The Revenue Management Site
As occupancy demand increases and supply (room availability) decreases, lower rates are closed to sale and only higher rates are
available. Hotels today need a base of business in order to cover operational expenses. Selling all one’s rooms at the same rate rarely
produces good occupancy or a good average rate.
Let’s examine how hotel rates are determined. Contrary to what some hotel owners may believe, setting rates has little to do with the
hotel’s furnishings or design. Hotel room rates are determined by what people will pay for those rooms. I’ve seen many hotel rooms
that sell for $150 per night in Florida, which would sell for $500 per night in New York City, for the same room. Occupancy demand is
the major difference. Higher demand allows for higher rates, plain and simple.
When developing rates, it’s always a good idea to “go-to-school” on the competition. Hopefully, Smith Travel Research is active in your
area; their comp set reports can give you almost everything you need. Their STR report can be the best investment you’ve ever made for
your property. Develop your rates as compared to your competition. How does your hotel compare?
For many years, hoteliers have realized that various market segments tolerate different rate levels. Most well-operated hotels set rates
by market segment all the way up and down the scale. All rates flow from your highest rack rates down to lower deeply discounted
Once your scale of rates is determined, it’s time to begin setting up revenue management parameters. In their simplest form, rates
might look like this:
Discount 1 (walk-in Corporate)
Discount 2 (Government/Military)
Deep Discount 3 (Segment Discounts)
Deep Discount 4 (Promotional rate)
Please note that AAA or AARP rates are not listed because, as a good business practice, these rate categories are rarely closed out.
Once rates are set for each segment of business, as listed above, the next step is to set desired occupancy levels needed to close
each discount level; what is needed to establish a base of business. This example is for a 100 room property.
0 to 50 rooms sold ……..all rates are available
51 to 70 rooms sold……close Deep Discount rates
71 to 85 rooms sold……close all rates except Walk-in Corporate and Rack Rates
Please note that rates are not actually increased. As the number of occupied or reserved rooms increase, lower rate categories are
closed for sale; in effect, increasing revenue yield. The scales above are very simple; with practice and experience, one can add many
more variables to fine-tune rate yield.
Obviously, the same principle can apply to holiday and special event periods as well. The rates may be increased for those periods,
but the same scales might apply.
For high demand periods, many hotels add restrictions to increase revenue yield. Some common restrictions, such as minimum
stays, closed to arrival, etc. are excellent tools for experienced yield managers. Restrictions should be applied with some caution
because they do limit demand.
Daily Practice Creates Perfection
A good practice is to create a yield meeting to include all key individuals in the hotel. To begin, I suggest meeting at least three days per
week. Larger properties and properties with full time revenue managers obviously review occupied and reserved rooms every day. The
purpose of this meeting is to review reservations for the future to determine which days need attention.
Booking pace, the rate in which reservations are made for the future, varies throughout the year. If yield meetings are held faithfully,
people managing revenue will gain a sense for the pace of bookings. Some careful records-keeping can aid in this process.
Generally, a three day program would include reviewing occupancy as follows: Monday, 30 days out, Wednesday, 60 days out, and
Friday, 120 days out. Hotels with group business could go out a year or more every Friday.
Revenue management utilizes intuitive as well as analytical skills; both of these skill sets improve with practice. The mind-set of a
good revenue manager or team is focused on producing a good blend of occupancy and average rate. The hotel’s mission should be
to build base occupancy, through a good mix of rates, and then take advantage of having a base by then closing-out lower rates to build
The mission should not simply be to get 100% occupancy; it should be to get occupancy as high as possible, with an average rate as
high as possible. For a 100 room property, occupancy of 85% with an average rate of $140 is more profitable than 100% occupancy at
$110. Although both scenarios produce roughly the same revenue, what does it cost you to clean 15 rooms?
This is a simplified format for those hotels which are currently “simply selling rooms” at the present time. The purpose of revenue
management is to help hotels to “shape” their business. Obviously, there can be much more detail and intricate techniques involved in
revenue management; but sometimes progress has to come in baby steps in the beginning.
As stated at the outset of this article, it is true that many larger hotels, franchised and Independent, and some hotel companies have
full-time talented revenue managers. However, most independent and smaller hotels are not using any form of revenue management
in their operations. Revenue management, even in its simplest form, can benefit most hotels no matter how large or small.
There are other factors which will affect close-out and/or restriction decisions such as occupancy history, overflow pressure from hotels
with convention facilities, and special events being held in the area. For properties which may be just beginning to use revenue
management in their operation, practice makes perfection. For many hotels, start with the basics. You will find, in short order, many
opportunities to become more sophisticated with additional ways to improve your revenue yield.
Revenue management is a vehicle to help hotels to become aware of the rooms they sell, the rates at which they sell, and the pace at
which they sell. It is a way hotels can become pro-active in the selling process, rather than simply posting rates and waiting for them to