Revenue Management is concerned with optimising financial results and is especially popular in industries like hospitality, which must contend with high fixed costs and a perishable inventory. For example, hotels have a certain number of rooms and fixed costs which must be met, regardless of how many rooms are sold. In such industries, revenue management is employed in an effort to predict demand and optimise inventory and price availability. When utilised correctly, this will ultimately result in higher revenue.
In order to understand revenue management, we must first define it. Within the hotel industry, the widely accepted definition is: “Selling the right room, to the right client, at the right moment, for the right price, through the right distribution channel, with the best cost efficiency”.
It involves the use of performance data and analytics, which serve to help hotel owners to more accurately predict demand and other consumer behaviours. This, in turn, allows them to make more sensible decisions regarding pricing and distribution, in order to maximise revenue and, therefore, profit.
As a concept, revenue management actually began in the airline industry, where companies found ways to anticipate consumer demand in order to introduce dynamic pricing. However, it is applicable in any industry where different customers are willing to pay different prices for the same product, where there are only a certain amount of that product to be sold, and where that product must be sold before a certain point in time.
To carry out effective revenue management, a business must also have some way of forecasting demand and consumer spending habits, so that informed adjustments can be made. For instance, hotels can use past data, existing bookings, weather forecasts, and other industry data to inform their revenue management strategy.
Why is Revenue Management Important?
For hotel owners, hotel revenue management provides the ability to make the most out of a perishable inventory of hotel rooms, allowing them to maximise the amount of money the business generates. Essentially, it allows decision makers to make informed, data-driven choices, rather than relying on instincts or guesswork.
Hotels, like many other businesses, have fixed costs, which need to be paid regardless of how many rooms are sold and regardless of how much money is generated from guests. Therefore, through a revenue management strategy, hotel owners can ensure their costs are met and their prices and services are dynamically optimised.
Necessary Conditions for Revenue Management
In order for a business to employ a revenue management strategy effectively, a number of conditions must be in place.
These conditions are as follows:
- Different customers must be willing to pay different prices for the same service or commodity;
- The business must be some ability to predict the changing levels of demand ahead of time;
- Only a fixed amount of resources are available to be sold at any given time;
- A perishable inventory e.g. after a certain point, the resources can no longer be sold.