Next to the airline industry, the hotel industry is one of the strongest and longest users of revenue management. However, the origin lies in the airline industry and was adapted by the hotel industry.
We at happyhotel have been dealing with this topic for a very long time and have gained a lot of experience in the last few years. Because our software only works as well as we understand it. In the early days, we read everything there is on the subject of revenue management and analyzed when a revenue manager is successful.
Content:
- We are experts in our business
- This is why you should get involved with revenue management
- That’s not revenue management!
- How does the price influence the booking behavior?
- Start your successful revenue management with these 5 steps (Infographic – The Revenue Management Guide)
- Additional tips
- Use revenue management software for better control
- Conclusion
1. We are experts in our business
But opinions on revenue management vary and there are numerous posts to read about it. Why should you trust exactly this post! We are the experts on this level!
Therefore, our expertise is based on hotel experiences from practice, exchange with hoteliers, own initiatives and tests, as well as theoretical knowledge from studies and literature! We are convinced, with Revenue Management you can build your hotel from scratch.
Our knowledge has the greatest influence on our software. Because the best tool is only as good as the craftsman who uses it.
2. This is why you should get involved with revenue management
But it is becoming more and more important to operate revenue management, because only if you operate revenue management, you remain competitive. This is especially true for small and medium-sized hotels. In addition, with revenue management you can build up your hotel more profitably and increase your profitability. Through this you also get to know your product better and deal with your data. Even if your occupancy is not so good, it may be that the demand in the region is high, but your price is not competitive. So revenue management reacts to that and adjusts your price here.
3. That’s not revenue management!
Many hoteliers think directly of competitors when they hear the term revenue management. Hoteliers often associate revenue management with a price comparison with the neighbor’s prices. They analyze who is currently offering what price on the market. No! Revenue Management is not that.
Why shouldn’t you pay too much attention to your competitors?
First, you don’t know what’s happening behind closed doors. If the competitor has received a group booking, they can work with their prices in a completely different way.
Second, demand in a region cannot be influenced by prices. For example, price dumping does not trigger more demand for an entire region.
Finally, revenue management deals with the data and tries to find out the demand in the region, as well as its price sensitivity.
4. How does the price influence the booking behavior?
A great deal can be gleaned from the price and its booking behavior. Price sensitivity and price elasticity play a major role here. You can read a lot from the booking behavior. For example, at which price most bookings are received.
If a hotel is booked to capacity at a certain ADR (Average Daily Rate) very early on, this can be compared with the other days.
These are analyses and figures that can only be done manually with more effort. This is exactly where happyhotel comes into play. Therefore, our data-driven approach helps when manual analysis is no longer feasible. Finally, you get completely new representations and analyses of your numbers, which you would not be able to create without happyhotel.
5. Start your successful revenue management with these 5 steps (Infographic – The Revenue Management Guide)
Here you can download the PDF of our revenue management guide for free.
With just five steps, you can build your own revenue management system. This approach is particularly suitable for beginners in revenue management. However, it requires a lot of manual effort, but it is the ideal way to get started with this topic. Thus, keep in mind that successful revenue management is a daily, recurring task.
5.1 Adjusting and defining the rate structure
The first thing you should do is look at your rate structure. And try to build the rates in such a way that everything depends on one rate. This is the so-called rack rate or revenue rate. The rates should be made dependent on each other. Here’s a pricing example of what it might look like:
| Rates | Dependency rates |
| Rack Rate | |
| Rack Rate with breakfast | Rate Rate + 0 % |
| OTA Rate with breakfast | Rack Rate + 10 % |
| OTA Rate without breakfast | Rack Rate + 10 % |
| Business Rate | Rack Rate – 5 % |
| Family Special | Rack Rate – 5 % |
5.2 Set lower and higher price levels
In the second step, you should set a maximum and minimum price. Here it is important that you define your price floors. You should know your cost structure in order to really know what prices you have to charge. Otherwise you will pay more. Therefore, take your fixed costs and variable costs at hand.
You should also be able to answer these questions:
- How much does it cost you to rent out a hotel room?
- And how much does the hotel room cost you when it is not rented?
Likewise, you should set your price ceiling. Don’t be too passive here, often hotels offer rooms too cheap when demand is high. The thought is often “I can’t charge that” or “no guest will pay that”. When demand is high, there are always guests willing to “pay more”. The next step is to define the levels, here is an example:
| Levels | Price |
| Level 1 | 80 € |
| Level 2 | 90 € |
| Level 3 | 100 € |
| Level 4 | 110 € |
| Level 5 | 120 € |
Now we should define when which level is used. Especially if the revenue management is done manually, you need a structure to fall back on.
| Which level? | Occupancy in % |
| Level 1 | 0 – 20 % |
| Level 2 | 20 – 40 % |
| Level 3 | 40 – 60 % |
| Level 4 | 60 – 80 % |
| Level 5 | 80 – 100 % |
5.3 Check your occupancy
To know your occupancy better, you have to try to work with your data. Every hotel has so much data that is often not used, but it can help you so much!
5.3.1 Datas from the past
Take your data from the past at hand. And check your utilization rate carefully. Find out on which days demand was higher than your supply and how early you reached capacity. In other words, how far in advance you were booked. Try to read the data from your PMS and export it to an Excel list.
5.3.2 Future occupancy
After you have taken a closer look at your data from the past, you now know on which days or time periods the load is particularly high. On these days you can already start with a listen level than with the standard level. It is best to use an Excel list to maintain the data. Display the utilization or occupancy and the level for the period.
5.4 Your daily to-do
Check your numbers daily and how the bookings (pickup) are behaving. Because this is the job of a revenue manager, who checks the pickup daily and adjusts the prices and levels if necessary. This way you can react in time to any peculiarities.
5.5 Manage group and business travel
Before confirming a request, check if you can accept group request and group booking. If yes, ask yourself at what price. Generally, we distinguish three decision levels:
- Long-term: How many group bookings should there be at the hotel?
- Medium-term: Should the respective group be accepted or not?
- Short term: If a group is accepted, how many guests independent of the group booking do I expect?
Here is a sample calculation that we use as a guide for the medium- and short-term decision stages. Here we want to decide whether to accept the booking and at what price.
Sample invoice for group travel
We are looking at a group booking with three days of accommodations. The hotel has a total of 100 rooms and the group would like to book 30 rooms per night. These are the results of our forecast:
Day 1: 40 rooms are expected to be sold individually
Day 2: 90 rooms are expected to be sold individually.
3rd day: 80 rooms are expected to be sold individually
The average rate is 120,00 € per room and the variable costs are 20,00 € per room. This will therefore generate a contribution margin of €100.00. The group can be expected to generate additional revenue from food and beverages in the amount of 1,000.00 €.
Procedure for calculating the minimum price
Day 1: According to the analysis, we have an occupancy of 40 rooms, without the group booking. If we accept the group booking, we have an occupancy of 75 rooms. With the capacity of 100 rooms, we do not have to make any cancellations.
Day 2: On this day, according to the forecast, we already have 90 rooms occupied. Assuming the group, we need a total of 125 rooms. But there are 25 rooms missing, so we would have to cancel individual guests.
Day 3: According to the forecast, 80 rooms are sold. With the group booking, we have a bottleneck again. We have to cancel 10 rooms.
If we accept the group booking, we have to cancel a total of 35 room bookings. This results in the following calculation: Contribution margin (DB) per room of individual guests is 100.00 €. 35 rooms have to be cancelled.
100,00 € DB x 35 cancelled rooms = 3.5000 € (opportunity costs), assuming the group.
With the group, we receive additional income of at least 1,000 € for food and drinks. This reduces the opportunity cost: 3,500 € opportunity cost – 1,000 € food and drinks of the group = 2,500 €.
This means that in order to make a profit on the group booking, at least €2,500 in revenue is required.
Set minimum price per room
With three nights and 30 rooms needed, the group rents a total of 90 rooms.
2,500 € opportunity cost: 90 rooms = 40 € per room. To this must be added the variable costs of 20 €. This results in the minimum price of 60 € per room per day.
From this value on, only the revenues through the group vs. the 35 individual bookings are equal, there is still no additional profit generated by the group!
If you accept the group, you have to achieve at least a price of 60 € per room per night, so that you at least cover your opportunity costs. If the group is not willing to accept the price, the stay is not profitable.
6. Additional tips
Of course, there are still some things that should be taken into account.
As you can see, to perform successful revenue management, you need a lot of time and accuracy.
6.1 Set conditions of stay (restrictions)
Revenue management consists of many different building blocks. These also include the restrictions. Restrictions are, for example, time periods, possible and restricted bookings. Sundays, which are often poorly utilized, should be included in arrangements to support bookings. Through so-called MLOS (Minimum Length of Stay), you create a minimum length of stay for possible bookings.
6.2 Sell more than you have!
Careful! You should only do this if you have your numbers absolutely under control and can predict exactly how high your cancellations will be. You must have an emergency solution ready. For example, you can then switch to FeWo or a neighboring hotel.
Sell the right room to the right customer at the right time for the right price through the right sales channel with the best possible commission.
Sell the right room to the right customer at the right time for the right price through the right sales channel with the best possible commission.
7. Use revenue management software for better control
One is software makes sense, because:
- it is data driven
- gives you automated analysis
- you save a lot of time
- you get an overview of all KPIs
- and you get a data preparation
All in all, we have learned in this article that revenue management is complex and involves a lot of work. Especially since the approach we describe here is relatively rigid and not as dynamic as a good revenue management software. With happyhotel we try to relieve you of this completely and have developed an algorithm that allows you to automate it.
Revenue management systems also have big differences. Most are based on rules that are stored in the system, which is of course also a rigid solution and cannot react well to changes.
Start the software and you only need to use an e-mail address. You can directly create a demo account with demo data, then you can convince yourself of our software.
Conclusion
Every hotel should operate revenue management in order to increase profits enormously and exploit potentials. Fears of customer complaints due to price differences are unfounded, because by now every guest is aware that there are different prices.
An aha moment from a happyhotel user:
A guest came to the hotel late at night and wanted to book a room for the night. I looked in my PMS and saw a very high price. I almost didn’t dare to tell this price to the guest. In the end I did. The guest agreed to the price directly and had a nice stay.
Claus Kuhnhardt
I guess the biggest hurdle to working with dynamic pricing was myself.
In the end, it clearly shows us that often we ourselves are the biggest hurdle to work with dynamic prices.
Especially the smaller and medium-sized hotels should have more confidence here and be able to properly classify their product.
Everything is very open with a precise clarification of the challenges. It was really informative. Your website is useful. Thanks for sharing!