Revenue Management Basics - 3 Concepts Every Hotel Employee Must Understand
By Bill Kotrba VP of Industry Strategy, Leisure, Travel & Hospitality, JDA Software | July 22, 2012
After location, of course, the three most important profit levers for a hotel are price, price and price. Suppose you are given the opportunity to make a 10 percent improvement in occupancy, price, fixed costs or variable costs. All things being equal, a top-line price increase drives the most dollars in bottom-line profit. This is not a new discovery, although with the intense focus on cost-cutting that many businesses have embraced, it bears repeating.
Good revenue managers know intuitively that setting the "right" price can drive success or failure for any business. But for hotels and other businesses with the combination of low marginal costs, high fixed costs and perishable capacity, pricing decisions take on the utmost importance and complexity.
So it should not come as a surprise when I say that, as a consultant and solution vendor, the most common concern I hear from individual hotels is that they have trouble choosing what price levels to set. Similarly, at the chain level, executives responsible for revenue generation have serious concerns that many general managers and franchise owners blindly follow unsophisticated competitors up and down, unsure about what the true impact on revenue will be. Others may treat pricing solely as a lever to drive occupancy, with limited visibility into whether or not their efforts are creating a more favorable total revenue outcome.
Having heard numerous misconceptions and biases about how to approach pricing strategy in the hospitality industry as well as other industries, it never hurts to revisit three basic revenue management concepts and ensure that every employee in the hotel, or at least all those who interact with pricing and customers, understands them. The three concepts are:
Increasing prices does not always increase revenue.
The only reason to offer discounts is if it results in more revenue.