Top 6 Tips for Hotel Revenue Management

So you’ve heard of the term but don’t really understand what comprises Revenue Management. You are curious to see if it can really help your hotel, but don’t have the time to wade through mountains of information to figure out where to even begin.

In this article, I’ll outline the six most important tips to increase your hotel earnings with Revenue Management (abbreviated as “RM” here).

TIP #1

Set different rate strategies for different room types

For example, you have rooms with a king bed that have much higher demand for the weekdays. You’d want to set higher rates for weekdays and possibly lower rates on the weekends.

In the example diagram above, changing the rates of weekdays vs. weekends yields a significant increase in total revenue for this room type, even factoring in a possible decrease in occupancy due to the higher rates.

On the other hand, say you have rooms with twin beds that have higher demand on weekends. Here you’d want to set higher rates for the weekends and the opposite on weekdays.

As you can see, setting different rate strategies for each room type gives you better chances of increasing over-all revenue than having a single rate strategy across all rooms.

Keep in mind that at any given time, different rooms have different demand and supply values. And we always want to match our rates with the room’s over-all value. All the while noting that this could change quickly at any time.

A little puzzle for you: With a 10% increase in ADR, up to how much decrease in occupancy can you handle and still produce a positive result?

A - Up to 10% decrease in occupancy

B - Up to 5% decrease in occupancy

C - Up to 20% decrease in occupancy

D - None of the above

(Answers at the end of this post).

TIP #2

Close out discounts when busy

If you have high demand and know that you will sell out, why keep discounts open?

If demand is very high and you stop offering discounts for those dates, you could still likely get the rooms booked for full price. Furthermore, the discounts could be better used to attract bookings at another time when there is less demand.

If you are not so sure about the level of demand, you could shut down discounts a few at a time. And continue to close out discounts as your occupancy rises.

You can extend this approach to online travel agencies (OTAs) as well, closing OTA channels to give more rooms to higher-revenue generating channels. The same goes for other channels such as negotiated accounts.

You’d want to pay attention to these discounts, to get every dollar you can on those high demand days. Every dollar earned this way can help make up for when the days of lower demand comes.

TIP #3

Don’t be afraid to take a lower rate at the right time

When you know occupancy is struggling, negotiate good deals for groups or local negotiated accounts.

You’d need to have a good grasp of your break-even costs so as not to risk selling the rooms at a loss. Then try to close deals even with reduced rates. This strengthens what is called your base business, bookings that are already “on the books”.

This gives you a level of certainty for the level of occupancy you can expect for the period. It also makes the challenge of increasing occupancy through transient guests much less daunting.

It sounds much more achievable, and puts a higher degree of focus to say: “We need to generate an additional 40% occupancy from transient guests on top of the 30% occupancy on the books”, rather than just “We need to generate an additional 70% occupancy”.

You also don’t have to lower all your rates on all your channels. You can keep the higher rates online, while actively pursuing negotiated rates directly with potential customers.

TIP #4

Pay attention to the market

Watch the hotels around you that are similar to yours. We call this your competitor set, or Compset. Make sure that your rates are in line with your competitors because potential guests are certainly making that calculation.

You can definitely offer a higher or lower rate depending on a multitude of factors, including the uniqueness of rooms in your property, the amenities you offer, the quality of service, and so on.

However, your rates must be in line with the perceived value of your rooms as compared to your competitors. If your rates are too high, your rooms won’t sell. If your rates are too low, you will be leaving money at the table.

TIP #5

Know what your break even costs are

You can make smarter rate decisions when you know what are the costs to operate each room. What are the expenses incurred such as cleaning, cable, electricity, supplies, light bulb replacement etc.

If it costs you $60 to rent a room for a night then you know you should never sell below that. And on the other hand, you’d also know that reducing rates from $100 to $80 would still give you a healthy profit.

Investing on high quality equipment, furniture and supplies can help lower your break even costs. The higher quality usually means less maintenance expenses, which leads to lower total costs over the lifetime of the item.

Another way this helps is by making your break even costs more consistent across many months. If you constantly need to repair or replace equipment and furniture, you’d have a harder time figuring out your true breakeven costs.

TIP #6

Track and update daily (sometimes several times a day)

At its core, RM is about optimizing room supply and prices to meet continuously-changing demand. For most hotels, these three are always changing —daily. Hence the need to be nimble and be ready to make frequent adjustments. Otherwise, you will miss out on most opportunities.

Say your hotel is currently booked at 40% occupancy for tomorrow. And so are most of the other hotels in the area. Then a group booking blocked out 20% of the remaining rooms.

Other would-be guests see this and decide to make a booking before it’s too late. This then precipitated other guests to proceed with their own reservations. Eventually, all the hotels in the neighborhood jumped to 90% occupancy for the following day.

If you were tracking these daily developments, you could have adjusted prices to meet the surging demand, or converted room packages to require upsells and other promotions.

The diagram below illustrates the scenario. By adjusting the rates at the right time, the hotel is able to achieve a much higher total revenue.

The guests would be happy to get the booking and you would have gained more earnings for the same rooms.

The best revenue managers are those that can tune prices and adjust supply rapidly and frequently. Setting one rate and leaving it is the worse thing you can do for your property.

Answer to puzzle

D - None of the above. It would depend on the ADR and number of rooms.

For example, say we have 10 rooms, an ADR of $100 and an occupancy rate of 100%. This gives us a revenue of $1,000 for the night.

If we are to raise ADR by 10% to $110, at the very least we want the revenue to stay the same or greater than 1,000.

To get the lowest occupancy we can handle, divide revenue by (ADR * number of rooms).

So 1,000 divided by (110*10) = 0.9091

This is the lowest occupancy we can handle, which shows a decrease of 9.09%.

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