Revenue Management Trends in Hospitality Industry

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Introduction

In modern business conditions, for most hotels, the solution to the problems of improving the financial and economic condition and stable capital growth comes to the fore. Revenue management implies the use of accurate analytics that predict consumer behavior at the micromarket level and optimize product/services availability and pricing to maximize profit growth. At the same time, the management of the income of a company operating in the hospitality industry should be expressed in the economic technique aimed at determining the optimal pricing policy based on the behavior of demand. Revenue management is part of the strategic management of a hotel business, addressing the issues of optimizing the revenue potential of the enterprise, which ultimately increases efficiency. This increase is based on taking into account specifics of the industry, overall environment, best practices, and digital technology.

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Specifics of Revenue Management in the Hospitality Industry

The main task of the management of any hotel enterprise is to adequately assess the existing and potential risks, properly manage investments, optimize financial flows, minimize costs and make the most of all potential sources of income (sale of rooms, food, and drinks, rent of conference rooms, etc.), etc. An integral part of the hospitality strategy is to gain or maintain a competitive advantage within its competitive group. In addition, management must always be prepared to respond to external factors, such as an urgent change in hospitality strategy following unpredictable events, such as the current COVID-19 crisis. According to Coronavirus Impact Data (2020), in the U.S., the leisure and hospitality sectors have been affected by this downturn showing severe declines in revenue. According to Lock (2020), the United States had decreases in key indicators in the hotel industry compared between Sept 26, 2020 to Sept 26,2019; occupancy percentage had a decrease of 17.2% to 31.5%, the average daily rate (ADR) has a decrease of 29.6%, and revenue per available room (RevPAR) had a drop of 51.7% compared to the previous year. Accordingly, the need for hotel managers to understand and carefully study the external environment is a prerequisite for a competitive enterprise. Without constant scanning of the market, there is a high probability of missing a threat due to the inadequacy of the hotel’s strategic plan to what is happening in the outside world. This approach will ultimately lead to a decrease in the efficiency of the business.

In the current economy, hospitality enterprises are faced with the problems of finding clients, competitiveness, finding and training personnel, which accordingly affects the operational activities. Most hospitality businesses are immersed in day-to-day operational challenges and overlook the core management approach, namely strategic management. At the same time, in a constantly changing environment, strategic management at a hotel enterprise is of great importance. In its process, the future states of the organization are analyzed, and specific solutions are sought in different options for the development of the market situation. Modeling event scenarios with the help of strategic management and planning, the hotel company predicts situations that may happen to it in the future and develop appropriate measures aimed at achieving the planned financial result.

The characteristic features of the hotel business imply the use of additional data in the management of profitability, in particular, a set of coefficients characterizing the effectiveness of the hotel’s activities, which can be selected by management as a target. The share of proceeds from the sale of room stock in most hotels is in the range of 60-70% (Vives, Jacob, & Payeras, 2018). Therefore, most of the coefficients characterize the efficiency of its use. Moreover, profit centers and cost centers can be allocated in the hotel as components of financial responsibility centers – a structural unit or a group thereof that carry out a certain set of operations and can have a direct impact on the financial result of the hotel.

The center of income in the hotel is mainly the sales department, so it is advisable to consider the profit centers of the hotel, formed based on the list of services provided by the hotel. It should be noted that some of the costs can be allocated to profit centers, and some of them are undistributed costs (Vives et al., 2018). Such expenses are separately distinguished in the hotel’s management reports, and if cost analysis is required, they are conditionally attributed to profit centers in proportion to the distribution base.

The specificity of the hotel business is its seasonality. This is especially true for country and resort hotels, where the highest income is brought by the period from May to September. The seasonality factor must be taken into account both when pricing and when planning the hotel’s income and expenses. It is important to note that during the high season, the share of variable costs per unit of service (for example, per room) may increase, mainly due to the hiring of additional staff.

Innovative Digital Technologies in Revenue Management for Hospitality Industry Companies

Traditionally, hoteliers rely on the results obtained using the main methods of PEST and SWOT analysis when forming a strategy for managing income. These methods, when forming a strategy for managing income, have several drawbacks. Namely, they do not take into account historical statistical data, which, with in-depth analysis, can justify the chosen strategy and calculate the probability of the outcome of this event. To work in this direction, it is necessary to use a large amount of data, both of the hotel itself and its competitors. The more such data is used for analytics, the higher the accuracy of forecast calculations, and as a result, the chosen strategy is optimal and realistic for a given object. This is especially true because the activity of hotels is characterized by unstable development trends, mainly determined by seasonal fluctuations in demand, an increase in prices for services, and an insufficient level of service quality with a low price elasticity of demand. Moreover, the obstacles are organizational conservatism of the management process and instability of the external environment.

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To minimize these risks as much as possible, it is necessary to use modern digital technologies. According to the report of the Global Center for the Study of Digital Business Transformation, entitled Digital Vortex, the impact of digital technologies on various sectors of the economy is assessed and the likelihood of replacement of leading companies due to their displacement by more efficient ones using digital technologies is estimated. At the same time, the maximum changes await the hospitality, travel, and finance industries – 43%, followed by retail, education, technology products, and telecommunications (Tajeddini, Ratten, & Merkle, 2019). That is, this means that out of 10 companies, 4 companies will lose their positions, provided that advanced digital technologies are not used. Interestingly, the Marriott hotel chain pioneered the investment in automating the collection and analysis of information. The investment was not in vain – by the mid-90s, Marriott had developed a tariff plan strategy that allowed generating significant additional income.

The use of digital technologies makes it possible to track the main indicators in real-time and, if they deviate from the specified parameters, apply appropriate corrective actions. This process is possible only with the use of digital technologies (IT solutions), such as: 1) PMS – a hotel management system that allows to timely manage the room stock, control the load, and book the room stock; 2) RMS – a system for managing prices, capacity and segmentation of guests, sales channels; 3) CRM – customer relationship management system. There are currently a number of hotel PMSs (Tajeddini et al., 2019):

  1. Bnovo is a functional PMS that is constantly being improved, developed, and supplemented. One of the advantages is the provision of convenient functionality for working with reservations.
  2. Lite PMS – appeared in 2015, and positions itself as a management system for hotel companies of various categories.
  3. MewsCommander – development from the company of the same name from the Czech Republic. The system is working with any device that has Internet access.
  4. NewhotelCloud PMS is a product of NewhotelSoftware, which has existed on the market since 1984. The system adapts to all types of hotels and resorts, quickly performs all types of basic hotel operations.
  5. Clock PMS is a development of the English company ClockSoftware, which has been presenting its services on the market since 1996.
  6. TravelLine: WebPMS – development for small hotels from the Russian company TravelLine. This PMS-system is notable for inexpensive maintenance, has simple and convenient basic functionality, and can be integrated with other developments for a fee.
  7. Frontdesk24 is a product that has existed on the market for the third year and was created to automate the activities of hospitality establishments. In addition to accounting for bookings by numbers, it keeps track of all beds in the hotel.
  8. Resonline is a PMS system ideal for small hospitality establishments.

Using algorithms based on the history of the past, cloud software quickly provides an accurate picture of future demand, which allows the hotel to retain target customers during periods of high demand, as well as attract new customers at a special price (but not artificially low) during low seasons. Some of the performance-enhancing features of such software can be summarized as follows (Alrawadieh, Alrawadieh, & Cetin, 2020):

  • Group distribution management. Working with prices for groups, calculating the best and lowest possible price;
  • Event calendar. Tracking current and future events;
  • Competitor pricing data. Report on competitors’ prices and their changes, showing dynamics
  • Analysis of the productivity of the hotel website. Reducing the number of uncompleted bookings (regrets booking) and denials of bookings with high occupancy (denials booking);
  • Air traffic. Analysis of the number of flights and people arriving at the nearest airports, on the basis of which one can find out in advance about upcoming events or the arrival of groups;
  • Reputation module. It helps track any mentions of the hotel in reviews and social media.

Also, cloud computing technologies allow using a progressive approach to booking, depending on the client’s personality and his history of hotel visits; it sets prices for different segments of the hotel. They make it possible to automate prices and their changes depending on the given settings and market behavior (Alrawadieh et al., 2020). By working with budget data, hoteliers receive more relevant and accurate prices and forecasts.

Most systems have a similar purpose and basic functionality, but the more rooms a hotel has, the more difficult it will be to build such a system, and the requirements for functionality are wider and higher. However, for a complete picture of assessing and predicting the market situation, one needs to have not only statistical data on the hotel but also on competitors in this location. As an example, it is possible to use one of the popular resources that hoteliers use to sell room stock through online sales channels. These resources today accumulate almost 100% of all accommodation facilities. Such tools provide an overview of analytics that allows assessing quickly the main indicators of interest, such as: the number of booked rooms-nights, revenue from the sale of rooms, the average cost of selling a room, and more. It also allows tracking the dynamics of the average selling price of a room through the channel and comparing it with several competitive groups. Thus, digitalization of revenue management is one of the obvious newest digital approaches that radically change one of the key components of the hotel business – sales and marketing, which enables the chosen strategies to be more flexible, adapted to the realities of the modern-day, and competitive.

Overall Trends

A few years ago, Revenue Management was used only in large chain hotels, but today there is a clear trend in the development of this technology. Today, Revenue Management also comes to small hotels, where only one employee is involved in revenue management, who often perform other management functions. Today, there are several approaches to building an innovative model of revenue management for an enterprise in the hospitality industry. For example, the use of automated revenue management systems that provide full control of the system life cycle, with the help of which approaches such as the following can be applied (Forgacs, 2017; Kayapehlivan, 2015):

  • Daily Pricing (“Daily BAR” or “BAR by Day”) is a pricing strategy where a different price is used for each night of stay. The price for each night is set independently of the others, which can lead to different rates over long stays
  • Pricing by the length of stay (“BAR by LOS”) – this system offers one optimal level depending on the number of nights booked. The rate is calculated by estimating the cost of all the nights required, combined
  • Continuous Pricing – it provides hotels with maximum flexibility within their desired rate boundaries. Rather than relying on a user-defined rate, the hotel determines the lower and upper bounds for the rate and, as a result of the analysis, the rate is continuously optimized to ensure the best price and return. This approach allows hotels to get as close as possible to the analytically optimal price.
  • Assessment of business groups. As the most reliable group pricing tool in the industry, it enables the ability to provide immediate group pricing results, predict group materialization, and the difference between individual and group final accommodation prices by market segment and room type. The assessment tool identifies the full value of a given group and the value of any potential business as it shifts, allowing users to develop comprehensive assessments of group booking opportunities and simulate different scenarios to determine which group will bring the most profit to the hotel
  • Management of the income of the hotel functional space. A forecast checker dashboard, demand calendar, and price optimization for groups help optimize margins across multiple streaming revenues ranging from guest rooms and conference spaces, food and beverage, equipment rental, and more.

It should be noted that after the implementation of the strategy, everything should start over again since the proposed process will have a positive result under the condition of the continuity of its use. With the effective application of the revenue management strategy in the hospitality industry, it will be possible to talk about future changes that will allow hospitality enterprises to reach a new level of revenue management and optimization of activities in general (Szende, 2020):

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  1. The term “revenue management” will become obsolete and will probably be replaced by “revenue optimization,” reflecting the multitasking approaches to revenue management.
  2. Optimization of income in hospitality will become more qualitative than quantitative. Manual accounting and decision-making will be reduced and replaced by automated decision support technologies.
  3. The presence of a specialist in revenue management at every enterprise will become the norm.
  4. Ancillary revenue optimization and resource management will fall under the scope of revenue management.

Conclusion

The new market conditions have already become a big test for many, and it will remain a problem in the coming year; only measures to increase the profitability of the hospitality enterprise can guarantee that the business is still profitable. It is possible to expand the business, or one can apply income management methods, which will allow achieving greater returns from an existing business. Decision-making should be based on a more thoughtful approach to organizing business processes, and the speed of reaction to market changes should increase as a result of more accurate forecasting, including using digital technologies. Even during a downturn, there are excellent business opportunities, and any hotel, with the right approach, can take advantage of each of these opportunities.

As it was shown above, at its core, revenue management is business analytics, a culture of working with historical data and current indicators to correctly assess the future. For hotels that are just starting to implement Revenue Management, it is very important at the first stages to correctly determine and form a segmentation of demand, which is determined by a combination of factors such as location, list of services provided, competitive environment, and price elasticity. To analyze competitors, one can and should use widely used tools, such as STR, which provides daily reports on the main indicators of the hotel (occupancy, average price, and profitability per room) in comparison with a selected pool of competitors. Moreover, it is necessary to study the open prices of competitors in electronic sales channels and various resources of information exchange between hotels.

References

Alrawadieh, Z., Alrawadieh, Z., & Cetin, G. (2020). Digital transformation and revenue management: Evidence from the hotel industry. Tourism Economics, 20(10), 1-18.

Coronavirus (COVID-19) Impact Data: National Summary. (2020). Web.

Forgacs, G. (2017). Revenue management :Maximizing revenue in hospitality operations. Washington, D.C.: American Hotel & Motel Association.

Kayapehlivan, B. (2015). Pricing for hospitality & tourism: Pricing and revenue management tips and ideas for hospitality & tourism. Web.

Lock, S. COVID-19’s effect on hotel KPIs in the U.S. as of 2020. Web.

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Szende, P. (2020). Hospitality revenue management: Concepts and practice. Delhi, India: Apple Academic Press.

Tajeddini, K., Ratten, V., & Merkle, T. (2019). Tourism, hospitality and digital transformation: Strategic management aspects. Abingdon, UK: Routledge.

Vives, A., Jacob, M., & Payeras, M. (2018). Revenue management and price optimization techniques in the hotel sector: A critical literature review. Tourism Economics, 24(6), 720-752.

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