WHAT IS

HOTEL REVENUE MANAGEMENT ?

Defining the concept
Become the architect of your own fortune
New dimensions with the evolution of technology

A BRIEF LOOK INTO

THE PAST OF HOTEL REVENUE MANAGEMENT
Origins: Arising from airlines yield management
Parallels to the Hotel Business
Evolution: Hotel Revenue Management comes into being

HOTEL REVENUE MANAGEMENT IN

PRACTICAL USE
The Big Data
Applying Hotel Revenue Management

ONLINE REVIEWS
A NEW APPROACH TO HOTEL
REVENUE MANAGEMENT
An increasingly obsolete concept
Times are changing along with customer demands

USER-GENERATED CONTENT IN
MODERN HOTEL REVENUE MANAGEMENT

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A case study provided by SAS

Applying BCG to Hotel Revenue
Management A depiction
Top left quadrant Rough and Rich
Top Right quadrant Luxury Class
Bottom left quadrant Discounter
Bottom right quadrant Low Price Quality

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IN A NUTSHELL

11

WHAT IS
HOTEL REVENUE
MANAGEMENT ?

Revenue Management has contributed millions to the bottom line, and it has
educated our people to manage their business more effectively. When you focus on
the bottom line, your company grows.
-- Bill Marriott Jr., Chairman and CEO,
Marriott International --

Defining the concept

A general and widely accepted definition of
Hotel Revenue Management goes as follows:
Selling the Right Room to the Right Client at
the Right Moment at the Right Price on the
Right Distribution Channel with the best
commission efficiency (Landman, 2011).
Thus, the main objective of Hotel Revenue
Management would be to maximize a
hotels profit by appyling knowlegde about
various markets, competition and trends
while at the same time monitoring, analyzing and reporting on demand patterns.

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

Become the architect of your

own fortune
In the end, Hotel Revenue Management is
about becoming the architect of your own
fortune, being proactive as opposed to
being reactive. A hotel room is a perishable
product since the number of hotel rooms
is limited. As a result, customer satisfaction
and pricing remain the most important
dynamic variables, which are subject to
Hotel Revenue Management. It is all about
balancing demand and capacitiy by forecasting prices for the purpose of maximizing the effectiveness of hotels ressources.

New dimensions with the

evolution of technology
The rise of Online Travel Agencies and
Review Portals during the 21st century
has added another dimension to this field.
On the one hand, this technological process has made traditional Hotel Revenue
Management much more complex. On
the other hand, it has provided new ways
to cheaply and objectively measure both
customer satisfaction and pricing.

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A BRIEF LOOK INTO

THE PAST OF HOTEL
REVENUE
MANAGEMENT
Origins: Arising from airlines
yield management

Evolution: Hotel Revenue

Management comes into being

Hotel Revenue Management goes back to

the concept of yield management, developed in the late 1970s within the airline
industry. In order to maximize revenues
from a range of differently discounted airplane seats, a mathematical approach was
introduced, recognized as the beginning of
revenue management as a science.

This is why the concept of yield management eventually started to be applied on

hospitality industry, during the 1990s.
Because yield was a term that applied
more to the airline industry, this practice
started being referred to as Revenue Management. Marriott International was one of
the first major player to draw large earnings
by introducing the concept into its business
strategies. Hotel Revenue Management has
grown in importance ever since.

Parallels to the Hotel Business

As a matter of fact, hotel and airline businesses are similar in a number of ways. Just
like airline seats, hotel rooms are limited
and have to be sold before a certain date
making the trade good a perishable
product. In addition, both industries have
to adjust their offers to a constantly varying
demand which depends on weekends,
weekdays and holidays. Furthermore,
airlines and hotels offer a range of price
and service rates for their customers
to choose.

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

The international Hotel

expresses it this way:

Association

Yield Management is the must- have

business planning tool for hoteliers in the
1990s and beyond. The computerized
functioning [mathematical model] of yield
management is complex, but the concept
is simple: By using a combination of pricing and inventory control, a hotelier can
maximize profits from the sale of rooms
and services.

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HOTEL REVENUE
MANAGEMENT IN
PRACTICAL USE

When you talk about Revenue Management, people like the concept, but they
have no idea how to effectuate the concept.
Theres a market out there for Revenue
Management thats just unbelievable!
-- Herb Kelleher, Chairman and CEO,
Southwest Airlines, Inc. --

Past occupancy rates

General sales
Company target groups
Customer segmentation
Market(share) information
Customer satisfaction
but also about external influences such as

Past weather conditions

Holiday and event information
Closing of nearby hotels
Competitor price information and

similar circumstances that are likely

to affect your business climate.

The Big Data

As there are many aspects that must be
taken into consideration, it is impossible
to introduce effective Hotel Revenue Management overnight. Hotels need to understand and use all of the specific tools,
products and services available to them.
The most important thing to have, though,
is significant data tables about your property and its business environment. This
includes information about basic factors like

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

Applying Hotel
Revenue Management
You can decide to either buy a Revenue
Management System from a specialized
company or to hire experts to build your
own system, adjusted to the particularities of your hotel. In both cases, you have
to align your Hotel Revenue Management
approach to your general company strategy as well as to other sectors of the ho-

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tel. For instance, combining insights from

your marketing department and revenue
management will provide a clear picture of
a customers purchase history or booking
preferences. This is why a revenue manager should also be very aware of his hotel
Marketing Plan (which you can learn more
about in our article Hints for creating a
succesful Hotel Marketing Plan). But even
with all of that the booking site remains
one of the most important opportunities to increase profit. A revenue manager
should always be interested in increasing
sales while simultaneously lowering

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

distribution costs; an efficient website can

offer both these advantages, as it is the
cheapest booking source for bookings
(learn more about it in our whitepaper
Hotel Website Secrets).
However, the functioning of Hotel Revenue
Management has fundamentally changed
within the past decade. Demand patterns
have become much more unpredictable
while increasingly dependent on user generated content, especially reviews. This is
why we want to present a new approach to
Hotel Revenue Management.

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THE AGE OF
ONLINE REVIEWS
A NEW APPROACH
TO HOTEL REVENUE
MANAGEMENT
An increasingly
obsolete concept

Times are changing

along with customer demands

Todays markets have fundamentally

changed, both when it comes to demand
patterns and purchase behavior. This
is why most existing Hotel Revenue
Management approaches seem to be
outdated. Developped decades ago, the
concept behind yield and revenue
management is still a daily part of the
hospitality business. Many revenue managers are working with systems that are
not adapted, and therefore cannot keep
up with the rapid social and technological
changes we face. Online Travel Agencies
have come into being, establishing large
marketplaces which are widely used by
cutomers nowadays. On the one hand,
they generate demand for hotels, but on
the other hand, they impose high commissions for their role as intermediaries.

Hotel Revenue Management has become

quite a complex field. Today customer satisfaction is a key factor of success and bad
reviews are quickly spread out... Long-lasting
satisfaction is much harder to achieve when
the market of potential guests is basically
unlimited. However, online review portals
and review analytic software (as provided by
Customer Alliance) offer new and cheap ways
to effectively measure customer satisfaction.
Next to Revenue Management software,
effective review management can help to
more directly formulate and eventually
achieve business goals. By using professional
review analytic solutions, hoteliers can gather feedback that can help them determine
appropriate pricing for their entire range of
products and services, as well as for different
customer groups.

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

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USER-GENERATED
CONTENT IN
MODERN HOTEL
REVENUE
MANAGEMENT
A case study provided by SAS
The American analysis institute SAS (statistical analysis system) conducted a scenariobased online study, in order to investigate
the general booking behavior of people
searching for an accommodation via online
channels. The studys participants were
asked to select a four-star hotel in a
particular city, where they might theoretically spend a vacation with a friend. These
are the key findings of the online study:

Reviews and price are the most important influencers of choice.

While consumers did pay attention to
aggregate ratings, TripAdvisor rank and,
to a lesser extent, positive reviews contributed the most to consumer choice behavior, closely followed by lower price.

Negative reviews remove you from the choice

set. Period.

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

Lower price or higher ratings do not overcome the impact of negative reviews.
Consumers simply will not choose a hotel
with negative reviews. Hotels that are in
this unfortunate situation should focus on
improving their reputation.

Consumers prefer to pay a lower price.

While consumers would go for a higherpriced hotel when the reviews and ratings
were better than the alternatives, all things
being equal, they will look for the lowest
price. Hotels need to understand their
position relative to their competition both
on reputation and on price in order to take
advantage of any pricing power associated
with positive feedback.
Consumers only notice high ratings and
rankings.
Results showed that consumers only notice
ratings and rankings when they are as high as
other compared choices. Consumers do not

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place any value on the comparison between

low and mid-level ratings and rankings.1
The bottom line is that driving revenue and
share in the hospitality industry is no longer
just about competing on price. Consumers are clearly turning to user-generated
content to make their purchase decisions,
in particular, reviews. This means that
hoteliers must not only keep an eye on how
they are priced relative to the market, but
also on how they are positioned in terms
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of reputation.

Applying BCG to Hotel Revenue Management A depiction

Top left quadrant

Rough and Rich
If your hotel is positioned within the top
left quadrant, your prices are too high in
relation to your online reputation. Thus,
you should either concentrate on improving your general quality particularly with
regards to your negative reviews main critiques or you should decrease your price
level. Very few will still be successful while in
this quadrant. In some special circumstance
you are well accepted by an exclusive
niche, or you happen to have little competition in your surroundings your hotel might
still be able to survive and thrive while in this
category. However, such circumstances are
likely to change sooner or later, so even if
you are doing well, you should get ahead of

PRICE

As we prefer to present tangible results

rather than ambiguous theory, we present a modified version of the BCG-Matrix
(a growth-share matrix developed by
Boston Consulting Group). This graph
should objectively position a hotel in
relation to its price and customer satisfaction. The vertical line represents the price
level while the horizontal line indicates

general customer satisfaction based on

various selected factors (Customer Alliance
offers a significant rating based on real
reviews and ratings extracted from the
main review portals within a Customer
Satisfaction Index).

1, 2

Rough
and Rich

Luxury
Class

Discounter

Low Price
Quality

Mc Guire, Kelly. Pricing in a Social World:

How consumers use ratings, reviews and

price when choosing a hotel. Retrieved on
22.05.2014, 11.27 CET from:
http://blogs.sas.com/content/hospitality/
2013/10/24/pricing-in-a-social-world2/

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

SATISFACTION

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the game and already take the time to work

on those areas which are subject to severe
criticism. From the perspective of Hotel Revenue Management, it is always in your interest to improve your reputation.

Top Right quadrant

Luxury Class
You are offering outstanding quality and
being well accepted within an exclusive selection of guests. Your property is considered a luxury hotel which customers are
willing to pay a high price for. However,
as Paul Kerr, CEO of Small Luxury Hotels
of the World puts it, The word luxury has
certainly become an overused term but
that said, the standard of luxury is now
defined by the consumers expectations and
experience. This being the case, you should
continually ask yourself whether you are
sufficiently fulfilling the demands of your
customers to maintain the high price level.
If you are not truly fulfilling your potential,
you should definitely think about occasionally lowering prices and applying old
fashioned Hotel Revenue Management
approaches in order to sell out your rooms.

Bottom left quadrant

Discounter

As shown by the case study above, prices

alone cannot make up for a very bad reputation. Thus, you should concentrate on
those points of criticism that are important for your target groups (e.g. students,
travelers, seniors). If you are well known
for offering at least moderate quality for
small prices, people will overlook certain
deficiencies and your Hotel Revenue Management concept will be worthwhile.
Beside that, you should always should
always be on the look-out for cheap
opportunities that might improve your
reputation, driving additional demand to
your property or allowing you to bring up
your prices now and then.

Bottom right quadrant

Low Price Quality
You have done an excellent job building up
a good reputation that goes hand in hand
with fair pricing. People feel comfortable
at your property, even if it isnt luxury. You
meet the necessary requirements to satisfy your guests and seem to know your
customer very well. Some RevPar calculations for your Hotel Revenue Management might provide you with some extra
income. However, maintaining your good
reputation should always be your first priority, since this is the key to success in the
low-budget hospitality market.

Hotels in the bottom left quadrant find

themselfes positioned in the discount
market. Your prices are low, and so is your
quality. As a discounter, not meeting the
highest demands is acceptable, to a certain
extent. You should, however, be aware of
what your negative reviews say about you.

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

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IN A NUTSHELL
The concept of Hotel Revenue Management
originated from the airline industrys yield
management and was later adapted to the
hospitality industry. Many revenue managers initially concentrated on historical data
rather than up-to-date demand.
This is why the second part of this whitepaper focuses on the fast technical and
societal evolution that took place during the past decades. Travel behavior has
fundamentally changed and opened up
new dimensions within the field of Hotel
Revenue Management.

Due to the rise of online travel research

and online bookings, user generated content such as reviews have become a if not
the major decision factor for customers.
Thus, the correct combination of pricing
and online reputation might be the key
to driving customers to your property and
eventually renovating the traditional concept of Hotel Revenue Management.

If ever a general conclusion can be drawn

concerning the complex field of Hotel
Revenue Management, it should be a simple
one like the customer is always right!
In order for a hotelier to maximize revenue,
it is crucial to accurately react to the
demands of hotel guests. While this has
always been important, today Hotel Revenue Management has to be even more
dynamic and flexible in terms of price structure than it has been before.
Even though the presented model is limited to two variables price and customer
satisfaction it also can be used as a handy
tool for Hotel Revenue Management to
anticipate cash flows and make resourceallocation decisions.

THE CONCEPT OF HOTEL REVENUE MANAGEMENT

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About Customer Alliance

Customer Alliance is a Berlin-based company oering smart hotel
solutions. Ocially founded in 2009, we have over 3,000 customers
from the hospitality industry in more than 35 countries.
Our core product is the Review Analytics software which helps
hoteliers manage all their online reviews in one single place. We also
help hoteliers actively generate more reviews both on external sites
and their own website to strengthen their online reputation and
increase visibility and direct bookings.

Disclaimer
Every eort has been made to make this manual as complete and as
accurate as possible. However, there may be mistakes both
typographical and in content. Therefore, this text should be used
only as a general guide and not as the ultimate source of published
information. Furthermore, this manual contains information that is
valid only up to the printing date.
The authors, advisers and publisher shall have neither liability nor
responsibility to any person or entity with respect to any loss or
damage caused or alleged to be caused directly or indirectly by the
information contained in this manual.

Copyright 2015 von Customer Alliance

All rights reserved. No part of this publication may be reproduced,
distributed, or transmitted in any form or by any means, including
photocopying, recording, or other electronic or mechanical
methods, without the prior written permission of the publisher,
except in the case of brief quotations embodied in critical reviews
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