The hotel industry is facing disruption. Online travel agencies like Expedia and Booking.com are changing the game, and hotels need to adapt. Enter revenue management – the science of selling the right room to the right customer at the right price.
The Rise of Online Travel Agencies
In 2016, Marriott acquired Starwood Hotels, becoming the world’s largest hotel company. This was devastating news for Starwood loyalists. Starwood Rewards were more accessible than Marriott’s program. You could earn a free stay after spending just $10,000 on a Starwood card. With Marriott, you’d need twice that amount.
Starwood also had no limit on Rewards Redemptions. There was always a room available if you needed one. Marriott realized that to compete with OTAs like Expedia and Booking.com, it had to grow in size and loyalty members.
To get customers to book directly, hotels need revenue management. This matches supply and demand – selling the right room to the right customer at the right time and price. Something all businesses do but hotels need most.
Why Hotels Need Revenue Management
Hotel rooms are perishable. An empty room is lost revenue. Revenue management prevents this by aligning supply and demand.
Hotels have limited capacity. There’s only so many beds, restaurant seats and deck chairs. These cost money to maintain whether full or empty. So hotels have high fixed costs and a fixed supply of rooms to sell to varying customer demand. Revenue management brings them together.
How Revenue Management Works
In theory, room demand can be predicted. A Barcelona hotel expects high summer tourists. But will expectations match reality?
In 2014, Latin American hotels expected World Cup travelers. Demand was even lower than the previous year. Hotels raised prices to $148 a night, above Europe and Asia. 40% targeted luxury guests, but most were middle class. This imbalance between supply, demand and price caused losses.
Revenue management prevents this in 3 steps:
Segment Customers
Hospitality prices depend on customer type – age, marital status, business or leisure. Segmenting helps apply dynamic pricing. Airlines do this with business and leisure fares.
Adjust Pricing
Hotels can adjust pricing based on financials, competitors and perceived value. Automation and machine learning use live data to respond to demand shifts.
Forecast Demand
Looking ahead predicts future demand. Historical data, events, economy and weather feed these forecasts. This preparation aligns supply and demand.
Why Revenue Management Adoption Is Low
If revenue management is established, why do hotels still lose money? Marriott struggles against OTAs.
In 2010, Cornell professor Cheryl Eke Iams surveyed 500 revenue managers on expected changes. In 2016, she followed up on actual changes. Results were underwhelming.
While many expected more technology and analytics, little changed. Revenue management remained manual with minimal tech. IT and data analytics didn’t materialize as expected.
This isn’t a financial issue. Small hotels have access to revenue management solutions. Expedia and Booking.com even have free RM toolkits.
The problem is mindset. “Silo mentality” hinders technology adoption. But revenue management possibilities abound. Many property systems have built-in capabilities. Custom solutions bring long-term profit.
Revenue management is not about more transactions. It’s about finding your path in a dynamic world.