The foundation of revenue management lies in the economic concept of “willingness to pay.” It's a simple idea: Each consumer has a max price for any one unit, item, or service; the “willingness to pay” is that maximum amount.  Revenue managers are the bridge between marketing, sales and operations at your hotel.

Revenue management is built around this concept of better alignment between how a hotel room is priced and what a consumer will pay. In an ideal situation -- one that produces maximum revenue -- the hotel room is priced as close to that maximum amount as possible without setting too high of an expectation or sending prospective guests to a cheaper competitor.

To determine the best price, hotel revenue management systems analyze a hotel’s available supply, in-market and property-level demand, and softer metrics, such as a consumer’s price sensitivity and demographics (business versus leisure, loyalty member versus transient). Competitors’ rates are also a critical input for setting the best rates, as those prices shape the consumer's perception of the “right price” for a given stay. Together, these inputs provide a valuable baseline for hoteliers to optimize rates.

How to do revenue management right

The objective of revenue management (often called yield management) is to maximize a property’s yield, which optimizes revenue by balancing rates with actual and forecast occupancy. It’s always a balance between getting the most possible money per room and filling the hotel with enough guests to maintain profitability targets.

So where to start? Follow these steps to build the foundation for successful revenue management at your hotel.  

Step 1: Choose your compset

There are two factors that impact your rates the most: your competitors' pricing and your current occupancy forecast. Since rates influence occupancy, monitoring your competitors is a big part of revenue management for hotels. 

Choosing your compset seems daunting, but it doesn’t need to be. A good compset gives you a helpful baseline to compare your rates to, while a bad compset influences you to make poor pricing decisions. The ideal compset attracts similar guests to yours and makes for a useful (i.e. accurate) rate comparison.  Proximity is just one factor to consider but great revenue managers think creatively about characteristics such as TripAdvisor scores, business facilities and leisure facilities to find the right mix. More sophisticated properties might even go as far as to define different compsets for their business and leisure mix but this obviously takes significantly more time and resources to analyze properly.

Some factors to consider:

• Number of hotels. Pick 3 to 5 hotels max. You don’t want to be overwhelmed but you also don’t want to be too limited.  

• Types of hotels. For your main compset, stick to hotels with similar characteristics to yours, from amenities to size.

• Location of hotels. It might not make sense to just pick similar hotels nearby. Broaden your thinking to include hotels that directly compete for the same guest -- even if they aren’t next door. 

• Secondary compset. Build out a secondary compset that is a different tier from your property. This provides a view into opportunities to capture business from that segment. It could be either a higher or lower tier, depending on your target demographic.

There’s a lot of thought that goes into your compset choices! Be thoughtful and challenge your assumptions.

Step 2: Perform a value analysis of your compset

A value analysis puts your property in context among your competitors. It takes four factors into consideration: location, property amenities, room quality, and reviews, and then plots against room to identify value leaders and laggards. Once you can visualize value, you can better position your property in the eyes of potential guests.

Here's how to do a comprehensive value analysis to inform your pricing decisions and help you set up the right rules for your property in Step 3.

1. Rate each property’s characteristics on a scale of 1-10: location, amenities, room quality, reviews. Be objective and include your own property.

2. Calculate the average rates for each property.

3. Plot those averages on a value curve, like in the image below.

4. Evaluate your property's position. Generally speaking, you need to drop prices if you’re above the 45-degree line; if you’re below, you should consider raising prices. The ideal state is right on the gradient.

You'll need a little Excel elbow grease to plot each value analysis, but it's worth it. The visualization gives you a clear picture of whether you're pricing your hotel optimally. And, like it or not, each potential guest is doing a value analysis as they compare and contrast properties. Might as well get ahead of it and know where you stand!

Cloudbeds explains how to use value analysis in your hotel’s revenue management strategy. In this example, Your Hotel and Hotel B is not charging enough and should raise rates. Hotel D and Hotel A are overpriced. Hotel C is priced right.

Step 3: Setup rules and alerts

Now that you have a compset (or two), and know where your property lies in the value equation, the next step is to set up rules and alerts to support your strategy.

Rules are essential time-savers and revenue-preservers. You can’t be awake and at the computer all the time, so these rules give you control over pricing 24/7. Rules can either trigger alerts, giving you a heads up for any unexpected shifts in booking patterns, or they can automatically take action, saving you time from manually updating rates when certain conditions exist.

There are three primary rule types to help you manage your revenue strategy:

1. Occupancy-based. This triggers a rate adjustment when occupancy is greater/less than a certain percentage, thus ensuring your rates rise or fall alongside supply. There’s also a date range option, so you can apply only to a certain number of days out, or to only select specific dates (such as holidays). Tip: Make sure to round up or down so that the rate is sensible to guests!

2. Compset-based. This rule is one of the most helpful. Rather than continually checking competitors’ rates, you can set a rule that will alert you if my rooms are priced higher than a certain hotel in the compset. Then you review to see if adjustments are needed -- for instance, if a luxury hotel in a tier above yours has dropped their rates unexpectedly, your hotel might now be seen as overpriced by potential guests.

3. Restriction-based. This one is a bit more complicated but it’s a powerful way to optimize revenue by keeping your hotel full. For example, if you have a 3-night minimum length of stay over the weekend, and Friday and Sunday are booked up, the rule would remove that LOS restriction to fill the last couple of rooms on a Saturday night. This builds flexibility into managing your calendar and prevents restrictions from limiting revenue opportunities.

Systems such as Cloudbeds’ Pricing Intelligence Engine usually allow for manual confirmation or automatic triggers. Be sure to set manual approvals for any rules that you want to review prior to taking effect. For example, you might want to manually approve any blanket rate increases after an occupancy trigger -- just to be safe and make sure that’s the optimal reaction.

By the way, there’s no ideal number of rules and alerts. Some properties have over 100! It really comes down to setting up the system to save time and keep you up-to-date without having to constantly check.

Step 4: Set up a morning routine for rate management

Start your day by checking the calendar to review alerts, check your compset and identify upcoming need periods so that you can adjust strategy as appropriate.

There are four key questions to answer each morning:

1. What’s my occupancy each day? You need to be sure that you are hitting your occupancy targets, and anything unexpected here points to a potential pricing problem.

2. What rules have been triggered? Your rules can alert you to areas that need attention, such as unexpected booking patterns and approval of any manual triggers. 

3. How is my compset doing? Your compset provides a key piece of market data. Review each morning to know where you stand (And rely upon rules to alert you as needed throughout the day).

4. What’s left to sell? Your pace gives you a forward indication to potentially adjust rates, or perhaps build out a marketing campaign to accelerate interest.

A consistent morning routine keeps your revenue management mindset strong -- and also frees up space for you to trust the system and leave it to work on your behalf as you get busy tackling other priorities. 

Don’t go it alone. Software helps!

Successful revenue management without software is nearly impossible. At the very least, manual revenue management is tedious, soul-sucking and prone to error. Even if it is your full-time job, you’ll miss opportunities without automation around rate shops and rules. And if revenue optimization is one of many hats you wear at your hotel, the tech will de-stress your daily work life.

Thankfully, hotel revenue management software has become affordable and practical, putting it in the hands of properties of all sizes. Accordingly, it’s become less of a competitive advantage and more of a competitive necessity. If hotels in your compset price more fluidly, you’ll be at a disadvantage when potential guests compare hotels.