What Is Revenue Management? Hotel Pricing Explained

A hotel room that stays empty tonight cannot be sold tomorrow. A whole discipline has grown out of this simple fact: revenue management. It decides when a room is offered, at what price and on what terms.

Where the idea comes from

Revenue management, sometimes called yield management, was developed in the airline industry. In 1987, American Airlines described the goal as selling the right seat to the right customers at the right time. Hotels have adopted and refined the idea, as Chris Anderson and Sheryl Kimes of Cornell University describe.¹

At its core, it is about dividing guests into segments and managing rates and room allocations differently for each segment. According to Anderson and Kimes, revenue management has increased hotel revenue by 2 to 5 per cent in many cases. Because hotels have high fixed costs and comparatively low variable costs, a large part of this flows straight to the bottom line.¹

How revenue management works day to day

Defining segments: business travellers, families, groups, conference guests or guests booking through particular channels book at different times, stay for different lengths and pay different rates.

Forecasting demand: booking curves show how many reservations are on hand for a given arrival date at any point in time. If bookings are above or below the usual pattern, the hotel can react.¹

Managing rates and availability: each room type has several rate classes. Revenue management decides which of them can be booked at any given time.¹

Setting conditions: minimum stays, closed-to-arrival dates, prepayment and cancellation deadlines are just as much part of it as the rate.

Flexibility comes at a price

The ANDERS Hotel Walsrode shows how closely rates and conditions are linked. Flexible cancellation terms shift risk onto the hotel, because rooms freed up at short notice cannot always be resold. "For us, the economic limit is reached when flexibility becomes one-sided," says Deputy Hotel Director Doreen Garn in our article "Last-minute guests, fixed schedules".

Spreadsheet or software

Small properties often set rates using experience, an occupancy chart and a spreadsheet. Larger hotels and groups use a revenue management system, or RMS. It analyses booking data from the PMS, monitors competitor rates and suggests rates or sets them automatically. In both cases, what matters is to check regularly and not to leave rates unchanged for months.

What hoteliers should look for

More in the magazine

How one hotel handles short-notice bookings and flexible terms is shown in our article "Last-minute guests, fixed schedules". Why room rates that are rarely adjusted cost money is explained in "Digitalised – and still flying blind?". Why guests are booking later and how hotels can adapt is explained by tourism professor Marco A. Gardini in "AI is changing how guests find hotels and they are booking later – how hotels can adapt".