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.

Data Visualization: Hotel Statistics from Singapore Tourism Board

The data from this Story is from 2014 to October 2018 and taken from Singapore Tourism Board website. You can find my Tableau dashboard here.

Accumulative figures for available room nights, booked room nights, revenue, average room rates and RevPar are on a monthly and yearly basis.

Drilling down further, hotel statistics are categorized by four hotel tiers: luxury, upscale, mid-tier and economy. Since segment data is available only in RevPar, average room rates and occupancy rate, it’s not possible to compute the accumulative figures for segments.

Basic terminologies:

Available room nights refer to the total possible number of room nights in a period of time.

Booked room nights refer to the total number of room nights booked by guests in a period of time.

Average room rates refer to the average revenue per booked room nights in a period of time. It’s calculated by revenue divided by the number of booked room nights

Occupancy rates refer to the percentage of booked room nights against the available room nights. It’s calculated by booked room nights divided by available room nights

Revenue per Available Room or RevPar refers to the revenue per a room night. It’s one of the most important metrics in the industry, showing how a property fills its room inventory and how much it can charge per room. It’s calculated by Occupancy Rate multiplied by Average Room Rates in the same period of time.

Insights

Yearly Statistics

From 2015 to October 2018, the Singaporean tourism industry averages more than 80% in occupancy rate; which is pretty positive

The industry seems also to be on expansion with increasingly bigger yearly available room nights (almost 3 million room nights from 2014 to 2017) & booked room nights


While the number of rooms and occupancy rate get increasingly bigger year after year, the average room rate and RevPar go in the opposite direction

The rise in revenue signals that the increase in available & booked room nights outweighs the drop in average room rates and RevPar


Data in 2018 doesn’t include figures in November and December. Given the past performances, it’s difficult and uncertain to predict how the average room rates and RevPar will fare. It seems; however, average room rate will go up in December, compared to the rate in November.

Also, December seems to be a low month for Singapore’s tourism as historical figures show below. On the other hand, July and August are the busiest months of the year for Singapore.

Regression Model

Regression models every year show that there seems to be a correlation between occupancy rate and RevPar. Every year’s model is accompanied with a P-value less than 0.05 and an R-Squared between 58% and 77%

Seasonality

Regarding seasonality of Singapore’s tourism industry, every September seems to take a sharp decline in terms of occupancy rate, compared to the same year’s July and August. It’s an interesting phenomenon given that the Singapore Formula 1 Grand Prix takes place every September. Surprisingly, luxury and upscale segments tend to have fared better than mid-tier and economy segments from 2014 to 2016 and in 2018. My theory is that September may be a traditionally low month for Singapore and as a result, sees a low occupancy rate. However, hotels either push prices alone higher or package room rates with Formula 1 weekend tickets. The average room rate; therefore, may be driven up higher despite a low occupancy rate.

In 2014

In 2015

In 2016

In 2017

In 2018

It’s very interesting since if the demand is not there, businesses don’t usually drive up the prices. As a matter of fact, prices are usually lowered to stimulate the demand. My theory for such a phenomenon is cited above with regards to the Formula 1 Grand Prix in Singapore.

Luxury Segment

Upscale Segment

Mid-Tier Segment

Economy Segment