Creating memorable experiences is essential to operating a thriving hotel. But increased competition has made revenue growth and profitability equally important. That’s why we’ve created this guide—it’s filled with tips on building a revenue strategy that’s right for your business, freeing you to spend more worry-free time with guests.
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Hotel revenue management involves forecasting demand by understanding the unique characteristics and buying behaviors of prospective traveler segments, then matching that demand by optimizing prices and inventory to secure their bookings. In other words, attracting the right travelers by selling rooms at the right time, for the right price and thus increasing top-line revenue.
Nearly four decades ago, airlines developed the concept of revenue management—a flexible pricing approach that addresses inventory perishability and the individual value of each traveler.
The concept extends naturally to hotel inventory which is also perishable. A room left empty today cannot be sold tomorrow. Similarly, a room sold today can’t be sold for a higher rate tomorrow.
The airline industry was quick to adopt and refine the concept of revenue management, but the hospitality industry lagged. Mostly because fragmented systems and ownership models made it difficult for hoteliers to compile and analyze the right data.
How has hotel revenue management evolved?
Today, the challenges of data sharing have diminished, and more hotels are adopting a data-driven approach to pricing and distribution to generate growth. Having a hotel revenue strategy means understanding your market and traveler demand, then strategically optimizing your prices and inventory to capture profitable bookings.
In the high season, you may opt to leave a room unsold to secure a higher rate the next day. At periods of low-demand, you may sell a room at a discounted price. Measuring and monitoring the supply and demand of your hotel rooms will help you make confident decisions that drive revenue and profitability.
It’s not just your room revenue that benefits from implementing a strategy. Many other hospitality services are perishable too, such as restaurant reservations, meeting spaces, or spa appointments. Understanding your guests’ travel patterns and desires allows you to make informed pricing and staffing decisions. Anticipating on-property spend means that you’ll be able to staff your departments cost effectively so they always meet your guests’ expectations.
Why hotel revenue management matters
Every hotelier, regardless of size, is facing rising operating costs and increased competition. Having a revenue management strategy allows you to maintain profitability and achieve revenue growth even though you can’t physically increase the number of rooms you have to sell.
Getting started in hotel revenue management
Tracking the supply and demand of your rooms is the foundation of revenue management. There is no single, “right” way to approach revenue management. Depending on your circumstances, you may want to explore one of the following:
With the right approach identified, the next step is to understand market segmentation, forecasting, inventory management, hotel metrics and pricing strategies. If all this sounds complicated, don’t worry. We’ve broken each topic down into manageable sections.
Dividing the market of potential guests into groups, based on their different characteristics, is a cornerstone of every revenue management strategy. Some travelers prefer to book luxury rooms early, while others take their chances with last-minute deals. Some are costly to attract, while others provide steady business. Understanding how your traveler segments behave will allow you to strategically target the right guests for each season and forecast how their stay will impact your hotel profitability.
Start by considering the following:
Ways to segment your market
Once you know how your guests behave, you can divide them into segments. Below are examples of typical traveler segments, how they behave and how they might affect your business. Remember, market segments are unique to your property type and market. That means an airport hotel will likely identify different market segments from a luxury hotel in a large city.
These travelers often book through OTAs, which means you’ll pay a compensation on them.
Tend to have a longer booking window, so you can secure some business early.
Great for filling rooms at the last minute.
Reasonable rates help your ADR.
Corporate negotiated rates
You can rely on this type of business to cover your costs during slow periods.
Have a large impact on additional on-property spend.
Great business when you have very slow days of the week
Wholesale and tour operators
They often pre-pay and bring in customers from distant locations.
How market segments can affect your revenue
Consider the following snapshot and market segment booking windows. Is it worth selling your rooms early at a low rate to leisure groups? Could you potentially generate more revenue by selling them to another segment?
Market segments and Revenue
|Booking window||14 days|
|Rooms sold %||Rooms sold||ADR||Total revenue||Revenue share|
|Corporate negotiated rates||19%||19||$105||$1,995||17%|
|Wholesale and tour operators||7%||7||$75||$525||4%|
After you’ve identified your low-yield (lower rate) and high-yield (higher rate) segments, it’s time to think about demand, and how that changes throughout the year.
Forecasting involves estimating how much business will result from each segment and the value of that business. This information will help you drive incremental revenue by prioritizing high-yield business over low-yield business. Essentially, you want to feel confident that there’s enough high-yield business coming down the pipeline that you can minimize low-yield business—and still sleep at night!
Understanding your upcoming demand allows you to price rooms appropriately according to demand, and can also help to inform other operations, such as staffing and marketing. For example, during low-demand periods, it’s generally good practice to accept early bookings at lower rates (as long as you can cover your costs). During high-demand periods, guests generally expect to pay more—especially at the last minute. If you fill your property too early, you’ll likely miss the opportunity to capture these high-yield guests.
Before you can start forecasting demand, you’ll need to understand the following concepts: constrained demand, unconstrained demand, and competitive sets.
What is constrained and unconstrained demand?
Tip! If your unconstrained demand is higher than your capacity, you may want to increase the price of your last room or apply length-of-stay restrictions.
What is a competitive set?
A competitive set is a group of hotels that you see as direct competitors to your own hotel that you can use to benchmark yourself against. Competitive set information can help you anticipate other properties’ strategies so that you can make your own adjustments.
How to identify a competitive set
To get the most from your competitive set, it’s best to select competitors that are very similar to you. We recommend limiting the number of competitors to five or ten. However, you can have multiple competitive sets for different purposes, such as seasons.
Tip! Remember to review and update your competitive set regularly. New competitors and newly renovated properties might mean that your competitors change.
When you select your competitive set, consider:
How to forecast demand
To identify opportunities in different demand periods, you’ll need to forecast by day and by segment. Whether you’re working with historical data or intricate computing algorithms, the key to an accurate forecast is to use reliable numbers.
We suggest using data from all channels, including your hotel website, OTAs, and your channel manager, if you have one. Some OTAs even offer technology that helps you forecast demand, so be sure to check what tools you have available. Also, collecting data for repeat customer stays can become a valuable asset to both your demand forecast and your staff as these insights help your front desk improve and tailor the guest experience.
How to forecast demand – step by step
Identify transient and group “on the books” reservations
The more reservations you have, the more accurate your forecast will be.
Identify anticipated unconstrained transient reservations
How many rooms you could sell, if you had an unlimited number of rooms.
Identify anticipated group reservations
How many rooms you could sell to groups, if you had an unlimited number of rooms.
How to use a basic forecasting model
Once you’ve gathered all your information, it’s time to use it! To analyze your data, you’ll need to compile it in one place. Some revenue management software will help you with this, but you can also do this with a basic forecasting model (see below).
|Corporate negotiated rates|
|Wholesale and tour operators||5|
|Total rooms booked||50||60||45||72||65||90||55|
|Rooms booked occupancy %||50%||60%||45%||73%||65%||90%||55%|
|Expected pick up||3||2||10||15||5||0||1|
|Forecast room nights||53||62||55||87||70||90||56|
|Forecast occupancy %||53%||62%||55%||87%||70%||90%||56%|
Hotel inventory management is the process of monitoring and carefully controlling your room inventory. You’ll need to decide how many rooms you’ll allocate to each of your channels, how early you restrict business (you might make a channel unavailable) and whom you’ll accept business from.
Although it might be tempting to sell rooms as quickly as possible so you can rest easy, selling out too early might prevent you from reaching your revenue potential or affect the guest experience.
Inventory management and financial success
Some segments will provide business year-round, while other segments tend to be more seasonal. To succeed financially, it’s important to balance short-term, high-yield business with long-term, low-yield business. Turning down business from low-yield guests could potentially damage key relationships. Without these strong guest relationships, you may struggle to fill rooms and generate revenue in low-demand periods.
Inventory management and guest experience
Poor inventory management could also affect guest experience. If you accept all business, you may end up overbooking and needing to walk a customer (relocate a guest to another hotel, at your own expense). This can be a costly exercise and is likely to damage your relationship with the guest.
What to consider when managing hotel inventory
How much business do you want to drive from each of your channels? Think about the level of revenue and cost of bookings for each channel. For example, there’s no compensation on a direct booking, but corporate rates are generally lower than a leisure traveler.
What is the lead time (booking window) for travelers who book through each channel? Historical data can help you understand your travelers’ behavior and inform your decisions about when to accept low-yield group bookings and when to wait.
Are you willing to run the risk of overbooking and potentially upsetting a guest? Try to determine the probability of no-shows and decide what margin of error you’re willing to accept. Remember, you’re liable for the cost of relocating your guest to another hotel and it may affect your relationship with the guest. Equally, if you can sell that room for more than the cost of relocation, it may be worth it. You need to decide what’s best for your property.
Monitoring key performance indicators (KPIs), also known as hotel metrics, helps you to identify demand trends, opportunities for improvement, and areas of success. Performance measurement in the hotel industry involves countless acronyms, including ADR, RevPAR, GOPPAR—and the list goes on. But what do they mean, and how can they help you measure and improve the results of your revenue management strategy?
To help you get started, we’ve broken down the fundamental metrics in this guide. And if you need a reminder about calculations, check out our hotel metrics guide.
What is yield management?
Revenue management and yield management are related terms, but they are, in fact, different.
What is occupancy rate?
Hotel occupancy rate is the percentage of available rooms that were occupied (sold) during a specified period of time. Put simply, it tells you how full your property is.
While high occupancy is generally desired, a very high occupancy rate might indicate that you are pricing your rooms too low. In some cases, you might be able to achieve the same revenue with an 80% occupancy rate by pricing your rooms slightly higher. And that means fewer rooms to clean!
How to calculate occupancy rate
To calculate your occupancy rate, divide the number of rooms sold by rooms available.
Occupancy rate (%) = Rooms sold / Rooms available x 100
For example, if your property has 100 rooms, and you sell 80, your occupancy rate would be 80%.
80/100 x 100 = 80%
What is average daily rate (ADR)?
Average daily rate is the average amount paid per room, per day, during a specified period of time. It tells you the average income of an occupied room. It does not include complimentary or free of charge rooms, nor revenue from other departments, such as food and beverage.
ADR helps you understand your current operating performance in relation to your historical performance or other similar hotels, so that you can make informed, strategic pricing and promotional decisions. However, because ADR doesn’t consider other revenue or expenses, it can’t give you an idea of your overall performance.
How to calculate ADR
To calculate your average daily rate, divide your room revenue by the number of sold rooms.
Average daily rate (ADR) = Room revenue / rooms sold
For example, if your room revenue for a day is $8,000, and you sold 80 rooms, your ADR would be $100.
$8,000/80 = $100
What is RevPAR?
RevPAR is the revenue per available room. Calculating RevPAR allows you to evaluate daily performance based on occupancy (how many rooms are sold) and ADR (the average daily rate). It does not consider specific room types and rates, or actual occupancy (guests who checked in).
RevPAR is a great KPI for helping you quickly assess your financial performance. In other words, how well you’ve managed your inventory (rooms) and rates (prices) to optimize revenue.
How to calculate RevPAR
To calculate your revenue per available room, multiply your occupancy by your ADR.
RevPAR = Occupancy x ADR
For example, if your occupancy rate is 80% (you sold 80 of your 100 rooms) and your ADR is $100, your RevPAR would be $80.
.80 x $100 = $80
What is a good RevPAR?
RevPAR is a way of judging your own performance, and that means it will differ for each property. Generally, a good RevPAR is higher than the historic RevPAR you’re comparing it to. Be sure to select a date with similar demand for the best insight.
What is GOPPAR?
GOPPAR is gross operating profit per available room. GOPPAR considers revenue and expenses from all areas of the business. That means it’s a good metric for measuring your hotel performance as a whole.
How to calculate GOPPAR
To calculate your gross operating profit per available room (GOPPAR), subtract your gross expenditure from your gross revenue, then divide it by the number of available rooms in your hotel.
GOPPAR = (Gross revenue - Gross expenditure) / Available rooms
For example, if your gross revenue from all areas of your hotel is $1,000,000 for the year, your gross expenditure is $450,000 for the year, and your hotel has 25 rooms available 365 days per year, your GOPPAR would be $60.27.
$1,000,000 – $450,000 / (25 x 365) = $60.27
What is TRevPAR?
TRevPAR is total revenue per available room. TRevPAR indicates the overall financial performance of your property because it considers revenue from all departments (RevPAR only considers room revenue performance).
TRevPAR is particularly helpful for properties that generate considerable non-room revenue from other services, such as all-inclusive hotels or resorts. However, it does not consider costs incurred by the hotel, nor actual occupancy.
How to calculate TRevPAR
TRevPAR = Total Revenue / Total available rooms
For example, if your total net revenue from all areas of your property is $1,000,000, and your hotel has 25 rooms available 365 days per year, your TRevPAR would be $109.59.
$1,000,000 / (25 x 365) = $109.59
The goal of revenue management strategy is to maximize the revenue you make per available room (RevPAR), not just your room rates or occupancy rate. That’s why it’s important to consider the concept of supply and demand when developing a hotel pricing strategy.
What is hotel pricing strategy?
Hotel dynamic pricing, also known as demand pricing, time-based pricing, or surge pricing, involves changing room rates daily, or at multiple times during the day, based on real-time market demand data.
When demand is high, prices usually increase. For example, during New Year’s Eve, rates rise due to an influx of celebrating tourists. When demand is low, prices usually decrease, for example, a hotel in a small beach town will likely drop their rates during winter.
What to consider when developing a dynamic hotel pricing strategy
What to avoid when making pricing decisions
What is account reconciliation?
Account reconciliation is the process of accurately accounting for all transactions a business sees during a certain reporting period (usually a month). For hospitality businesses, this includes incoming payments from customers, usually in the form of room or service revenue, and outgoing payments, like wages, supplies, and compensation for OTAs or other channels.
Why reconciliation is important
Timely and accurate account reconciliations will help you better understand the health of your business. Here are our top reasons why you should be vigilant in reconciling your accounts.
1. It helps you make better operational decisions
Most operational decisions rely on accurate financial information, whether they’re actual numbers or forecasted data. For example, your forecast will only be relevant if you use accurate historic information.
2. It helps you avoid tax audit issues
It’s important that you have accurately reconciled your figures in a timely manner. Failed audits may result in fines or other consequences.
3. It helps you identify fraud and mistakes
Accurately accounting for all transactions enables you to spot irregularities, such as fraud or overdue payments from partners or guests. It will also help you identify errors, such as charging the wrong amount to a credit card.
4. It helps you track cashflow
Proper reconciliation allows you to see your cashflow, so you can prepare for expenses and avoid defaulting on debts.
Account reconciliation best practices
The account reconciliation process may differ depending on your property type. For example, if you have a management company, they may have established requirements in place. While we recommend that you consult an accountant to ensure you’re meeting all generally accepted accounting principles, here are a list of tasks you should consider as part of your process:
Connecting with guests, helping them enjoy extraordinary experiences and create lasting memories is at the core of why we work in hospitality. Every day we see properties around the world delivering exceptional service to travelers. Our hope is that this guide will help you navigate the complications of increased competition and rising costs. Having a revenue management strategy that reflects your unique market, guests, and property will give you a strong, lasting foundation for a thriving business.
For additional help, explore the suite of revenue management tools available in Expedia Group’s Partner Central. From crafting a custom competitive set to leveraging real-time public market data to understand the current state of occupancy and ADR; you’ll have support to make informed decisions about optimizing your revenue.
A glowing guest review may be the best reward, but hoteliers also need to deliver strong business results. To inform pricing and distribution decisions, the hospitality industry relies on a core set of metrics that measure performance and allow it to be compared with others in the market.