The hotel industry is competitive to say the least. From the rise of Airbnb to changing guest expectations to changing hotel management trends, hoteliers face a variety of new challenges. At the end of the day, though, what will separate the winners from the losers in the hotel industry will be the willingness to adopt entirely new hotel management best practices. Insofar that hotels are businesses, the biggest need for adaptation or change is in revenue management. After all, fads and trends come and go, but the ones most worthy of hoteliers attention are those that impact a hotel’s bottom line. So as technology and guest expectations continue to evolve at an increasing pace, we’ve taken a look at the revenue management strategies that hotel operators should focus on in the coming years.
Revenue Management KPIs
Revenue management begins with measurement, and when it comes to the hotel industry, from occupancy to costs, there is no shortage of KPIs that hotels can track. There are four key KPIs, however, that hotels should watch closely to both maximize their revenue and reduce their costs.
Average Daily Rate
Simply put, Average Daily Rate (or ADR) measures the average rate that can be charged for a room during any specified period. ADR is also useful for demand forecasting and predictive marketing, helping hotel managers maximize revenue over time. Indeed, understanding their Average Daily Rate allows hotel operators to anticipate seasonal trends, and to maximize revenue by optimizing their pricing accordingly.
Revenue per Available Room
Once a hotel understands its ADR, it can take its revenue management and forecasting a level higher with Revenue per Available Room. RevPAR is calculated by multiplying a hotel’s ADR by its occupancy rate. And once a hotel understands its RevPAR for a given period, it can compare that to the RevPAR of the same period for previous years, and set firmer revenue targets. In this way, RevPAR can help hotels measure their profitability, as well as plan for and manage seasonal demand.
Cost per Occupied Room
Believe it or not, measuring revenue is only the first step in managing revenue. After all, revenue is offset by costs., Sso by managing costs, hotels can maximize revenue. Cost per Occupied Room (or CPOR) is a hotel KPI that allows hotel operators to calculate the average cost per occupied room, and measure and evaluate whether their operating costs are reasonable or require attention. CPOR is calculated by dividing the Total Rooms Departments Cost by the Number of Rooms Sold. And, of course, the lower a hotel’s CPOR, the more profitable the hotel becomes.
Gross Operating Profit per Available Room
Speaking of profitability, CPOR is not the only cost-related hotel KPI. Gross Operating Profit per Available Room (or GOPPAR) provides critical insight into a hotel’s performance because it factors in not only revenue, but also the costs incurred in generating that revenue. To this extent, it goes beyond RevPAR because it considers operational costs, and it goes beyond CPOR because it looks at the costs of operating the entire property, and not just occupied rooms. GOPPAR is calculated by subtracting hotel expenses from the hotel’s total revenue, and then dividing the difference by the number of available rooms.
Managing Energy Costs
Insofar as both CPOR and GOPPAR are critical hotel KPIs because they measure costs, measuring, monitoring, and managing costs at a more direct and granular level is also essential for maximizing hotel profitability. Fortunately for hotel operators, there is no shortage of smart technologies to help hotels do just that. Specifically, energy consumption represents a significant part of a hotel’s overhead. Indeed, it comprises as much as 60% of utility expenditures. Consequently, a hotel’s energy consumption has a direct impact on its GOPPAR. Just because energy is part of a hotel’s overhead, however, doesn’t mean that it’s a fixed cost. Indeed, hotels can choose from a number of smart energy management technologies that can help them reduce their energy consumption without compromising guest experience.
Smart HVAC Technology
Climate control is an essential aspect of any guest experience. After all, whether it’s heating or cooling, a hotel’s HVAC system is what makes the difference between glorified camping-with-four-walls-and-a-roof-over-your-head, and having actual lodging which provides shelter from the elements. Insofar as HVAC energy consumption, then, is part-and-parcel of any hotel guest experience, managing and optimizing HVAC usage is part-and-parcel of maximizing hotel profitability. This is why hotels are turning to smart energy management systems such as Verdant EI to optimize their HVAC energy consumption while maintaining guest experience. Specifically, smart HVAC energy management systems use occupancy sensors and smart thermostats to monitor and respond to fluctuations in occupancy and demand load. More importantly, though, they also use sophisticated machine learning algorithms to continuously analyze data on occupancy, historical thermodynamics, and local weather patterns to continuously optimize energy consumption in real-time, all year round. The ROI of a smart HVAC management system, moreover, has such a significant impact on GOPPAR that it significantly increases the resale value of a hotel. Indeed, Verdant’s energy management system has a payback period of only 12-18 months.
Smart Lighting Technology
HVAC performance is not the only way in which energy management systems can increase hotel profitability. Smart lighting technology can also have a significantly positive impact on GOPPAR. As with HVAC performance, smart lighting systems can help hotels (1) monitor fluctuating lighting needs, (2) react to real-time changes in guest occupancy patterns, and (3) optimize energy consumption based on those patterns. Similar to HVAC systems, moreover, smart lighting systems use occupancy sensors (and programmed lighting schemes) to prevent wasteful energy consumption. They can even adjust lighting according to the time of day, providing a seamlessly comfortable hotel guest experience. In fact, both Verdant’s own ZX and VX smart thermostats integrate with third party lighting systems, using their own occupancy sensors to adjust lighting consumption according to whether a room is occupied.
Segmentation & Price Optimization
Maximizing ADR and RevPAR goes beyond understanding (and maximizing) CPOR and GOPPAR. It also entails booking the right room with the right guest at the right price. One of the most effective ways to do that is to identify different customer “personas,” and then examine each of these segments to evaluate how, when, and why they book hotel rooms or other hotel facilities. And with that understanding of their guest personas/segments, a hotel can adjust its pricing (i.e. according to the principles of supply and demand). There are several key advantages to this kind of segmentation and price optimization. First, room rates can be optimised for a particular segment, and price changes can be minimised. Secondly, it fosters customer loyalty and repeat bookings from guests who appreciate price consistency and personalized service. There are a number of variables around which a hotel can build its guest personas/segments. These include, but are not limited to:
- Days of the week of bookings
- Length of stay
- Lead time (how in advance bookings are made)
- No show ratio
The point is that once a hotel has an understanding of its market segments, it can decide where to focus its marketing efforts at different times of the year. For instance, realizing that a particular segment has a higher cancellation rate allows a hotel to decide to deprioritize it as a marketing priority, and reallocate that budget toward booking guests from segments that are more profitable.
Pricing optimization is just part of a larger revenue strategy: pricing strategy. Of course, there are a lot of different pricing strategies out there, but for hotels, implementing the right pricing strategy is about finding the best pricing for a particular hotel, based on (1) the amenities and guest experience they offer, (2) the segments they want to target, and (3) competitors’ respective strategy. There is no shortage of other pricing strategies and, as with all choices, different pricing strategies have their respective pros-and-cons. Some of the most prevalent pricing strategies include:
- Discount Pricing: typically used during seasonal lulls, this pricing strategy allows hotels to boost occupancy by dropping room rates and appeal to discount travellers.
- Competitive Pricing: while this pricing strategy also puts hotels in more direct competition with their rivals, it is advantageous if the hotel can offer more than their competitors for the same price.
- Value-Added Pricing: this strategy allows hotel operators to remain competitive while charging higher prices so long as they offer sufficient additional amenities to offset their higher price.
- Dynamic Pricing: this is a pricing strategy that involves changing room rates daily (or even according to the time of day) based on real-time supply-and-demand data.
- Open Pricing: an elaboration of Dynamic Pricing, this pricing strategy allows hotels to set prices at different levels according to market, segment, and distribution channels; this approach also allows hotels to forecast revenue and demand more accurately — i.e. based on their rate of bookings per segment, channel, or geographical market, etc…
- Positional Pricing: this is a pricing strategy based on brand strength and reputation — i.e. a premium or luxury hotel brand to charge more than a similarly star-rated hotel based on consumer confidence in their ability to deliver on value and guest experience.
- Penetration Pricing: this pricing strategy involves hotels penetrating a particular market by positioning themselves as the cheapest option within that market; this strategy, of course, poses the risk of how guests might perceive the hotel’s brand (i.e. a discount hotel brand), so the hotels that take this route will have to plan on how to later sell their rooms at a higher rate
Of course, there are as many different hotel pricing strategies as there are business models. The point , however, is that if a hotel understands its core KPIs (e.g. ADR, RevPAR, CPOR, GOPPAR, etc.) and Segmentation, it can not only optimize (and customize) its room rates in the moment, but implement revenue management strategies that perpetuate those gains into future cycles and seasons.
Demand Mapping & Forecasting
The world of hotel revenue management doesn’t stop at monitoring KPIs, segmenting customers/guests, or pricing strategy. Indeed, the insight and data gained from those practices lend themselves to anticipating future bookings (as well as additional market trends) that hotel operators can then use to forecast and map demand based on historical booking patterns. Anticipating future demand (within a reasonable margin of error, of course) is an essential part of hotel revenue management. This includes forecasting everything from room availability to estimated market share to distribution and size of market segments. In a nutshell, by comparing historical data about seasonal bookings, RevPAR, and pricing, hotels can identify just where the greatest demands for their rooms/services lie, where it’s growing/contracting, and where they should focus their marketing (and booking) efforts moving forward.
Property Management Systems
Energy management isn’t the only area in which hotel operators are using smart technology to manage their revenue and profitability. Specifically, Property Management Systems (PMSs) allow hotels to automate everything from room availability and rate management (based on pricing strategy) to booking large groups and/or events to collecting deposits on larger bookings. For example, a PMS allows hotel operators to track, update, and access critical guest information through the booking process (and their stay) so that guest experiences can be streamlined, personalized, and optimized. Indeed, modern PMSs even provide hotel staff with automated upselling suggestions, such as room upgrades, flexible check-in/check-out schedules, and a host of other services that can be emailed to a guest or pushed to their mobile app. Unsurprisingly, revenue and room rate management is a built-in feature of many property management systems in that these PMSs leverage historical data to identify trends that affect ADR and can be used to increase occupancy. And conveniently, PMSs tend to be cloud-based services, meaning that hotels do not have to invest in additional tech infrastructure or hardware to implement them.
Revenue Management Systems
Of course, automated revenue management tools are not limited to cost and booking management. Indeed, smart Revenue Management Systems take things a step further by using machine learning algorithms that can optimize room pricing in real-time according to seasonality, supply/demand, and time of day. Essentially, these Revenue Management Systems aggregate data from a hotel and its competitors, and then help operators build more competitive pricing strategies. Furthermore, this insight tends to be packaged into a single dashboard that hotel staff can then use to manage their operations, distribution, and revenue forecasts. In a nutshell, PMSs leave less room for human error, and help hotel managers optimize their pricing for rooms and other services and amenities.
Competitor Rate Analysis
All this discussion about segmentation, pricing strategy, and demand forecasting, of course, begs the question: What is the competition’s pricing strategy? After all, KPI data and machine learning algorithms can give you insight into margins, etc., but a valuable variable they require to perform to their full potential is what the competition is charging per room. By analyzing competitor pricing through third party tools, however, hotels can compare their competitors’ current pricing, plug that into their PMS or Revenue Management System, and use that as a benchmark so that those machine learning algorithms can operate with some context. Indeed, monitoring competitor pricing provides hotel operators with the insight they need to develop more accurate demand forecasting, enabling them to target and attract the right kinds of guests based on seasonality and other factors.