Revenue management for hotels has transformed over the past four decades, though some of its tried and true principles remain in place. What does the practice of modern revenue management mean to hotel operations?
Loosely speaking, revenue management (AKA “yield management”), a cornerstone of successful hotel operations, follows a formula: sell the right product to the right customer at the right time for the right price. Hoteliers accomplish this by effectively balancing occupancy and rate strategies to maximize revenue.
This article lays out the essential tenets and components of revenue-management practices, including how they relate to a hotel’s revenues and value.
A Brief History of Revenue Management
The concept and modern practice of revenue management originated in the 1970s when airlines began experimenting with new ways to fill seats without sacrificing ticket prices.
To do this, they analyzed historical booking patterns of individual and subgroups of travelers. Two of the earliest approaches took the form of overbooking flights and offering discounts to passengers who book early.
Overbooking worked on the principle of predicting the number of passengers who would not show up for a specific flight and selling those seats again to new passengers.
Airlines would analyze historical data for similar flights, looking specifically at how many ticketed passengers did not arrive, and overbook by the same number. This practice all but guaranteed that all seats would be filled on a given flight.
To maximize potential revenue further, airlines also began to change ticket prices throughout the booking cycle and gauge corresponding demand levels.
Airlines would allocate a number of seats three or more months from the departure date at a lower ticket price, typically appealing to the leisure traveler to provide a base of business for a specific flight.
As the departure date approached, airlines would increase rates to maximize yield, knowing most of these last-minute travelers (often commercial customers for whom the travel was necessary and inflexible), would pay the higher price.