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What is Revenue Management?

The most common definition of revenue management is: “Selling the right product to the right client at the right moment at the right price through the right distribution channel with the best cost efficiency” or in a different perspective “Targeting the right distribution channels, controlling costs, and having the right market mix plays an important role and selling rooms and services at the right price, at the right time, to the right people”

Revenue management is optimising financial results which must contend with high fixed costs and a perishable inventory.

For example, hotels have a certain number of rooms and fixed costs which must be met, regardless of how many rooms are sold. Revenue management is employed in an effort to predict demand and optimise inventory and price availability. When utilised correctly, this will ultimately result in higher revenue.

History of revenue management

It all started in 1985 with American Airlines and Yield management spread to other travel and transportation companies in the early 1990s. In order to optimise financial results, airlines began to introduce a concept known as dynamic pricing. They found huge success in applying price discrimination techniques and anticipating consumer demand.

Managing hotel revenues and profitability are becoming more complex due to rapidly changing market of the hospitality industry. The traditional way of dealing supply and demand totally changed and it becomes a living organism which could change top to bottom and one day to another, and sometimes hour by hour during the past decades.

So, how we define Revenue Management?

It can be described as the use of analytics, which helps to predict the behaviour of customers, so that product availability and price can be optimised in order to generate the maximum amount of revenue possible. Within the hospitality industry, the main purpose is to increase revenue while selling the same number of products or services, such as hotel rooms. It is, essentially, about matching supply and demand and successful revenue management involves understanding how customers think and what their perceptions of value are.

This may mean also refusing to sell a room today so that you can sell it for a higher price tomorrow, but it might also mean recognising when demand is low enough that you should sell at a discounted price.

In order for a business to employ a revenue management strategy effectively, a number of conditions must be in place. These conditions are as follows:

  • Different customers must be willing to pay different prices for the same service or commodity;

  • The business must be some ability to predict the changing levels of demand ahead of time;

  • Only a fixed amount of resources are available to be sold at any given time;

  • A perishable inventory e.g. after a certain point, the resources can no longer be sold.

It can be employed in almost any business where changes in levels of demand can be predicted, where fixed costs must be paid regardless of sales and where customers are willing to pay different prices for the same product or service.

In summary, revenue management allows hotels to adopt a data-driven approach to decisions on what to sell them. It is a way of ensuring that informed decisions are made with predicting demand and optimising price and availability, in an effort to boost revenue.

As in any business strategy, there are several KPI’s (Key Performance Indicators) to measure and identify areas of success and failure in our approach to Revenue Management.

This will give hoteliers an even greater insight into the actual performance of their hotel. Please follow for my articles on Revenue Management KPI’s, it’s calculation and interpretation methods.

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