Home Revenue Management Revenue Management What is Revenue Management? A 2021 Guide for the Hotel Industry

What is Revenue Management? A 2021 Guide for the Hotel Industry

Dec 7, 2020  By 

In this guide to all things revenue management, we’ll cover everything from the history of revenue management to the best revenue management software, career and education options, revenue management strategies and important terminology.

Whether you’re considering a career in hotel revenue management, have recently embarked on one or work in another area of hotel management and want to better understand the field, our guide sets you up with the foundation you need for a successful career in revenue management!

 

A Brief History of Hotel Revenue Management 

Airlines were the first to understand the power of segmented pricing to yield more revenue than across-the-board pricing. It all started with American Airlines, who realized that there was more value to be unlocked by tiering pricing according to specific conditions, such as offering discounts to tickets that were booked more than 21 days in advance. It was about getting the highest “yield” by more efficiently and intelligently pricing its inventory.

This concept was called yield management, a term coined by former chairman and CEO of American Airlines Robert Crandall, and became what Crandall called “the single most important technical development in transportation management since … deregulation.”

Yield management is an inventory-centric approach that matches the right product in front of the ideal customer at the best price. 

Both airlines and hotels have what’s known as perishable inventory, or inventory that can’t be sold once a flight has taken off or the night has passed. But it wasn’t until the late 1980s when hotels caught on and larger brands began to experiment with yield management. Marriott was the first mover, adapting airline yield management strategies to the hotel business and seeing great returns, as Bill Marriott Jr., Chairman and CEO, Marriott International once said:

“Revenue management has contributed millions to the bottom line, and it has educated our people to manage their business more effectively. When you focus on the bottom line, your company grows.”

Once other hotel brands saw Marriott’s success, yield management for hotels became a common practice across the industry. Hotels became more intentional about optimizing room revenues (pricing) and occupancy (bookings volume) through variable pricing strategies based on factors like demand, booking windows, and market conditions.

Eventually, this evolved into a more comprehensive approach known as revenue management, which puts the consumer at the center of the equation. It’s based on the economic concept of “willingness to pay,” which is the maximum amount each consumer is willing to pay for any one unit, item, or service. Revenue management strives for better alignment between how a hotel room is priced and what a consumer will pay. 

“Revenue management refers to a business practice designed to optimize the revenue potential of an asset through all market conditions.” -Revenue Matters

And it’s more than just rooms: it’s also about maximizing a guest’s total spend on property. As we’ll see below, today’s revenue managers must collaborate cross-functionally to implement a holistic strategy that delivers peak profitability rather than simply focusing on room revenue.

 

What is Revenue Management?

A lot has changed since the first revenue management system was put into place in the late 1980s. Today’s technologies are far more sophisticated, able to capture  and analyze massive datasets to deliver pricing recommendations in real-time.

Given this complexity, today’s revenue managers are commercial leaders that bridge between marketing, sales and operations at your hotel. They act as the glue between departments to ensure that a hotel is getting the most it can from its asset across all market conditions, navigating an increasingly complex distribution landscape to optimize revenues.

“Revenue management is selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission efficiency.” -Patrick Landman, Xotels

In an ideal situation — one that produces maximum revenue — the hotel room is priced as close to that maximum amount as possible without setting too high of an expectation or sending prospective guests to a cheaper competitor. To determine the ideal price, revenue managers use an RMS (revenue management system) to analyze a hotel’s available supply, in-market and property-level demand, as well as a consumer’s price sensitivity and demographics such as business/leisure and loyalty/transient).

Today’s revenue managers need these four components to build the foundation for successful hotel revenue management:

  1. Compset: Competitors’ rates are also a critical input for setting the best rates, as those prices shape the consumer’s perception of the “right price” for a given stay. Together, these inputs provide a valuable baseline for hoteliers to optimize rates. 

  2. Value analysis: A value analysis puts your property in context among your competitors by comparing its location, property amenities, bring quality and reviews against those of your compset. Once you can visualize value, you can better position your property in the eyes of potential guests.

  3. Rules and alerts: Technology empowers revenue managers with  automation. Most modern software allows you to set up rules and alerts to support your strategy in an automated fashion. These rules and alerts keep your strategy on track 24/7 and  make for a real-time responsive revenue management discipline.

  4. Routine and habits: Powerful routine and habits can be to unlock revenue management genius. Revenue managers with daily habits maintain visibility and control over their strategy and make tweaks on the fly to ensure alignment between property strategy and how your software functions.

 

Revenue Management Jobs

It’s helpful to understand the various roles within revenue management, as well as their related salaries. It’s also useful to understand the potential career paths and opportunities available to you as a revenue management professional. Common threads throughout each of these jobs are a data-driven mindset, a grasp of technology’s role in revenue management, and a collaborative approach to building bridges across departments.

Here are relevant revenue management job titles, ranked by seniority, along with salary ranges pulled from Payscale, Glassdoor and Hcareers. Salaries can vary greatly depending on your location and work history, so consult Glassdoor, Payscale or another website to benchmark any offers you may receive!

  • Revenue Analyst (sometimes a Yield Analyst): This position (usually more junior-level) is responsible primarily for analyzing historical data and demand forecasts through a financial lens to Make recommendations for improving revenue growth. Even though this role often uses software, it’s exceptionally helpful to know your way around Excel! Many properties still rely on spreadsheets, so proficiency in traditional data analysis is a must. That’s why many in this role have CPA credentials and a degree in finance or accounting. Most often promoted to Senior Analyst. [USD 40k-85k base salary plus potential bonus and profit sharing: Payscale | Glassdoor]

  • Revenue Manager: A recent graduate or junior-level professional with a few years experience. Implements revenue management strategies and related processes to optimize revenue in a single hotel or across a portfolio. Scope includes  regular reporting, managing and expanding distribution partnerships, influencing across the organization, identifying new revenue opportunities, and optimizing processes and technologies for peak performance. Most often promoted to Senior Manager. [USD 40k - 75k base salary plus potential bonus: Payscale | Glassdoor]

  • Cluster Revenue Manager/Area Revenue Manager: Larger portfolios will have  a revenue manager responsible for a cluster of hotels or hotels in a specific area. This person will do similar tasks as the revenue manager but expanded across a portfolio. This role requires strong collaboration and interpersonal skills to influence management in each individual hotel and align everyone with a shared revenue management strategy. Most often promoted to Senior Manager. [USD 50k-85k+ base salary plus potential bonus and profit sharing: Glassdoor]

  • Director of Revenue Management: An experienced professional. Creates and implements revenue management strategy, often leading a small team of Revenue Managers. For smaller footprints, this role encompasses all revenue management tasks alongside the higher-level strategic role. The role can also encompass a cluster or single region. Most often promoted to Senior Director. [USD 70k-130k base salary plus potential bonus and profit sharing: Payscale | Glassdoor]

  • VP of Revenue: Experienced and ambitious professionals often move up to the VP level in larger hotel brands. This role functions as an organizational cheerleader, developing relationships that keep revenue management at the Forefront of the organization. This person also manages revenue managers across a portfolio (and often geographies)  and must have nuanced people management skills to motivate those on the ground in different locations. There’s also often lots of travel involved. [USD 91k-152k base salary plus potential bonus, profit sharing and stock: Glassdoor]

  • Chief Revenue Officer (or Chief Commercial Officer): The zenith of a revenue management career could be as CRO/CCO. This prominent role leads sales and revenue management across an organization to deliver performance across a globally distributed team. It’s an essential role that creates and drives strategy to meet or exceed revenue and profitability expectations. Sometimes this role reaches across an entire organization  or can be broken down by region, such as the Chief Revenue Management Officer, Americas. [USD 500k-800k+ base salary plus bonus and stock, based on public filings]

A traditional revenue management career path would progress along the above list from top to bottom. As responsibilities increase, these roles have less defined edges. Top executives have more flexibility to craft roles ideally suited to their strengths  and different organizations have varying needs as far as which responsibilities top execs take on.

Other potential career paths:

  1. Marketing: Since revenue management collaborates closely with marketing, those with strong data-driven digital marketing skills often make the jump over to the revenue management team (and vice versa). In many cases, having both a marketing and revenue management background provides a stellar foundation for entering into higher levels of management. 

  2. Operations: Those that also have experience on the operations side of the business are especially well-suited to moving up the ranks. That’s because revenue management also requires buy-in from operations, as improved operational standards and service levels lead to better reviews, stickier loyalty, and higher rankings on OTAs. That’s a much easier path for more profitable distribution!

  3. Tech: There’s also a well-worn path between hospitality revenue management and technology vendors.  with easily transferable skills, industry expertise, and a broad Network, revenue management professionals make great assets for hospitality technology vendors. If that’s something that you are looking to do, be sure to nurture your network and develop the proper skills required for your target role.

 

Revenue Management Terminology & Metrics

Revenue management can be a confusing area of the industry, with plenty of jargon. As you get started with your revenue management career, become familiar with these essential revenue management terms. We’ve also included some helpful industry benchmarks to provide a deeper foundation of understanding.

The most common metrics used to measure hotel performance:

  • Average Daily Rate (ADR) shows a hotel’s pricing trends over time. It’s especially helpful when benchmarking price competitiveness and pricing trends against other hotels.

  • Average length of stay (ALOS) is the average amount of days stay at the hotel during a particular period.

  • Booking window, or how far in advance guests make bookings. Booking window acts as an anchor for making pricing decisions, as booking patterns 

  • Cost of Acquisition shows you how much it costs to acquire a booking, such as paying a channel or travel agent’s fees and commissions.

  • Occupancy rate shows the percentage of rooms filled in any given period. It’s a measure of demand. 

  • Revenue per available room (What is RevPAR?) tracks how much room revenue is earned per available room in the hotel. It’s rooms revenue divided by rooms available. Recently, TRevPAR has gained popularity, as it divides a property’s total rooms and non-rooms revenue by rooms available to track “total revenue.”

Other revenue management terminology:

  • Allotment: Refers to any block of  pre-negotiated rooms purchased and held by a third party, such as an event organizer, wholesaler, operator, travel agent, or OTA.

  • Best Available Rate: The base rate from which other segments are priced.

  • Commissions: Amount paid to intermediary for each reservation made.

  • Comp set: This is the competitive set of similar hotels that you benchmark against. 

  • Days Before Arrival: Number of days before guest arrives.

  • Displacement Analysis: Calculating the cost of accepting group bookings today compared with the loss of potential full-price bookings  at a later date.

  • Fenced rate: Rate with specific limitations, such as no refunds or cancellations. 

  • GDS: The Global Distribution Systems (Amadeus, Sabre, Travelport) connect travel buyers and suppliers in a centralized interface, charging access and per- transaction fees.

  • Market share:  Percentage of local market your hotel has compared to the competition.

  • Online Travel Agency (OTA): Digital-only travel seller, such as Expedia and Booking.com, that offers booking directly to Consumers and business travelers.

  • Pace: Being “on pace” means that bookings are happening as expected and on track for meeting booking targets and/or demand forecasts for a particular date.

  • Price Elasticity: How responsive demand for your hotel is based on changes in its price, as in does demand drop when prices increase? More on price elasticity in the hotel industry.

  • Rate Parity: Strategy for maintaining the same rate across all channels; rates are the same, they are in “parity.” 

  • Segment: A subset of either past guests for potential guests used for marketing purposes, often derived from a hotel’s CRM data or digital marketing campaigns.

  • Shoulder Date/Season: Time in-between busy seasons or busy periods, such as weekdays or the fall/spring.

Benchmarks/Statistics

  • Customer acquisition costs: These benchmarks show how customer acquisition costs affect revenue performance. Recent data from Kalibri Labs Shows that hotels keep the following amounts of every dollar paid by a guest: 97.3% from property direct, 93.4% for brand.com bookings, 94.5% from group bookings and 83.4% from OTA bookings. 

  • Impact of loyalty bookings: Loyalty continues to be a great source of business for hotels. In 2019, according to Kalibri Labs, total US loyalty contribution increased to 56.2%, which is up 17% since 2016, when book direct campaigns began.

  • The power of reputation: Another Kalibri Labs data analysis found a correlation between review score and ADR: in 2019, properties with lower consumer review scores saw decreases in ADR.

  • Channel mix: Each country has its own consumer preferences as far as where they book travel. To see the top revenue makers in different countries around the world in 2019, SiteMinder’s annual review breaks it down. 

  • Cancellation rates: D-EDGE found a 40% cancellation rate in 2018, with Booking.com having the highest cancellation rate of OTAs: 50%. Another win for direct bookings, cancellations from a properties website where the lowest at 18.2%.

 

Revenue Management Training

There’s certainly a lot of powerful technology available to revenue managers. These tools can actually make it possible to learn on the job and, with enough dedication, to become relatively proficient at the job without formal training.

Even so, revenue management is an analytical role with a foundation in statistics and math (and lots of Excel formulas!). For those looking to make this a career, it can be extremely helpful to have a formal degree that emphasizes your credentials –  especially if you’re looking to go into a bigger global brand. There are also plenty of certifications that can boost your professional credibility without investing in a dedicated degree. Some options to consider:

  • Dedicated degrees: For those just starting out in hospitality, it can make sense to invest in a dedicated degree. For those later in their careers, It may make more financial sense to pursue certifications, which we’ll cover below. The top three degree programs, covered below, offer not just top-notch education but also global alumni networks and helpful placement services to fast track your revenue management career:

  • Certifications: Continuing education doesn’t necessarily require a full degree program. Many universities and organizations offer certifications and online learning that can help keep your skills sharp. A few to consider:

    • CRME: This is the formal Certified Revenue Management Executive certification from HSMAI, a global association of hospitality sales and marketing professionals. It’s a widely recognized and trusted way to prove proficiency at revenue management. To be eligible for this degree, you must be an industry professional that can prove a certain level of expertise. Once approved, you’ll receive a study guide that covers the evolving dynamics of revenue management, which is the basis for an online exam that determines certification. The cost is $450 for HSMAI members and $625 for non-members.

    • CRM: Also by HSMAI, the Certificate in Revenue Management is a starter course for those just starting out in the field or current hotel staff considering a move into revenue. The online course covers the fundamentals of revenue management, from pricing strategy to forecasting, segmentation and business intelligence. The cost is $350 for HSMAI members and $500 for non-members.

    • Cornell: For those looking to take advantage of Cornell’s reputation without having to take classes on site, there’s the Hotel Revenue Management certificate teaching the basics of revenue management and the certificate in Advanced Revenue Management covering segmentation, pricing decisions and revenue strategy. Both are two weeks and $3,600. For executives pursuing continued development, the university also offers a variety of other online-only certificates, ranging from leadership to F&B management, as well as three-day classroom programs.

    • CHRM: The educational arm of the American Hotel & Lodging Association offers a course to become a Certified Hospitality Revenue Manager. The digital course is for those with at least 6 months experience or an advanced degree, and requires passing a 125 multiple-choice question online exam on forecasting and planning, strategies and tactics, statistical analysis, e-commerce and online distribution. The cost is $300 for AHLA members and $375 for non-members.

    • ESSEC via Coursera: You don’t necessarily have to go to a physical school to get the certification. This Coursera specialization, taught by professors from ESSEC Business School And created in partnership with Snapshot and Duetto, takes up to four months to complete and includes modules on hotel demand management, distribution and revenue management, as well as a case study. Students can audit the class for free but must sign up for Coursera’s $49/month plan to earn the official certificate for placement on resumes and LinkedIn.

 

An Overview Of Revenue Management Strategies 

Revenue managers use data from business and market intelligence tools to craft strategy and then leverage software to implement the best tactics and pull the pricing levers based on actual/forecast demand. Revenue management strategies are often blended depending on the properties priorities and current market conditions. No strategy is ever static; here are a few jumping off points for developing a property/brand-specific strategy.

  • Yield management. As we saw earlier, hotel yield management is a strategy for pricing inventory according to demand in order to control profitability. As a subset of revenue management, it focuses exclusively on finding your hotel’s optimal balance of supply and demand for its rooms, or the point where prices perfectly match traveler demand.

  • Proactive versus reactive. Proactive revenue management is seeking to be a market leader and leveraging historical data and future forecasts to proactively stay ahead of the competition. Whereas reactive revenue management is being a market follower and setting rates according to the competition. For instance, setting a rule to always undercut competition by 5% and using what’s known as penetration pricing, or positioning your hotel as the cheapest in the market.

  • Strategic versus tactical: Another way to look at proactive versus reactive is to think strategically versus tactical. Strategic revenue management proactively uses a sound revenue management strategy to shape all pricing and distribution decisions. Tactical revenue management is about reacting to changing market conditions with specific tactics, such as using discount pricing to boost occupancy by dropping rates or through automatic rules that adjust pricing based on specific events (competitor drops rates) or thresholds (forecasted occupancy dips below a certain percentage). Tactics generally cascade up to an overarching strategy.

  • Open pricing. Traditional revenue management relied on static prices, using the Best Available Rate as a basis for discounts or premiums. It was fixed, inflexible and poorly optimized. Thanks to AI-enabled revenue management software, it’s now possible to adjust pricing in real-time for specific segments and channels. This tech is also enabling personalized pricing, where offers are targeted down to the individual guest level. Segmentation is a key part of open pricing; revenue managers must have a thorough grasp on the nuances of their guest demographics and channel mix to fully leverage open pricing.

  • Direct bookings. Most hotels are focused on a “direct is best” revenue strategy because hotels keep more of every booking that comes direct versus third-party. In addition to carefully managing the channel mix, as far as availability, rates, and inventory, other tactics for this strategy include encouraging positive reviews to build online reputation and WOMM, capturing more bookings direct by offering special packages or other incentives and using the best hotel software that optimizes marketing funnels.

  • Channel-based. As software becomes more capable, it’s much easier to create a channel by Channel revenue strategy that prioritises the lowest-cost channels and  limits inventory on channels that produce less-profitable bookings. There’s plenty of nuance here, but it’s easier than ever to quickly open and close channels depending on changing demand forecasts.  A channel-based revenue management strategy is ideally suited to today’s “total revenue” and “total profit” mindset. 

  • Total revenue management. Last but not least is something that we’ve mentioned a few times: total revenue management is a strategy that optimizes all aspects of a hotel’s operation for profitability. It combines collaboration across departments with data-driven insights to deliver results.

 

Revenue Management Consultants

There are two options for hotels looking for outside help with revenue management: a hospitality consulting firm or a freelancer. Much of the decision will come down to price. Also, look for specific experience in your hotel’s category, solid client testimonials, and a data-driven approach.

While there has been a rise in capable revenue management professionals going freelance on a contract basis, larger hotel groups may prefer to engage the services of a bigger firm with larger staff and broader capabilities, such as branding, marketing, social media and PR . Of course, that usually comes at a higher cost! 

Here are a few firms and freelancers to get your search started. Another great place to find recommendations is with dedicated hotel organizations, such as the AHLA and HSMAI, who keep lists of members in related revenue management fields.

Firms:

  • Revenue By Design: Based in the UK, Revenue by Design offers training programs, outsourced revenue management services, and revenue/distribution audits to hotel clients across categories and geographies.

  • Xotels: As a boutique hotel consulting company, Xotels consults independent hotels on several areas of expertise, from operations to sales and marketing to revenue management, finance, pre-opening, and brand positioning.

  • Revenue Matters: Led by Trevor Stuart-Hill, an HSMAI Top 25 mind in hospitality sales and marketing, Revenue Matters  helps clients build a holistic approach to optimizing Total Property performance, aligning across marketing, sales, and revenue. Engagements can be strategic or full-service revenue management support. 

  • berner+becker: The firm optimizes existing revenue management strategies through extensive audits, as well as create custom revenue strategies that can either be implemented by clients or by the firm itself.

  • Kalibri Labs: Founded by Cindy Estis Green, who previously founded a data mining consultancy sold to Pegasus, Kalibri Labs provides revenue management consultation to hotels worldwide. It also has a proprietary revenue strategy platform that uses data from 33,000 hotels to drive its analysis and recommendations.

  • Revenue Acrobats: Silvia Canteralla began her revenue management career in 2004 at a major international chain. Her services range from total revenue management, including dynamic pricing and forecasting, to optimizing F&B, group, and catering revenues.

  • HotelRevBaba: Sunil Singh has 10 years of revenue management experience. He provides revenue strategy and planning services, as well as strategic support across the entire hotel operation, from pre-opening plans to budgeting.

  • kbb consulting: Kathryn Baker started her revenue management career at Westin, eventually  transitioning into roles at Starwood and Intrawest Corporation. Since 2007, she has consulted on revenue management strategy  across a broad client base, from small properties to full-service multi-unit resorts.

  • RevMutu: Kammelh Kishorre Founded his consultancy in 2012 has over 15 years of experience in hospitality and revenue manager within India and internationally. His services include audits, training, digital marketing, revenue management and channel distribution. 

  • RevUp: Robert Lewis Sudakow uses his background in revenue management, ecommerce, sales, distribution, and digital marketing across multiple markets to advise properties and luxury resort, urban, corporate, boutique, and conference center categories.

 

Revenue Management Software and Solutions

There are several categories of revenue management software that can power an optimal revenue strategy. Here’s a look at some software you might want to consider for your hotel’s revenue management function.

  • Revenue Management Systems (RMS): These all-in-one systems provide a comprehensive suite of tools to support your revenue management strategy. By bundling everything in one, RMS provides convenience and simplicity.  There’s a single system to manage — which streamlines daily operations, as well as training new staff.

  • Upselling Software: Upsells are a great way to boost revenue from existing reservations and play into the “total revenue” mindset of modern  revenue management. Upsell software makes it easy to implement upsells in guest communications.

 

We hope that this guide was useful as you embark on your path to becoming arockstar revenue manager. We’ve got plenty of resources on our blog, which covers all aspects of hotel life, from operations to revenue management. Wherever you are in your career, you’ll want to stay on top of how the latest trends will impact our interconnected industry –  and what you need to do to maintain competitiveness in both the near and long-term.

 

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