7 false myths about revenue management for hotels
Want to learn more about revenue management and dismantle its most common myths? Here you will find what you are looking for!
In this article we discuss a fundamental concept: revenue management in a hospitality business plus 7 related misconceptions. A topic that needs to be explored in depth if you want to increase the revenue of your business.
In the next few lines you will find an overview of the most profitable strategies you can apply to your hospitality business, wherever it is located, but first I suggest you delve into what revenue management is and why it is important.
Having made this brief introduction, here is the list of 7 common myths related to revenue management:
Revenue management in hotels and 7 common myths
Here is the list of the 7 misunderstanding associated with revenue management:
1 - Doing revenue management means adopting strategies that do not consider costs
Let's start with a fundamental concept: to do revenue management you have to start with costs.
In fact, without a detailed statement of your expenses, it is not possible for you to understand which are the most profitable rates to propose.
If you want to delve deeper into this topic, we recommend you download our resource to calculate your facility's fixed and variable costs, quickly and easily, download here!
The first piece of data you need to find is the bottom rate, that number that allows you to answer the question: what is the minimum amount below which selling a room is no longer affordable?
Let's take a very simple example: if your bottom rate is €39.00, your prices should always be above or equal to this figure.
By knowing the bottom rate, derived from an analysis of your fixed and variable costs, you will have a broader view of the financial situation of your facility and be able to apply profitable revenue management strategies.
2 - Doing revenue management means selling only on Booking.com or other OTA (Online Travel Agencies)
There are two types of hoteliers: those who believe it is useful to sell only through OTA channels, and those who believe it is necessary to sell only through disintermediation (i.e., through direct bookings on the site).
Actually doing revenue management means having a holistic view, that is, not focusing on one sales channel only, but giving equal importance to all of them. However, pay attention toward some of the issues with OTAs:
- the rules defined by these portals that you need to adhere to
- the high commissions you have to pay
- the Genius rates that can cannibalize your sales (on this issue, we refer you to our article: What nobody never told you about Booking's Genius program)
To conclude, revenue management allows you to manage rates on any sales channel you use, whether it's your website or an OTA.
3 - Doing revenue management means selling at low rates
This is a very common belief, in fact it is thought that offering lower prices will attract more customers.
On this subject, we want to tell you about an experiment carried out by one of our clients a few months ago, before adopting Smartpricing.
Andrea Bazzoli, owner of Hotel Meandro in Gargnano, tried to set very low prices (€10 per room), to see how many more people he could attract. Much to Andrea's surprise, he received no reservations. Then, by optimizing the rates based on supply and demand (without changing other factors), customers began to book en masse, despite the fact that the price was much higher than proposed in the test.
This case shows that price is not the only element that tourists take into consideration.
Not only that.
By charging low prices, the risk you run is to attract the wrong clientele, that is, people who are only interested in buying at the lowest prices on the market, without being interested in the value of your facility.
That is why doing revenue management does not mean selling at low prices, but selling at dynamic, profitable prices that will attract the best clientele for your accommodation.
4 - Doing revenue management means always watching your competitors
It is true that you have to monitor your competitors but...
You must keep in mind that your rate strategy cannot be based on them, for 5 reasons:
- You lose the big picture
When you focus too much on your competitors' activities, you lose sight of key elements such as weather, destination trends, or events in your location.
- You get sidetracked from your own activities
Although similar, each facility has unique characteristics that make it stand out from the rest. Yours is no exception! Whenever you look at your competitors, you underestimate the elements that differentiate your facility and can impact your pricing.
- You always lag one step behind
Using dynamic pricing means anticipating tourism demand, so you get bookings before others do. But, if you regularly observe the actions of your competitors, you will more often than not find yourself chasing after them, missing out on the best revenue opportunities.
- You let others decide for you
One of your competitors may have applied the wrong revenue management strategy. Copying from it would certainly be counterproductive.
- You may miss important details
You can hardly know the actual occupancy of your competitors with precision. You don't know whether it may be similar to yours, so you cannot rely on their pricing choices.
5 - Doing revenue management involves losing repeat customers
This is one of the most frightening concerns in the minds of hoteliers.
Fortunately, there are strategies to use dynamic pricing even with legacy customers.
For example, you can:
- Use a secret list available only to regular customers. This form is also used by giants such as Booking.com, through their Genius program
- Introduce a loyalty program that can reward customers based on their actions and number of bookings
- Gradually increase rates from year to year by one or two percent
These are some strategies you can put in place, to use dynamic pricing with a steady customer base (in any case you can get more information on this here: How to do revenue management with regular customers).
6 - Doing revenue management is only good for airlines
It is critical to understand that dynamic pricing is used for many purposes and by many companies, including:
- Ticketing sites for concerts, theater, movies, and sports
These entities use dynamic pricing to maximize revenue. In fact, it is possible to observe how the prices of different tickets can vary even from one day to the next.
Many online sales sites in beauty, sports, auto parts (and more) have begun to use dynamic pricing.
By doing so, they are able to change prices dynamically based on product availability, site traffic, conversion rates, and sales goals.
- Theme parks
The first to introduce dynamic pricing were Disneyland and Walt Disney World in 2016, to be followed by Universal Studios.
The parks apply revenue management because, as with hotel rooms,new attractions cannot be added as demand increases.
As I have shown you, dynamic pricing logic is applied by most businesses around the world with great results.
Would you like to better understand the topic of revenue management and dynamic pricing along with all their benefits? Download the ultimate guide to revenue management and start increasing your hospitality business' revenue!
7 - Doing revenue management will not benefit my hotel
This thinking is typical of hoteliers who manage their property in a traditional way, with few technological tools and managing prices through:
- A fixed price list
- Competitor observation
These two approaches are very risky.
First, the fixed price list cannot effectively intercept fluctuations in demand, which leads to two problems:
- Losing revenue
If room demand is higher than anticipated, customers will be willing to pay a higher price than usual. If you do not adjust your rates accordingly, you will inevitably find yourself selling rooms at a much lower price, than people are likely to spend. In this way you will sadly lose a lot of revenue.
- Be left with empty rooms and lose revenue. Again!
If you experience a period when the demand for rooms is lower than expected, people will be less willing to pay the price you originally decided on. In this case, with fixed prices, you risk watching helplessly as unsold rooms increase, resulting in lost revenue.
As for changing prices by watching your competitors, this will give you limited insight into the real market demand (as explained in point 4 of this article).
Ultimately, revenue management is also useful for your facility, as you can benefit from its potential to increase your revenue, through revenue management software such as Smartpricing.
Within this article we saw what revenue management is and the 7 false myths that continue to persist to this day.
You gained insight and a new perspective that can open up new possibilities for you. Such as the benefits of applying dynamic pricing through revenue management software.
You, too, can start increasing your facility's earnings through revenue management and Smartpricing. Talk to a consultant to get more information about the software.