A quick explanation on revenue management in hospitality industry

I was lucky enough to have a short amount of time working in the revenue management in the hospitality industry. Personally, I think it is the most exciting part of the industry. There are a lot of moving parts and many factors to be taken into account before a decision is made to maximize revenue. Below is a rough explanation on how it works

Properties have two types of end customers: individual guests who seek for short term stays and corporations which may combine meeting & convention needs with accommodation. Both are represented by the green color. Meanwhile, there are two main intermediaries between properties and customers: travel agents and online travel agents (OTA); both of which are represented by the blue color in the diagram. Properties can also communicate directly to customers.

There are multiple ways in which properties can communicate to individual guests. Guests can call, book via websites or just walk in to book rooms. However, there is only so much a property can do in terms of advertising and marketing. Relying solely on its self appeal, it’s unlikely an average property can fill up its rooms. Hence, it needs travel agents and OTAs such as Booking.com or Expedia. These agents combined can expand a hotel’s reach to a much bigger audience. In return for their services, properties need to compensate the agents.

With regard to OTAs, they will take commission that ranges from 13% to 25%, depending on negotiations between the two parties. They will take payments from guests, save their cut and pass along the rest to properties. Regarding travel agents, room rates are usually combined together with other items such as F&B, transportation and sightseeing, to name a few. Hence, it’s difficult to single out how much they charge for rooms, but it is sure that properties have to give travel agents a lower rate than what is publicly available, meaning that Rate 3 is usually lower than Rate 1 and 2. Otherwise, why would they be motivated to sell on behalf of properties and how would they cover operational expenses? Both travel agents and OTAs check public rates (Rate 2) on properties’ own websites very regularly to make sure that the rates they receive are beneficial. Sometimes, I received calls or emails from agents, asking why their rates were higher than the ones on our website.

As properties have to compensate agents, the question is why. The answer is volume. Travel agents and OTAs bring more bookings to the table and ensure that properties are filled up faster. Hence, a big part of revenue management is to balance out volume and margin. If occupancy is low, properties need to push on all cylinders with attractive rates to sell rooms. As occupancy inches upward, rates need to be raised to maximize the revenue. For instance, if a hotel has only 10 rooms available for a certain day in the next 7 days and is confident that it can sell those rooms directly based on historical data, it makes sense to not sell those rooms to travel agents.

Partnership with agents is more important when it comes to foreign markets. A property in Vietnam welcomes guests from many countries in different continents. Without local partner agents in foreign countries, how could the property reach out to international guests?

The same dynamic between individual guests, agents and individual guests is similar to that between corporate customers, agents and properties.

A property’s room inventory on a given day is limited and perishable, meaning that if a room is not sold, the room night is gone forever. Hence, it’s imperative that a hotel try to sell as many as possible. On top of that, the job of a revenue management person is to maximize the revenue. Below is the list of factors that can influence revenue, including but not limited to:

  • Rates
  • Occupancy
  • Seasonality
  • Competitors’ rates
  • Holidays, local special events
  • Room types & their availability (A suite is sold at a higher rate than a standard room. Hence, if you can sell a suite, why shouldn’t you?)
  • Promotions
  • Historical pick-up rates
  • Historical cancellation rates

In a highly competitive industry such as hospitality, rates have a lot of sway over a booking decision. If you look for rooms in a certain city on Booking.com, a difference of $2 or $5 between comparable properties is pretty significant. It’s easy to sell rooms by lowering rates, but what is the point if no profit is materialized? The hard part is to be able to fill up the rooms and make profit, but it’s also the exciting piece of the puzzle. You have to process a lot of data on a daily basis to make informed decisions, but working in the revenue department allows you to have a pretty good understanding of a hotel’s business. And that’s also what excited me.

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