What does it mean to manage revenue?

What is revenue management and what is the role of revenue manager in a lodging company? It is likely that such a question will still be posed by many lodging property owners. Such fields as sales or accounting are recognizable and common, but the assumptions of revenue management appear to be different or non-existent.

Accommodation facilities are the primary product of the lodging sector and the main income comes from the selling of rooms. It is the aim of any accommodation provider to sell all the rooms available on a given date. However, the achievement of that goal is complicated by the fact that a room in a lodging is a perishable product. In other words, it will not be possible to sell today's hotel room the following day. Like the aviation industry, where a seat on a single flight is the main product, it can no longer be offered after the flight departure date. Thus, the primary purpose and, at the same time, the most challenging aspect of revenue management is to make pricing decisions on hotel rooms that will be sold before the date of arrival of the guest for the highest possible revenue.

The key concept in revenue management is the calculation of opportunity costs or waiving revenue today to retain the opportunity to sell at higher rates in future. This principle works on the assumption that demand will rise, and consumers will be willing to pay more. Revenue management techniques vary, but the major ones are two - dynamical room pricing and room type restrictions.

While revenue management practices have existed since the dawn of commercial trade (for example, through marketing goods of varying quality at different prices to different groups of society), modern revenue management has emerged in the aviation industry. To increase demand, in 1972 BOAC (now British Airways) decided to experiment with seat pricing on passenger flights. For all travellers who were ready to book their seats in time, BOAC offered discounts on their flight tickets. The innovative discount policy of the airline was simple: limit the reduced price to only the number of seats that would be empty if discounts were not available. Once the limit has been met, BOAC continued to sell seats at full price.

Following the example of the BOAC and pursuing a similar discount policy, airlines quickly discovered that granting discounts would entail conditions in the event of a modification or cancellation of a reservation and that extra costs would apply. Initially, airline customers did not grasp this quid pro quo concept, but it was accepted over time and became the industry's common practice.

Driven by effective revenue management practices in the airline sector, a tiered pricing scheme, combined with discounts and booking restrictions, has been adopted by the lodging industry. The pioneers of revenue management were the Marriott International hotel chain, which was soon followed by other large hotel chains and hotel groups.

Initially, revenue management practices were introduced in three major areas:

1. Pricing during periods of high, medium and low demand or during high and low seasons (prices have been printed and placed in a visible place in the registration area as well as published in the hotel marketing materials);
2. Setting restrictions on highly demanded dates. The key constraints were a minimum night stay or closed dates for arrival;
3. Setting the contract rates and conditions for business customers and other parties in exchange for a guaranteed volume of the reservation.

These decisions were strategic decisions that were reviewed once a year. They were approved by the general manager together with the heads of the sales and room division department. In turn, the implementation of the strategy was entrusted to the reservation manager. The key metrics of revenue management were hotel occupancy and ADR (Average Daily Rate).

One of the benefits of revenue management was the ability to forecast future reservation flow more accurately. This factor was often the primary reason why lodging properties wanted to implement revenue management principles in day-to-day management. Higher forecast accuracy allowed managers at all levels to make more strategically and tactically sound decisions on employees, strategy, and spending, as well as to formulate short-term and long-term business goals.

A new role was developed in the early 1990s - Revenue Manager, who became part of the hotel management team. However, strategic decisions were still taken at senior management meetings, and the revenue manager was only responsible for executing the decisions taken.

It was only after revenue management started to generate results that the position of revenue manager expanded. The revenue manager became a policymaker under the direct authority of the hotel manager. As revenue management practices evolved, new performance indicators were introduced. One of the main ones was RevPAR (Room Revenue Per Available Room), which, compared to hotel occupancy and ADR, provided a broader picture of the efficiency of the accommodation.

Over time, the revenue manager has also been tasked with the revenue management of other revenue centres, such as food and beverage department, room rentals, etc. Naturally, the future business was increasingly evaluated from the total revenue potential, or with a higher TRevPAR (Total Revenue Per Available Room).

While the role of revenue management has become increasingly important, this position was often only a "privilege" for large hotels, as small accommodations are unable to hire a full-time manager for this function due to limited resources. This in turn facilitated the development of various alternative solutions and revenue management models, such as corporate outsourcing and third-party outsourcing. The advancement of technological solutions has made it easier to handle the key processes of revenue management remotely.

In turn, when evaluating a potential business, not only the potential revenue but also the costs and the potential profit of each project were increasingly analysed. In parallel with the revenue ratios RevPAR and TRevPAR, a profitability indicator such as GOPPAR (Operating Profit Per Available Room) was introduced.

In recent years, digital transformation has taken place in the field of revenue management - a range of innovative technological solutions have been developed. And it is also likely that the use of technologies, like artificial intelligence (AI), will have a further impact on the efficiency of management processes. Any manual process that is predictable and standardizable can be automated with relatively simple technological solutions, but AI is capable to analyse the historical experience and apply it in response to various non-standard scenarios. For example, dynamic pricing tools for hotels. AI software constantly analyses the market demand for a particular day, accommodation availability, simultaneously collects and evaluates historical data, analyses possible development scenarios, determines the most cost-effective price offer, adjusts, and personalizes it for different market segments and automatically changes the price in all online distribution channels. All these processes take place in real-time. The human role is only to initially help the software "learn" to make the right decisions, and then to monitor its operation.

Naturally, the role of the revenue manager has changed under the new circumstances. Understanding of digital technologies and their application in revenue management processes have become important and necessary. Extensive knowledge of finance, economics and digital marketing is required, as well as the ability to structure, analyse and interpret large amounts of data. However, the key role has not changed - the revenue manager must be an expert and competent advisor in strategic decision-making of the hotel management.

References:
Ferguson, M., Smith, S. (2014). The changing landscape of hotel revenue management and the role of the hotel revenue Manager. Journal of Revenue and Pricing Management volume 13, pages224–232. https://doi.org/10.1057/rpm.2014.11 

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