What is Revenue Management?

You're just a couple of weeks away from enjoying your long-awaited and well-deserved vacation when you realize that the hotel reservation hasn't been made. That was supposed to be your spouse's task, but they thought it was yours. When you rush to book it, you find that the price is 20% more expensive than it was a month and a half ago when you decided on the location. What happened? Well, what happened is simply time.

There is a concept that is not new but has been gaining increasing importance in various industries, especially in the hospitality sector, and that is Revenue Management.


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But what is revenue management?

This concept aims to maximize revenues by playing with three variables: time, installed capacity, and customer segments. Time and installed capacity have relative value, which changes as certain conditions are met. Conditions such as, the closer the date of stay, the higher the hotel rate.

Elements of Revenue Management

There are several elements that revenue management uses to maximize revenues, which we detail below:

1. Customer Segmentation

The entire strategy starts with the customer since what the customer perceives as high or low value is exactly what can be played with in these price changes. This is where segments come in, identifying and grouping customers into categories with similar characteristics and behaviors. This segmentation is based on various criteria, such as the purpose of the trip (business, leisure, events, etc.), the frequency of visits, the booking channel, the geographic origin, the willingness to pay, and personal preferences. By better understanding the needs and expectations of each segment, hotels can personalize their services, offers, and marketing campaigns, resulting in higher customer satisfaction and revenue optimization.

For example, a hotel can segment its customers into typical segments such as business travelers and leisure tourists. For business travelers, specific services such as access to meeting rooms, high-speed Wi-Fi, quick check-in and check-out, and loyalty programs that reward frequent stays can be offered, providing a lower rate with fewer penalties for cancellations or changes, as the high volume of stays reduces risks.

On the other hand, for leisure tourists, the hotel can focus on vacation packages, recreational activities, spa service discounts, and special offers for families or couples. In this case, a low-rate strategy can be offered if reservations are made at least three months in advance. By adapting their offer to the needs of each segment, hotels not only improve the customer experience, increasing the likelihood of repeat visits and recommendations.



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2. Managing Installed Capacity

In all scenarios where revenue management is applicable, there is a given installed capacity that must be used in the best possible way. The problem is that demand does not always match this capacity, and this is where the secret of success lies: aligning the changing demand with the fixed installed capacity that cannot be changed in the short term.

A hotel room that is not used one night is lost forever and can never be recovered.

For instance, in a hotel with 50 rooms distributed in two wings of three floors each, even if all the rooms are exactly the same, it is a mistake to think they will all have the same value. Rooms on the third floor will have a better view. Rooms on the first floor do not require climbing stairs but are noisier. Rooms on the second floor may offer an interesting balance between noise, the number of stairs to climb, and the view.

In this case, the prices for the three levels can be charged differently since they have attributes that may be more valuable to different customers. For elderly clients, pregnant women, and people with limited mobility, rooms on the first floor may be more attractive. Honeymooners may prefer those on the third floor. And if we delve deeper, in a convention, rooms closer to restaurants or auditoriums may be more attractive. This is where proper customer segmentation sheds light on what each segment values most and, therefore, what they would be willing to pay a little more for.


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3. Balancing Capacity with Demand

Here is where the other element comes in, which is time. Time makes things change in value. In the case of hospitality, it is very common for rates to vary over time due to fluctuating demand.

For example, in cities hosting important events such as concerts, festivals, conventions, or sports events like the Super Bowl or the Olympics, hotels adjust their rates upward due to increased demand. Similarly, during national or local holidays, such as Thanksgiving, Easter, or Carnival, prices may rise due to the higher influx of tourists. These adjustments allow hotels to maximize their revenues during high-demand periods.

On the other hand, rates can also vary according to the day of the week. In tourist destinations, rates are usually higher on weekends when more people are willing to travel. In contrast, in urban or business hotels, rates may be higher during the week due to the demand from business travelers, while they may drop during weekends. This variability allows hotels to optimize occupancy across different market segments.

Last-minute bookings are another factor that affects rates. Hotels often adjust their last-minute rates, offering discounts to fill vacant rooms or, in the case of high last-minute demand, raising rates. Additionally, hotels can offer reduced rates for extended stays, encouraging guests to stay longer. This is common in hotels catering to business travelers, long-term tourists, or people in housing transition.

In certain cases, especially in hotels near airports, hourly rates can be offered for travelers needing a place to rest during long layovers.

Finally, hotels can offer discounts to customers who book well in advance, known as “early bird” offers. This allows hotels to secure early revenue flow and better plan their capacity. They can also launch special promotions during specific periods to incentivize occupancy, such as summer offers, weekend getaways, or "pay for two nights and get one free" promotions.

4. Data Analysis (Historical Information)

To analyze the three elements mentioned above, it is essential to dive into the hotel's databases, where we have clients, booking dates, used rooms, services provided, and much more. All this information is a gold mine for implementing revenue management strategies.

By analyzing large volumes of data, hotels can make informed and strategic decisions about how to adjust their rates based on time and other factors. To begin with, as mentioned earlier, hotels collect a wide variety of historical data on occupancy, rates, demand, and booking patterns. This information includes high and low seasons, past events, and customer behavior. In addition to historical data, hotels continuously monitor current bookings, room availability, cancellations, and search behavior on online booking platforms. External information about local events, holidays, economic conditions, travel trends, and competitors is also collected, as these variables can significantly influence room demand.

Data analysis allows hotels to segment their customers by identifying similar patterns and behaviors. This segmentation facilitates the customization of offers and rate adjustments according to the specific characteristics of each customer segment.

Furthermore, when revenue management is mature, predictive models using machine learning algorithms and statistical techniques are employed to forecast future demand. These models consider multiple variables, such as past trends, upcoming events, and real-time search data, to anticipate peaks and troughs in demand. The ability to forecast these changes allows hotels to adjust their rates proactively, thus maximizing occupancy and revenues.

Competitive analysis is another important aspect of data analysis in hotel rate management. Hotels examine their competitors' rates and pricing strategies to ensure their own prices are competitive. By understanding how competitors are positioning themselves in the market, hotels can adjust their rates in the quest to maximize revenues.

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Revenue management is a key strategy in various industries, but especially in the hotel industry, to maximize revenues through the intelligent management of three fundamental variables: time, installed capacity, and customer segmentation. By dynamically adjusting rates based on the proximity of the stay date and demand, hotels can optimize their occupancy and profitability. Customer segmentation allows for the personalization of offers and services according to the needs and preferences of different groups, improving customer satisfaction and fostering loyalty.

On the other hand, the analysis of historical and real-time data provides the inputs for effectively implementing revenue management. A deep understanding of customer behavior and market conditions allows hotels to maintain their competitiveness and maximize their revenues by adapting to fluctuations in demand and external conditions, making the most of their installed capacity.