Price Construction: An Introduction to Revenue Management

Innovation requires an approach to pricing policy that is aligned with the evolution of the tourism market, the evolution of technology, and the trends in supply and demand. This is a reality worldwide, not only in the hotel industry, but also in the cruise, automotive, and, of course, airline sectors, as pioneers of revenue management policies.

The most important aspects that lead a customer to choose a particular hotel are various and can be summarised as follows:

• Name: whether the hotels are particularly well-known or part of a widespread brand;

• Location: every tourist/traveler tends to look for accommodation as close as possible to the places they want to visit or where they have to go for the most disparate reasons;

• Word of mouth: that is, recommendations from people we know, a traditional method that provides confidence in our choices, to which online word of mouth has now been added, linked to the numerous sites that offer travel advice or have specific reviews left by users on a hotel, restaurant, museum, or a specific destination;

• Value for money: simply translated and shared by everyone, it means "feeling good and spending little."

• Hotel amenities: The amenities a hotel offers aren't always crucial, and they don't have the same value for everyone. It depends a lot on the type of stay: if you're staying just for the night for work, a pool or wellness center won't be as important as, say, location, luggage storage, or proximity to the train station or airport. On the other hand, if you're staying for several days or even just a weekend for leisure, the amenities offered will be much more important and will make your vacation much more enjoyable.

• Once a customer has chosen a specific property for their stay, it's important to consider the aspects that will make them return. The following are of great importance:

• Attention received based on requests: customers have become much more demanding. Traveling is no longer a once-a-year event, perhaps only during the summer holidays. Customers, in short, are more comfortable and no longer fear making a bad impression by asking hotel staff for this or that. Sometimes requests can be unique: a north-facing or south-facing room, a bathroom with or without a window, a shower or a bathtub, a high or low floor. These are all things that have always existed, but today they have become needs that customers are not always willing to give up.

• Cleanliness: It may seem obvious, but it's not. This is an aspect that shouldn't be overlooked: no guest will ever want to stay in a dirty room, no matter how much they pay.

• Expectations met: Today, new means of communication allow customers to know in advance where they will be traveling and to form a precise idea of the accommodation they will be staying in. Only if what they find matches their expectations, based on what they've seen and read, will they be satisfied and give a positive assessment of the price-to-service ratio.

QUALITY/PRICE RATIO

Value for money is crucial both when choosing a hotel and as a reason to return. However, it's impossible to provide a univocal value because it's a subjective assessment based on spending power, experience, motivation, and travel duration, weather forecasts, and a thousand other factors that vary from person to person. What's considered expensive to one guest isn't to another. If this is true, how can so many hoteliers claim to know the right selling rate for their hotel? What do they base their calculations on? Often, they take into account the majority of bookings received, or what their direct competitors offer, or they simply rely on the established practice of many years of working in the industry. Knowing that a given rate is fair for most guests, however, means losing those who would prefer to pay less, or forgoing the opportunity to collect higher prices from those who would be willing to pay more. Relying on what your direct competitors offer can be risky, as the selling rates could be incorrect, and the hotelier, by following them, would make the same mistake. Without forgetting that competitors are no longer just those from the same city or, at most, the same region or nation. Today, competition is the entire world.

HOTEL REVENUES

The main source of revenue for a hotel is room sales (between 80 and 95% of the turnover, depending on the type of structure and the services it offers), but there are other significant revenue opportunities:

• restaurant;

• bar;

• minibar;

• meeting rooms;

• wellness center, beach, swimming pool, excursions.

Traditionally, a hotel restaurant is an expense, not a source of revenue. There are several reasons for this, starting with the typical Italian belief that one shouldn't eat there or that the food is poor. Then there's the issue of accessibility: restaurants don't always have an external entrance, so those who aren't staying at the hotel must ask at reception. Perhaps the real limitation lies in the hotel's own belief that its restaurant can't be appealing to outside guests, and therefore, it doesn't invest in furnishings, menus, or even in the people who work there. Rarely does a hotel have a restaurant manager who handles not only day-to-day management but also promotion, advertising, and outreach. This task is entrusted to those responsible for promoting the hotel, but the perspective is different: it's a hotel with all its unique features, including a restaurant, that is, among its amenities. Hotels with a successful restaurant are those that have successfully given it a distinctive character, with appropriate menus (à la carte, daily, and house specials), and trained staff who, in addition to serving, can also advise, describing the dishes and suggesting matching wines. Ultimately, a restaurant that collaborates with the hotel, not just works for it.

Bars are often overlooked, especially in city hotels. They're there only because it's a legal requirement for a 3- or 4-star hotel, but many properties could certainly do without one. If it's difficult to run a hotel restaurant, imagine a bar. Consequently, it's common to find properties with unique bars, with views, and spacious spaces, but often empty. Yet the cost-to-revenue ratio for a soft drink or spirit is very high, and therefore the profit potential is excellent. The real problem is the deep-seated belief among many hoteliers that bars cannot be a source of income, that takings aren't sufficient, and therefore, it's not worth investing in, so much so that they often leave them closed during the day.

Add to this the unmarketable prices (much higher than city bars) and the limited selection of products (few spirits, main soft drinks, and coffee), and the picture becomes complete. Of course, not all hotel bars will be successful, but the approach is flawed, and many hoteliers will continue to keep them open for only the bare minimum, leaving them in inexperienced hands, preferring to save the salary of a good bartender who could, instead, help make them a strong point of the establishment.

The minibar is no exception. When it first appeared, it was a luxury; it was the reason to charge more for a room. Today, finding a room with a minibar is much easier; no one considers it a luxury anymore, but prices are often as high as when it first appeared, and products are too standardized, with no attention paid to local specialties. Often, the minibar is hidden under a desk, unlabeled, unlit, and with no visible price list. There are opposite situations, such as overpriced minibars and free minibars (usually only soft drinks). As with the bar, the idea that the minibar is a loss is wrong, and mathematically so. In fact, if all guests paid exactly what they consumed, the hotel would earn much more than it actually does, and comparing product purchase invoices with actual revenue and considering opening and closing inventories, a negative result is practically impossible.

Meeting rooms can also be attractive sources of revenue, both directly, with more attractive and aggressive pricing, and indirectly because, with very low setup costs, they can be offered free of charge if guests stay at the hotel or use other services such as the restaurant. Sometimes, the excessive price of meeting rooms discourages sales, but if you analyze only the out-of-pocket costs, you'll find they're very low. This allows you to sell at lower rates than those typically charged by hotels.

The final aspect concerns selling the hotel's services (spa, beach, pool, excursions, etc.). In this case, the flaw lies in the poor sales skills of those in charge, often due to a lack of training or the right incentives to encourage sales. Beyond financial incentives, there's often a lack of in-depth knowledge of what they're selling. It's much easier to recommend something you've personally experienced, and the quality of the responses you give to guests' various inquiries will also be more relevant.

HOTEL COSTS

We define fixed costs as those costs that are not affected by the greater or lesser presence of guests, while variable costs are those directly affected by their presence.

The main fixed costs of a hotel structure are:

• mortgages and financing;

• insurance premiums;

• hired staff;

• utilities (fixed fee linked to the subscription and not to consumption);

• extraordinary maintenance;

• purchase or depreciation costs related to machinery (computers, ovens, refrigerators).

If a hotel is open but completely empty, all these costs must still be incurred. As for variable costs, however, we only consider those generated by the presence of guests and which, in their absence, would not be borne by the hotel. These are:

• bedroom and bathroom linen costs;

• courtesy products (caps, shampoo, soap, etc.);

• utilities (share of consumption generated by the guest's presence);

• routine maintenance;

• breakfast (if included in the price);

• stationery and commission costs related to payment by credit card;

• commissions to travel agencies.

To correctly calculate both costs, you need to take as a reference the set of fixed and variable costs for a long period (usually the year or season) and divide both by the number of guests (if we are interested in a cost per person), or by the number of room nights (if we are interested in a cost per room).

To help you understand the costs involved, consider, for example, that linens, which are typically rented from specialized companies, typically cost the following: single sheet €0.60; double sheet €0.70; pillowcases €0.25; terrycloth bath towel €0.75; and terrycloth hand towels €0.30. Prices may vary slightly depending on the quantity or type of fabric (here you can find more information on industrial laundry prices and hidden costs).

The average cost of breakfast (food cost), on the other hand, is around €1.50 per person: the same reasoning applies here as for linen.

The cost of toiletries varies depending on the quantity ordered, the size of the individual bottles, and the quality of the product. Typically, a set that includes shampoo, shower gel, soap, shower caps, shoe polish, and a vanity set can range between 3 and 5 euros.

There are no precise reference values for utility consumption because they are not always so easy to calculate, but if we are talking about averages for gas, electricity, and water, it should not go beyond 1 or 2 euros.

Routine maintenance can also vary greatly, but it's still around a few euros on average. The same goes for stationery and agency fees.

The average variable cost that emerges from the data provided by various hotels usually ranges between 12 and 15 euros for a double room per night, 20 euros if we include all hotels from 5-star luxury to 1-star guesthouses.

Regardless of the room booked, and regardless of the type of hotel, the cost generated by a guest is a maximum of €20. Therefore, when a room is occupied, it generates a cost of €20, to which must be added the hotel's fixed costs, which are the sum of all fixed costs divided by the total number of rooms and spread over 365 days. The determination of fixed costs per room varies from property to property, and it is therefore not possible to find an average like with variable costs: consider only the amount of the mortgage or the size or services one hotel can offer compared to another.

For simplicity, let's assume a fixed cost per room of €50, to which we add the actual variable cost of €20, resulting in a total cost of €70. The minimum rate below which it's not worth selling is €20, which is the amount that covers variable costs. The alternative is to leave it empty, and in our example, this would result in a cost of €50 (fixed costs). Selling a room for €20 generates neither costs nor revenue: only the variable costs generated will be covered. Therefore, there's no financial advantage, but there will be an advertising benefit. If, however, the room is sold for 25 euros, the variable costs will be fully covered and the fixed costs partially covered (for 5 euros), and that room, for that day, will cost the hotel 45 euros instead of 50. There is no savings in leaving rooms empty because they are still expensive, and therefore the goal should always be to sell them all, or at least as many, at the highest possible rate.

Achieving 100% occupancy is certainly difficult, but that's not necessarily impossible. A hotel's price list is fixed and acts as a barrier. When it sets its rate, a property has automatically established its occupancy level, but if it sold some rooms at one rate and some at another, it would automatically increase occupancy, and therefore revenue. If it actually sold each room at a different rate, it would achieve the highest possible revenue.

According to yield management theory, selling requires offering the right price to the right person at the right time. A glass of water sold in a city bar cannot have the same price as one sold in the middle of the desert. Likewise, a hotel room doesn't have the same price on December 31st or January 7th. The same product is always on sale: the customer's propensity to spend and their perception of value change.

Even now, room rates are divided by season: high, medium, and low. Conventionally, prices are raised when high or low season begins, because over the years, the belief has become established that from that point on, people are willing to spend more. We should ask ourselves whether this applies to everyone, and also what would happen if the hotel didn't raise its rates. Those who book a flight early save money, yet there will also be many other people on board who paid more to get the exact same service. The price paid is therefore considered fair by each passenger who, otherwise, would not have purchased the ticket.

The same concept can be applied to room sales. The price should be tied to the type of reservation, not the requested date. This way, early bookers will get the greatest possible advantage, and the hotel will secure a good number of reservations well in advance, allowing it to better organize itself and increasing its revenue.

Achieving maximum occupancy at the highest possible rate is the task of revenue management, whose techniques are applicable in a given sector provided that at least the following requirements exist:

• high fixed costs (and we have seen that they are the vast majority of costs);

• low variable costs (we are referring to the 20 euros we talked about);

• predictable demand (for example, requests related to parties or events, or even Saturday nights);

• perishable product (rooms that don't sell cannot be stored, they had a cost but there was no way to resell them).

The hotel sector has these characteristics (as do transport and many services) and therefore revenue management techniques can be adopted.

The guidelines that will be used to analyze a structure and will help make the most correct decisions concern:

• RevPar;

• high/low employment;

• nesting (customer segmentation);

• study of historical data;

• maximum attention to events that may influence employment;

• revenue calendar (for collecting information in a practical and easy-to-consult manner);

• correct and adequate sales techniques.

RevPAR (REVenue Per Available Room) is a hotel's revenue performance indicator, meaning how much revenue is generated from each available room. The revenue objective is to sell all rooms, so performance analysis must consider the entire property's capacity. RevPAR is calculated by multiplying the average room revenue (Rmc) by the occupancy rate for a given reference period (day, month, year, or other period), or by dividing the production for a given period (e.g., a week) by the total number of hotel rooms (existing and unoccupied) for the days considered (in our example, seven days).

The traditional benchmarks used—average room sales revenue and occupancy rate—provide only partial information. A 90% occupancy rate is positive only if the room price is high, because if rooms are sold for €20, the rate becomes low. The same applies to average room revenue: €200 in revenue can be positive if accompanied by high occupancy, but if occupancy is 15%, the opinion changes completely. In many cases, the yardstick for evaluating a hotel's performance is average room sales revenue, that is, the average rate at which rooms are sold: the higher it is, the happier some hoteliers are. In reality, lowering average room revenue results in higher sales, higher revenue, more word-of-mouth, higher earnings, and, most importantly, a solid foundation for our business. Using the RMC as a benchmark can be misleading because, whenever it is deemed low, the selling price is raised to collect more, but if there is no adequate demand, the total turnover will end up being lower.

The main factor for raising or lowering rates is the hotel's occupancy rate, not the season. If you make decisions based solely on the latter criterion, you'll find high rates in Rome in May because it's the peak season. However, within this month, there are days with different sales potential: a Saturday night may be more attractive than a Sunday, but working with price lists, these two nights will have the same price. The same goes for November, when rates are low because demand is lower, but you risk selling for too little even if demand suddenly spikes. Therefore, the decision on which rate to adopt should be based on your property's performance, not the season.

Season and occupancy will likely coincide for many periods, but not always, and it is this greater attention to the hotel's performance that will allow for optimized sales.

To improve revenue, you need to fill all rooms first and only then decide which types of guests are most attractive, at the expense of those with the least benefits. Nesting represents the composition of the hotel's clientele, broken down by individual days, and helps you choose the highest-contributing customer segments during periods of full occupancy.

Being fully booked isn't always the best option: 100% occupancy should be achieved, but at the highest possible rate, because filling your space by selling at low rates doesn't fit into the revenue management logic.

Let's imagine a situation in which a city hotel has a weekly occupancy rate that is distributed as follows: Wednesday and Thursday are statistically 100% full, but two questions still need to be asked: how can revenue be improved on those two days, and which customers should be avoided and which ones should be encouraged. Let's analyze the various segments:

• Walk-ins: these are customers who stop by and request a room for the same day. If the front desk staff is good at selling, they'll be able to get the most out of every customer who walks in. It's impossible to do better here;

• Tourist: Generally speaking, these are all customers who book hotels through online portals. To improve revenue, it's necessary to implement a variable pricing policy that maximizes profits. In this case, rates should be raised at the right time to maximize revenue.

• Commercial: These are all business guests who have signed agreements with the hotel for preferential rates. Careful analysis is required because these guests aren't always essential: for example, if they stay on Wednesdays or Thursdays, they aren't essential guests for the property in question. When renewing agreements (if they're annual and rates can't be adjusted), it would be appropriate to adjust them upwards to discourage non-essential guests from visiting. The situation is different for guests who, despite staying only once a week, typically stay on Mondays or Tuesdays. These two days aren't yet strong enough to warrant a rate increase: you risk losing the guest.

• Allotment: This too is an analysis that must be done carefully, to understand whether there is a need for fixed-fee (fit) and allotment contracts and, if they exist, evaluate whether it is worth maintaining them.

A hotel's historical occupancy and sales statistics are a very important source of information. When compared and analyzed, they reveal a wealth of information about the type of guest. The data should be compared year to year, considering the day of the week, not the date (compare the first Monday of the month, not the 1st to the 1st). It's important to understand which events influenced occupancy and to what extent, whether they will repeat next year, how many groups arrived and during which periods, whether the agencies or tour operators with which the hotel works are selling their rooms, how many compared to the allotment, and when. The analysis should be done daily.

Equally important are the events planned for the coming months, whether national or religious holidays (April 25th, May 1st, Easter) or local events (sporting events, exhibitions, and various other events). People are increasingly eager to move, but they need a reason, as demonstrated by the increased attendance of even smaller events in recent years.

To make pricing decisions, you need to have a set of information at hand to help you. Below is an example of a revenue calendar, a collection of essential historical data for, say, Thursday, April 14, 2011:

• Closed on: If the hotel is fully booked, the date on which sales on the portals and to the public closed;

• Weather: an important variable that increasingly influences whether or not to go on a weekend getaway and certainly influences room occupancy and sales for that day;

• Events: This report highlights the distorting variables that influenced the structure. In this case, it indicates that a company meeting was hosted, which must be taken into account because it's not known whether it will be held again next year.

• Revpar: in this case, it's daily. It's used to compare the performance of each day from year to year. It's more useful over long periods of time, but it's still useful for setting a goal to achieve.

The table indicates "average" in brackets because it would be ideal to be able to compare statistics from multiple years to get a clearer picture. However, if the hotel is just starting to adopt this new working method, or if it has large sales fluctuations from year to year, then it's not a good idea to use multiple years as a reference because the averages would be unreliable.

• Trend: this should only be used if you are calculating averages and therefore it is important to understand whether the trend is increasing compared to the past or not;

• IMO Occupancy %: This is the percentage of rooms occupied for that day. The word "average" is also shown in brackets, and the same applies as for RevPAR;

• Rmc: the average price at which rooms were sold for that day. This is an important reference figure, which should be analyzed in conjunction with other data, not alone;

• RPO: Refusals by occupancy. This is a new and highly relevant statistic. It tracks how many people we were forced to turn away because the hotel was fully booked. In this case, since there were rooms available, the value is zero;

• Rpp: Price-related rejections. Another important figure to record is the number of potential guests who declined a room because they deemed the rate too high. In this case, the calendar shows the number 2. The price wasn't right. This is a mistake that shouldn't be repeated, especially since there were still many rooms available.

• Nesting: is the segmentation of existing customers, with their relative RMC;

• No-shows/cancellations: These are changes that occurred on the same day (cancellations) or the following day (no-shows). They are especially important for large hotels. To achieve full occupancy, you have to risk overbooking. The key is to do so on the right dates, where historical data indicates that the number of no-shows and cancellations will allow you to recover from overbooking.

• Booking velocity: that is, how far in advance bookings arrive, and when repeat customers book. It would be even more useful to be able to combine booking velocity with nesting.

This is the essential data for making decisions and can be found in most hotel management software, otherwise it must be collected manually.

The type of tourist has changed, the way they travel, the length and motivation of their trip, the way they book, even the way hotels work has changed and it is necessary to adapt.

HOTEL SALES

The goal of anyone managing a hotel is to always be fully booked at the highest possible rate, ensuring that no reservation or guest slips through the cracks. No longer relying on traditional seasonal price lists, receptionists must be properly trained in sales, familiar with revenue management principles, and have decision-making freedom. They must be free to apply discounted rates based on the guest, time of day, and situation, but also capable of selling upgraded rooms at higher prices. To do this, they must be involved in the operational management of the property and be able to contribute. Too often, receptionists are mere executors, disconnected from corporate objectives and inadequately updated on the actual performance of the property they work for. Changing sales methods also requires reconsidering other concepts, which are too often taken for granted.

Children: Up to a certain age, children don't pay. This is often a custom passed down from year to year, born with a logic that has often been lost over time.

A thoughtful hotelier should consider whether it's in their best interest to encourage guests traveling with children, whether they have large rooms to accommodate families with children sleeping in cribs or crib, and whether their accommodations are suitable for this type of guest. They should then decide whether to charge for them, when, and how much, knowing that a free child stay is certainly a way to attract additional bookings.

A customer may have chosen a hotel because it has features they like or because their child doesn't pay. If they hadn't found that offer, they would most likely have chosen another place. Ultimately, children are free in hotels if it's convenient for the hotel.

Non-refundable rates: Most hoteliers believe that non-refundable rates are a great option and work very well. However, it's difficult to understand why a guest would book something they can't cancel or change, and for which they must pay well in advance.

The non-refundable rate probably works well not because it's non-refundable but because it's lower. However, if the hotel sold rooms at that same rate but the reservation was refundable (i.e., the standard reservation guaranteed by a credit card), it would sell much more.

Customer reviews: Star ratings are increasingly less representative of a hotel's true value, while guest reviews are becoming increasingly important. It's better to know what people who have already stayed at a property think, rather than just reading the hotel owner's description. They'll never mention that the property is located in a noisy area or difficult to reach by car, or that it needs updating, or that the bathrooms are uncomfortable.

Many hoteliers give too much importance to negative comments and undervalue the positive ones, forgetting that what they consider negative is nothing more than the story of something that actually happened or simply the opinion of a customer who simply has different tastes in furnishings than ours.

For example, we know from Tripadvisor that 70-80% of customer reviews on its website are positive. In short, reviews should be seen as an opportunity to improve the way we work, a way to break free from the self-referentiality that has always characterized the Italian hospitality industry.

Tour operator

They are valuable allies, but should be better integrated into the commercial logic of each hotel. They are no longer the only way to publicize a hotel: in the internet age, it would be absurd to remain tied to the rigidity of a contract signed so far in advance, before realizing how the season is going. Consequently, commercial agreements, rates, and allotments should be reviewed. Internet: tour operator rates should be the lowest possible to sell early and give the hotel complete freedom to raise the price as bookings come in. Allotments should be increaseable, and generally are, as are rates, which are not.

Groups

For some time now, it's become common practice to give groups a 30-day release period with no penalty for cancellation. This is unfair and certainly inconvenient. The hotel commits months in advance to room availability and pricing, forgoing other potential sales, and relies on a group that can suddenly cancel 20-30 rooms (sometimes many more) that are unlikely to be sold, unless they often do so at very low rates.

It's much more appropriate to offer a group option, very close to the booking date (not the arrival date), and upon expiration, if the group is confirmed, ask for a 20-30% deposit and the balance upon departure. Not many agencies accept a deposit: in recent years, some hoteliers have relied entirely on intermediaries who "managed" the hotel, directing groups and setting rates and conditions. Today, the situation has changed, and there are every opportunity to manage your own property again.

Room types

The offerings should be varied but not overwhelming. Everyone likes to have choices, but when there are too many options, it often has the opposite effect: it confuses the customer. The ideal is to divide them into two or three categories, so you can sell them at different rates and improve both the customer's impression, who has a choice, and revenue, because the customer will be willing to pay more for what they choose. A note on quadruple or family rooms: they are highly sought-after, but it's important to remember that they are for families and the cost isn't split among the guests, but is entirely borne by the parents, so the rate shouldn't be excessively high.

Overbooking

Overbooking is a situation in which a hotel accepts more reservations than the actual number of rooms available because it expects cancellations or changes to stays for those dates. It's an essential practice for maximizing occupancy, but it must be done carefully and intentionally. The risk is overselling, a situation in which a guest is arriving at the hotel but the room isn't available, forcing them to rebook elsewhere. This is a possible mistake, but it should be avoided at all costs.

Portals and website

They've become indispensable. Nowadays, it's unthinkable for a hotel not to be listed on online booking portals, just as it's essential to have your own website. Both must provide accurate, clear information and attractive photographs. The text must be designed for the type of user who browses and doesn't simply read lengthy descriptions. Five, or a maximum of ten portals are sufficient, perhaps chosen from among those best suited to your area, but the key is to align with their sales policies: the more a hotel sells, the more attractive a customer it becomes, and the more interested the portals will be in maximizing its visibility. For this reason, it's good practice to never close dates, even if the property is fully booked. Instead, raise the rate to the maximum allowed and impose a minimum stay requirement, so as to minimize the possibility of receiving bookings while simultaneously maintaining the possibility of being seen. The website is the next step: once a hotel has made itself known through its portal, guests will start visiting it, which is why it must be well-designed and easy to use, especially for bookings. Finally, it must feature all the latest technological innovations, videos, Facebook, and Twitter, and be optimized for smartphones.