Why Manage Your Revenue?

The first recognisable revenue management strategy was introduced by British Airways back in the 1970’s.

They exercised 2 different fares in order to achieve the optimal mix of passengers and the highest revenue, balancing the popularity of the lower fare with the profitability of the higher. 

Following this, American Airlines invested heavily in what they termed ‘yield management’; forecasting, inventory control and over-booking capabilities. They targetted surplus empty seats with discounts and announced an ultimate super saver fare. These fares were priced even lower than discount airlines, advance purchase only, limited and non-refundable. These strategies saw profits increase 48%. And so airlines are credited with introducing revenue management, but by the early 1980s, car rental companies, such as Hertz, began to undertake yield management. 

Soon, this success caught the attention of Marriott International. Marriott had many of the same issues as airlines; perishable inventory, advance room bookings, lower cost competition and wide swings in supply and demand. And so similar strategies were introduced to the hotel industry, under the term revenue management.

Investing in automated revenue management systems allowed Marriott to target price sensitive market segments based on demand and optimise room availability by stay length. By the mid 1990s, successful execution of these systems had increased Marriott’s annual revenue by over $150 million. 

Today, vacation rentals have emerged as a major competitor to hotels, with Airbnb’s stock capacity alone equivalent to that of the top-5 hotel groups combined. Yet, despite this revenue potential, occupancy is dwarfed by that of major hotel chains and revenue management in short-term rentals remains in its infancy. In seeing what data informed revenue management strategy has achieved for hotels, it’s time for us to make smarter, informed decisions within our industry.

Case study: Electric Daisy Carnival, 2009

To give an example of the role that the application of these practices has to play, let’s talk about the Electric Daisy Carnival. In 2009, it relocated to Las Vegas, bringing over 250,000 attendees with it. 

Image result for Electric Daisy Carnival, 2009

Hotels didn’t anticipate the demand, booking patterns, or room rates of this new scenario, and so rooms on the strip sold out 6 months in advance of the event and for around only $99/night. When the event came around, properties downtown, usually achieving much lower rates than the strip, recorded walk ins at over $1000/night. Millions of dollars were left on the table for hotels that could have easily strategised with revenue management. 

What have we learnt?

Ideally, we would like to extract the maximum rate from our units at maximal occupancy, giving a firm projected revenue, allowing us to model financially and strategise within the wider context of our business and to maximise RevPAR. In reality, ‘the maximum rate’ for any unit looks very different across consumers, months, and even day to day. 

It is therefore crucial to understand demand and how and why that maximum fluctuates. This way we can sell our product optimally and build an accurate strategy. Data can inform us on this, as well as helping us to understand the relative strengths and limitations of each point of sale. Having the competencies to leverage segmentation, forecasting, tracking, inventory management and pricing achieves the optimal pace and mix of bookings – selling your product to the right person, in the right place and at the right price and time is necessary to maximise revenue. 

In addition to maximising profit, managing revenue is important in informing wider business strategy. Many elements of short-term rental operations and growth hinge on understanding and being adaptable to demand and revenue, especially operations, sales and marketing, and finance. After all the driving force of any business is revenue, and so these practices are fundamental to any operation seeking success or growth.

Are you interested in becoming a revenue management expert? Register for the short-term rental revenue management course and learn how you can maximise your revenue.