Revenue Management, Part 1: The Basics

This is the first in a new series about Revenue Management. For many of you, this may be review, but for others, we hope you learn something new. We’ll start with the basics and then build upon them throughout the series.

What is Revenue Management?

Our CEO, Trevor Crist, is well known around here for saying: “Sell the right product at the right price to the right customer at the right time”. The goal is to sell your products, whether they are lodging or activities, at the highest price based on demand, product quality, and market conditions while still incorporating an idea of perceived value to the consumer.

OMG!  There are so many acronyms!

Many popular acronyms for Revenue Management are specific to the lodging industry, but have their place in other industries as well. Let’s review a few that you may encounter:

  • ADRAverage Daily Rate is the average nightly rate charged to a guest. It is the total gross revenue divided by the total occupied rooms on any given day.
  • ALOSAverage Length of Stay is the average number of nights your guests stay.
  • BAR Best Available Rate is the base rate from which most other rates are derived. It is based on the value of a room assuming unconstrained demand for a period of dates.
  • COMP SetCompetitive Set is a list of competitors that an organization would consider its direct competition (typically five to eight properties).
  • Dynamic Pricing – The act of selling the same product to different guests for the same time period at different rates. This is directly related to Yield Management.
  • Yield Management – This is synonymous with “Revenue Management” to many. It is the act of manipulating the BAR rate based on demand, weather, reputation, market conditions, consumer purchasing behavior, etc., in order to maximize the potential income of any given unit on any given day.
  • RevPAR – Revenue Per Available Room is the total gross revenue for a set of dates divided by the total available rooms for the same set of dates (this is different from ADR as it includes unoccupied rooms).
  • NOPAR – Net Operating Revenue Per Available Room is the same as RevPAR, but with net operating costs per room subtracted from the per-room gross revenue production.
  • Occ%Occupancy Percentage is the number of occupied rooms divided by the number of available rooms for a date or set of dates.
  • Pace – Pace reporting lets you know where you stand against budget/forecast/previous year at that instant in time. The idea being that you can measure where you are positioned and make appropriate changes to positively impact your revenue streams. This reporting is typically viewed two ways: versus the prior year and/or versus the budget.
  • Forecast – A forecast is the predicted revenue outcome for a set of dates based on factors such as revenue currently OTB (on-the-books), current ADR, and anticipated future sales within that period. The idea is to finalize the forecasted period by landing within +/- 3% of the stated “forecast” revenue. A forecast is judged on its accuracy (typically) from the first day of the current month vs. the conclusion of the current month. It is also important to note that a “forecast” and a “budget” are not the same thing. Forecast accuracy is incredibly important as it is essentially predicting the levels of business an organization can expect; this impacts cash flow decision making such as staffing decisions (labor costs), non-capitalized purchase decisions (food costs / housekeeping tools / spa materials), utility usage, etc.

As our Revenue Management series continues, we’ll take a look at market conditions and impact on decision making, forecasting and strategy, and planning and processes. Stay tuned!