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In addition to the air traffic industry, the hotel industry is one of the strongest and longest users of Revenue Management. However, the origin lies in the aviation industry and has been adapted by the hotel industry.
We at happyhotel have been working on this topic for a very long time and have been able to gain a great deal of experience in recent years. Because our software only works as well as we understand it. In the early days, we read everything there is about revenue management and analyzed when a revenue manager is successful.
We are experts in our field
But opinions on revenue management vary and there are numerous articles to read about it. Why should you trust this very post?! We're the experts at this level!
Our expertise therefore amounts to practical hotel experiences, exchange with hoteliers, personal initiatives and tests, as well as theoretical knowledge from studies and literature! We are convinced that with revenue management, you can completely rebuild your hotel.
Our knowledge has the biggest impact on our software. Because the best tools are only as good as the craftsman who uses them.
That's why you should look into revenue management
But it is becoming increasingly important to do revenue management, because only if you do revenue management will you remain competitive. This is particularly the case with small and medium-sized hotels. In addition, with revenue management, you can make your hotel more profitable and definitely increase your profitability. As a result, you also get to know your product better and deal with your data. Even if your occupancy rate isn't as good, demand in the region may be high but your price isn't competitive. That's why Revenue Management reacts to this and adjusts your price here.
That is not revenue management!
Many hoteliers think directly of their competitors when they hear the term revenue management. Hoteliers with revenue management often associate a price comparison with the prices of their neighbors. They analyse who is currently offering what price on the market. No! That is not revenue management.
Why shouldn't you pay too much attention to your competitors?
First of all, you don't know what's happening behind closed doors. If the competitor has received a group booking, they can work with their prices in a completely different way.
Second, demand in a region cannot be affected by prices. Price dumping, for example, does not trigger more demand for an entire region.
Finally, Revenue Management deals with the data and tries to find out the demand in the region, as well as its price sensitivity.
What influence does the price have on booking behavior?
A lot can be learned from the price and its booking behavior. Price sensitivity as well as price elasticity play a major role here. You can tell a lot from booking behavior. For example, at what price, the most bookings are received.
Is a hotel very early with a specific ADR (Average Daily Rate) Busy, this can be compared with the other days.
These are analyses and figures that can only be carried out manually with a great deal of effort. This is exactly where Happyhotel comes in. Our data-driven approach therefore helps when manual analysis is no longer feasible. You will finally receive completely new presentations and analyses of your figures that you could not create without happyhotel.
Here in our screenshot, you can see how the price and booking behavior are developing. You can clearly see how decisive the price is for booking behavior.
With these 5 steps, you can start your successful revenue management
With just five steps, you can set up your own revenue management system. This approach is particularly suitable for beginners in revenue management. However, it involves a great deal of manual effort, but it is your ideal start to take a closer look at this topic. Therefore, keep in mind that successful revenue management is a daily, recurring task.
Adjust and define rate structure
The first thing you should do is look at your rate structure. And try to build up the rates so that everything depends on one rate. This is the so-called rack rate or revenue rate. The rates should be interdependent. Here is a price example of what it could look like:
Set lower and upper price limits and define price levels
In the second step, you should set a maximum and minimum price. It is important that you use your Price floors Define. You should know your cost structure to really know what prices you have to charge. Otherwise, you'd pay more. Therefore, take your fixed costs and variable costs into account.
You should also be able to answer these questions:
- How much does it cost you to rent out a hotel room?
- And how much does the hotel room cost you if it is not rented out?
You should also set your price cap. Don't be too passive here, hotels often offer rooms too cheaply when demand is high. The idea is often “I can't ask for that” or “no guest pays that.” When demand is high, there are always guests who are willing to “pay more.”
The next step is to define the levels, here is an example:
Now we should define when which level is used. Especially when revenue management is done manually, you need a structure that you can fall back on.
Check your workload
To get to know your workload better, you need to try working with your data. Each hotel has so much data that is often not used, that they can help you so much!
Data from the past
Pick up your data from the past. And check your workload carefully. Find out on which days demand was greater than your supply and how early you reached occupancy. In other words, how long in advance you were booked out. Try to read the data from your PMS and export it to an Excel list.
Future utilization
After taking a closer look at your data from the past, you now know on which days or periods of time the load is particularly high. On these days, you can start with a listening level than the standard level. It is also best to use an Excel list to maintain the data. Here you can see the workload or occupancy and the level for the period.
Your daily to-do
Check your figures daily and how they are doing Bookings (pickup) behavior. Because that is the job of a revenue manager who checks the pickup every day and, if necessary, adjusts the prices and levels. This allows you to react in good time to any special features.
Manage group and business trips
Before you confirm a request, check whether you can accept the group request and group booking. If so, question yourself at what price. In general, we distinguish between three decision-making stages:
- Long-term: How many group bookings should there be at the hotel?
- In the medium term: Should the respective group be accepted or not?
- In the short term: If a group is accepted, how many guests do I expect regardless of the group booking?
Here is an example calculation, which we use as a basis for the medium and short-term decision stages. We would like to decide whether we will accept the booking and at what price.
Sample calculation for group trips
We are looking at a group booking with three days of accommodation. The hotel has a total of 100 rooms and the group would like to reserve 30 rooms per night. These are the results of our forecast:
Day 1:40 rooms are expected to be sold individually
Day 2:90 rooms are expected to be sold individually
Day 3:80 rooms are expected to be sold individually
The average rate is €120.00 per room and the variable costs amount to €20.00 per room. This therefore generates a contribution margin of €100.00. The group can expect additional income from food and drinks of €1,000.00.
Procedure for calculating the minimum price
1st day: According to the analysis, we have an occupancy rate of 40 rooms, excluding group bookings. If we accept the group booking, we will have an occupancy of 75 rooms. With the capacity of 100 rooms, we don't have to make any cancellations.
2nd day: According to the forecast, we have already occupied 90 rooms on this day. When accepting the group, we need a total of 125 rooms. But there are 25 rooms missing, so we would have to cancel individual guests.
3rd day: According to the forecast, 80 rooms will be sold. With the group booking, we have another bottleneck. We must cancel 10 rooms.
If we accept the group booking, we will have to cancel a total of 35 room bookings. This results in the following calculation: Contribution (DB) per room from individual guests is €100.00. 35 rooms must be canceled.
100.00€ DB x 35 cancelled rooms = 3,5000€ (opportunity costs), if accepted by the group.
With the group, we receive additional income of at least 1,000€ for food and drinks. These reduce opportunity costs: 3,500€ opportunity costs — 1,000€ of group food and drinks = 2,500€.
This means that in order to receive a profit with the group booking, a minimum income of 2,500€ is required.
Set the minimum price per room
With three nights and 30 rooms required, the group rents a total of 90 rooms.
2.500€ Opportunity cost: 90 rooms = 40€ per room. In addition, there are variable costs of €20. The minimum price is 60€ per room per day.
From this value, only the income from the group versus the 35 individual bookings is the same; no additional profit is generated by the group yet!
If you accept the group, you must enforce a rate of at least 60€ per room per night so that you at least cover your opportunity costs. If the group is not prepared to accept the price, the stay is not profitable.
Additional tips
There are, of course, a few more things that should be considered.
As you can certainly see, to carry out successful revenue management, you need a lot of time and precise work.
Set conditions of stay (restrictions)
Revenue management consists of many different components. This also includes restrictions. Restrictions include time periods, possible and restricted bookings. Sundays, which are often poorly utilized, should be included in arrangements to support bookings. Through so-called MLOS (minimum Length of Stay), you create a minimum length of stay for possible bookings.
Sell more than you have!
Careful! You should only use this if you have your numbers absolutely under control and can predict exactly how high your cancellations will be. You must have an emergency solution ready for this. For example, you can then switch to an apartment or a neighboring hotel.
Sell the right room to the right customer at the right time at the right price via the right sales channel with the best possible commission.
Use revenue management software for better control
Software makes sense because:
- It is data-driven
- gives you automated analyses
- It saves you a lot of time
- Get an overview of all KPIs
- and you get data preparation
All in all, we learned in this article that revenue management is complex and involves a lot of work. Especially since the approach that we describe here is relatively rigid and not as dynamic as a good Revenue Management software. With happyhotel, we try to do this completely for you and have developed an algorithm for this purpose that allows you to automate.
Revenue management systems also have major differences. Most are guided by rules that are stored in the system, which is of course a rigid solution and cannot react well to changes.
If you extrapolate it, a hotel with 5 categories and 6 different rates would have to make 10,000 pricing decisions per day to have a current price for 365 days.
You are welcome to test our software directly here. All you need to do is use an email address. You can create a demo account with demo data directly, then you can see our software for yourself.
TEST HAPPYHOTEL NOW FOR FREE AND GENERATE MORE REVENUE FROM DAY 1!
Conclusion
Every hotel should conduct revenue management in order to increase profits enormously and exploit potential. However, fears of customer complaints due to price differences are unfounded, as every guest is now aware that there are different prices.
An aha moment from a happyhotel user:
“A guest came to the hotel late in the evening and wanted to book a room for the night. I looked at my PMS and saw a very high price tag. I hardly dared to tell the guest this price. I did it in the end. The guest agreed with the price straight away and had a lovely stay.
The biggest hurdle to working with dynamic prices was probably myself. Claus Kuhnhardt
In the end, it clearly shows us that we ourselves are often the biggest hurdle to dynamic prices to work.
Small and medium-sized hotels in particular should be more daring here and be able to correctly classify their product.
