMS: Their strengths, weaknesses and what responsibilities are best suited for each / Jean Francois Mourier / October 2010

Rate Parity vs. Rate Integrity—What is Rate Integrity? / Jean Francois Mourier / October 2010

A New Day For Timeshares; Using automated RM systems for running your timeshare company / Jean Francois Mourier / October 2010

Best Practices in Revenue Management, Part 3; Automation, Channel Management and Decision Making / Jean Francois Mourier / September 2010

Best Practices in Revenue Management, Part 2; Rate discipline, the leveraging of real-time information, and price prediction / Jean Francois Mourier / August 2010

Best Practices in Revenue Management, Part 1; General revenue management and strategic pricing / Jean Francois Mourier / July 2010

The Irresistibility of the Obvious; How a new trend in revenue management and metrics is missing the point / Jean Francois Mourier / July 2010

Pricing Beyond the Compset - And other new pricing strategies that really work / Jean Francois Mourier / June 2010

A Tale of Two Strategies; Contrasting boutique and chain hotel revenue management approaches / Jean Francois Mourier / June 2010

Historical Pricing Is History, Well, Not Exactly; Examining the Role Historical Pricing Should Be Playing in Hotels’ Pricing Strategies / Jean Francois Mourier / May 2010

Tipping Your Cap (Rate) - Why hotel owners need to pay attention to RevPAR / Jean Francois Mourier / April 2010

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