Revenue management is the art of perfecting pricing, and it’s essential for any property owner to understand the different types of rates and how to apply them in order to maximize revenue and increase room bookings compared to using a simple “fixed rate” at all times.
Let's dive right in.
To come up with your most effective rates, you must first analyze your property’s historical sales data.
In the following sections, we’re going to explore each of these elements in detail so that you have the best possible preparation for setting your improved rates.
These are the costs incurred every time you sell a room. It’s essential to calculate your marginal costs accurately to ensure your room rates never fall below your marginal costs.
Marginal costs include agency and OTA commissions, utilities, laundry, room equipment (bathroom kit, stationery, etc.) and breakfasts.
The idea behind revenue management is to sell more rooms during periods of low demand, and to increase earnings on rooms when there is a high volume of bookings.
For this reason, you need to look at the data from previous years to see which periods during the year you experience the most and least bookings.
A key measure when making these assessments is occupancy rate, i.e. the percentage of rooms occupied for a given period.
This is the average rate collected, per day, from every room sold over a given period—net of taxes, discounts and meals.
One of your goals as a hotelier is to increase ADR year-on-year.
RevPar is the turnover generated by each room in your structure—also known as revenue per available room. You can calculate this by dividing the total turnover for a given period by the total number of rooms in your property.
RevPar is a very significant number in revenue management because it tells you how much each single room is worth at a given moment in the year.
This indicates the time between a guest making a reservation and physically arriving at your property. Knowing your booking window allows you to choose the optimum moments to adjust rates.
For example, if your guests generally book their stays one month in advance, raising your room rates too early can be counterproductive since customers aren't actually requesting rooms at that point.
This is the time it takes guests to travel from their home to your property. You might be wondering—what does this have to do with revenue management, and why should I care?
It matters because knowing when your customers leave from their trip also means knowing how much time you have to play around with room rates (to try and sell them all).
Raising or lowering prices at the last second—perhaps in the morning for that evening, for example—makes sense if your customers live within a few hours' drive of your hotel or bed & breakfast. However, it’s different if guests are traveling from far away and set off several days in advance.
Knowing where your bookings are coming (i.e. from which platform) from allows you to be fully aware of how much you’re spending on commissions—Booking.com and other OTAs are a great way to sell your rooms, but they have very high costs.
To optimize your prices and generate higher margins, you need to try and increase the number of direct bookings, i.e. those made without going through third parties.
These factors are harder to plan for because they’re so difficult to measure and vary wildly depending on the destination and clientele.
Knowing how to master them, however, very often the difference between those who capitalize on the extra business brought on by unseasonal weather or major events, and those who are overwhelmed by it.
Trends tell you if (and to what extent) tourists are attracted to your destination over a certain period.
A particular event could suddenly make your location more attractive and increase the number of tourists arriving. On the other hand, you may find yourself facing a period of low interest and few arrivals.
Seasonality, on the other hand, tells you if your guests prefer to come to you in one season rather than another. It is clear that a hotel in a seaside resort has its peak of reservations in the summer, while one near the ski slopes in the winter.
But pay attention to the weather! If a storm is expected to arrive in a week during which you have historically had the most bookings, it is very likely that you will have fewer guests than in previous years and you will have to act on the prices to fill the rooms—few people take their vacation during stormy weather!
Finally, events are a factor you must keep an eye on when performing revenue management. If a major event is hosted in your local area, you might experience an unseasonal boom—it’s not uncommon for properties to have their busiest spells of the entire year coincide with local events like concerts, international congresses or sports events. These are times to raise your prices since, on the whole, you’re still likely to get lots of bookings at the higher price point.
Now that you know the key elements to consider when performing revenue management, it’s time to explore the 7 different rates you can apply to improve revenue and capture more bookings.
This is the lowest rate you can sell your rooms for. Calculate your bottom rate by adding your minimum acceptable profit (i.e. the lowest amount of profit you’re willing to accept) onto your marginal costs per room.
This is the rate you’ll use during low season to increase demand and try to induce bookings where, normally, there are none.
Think hard about your minimum acceptable profit—you will not be able to set room rates any lower without compromising on profit entirely. And of course, your rates can never fall below the marginal cost, or your property will be at an instant deficit.
This is the initial rate set for low, medium and high seasons.
The low season is generally equivalent to the bottom rate—the number you think some customers might go for, even if it’s unlikely. The medium and high season rates are different: we calculate these by looking at our booking history.
Start by identifying the ADR (average daily rate) of high occupancy periods. At the start of busy seasons, simply lower this rate by a few percentage points (as much as 30% is common, to ensure early bookings) and then proportionally increase the room rate as bookings ramp up.
As the name suggests, this rate changes continuously—as frequently as hourly—and is calculated based on the number of bookings or cancellations the property receives.
This is the rate for when you reach full occupancy of the rooms while maintaining a higher ADR than in previous years.
This is the rate above which bookings generally stop being made. It is often equivalent to figures that cause psychological blocks, such as €99 or €199.
The opposite of the bottom rate is the rack rate, which is the highest rate at which you can sell a room. The rack rate can be as much as 5x higher than the bottom rate, sometimes more!
This rate is reserved for last-minute bookings. Depending on the specific circumstances, this could be anything from a significant increase to a massive decrease.
If, based on your experience, you think that demand will only increase for available rooms as certain dates appear, then you should increase your rates to capture that extra revenue. This is often an accurate prediction around events that attract major crowds.
The last minute rate does, however, more often than not lead to lower prices.
This is in large part due to previously-booked guests making use of free cancellation policies—either because they’re canceling the trip, or perhaps to take advantage of a more attractive offer.
In order to avoid rooms going unused, it’s common practice to lower rates in this case—better to have a reduced rate in the bank than nothing at all!
So there you have it—the 7 most relevant rates which you can apply across the year to capture as many bookings and as much revenue as possible. If calculating these rates feels like a lot of work, then we might have a solution for you.
The reality is that revenue management is an involved and complex job—it requires a lot of expertise and a serious time investment to get right.
The good news is that there's software that can help!
Smartpricing is a dynamic pricing and revenue management software that significantly reduces the time you need to spend on managing revenue, helping accommodations that use it to increase turnover, on average, by 30%.
Want to see how it works?
