Your guide to hotel revenue management

Hotel revenue management involves forecasting demand by understanding the unique characteristics and buying behaviors of prospective traveler segments, then matching that demand by optimizing prices and inventory to secure their bookings. In other words, attracting the right travelers by selling rooms at the right time, for the right price and thus increasing top-line revenue.

Nearly four decades ago, airlines developed the concept of revenue management—a flexible pricing approach that addresses inventory perishability and the individual value of each traveler.

The concept extends naturally to hotel inventory which is also perishable. A room left empty today cannot be sold tomorrow. Similarly, a room sold today can’t be sold for a higher rate tomorrow.

The airline industry was quick to adopt and refine the concept of revenue management, but the hospitality industry lagged. Mostly because fragmented systems and ownership models made it difficult for hoteliers to compile and analyze the right data. 

How has hotel revenue management evolved?

Today, the challenges of data sharing have diminished, and more hotels are adopting a data-driven approach to pricing and distribution  to generate growth. Having a hotel revenue strategy means understanding your market and traveler demand, then strategically optimizing your prices and inventory to capture profitable bookings.

In the high season, you may opt to leave a room unsold to secure a higher rate the next day. At periods of low-demand, you may sell a room at a discounted price. Measuring and monitoring the supply and demand of your hotel rooms will help you make confident decisions that drive revenue and profitability.

It’s not just your room revenue that benefits from implementing a strategy. Many other hospitality services are perishable too, such as restaurant reservations, meeting spaces, or spa appointments. Understanding your guests’ travel patterns and desires allows you to make informed pricing and staffing decisions. Anticipating on-property spend means that you’ll be able to staff your departments cost effectively so they always meet your guests’ expectations. 

Why hotel revenue management matters

Every hotelier, regardless of size, is facing rising operating costs and increased competition. Having a revenue management strategy allows you to maintain profitability and achieve revenue growth even though you can’t physically increase the number of rooms you have to sell.

Getting started in hotel revenue management

Tracking the supply and demand of your rooms is the foundation of revenue management. There is no single, “right” way to approach revenue management. Depending on your circumstances, you may want to explore one of the following:

1. Hire or train a revenue manager. If you’re in a position to hire a revenue manager, it’s an excellent skill to have in-house. Alternatively, you can invest energy in upskilling your existing team through courses offered by Revenue Academy or Coursera.
2. Invest in optimization software. There are many technology systems that eliminate the need to manually collect data and build individual reports. These solutions increase accuracy, simplify data comparison and make it easy to spot opportunities.
3. Leverage existing resources. If software investments aren’t in your budget, explore the services offered by your other system providers and partners. For example, many OTAs offer price comparison tools that eliminate the need to gather rate data from nearby hotels.

With the right approach identified, the next step is to understand market segmentation, forecasting, inventory management, hotel metrics and pricing strategies. If all this sounds complicated, don’t worry. We’ve broken each topic down into manageable sections.

After you’ve identified your low-yield (lower rate) and high-yield (higher rate) segments, it’s time to think about demand, and how that changes throughout the year.

Forecasting involves estimating how much business will result from each segment and the value of that business. This information will help you drive incremental revenue by prioritizing high-yield business over low-yield business. Essentially, you want to feel confident that there’s enough high-yield business coming down the pipeline that you can minimize low-yield business—and still sleep at night!

Understanding your upcoming demand allows you to price rooms appropriately according to demand, and can also help to inform other operations, such as staffing and marketing. For example, during low-demand periods, it’s generally good practice to accept early bookings at lower rates (as long as you can cover your costs). During high-demand periods, guests generally expect to pay more—especially at the last minute. If you fill your property too early, you’ll likely miss the opportunity to capture these high-yield guests.

Before you can start forecasting demand, you’ll need to understand the following concepts: constrained demand, unconstrained demand, and competitive sets. 

What is constrained and unconstrained demand?

• Unconstrained demand is how many rooms could be booked on a given day if you had an unlimited number of rooms. For example, although your property may only have 50 rooms, during a large event there could be 40 more travelers who want to stay at your property. That means your unconstrained demand would be 90 rooms.
• Constrained demand is the maximum demand for the amount of rooms you have. For example, if your property has 50 rooms, your demand would be no more than 50 rooms. 

Tip! If your unconstrained demand is higher than your capacity, you may want to increase the price of your last room or apply length-of-stay restrictions.

What is a competitive set?

A competitive set is a group of hotels that you see as direct competitors to your own hotel that you can use to benchmark yourself against. Competitive set information can help you anticipate other properties’ strategies so that you can make your own adjustments.

How to identify a competitive set

To get the most from your competitive set, it’s best to select competitors that are very similar to you. We recommend limiting the number of competitors to five or ten. However, you can have multiple competitive sets for different purposes, such as seasons.

Tip! Remember to review and update your competitive set regularly. New competitors and newly renovated properties might mean that your competitors change.

When you select your competitive set, consider:

• Location. Competitor properties should be located near your property. A property 20 miles away is unlikely to target the same market as you. 
  
  
• Property type. Select competitors that offer a similar property type. For example, a 5-room bed and breakfast will attract a very different clientele to a 100-room hotel. 
  
  
• Property category. Competitor properties should be a similar standard to yours. For example, you wouldn’t include a 5-star luxury property if your property was a 3-star motel. 
  
  
• Property facilities. Select competitors that offer similar facilities. Does your property have business facilities for corporate guests? Or is it more suited to leisure travelers? 
   

How to forecast demand

To identify opportunities in different demand periods, you’ll need to forecast by day and by segment. Whether you’re working with historical data or intricate computing algorithms, the key to an accurate forecast is to use reliable numbers.

We suggest using data from all channels, including your hotel website, OTAs, and your channel manager, if you have one. Some OTAs even offer technology that helps you forecast demand, so be sure to check what tools you have available. Also, collecting data for repeat customer stays can become a valuable asset to both your demand forecast and your staff as these insights help your front desk improve and tailor the guest experience. 
 

How to forecast demand – step by step

Identify transient and group “on the books” reservations

The more reservations you have, the more accurate your forecast will be.

• PMS (Property Management System) or other system used to track reservations
   

Identify anticipated unconstrained transient reservations

How many rooms you could sell, if you had an unlimited number of rooms.

• Public/bank holidays
• School holidays/vacation
• Exceptional demand indicators, such as events
• Competitors’ fully booked dates, seasonal rate periods, new properties, and renovations (some OTAs provide competitive set data)
• RevPAR last year (Revenue per available room)
   

Identify anticipated group reservations

How many rooms you could sell to groups, if you had an unlimited number of rooms.

• Considerations as per unconstrained transient reservations
• Groups or events from last year or previous year if they are biannual
   

How to use a basic forecasting model

Once you’ve gathered all your information, it’s time to use it! To analyze your data, you’ll need to compile it in one place. Some revenue management software will help you with this, but you can also do this with a basic forecasting model (see below).

1. Enter your existing reservation information into the model.
2. Next, compare this with your historical data and market trends to identify opportunities. 

Hotel inventory management is the process of monitoring and carefully controlling your room inventory. You’ll need to decide how many rooms you’ll allocate to each of your channels, how early you restrict business (you might make a channel unavailable) and whom you’ll accept business from.

Although it might be tempting to sell rooms as quickly as possible so you can rest easy, selling out too early might prevent you from reaching your revenue potential or affect the guest experience.

Inventory management and financial success

Some segments will provide business year-round, while other segments tend to be more seasonal. To succeed financially, it’s important to balance short-term, high-yield business with long-term, low-yield business. Turning down business from low-yield guests could potentially damage key relationships. Without these strong guest relationships, you may struggle to fill rooms and generate revenue in low-demand periods.

Inventory management and guest experience

Poor inventory management could also affect guest experience. If you accept all business, you may end up overbooking and needing to walk a customer (relocate a guest to another hotel, at your own expense). This can be a costly exercise and is likely to damage your relationship with the guest. 

What to consider when managing hotel inventory

• Distribution: Opening and closing channels 

How much business do you want to drive from each of your channels? Think about the level of revenue and cost of bookings for each channel. For example, there’s no compensation on a direct booking, but corporate rates are generally lower than a leisure traveler.

• Lead times: When to accept bookings

What is the lead time (booking window) for travelers who book through each channel? Historical data can help you understand your travelers’ behavior and inform your decisions about when to accept low-yield group bookings and when to wait.  

• Overbooking: When to say no to bookings

Are you willing to run the risk of overbooking and potentially upsetting a guest? Try to determine the probability of no-shows and decide what margin of error you’re willing to accept. Remember, you’re liable for the cost of relocating your guest to another hotel and it may affect your relationship with the guest. Equally, if you can sell that room for more than the cost of relocation, it may be worth it. You need to decide what’s best for your property.

Monitoring key performance indicators (KPIs), also known as hotel metrics, helps you to identify demand trends, opportunities for improvement, and areas of success. Performance measurement in the hotel industry involves countless acronyms, including ADR, RevPAR, GOPPAR—and the list goes on. But what do they mean, and how can they help you measure and improve the results of your revenue management strategy?

To help you get started, we’ve broken down the fundamental metrics in this guide. And if you need a reminder about calculations, check out our hotel metrics guide. 

What is yield management? 

Revenue management and yield management are related terms, but they are, in fact, different.  

Revenue management is your overall strategy including data analysis, market segmentation, and forecasting, while yield management is the price optimization aspect of your strategy. 

What is occupancy rate?

Hotel occupancy rate is the percentage of available rooms that were occupied (sold) during a specified period of time. Put simply, it tells you how full your property is. 

While high occupancy is generally desired, a very high occupancy rate might indicate that you are pricing your rooms too low. In some cases, you might be able to achieve the same revenue with an 80% occupancy rate by pricing your rooms slightly higher. And that means fewer rooms to clean! 

How to calculate occupancy rate

To calculate your occupancy rate, divide the number of rooms sold by rooms available.

Occupancy rate (%) = Rooms sold / Rooms available x 100

For example, if your property has 100 rooms, and you sell 80, your occupancy rate would be 80%. 

80/100 x 100 = 80%

What is average daily rate (ADR)?

Average daily rate is the average amount paid per room, per day, during a specified period of time. It tells you the average income of an occupied room. It does not include complimentary or free of charge rooms, nor revenue from other departments, such as food and beverage.

ADR helps you understand your current operating performance in relation to your historical performance or other similar hotels, so that you can make informed, strategic pricing and promotional decisions. However, because ADR doesn’t consider other revenue or expenses, it can’t give you an idea of your overall performance. 

How to calculate ADR

To calculate your average daily rate, divide your room revenue by the number of sold rooms.

Average daily rate (ADR) = Room revenue / rooms sold

For example, if your room revenue for a day is $8,000, and you sold 80 rooms, your ADR would be $100. 

$8,000/80 = $100

What is RevPAR? 

RevPAR is the revenue per available room. Calculating RevPAR allows you to evaluate daily performance based on occupancy (how many rooms are sold) and ADR (the average daily rate). It does not consider specific room types and rates, or actual occupancy (guests who checked in). 

RevPAR is a great KPI for helping you quickly assess your financial performance. In other words, how well you’ve managed your inventory (rooms) and rates (prices) to optimize revenue. 

How to calculate RevPAR

To calculate your revenue per available room, multiply your occupancy by your ADR.

RevPAR = Occupancy x ADR

For example, if your occupancy rate is 80% (you sold 80 of your 100 rooms) and your ADR is $100, your RevPAR would be $80. 

.80 x $100 = $80 

What is a good RevPAR? 

RevPAR is a way of judging your own performance, and that means it will differ for each property. Generally, a good RevPAR is higher than the historic RevPAR you’re comparing it to. Be sure to select a date with similar demand for the best insight. 

What is GOPPAR?

GOPPAR is gross operating profit per available room. GOPPAR considers revenue and expenses from all areas of the business. That means it’s a good metric for measuring your hotel performance as a whole.  

How to calculate GOPPAR

To calculate your gross operating profit per available room (GOPPAR), subtract your gross expenditure from your gross revenue, then divide it by the number of available rooms in your hotel. 

GOPPAR = (Gross revenue - Gross expenditure) / Available rooms

For example, if your gross revenue from all areas of your hotel is $1,000,000 for the year, your gross expenditure is $450,000 for the year, and your hotel has 25 rooms available 365 days per year, your GOPPAR would be $60.27. 

$1,000,000 – $450,000 / (25 x 365) = $60.27

What is TRevPAR?

TRevPAR is total revenue per available room. TRevPAR indicates the overall financial performance of your property because it considers revenue from all departments (RevPAR only considers room revenue performance).

TRevPAR is particularly helpful for properties that generate considerable non-room revenue from other services, such as all-inclusive hotels or resorts. However, it does not consider costs incurred by the hotel, nor actual occupancy.

How to calculate TRevPAR

TRevPAR = Total Revenue / Total available rooms

For example, if your total net revenue from all areas of your property is $1,000,000, and your hotel has 25 rooms available 365 days per year, your TRevPAR would be $109.59.

$1,000,000 / (25 x 365) = $109.59

The goal of revenue management strategy is to maximize the revenue you make per available room (RevPAR), not just your room rates or occupancy rate. That’s why it’s important to consider the concept of supply and demand when developing a hotel pricing strategy. 

What is hotel pricing strategy?

Hotel dynamic pricing, also known as demand pricing, time-based pricing, or surge pricing, involves changing room rates daily, or at multiple times during the day, based on real-time market demand data. 

When demand is high, prices usually increase. For example, during New Year’s Eve, rates rise due to an influx of celebrating tourists. When demand is low, prices usually decrease, for example, a hotel in a small beach town will likely drop their rates during winter.    

What to consider when developing a dynamic hotel pricing strategy

• Overall room availability in your area
  Are there any important events happening that will increase demand?
• Competitor availability
  How are your competitors tracking? If they only have a few rooms available, you can increase your rates, which will help you increase your average daily rate.
• Cancellation policies
  Will you offer non-refundable rates?
• Inventory management
  Who are your desired guests (segments)? What channels do they book through, and what are the costs of using intermediaries? 
• Cost per room
  Be sure to calculate the cost per occupied room to ensure your rate includes a profit margin. Consider staff/housekeeping costs, cleaning supplies, consumable amenities such as shampoo and conditioner, laundering of bed and bath linens, utilities such as electricity, and booking fees and compensation. It’s also a good idea to allocate an amount towards future renovations. 

What to avoid when making pricing decisions 

• Accepting reservations too early
  Not all guests are created equal. Accepting a large group with a heavily discounted rate during a period of high demand means you can’t sell those rooms to higher paying customers. If you do accept early reservations, be sure to charge a premium rate. 
• Pricing intuitively
  Data is always more reliable than a gut feeling. Always consider factors that could drive or reduce demand, such as weather forecasts, school holidays, or local events. 
• Keeping your rates static
  Keeping your rates fixed is likely to result in missed revenue opportunities. Be sure to adjust your rates based on supply and demand to drive the most revenue from your rooms. 
• Limiting pricing decisions to business hours
  No one wants to start the day with the news that you’re overbooked! Make sure you have people and systems in place to make pricing changes when your revenue manager can’t. 
• Closing your channels
  Closing availability means that travelers using those channels won’t be able to find you. Rather than closing discounted channels as demand increases, try decreasing the discount. That way, you’ll be able to keep the channels open while maximizing yield.
• Reacting suddenly to competitor prices
  Competitor pricing gives you a better idea of demand in your market, but you should never react on just one competitor’s rates. They may be adjusting their rates based on their occupancy or even intuition. Always consider your competitive set as whole before changing your prices.

What is account reconciliation? 

Account reconciliation is the process of accurately accounting for all transactions a business sees during a certain reporting period (usually a month). For hospitality businesses, this includes incoming payments from customers, usually in the form of room or service revenue, and outgoing payments, like wages, supplies, and compensation for OTAs or other channels. 

Why reconciliation is important

Timely and accurate account reconciliations will help you better understand the health of your business. Here are our top reasons why you should be vigilant in reconciling your accounts.

1. It helps you make better operational decisions

Most operational decisions rely on accurate financial information, whether they’re actual numbers or forecasted data. For example, your forecast will only be relevant if you use accurate historic information. 

2. It helps you avoid tax audit issues

It’s important that you have accurately reconciled your figures in a timely manner. Failed audits may result in fines or other consequences. 

3. It helps you identify fraud and mistakes

Accurately accounting for all transactions enables you to spot irregularities, such as fraud or overdue payments from partners or guests. It will also help you identify errors, such as charging the wrong amount to a credit card. 

4. It helps you track cashflow

Proper reconciliation allows you to see your cashflow, so you can prepare for expenses and avoid defaulting on debts.  

Account reconciliation best practices

The account reconciliation process may differ depending on your property type. For example, if you have a management company, they may have established requirements in place. While we recommend that you consult an accountant to ensure you’re meeting all generally accepted accounting principles, here are a list of tasks you should consider as part of your process:

• Monthly balance sheet reconciliation 
  
• Monthly income statement 
• Bank account reconciliation 
• Accounts payable and receivable reconciliation
• Relevant tax reporting and filing
• Compensation reconciliation (from marketing channels like OTAs)