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Why Your Definition of Revenue Management Needs an Overhaul

31 October 2023
Revenue management has long been one of the cornerstones of hotel operations. Its traditional definition has guided countless professionals in optimizing profitability and driving success. But as the industry matures and guest expectations evolve, I have asked a crucial question: Does our established understanding of revenue management truly serve our current needs? More importantly, does it encapsulate the heart of hospitality?
Before redefining revenue management, I would like to acknowledge the expertise and dedication of revenue managers worldwide. This exploration is not a critique but an invitation to a conversation about aligning our strategies with changing customer needs and behaviors.
So, as you read on, I would like you to approach this with an open mind. Whether you agree, disagree, or find yourself somewhere in between, let's embark on this journey of reflection together, always keeping our ultimate goal in sight: enhancing the guest experience and ensuring the sustained success of our beloved industry.

The current definition of revenue management

Having been deeply entrenched in the hospitality industry for decades, I've witnessed the evolution of practices, strategies, and ideologies that drive this sector. One constant in this ever-changing landscape has been the definition of revenue management. For over 40 years, hotels globally have clung to this definition, and it continues to be a cornerstone in hospitality curriculums worldwide. But as I've navigated through the industry's nuances in recent years, a growing discomfort has settled within me. This traditional definition, while foundational, has inadvertently nudged hotels away from the essence of hospitality. Instead of fostering genuine connections and memorable experiences, there's been a palpable shift towards the transactional. This subtle yet profound transition has spurred me to rethink, reassess, and reframe our understanding of revenue management. I invite you to join me in exploring a perspective that prioritizes the heart of hospitality over mere transactions. Let's start by deconstructing the standard definition of Revenue Management and analyze its implications:

"Selling the right capacity to the right customer, for the right price, in the right channel, at the right time."

  1. "Selling":
    • Implication: The emphasis on "selling" prioritizes making the sale over understanding and fulfilling customer needs. While sales are crucial, this approach might risk sidelining the customer's desires, needs, and experiences.
  2. "the right capacity":
    • Implication: Leading with "capacity" indicates an inside-out approach, prioritizing the hotel's inventory rather than understanding customer desires. It suggests that the hotel's primary concern is filling its rooms, irrespective of who fills them or why.
  3. "to the right customer":
    • Implication: This implies a reactive approach. It suggests the hotel is looking for customers who fit into its existing inventory rather than tailoring offerings based on customer needs and preferences.
  4. "for the right price":
    • Implication: While dynamic pricing is a cornerstone of revenue management, this phrase can indicate a primary focus on revenue optimization without necessarily considering value delivery or customer perception of value.
  5. "in the right channel":
    • Implication: The introduction of this phrase, albeit later, underscores the importance of distribution but might inadvertently prioritize the mechanics of distribution over the quality of the customer experience. It emphasizes where the sale happens over how or why it happens.
  6. "at the right time":
    • Implication: This phrase emphasizes the importance of timing in revenue management. However, it might suggest focusing on opportunistic selling (capitalizing on peak times) rather than building long-term customer relationships.

Focus on transactions

While comprehensive in its coverage of essential revenue management components, the traditional definition strongly emphasizes the process's transactional aspects. It starts with the hotel's perspective (selling what's available) rather than the guest's perspective (offering what's desired). It's a product-centric approach in a world rapidly moving towards customer-centricity.
In today's hospitality landscape, where customer experience and loyalty are paramount, a definition that starts with the customer and emphasizes understanding their needs might be more apt. This shift doesn't negate the importance of selling, capacity management, pricing, or distribution. Instead, it reframes these elements in a context where the customer's needs, desires, and experiences are at the forefront.

A subtle updated definition of revenue management

Now, let's analyze my updated definition of revenue management.

"Revenue Management is understanding and meeting the right customer's needs, with the right product, at the right price, through the right channel, at the right time."

  1. "Understanding and meeting the right customer's needs":
    • Implication: This places the customer at the forefront, emphasizing the importance of being customer-centric. Revenue management isn't just about selling rooms; it's about understanding what the guest wants and tailoring offerings accordingly. This suggests a proactive approach to guest experience, where hotels anticipate and cater to desires and preferences.
  2. "With the right product":
    • Implication: The product here represents the entirety of the hotel's offerings. It implies that the hotel should have a diverse and adaptable range of products (rooms, services, experiences) that can be matched to varying customer needs.
  3. "at the right price":
    • Implication: Pricing is still essential, but in this context, it's aligned with the value provided to the guest. It's not just about maximizing revenue but about ensuring the price corresponds to the perceived and actual value of the product or experience offered.
  4. "Through the right channel":
    • Implication: This acknowledges the importance of distribution but emphasizes the need to engage customers where they are most comfortable and where the experience will be most seamless. It's about optimizing the customer journey, not just optimizing distribution costs.
  5. "at the right time":
    • Implication: Timing remains crucial. However, in this definition, the context suggests ensuring availability when the guest needs it rather than just capitalizing on peak demand times. It's about being there for the guest when they want to book, ensuring you capture their business by offering them what they want when they want it.
My revised definition shifts the perspective from a product-centric to a customer-centric approach. It emphasizes the importance of understanding the guest, suggesting that successful revenue management is rooted in delivering value, not just in optimizing prices or filling rooms. The order and phrasing prioritize the guest experience and the importance of matching hotel offerings to guest needs.
Today's travelers are looking for more than just a place to stay. They seek unique experiences, personalized services, and a sense of connection. A holistic approach to revenue management—beyond just room rates and occupancy levels—is essential to meet these evolving expectations.
By redefining revenue management to be more customer-centric, we optimize revenues and enhance the entire guest journey. This involves understanding the diverse needs of guests, offering tailored experiences, and ensuring consistent value across all touchpoints, whether it's the room, the spa, the restaurant, or any other facility.
Moreover, the concept of total revenue management extends this approach beyond just rooms to encompass all revenue-generating areas of the hotel. This includes ancillary services, upsells, and cross-sells. It's about maximizing the total guest value and ensuring that every interaction, every service, and every offer aligns with the guest's expectations and desires.
Implementing such a holistic approach requires collaboration across all departments—from marketing to operations to finance. It's about breaking down silos and ensuring that every team is aligned in its goal to enhance guest satisfaction and drive overall revenue.
In essence, hotels can increase profitability and build stronger, more lasting relationships with guests by adopting a holistic, guest-centric approach to revenue management. This, in turn, can lead to higher loyalty, positive word-of-mouth, and sustained success in an increasingly competitive landscape.

A subtle update will have ripple effects

Updating the definition of revenue management to be more customer-centric will have ripple effects throughout the hotel organization. Here are several critical areas that would need attention:
  1. Strategic Alignment: The hotel's broader strategy might need a re-evaluation to ensure it aligns with the new definition. This includes revisiting the hotel's mission, vision, and long-term goals to align with a guest-centric revenue management approach.
  2. Technology & Systems: Current revenue management systems (RMS) are designed around the traditional definition. New tools or updates to existing tools might be needed to accommodate a more holistic, guest-centric approach. This could include integrating CRM data with RMS or adopting AI-driven tools considering guest preferences in pricing decisions.
  3. Data Collection & Analysis: The type of data collected and how it's analyzed will evolve. Beyond occupancy rates and ADR, hotels might need to deeply analyze guest feedback, reviews, and preferences to make informed revenue decisions.
  4. Performance Metrics: How success is measured will change. While revenue will always be a primary KPI, metrics like guest satisfaction, guest lifetime value, and brand advocacy might become more prominent.
  5. Marketing & Branding: If revenue management becomes more guest-centric, marketing and branding efforts must reflect this change. This might mean a shift in marketing campaigns, promotional offers, and the hotel's branding message.
  6. Budgeting & Finance: Financial planning and budget allocation might need adjustments. For instance, there might be increased investments in guest experience enhancements, training, and new technology, anticipating long-term revenue benefits from enhanced guest loyalty.
  7. Organizational Structure: Depending on the hotel's size and complexity, there might be a need to reconsider the organizational structure. This could involve creating new roles, redefining existing ones, or merging departments to ensure seamless collaboration.
  8. Communication: Internal communication strategies should be revamped to ensure every department understands the changes and their implications. Regular updates, workshops, and open forums can help keep everyone on the same page.
  9. Stakeholder Management: External stakeholders, including investors, partners, and even guests, might need to be informed about the shift in approach. This is crucial for managing expectations and ensuring continued trust and support.
  10. Feedback Mechanisms: As the hotel adapts to the new definition, it's vital to have mechanisms in place to gather feedback—both from guests and internally from staff. This feedback will be crucial in refining and optimizing the new approach.
An updated definition isn't just a change in terminology; it's a transformative shift that impacts nearly every facet of the hotel's operations. Adopting a new definition requires a comprehensive plan addressing these multifaceted implications. Let's examine whether retraining is needed and how to bridge operations and revenue management.

Do you need to retrain your team?

Suppose the definition of revenue management is altered, especially towards a more customer-centric approach. In that case, there will be a need to retrain or at least recalibrate the understanding and practices of marketing, sales, and revenue managers. Here's why:
  1. Shift in Perspective: A change in definition isn't merely a change in wording. It represents a paradigm shift in how hotels view their relationship with guests. Moving from a transactional to a customer-centric approach requires a deep-seated change in mindset.
  2. Altered Strategies: Marketing, sales, and revenue management strategies built around the old definition must be re-evaluated to align with the new perspective. For instance, marketing campaigns may need to focus more on the experiential aspects rather than just room rates and availability.
  3. New Metrics and KPIs: The metrics used to measure success might change with a new definition. While revenue will always be a vital metric, other KPIs like guest satisfaction, loyalty, and brand advocacy might gain prominence. This would require training on how to measure and optimize these new metrics.
  4. Integration of Departments: A customer-centric approach requires seamless integration between marketing, sales, and revenue management. Each department needs to understand the others' roles in depth to ensure a consistent guest experience from initial touchpoints to post-stay engagement.
  5. Technological Adaptations: These departments' tools and technology might need to be updated or changed. If the focus shifts toward customer needs, then CRM tools, personalized marketing platforms, and dynamic pricing tools that consider customer behavior and preferences might become more critical.
  6. Enhanced Soft Skills: Focusing on hospitality and customer needs might necessitate training in soft skills. Understanding and empathizing with customer needs, effective communication, and building genuine relationships might be essential for all three departments.
  7. Continuous Learning: The hospitality industry is dynamic. As the new definition evolves, constant learning and adaptation will be crucial. Regular workshops, seminars, and courses can keep all teams updated.
In essence, while the foundational skills and knowledge of marketing, sales, and revenue management will remain relevant, retraining will be needed to align with the updated definition of revenue management. The goal will be to ensure that all departments understand and embody this new perspective in their daily operations.

Bridge the gap between operations and revenue management

The traditional definition of revenue management, with its strong focus on transactions and capacity utilization, often stood somewhat apart from the core ethos of hospitality, which is inherently guest-centric. By redefining revenue management to be more customer-oriented, we're essentially bridging that gap and ensuring a more cohesive approach throughout the hotel's operations.
When operations are trained in traditional revenue management, they're often introduced to a world of numbers, forecasts, and price points. While this is essential, there's a risk that the heart of hospitality—creating memorable guest experiences—might get overshadowed by the mechanics of revenue optimization.
On the other hand, if revenue managers were to be trained in hospitality, several benefits could emerge:
  1. Holistic Understanding: Revenue managers would gain a comprehensive understanding of the guest experience from the initial booking process to check-out. This holistic view can lead to better pricing and promotional strategies that resonate with guests.
  2. Empathy: By understanding the intricacies of guest service, revenue managers can develop empathy for guests, leading to more informed and compassionate decision-making.
  3. Improved Collaboration: A shared understanding and mutual respect between operations and revenue management can enhance inter-departmental collaboration. The entire hotel benefits when both teams are aligned in their goal to improve guest satisfaction.
  4. Balanced Decision Making: While revenue remains a crucial metric, understanding hospitality can help revenue managers balance pure revenue goals with other essential KPIs, such as guest satisfaction and loyalty.
  5. Innovation: With a deep understanding of guest needs and desires, revenue managers might be better positioned to innovate, crafting unique packages, offers, and experiences that not only drive revenue but also elevate the guest experience.
In conclusion, training revenue managers in hospitality doesn't mean sidelining the importance of revenue optimization. Instead, it's about enriching their toolkit, equipping them with a broader perspective that combines the best of both worlds. When revenue management and operations truly understand and complement each other, hotels are better positioned to thrive in a competitive landscape.

Which definition will lead to maximizing success and profitability?

This is indeed a pivotal question. Let's examine both definitions and their potential implications for success and profitability.

Traditional Definition:

"Selling the right capacity to the right customer, for the right price, in the right channel, at the right time."
  1. Clear Focus on Revenue: By emphasizing "selling," this definition prioritizes revenue generation, which can lead to immediate financial gains.
  2. Optimization of Inventory: By stressing "the right capacity," hotels are encouraged to maximize occupancy, ensuring rooms aren't left vacant.
  3. Dynamic Pricing: The phrase "for the right price" emphasizes adjusting prices according to demand, potentially maximizing revenue during peak periods.
  1. Transactional Nature: The definition can lead to a short-term, transactional mindset, which might not foster long-term guest loyalty.
  2. Potential Neglect of Guest Experience: The emphasis on selling and capacity might overshadow the importance of guest satisfaction and overall experience.
  3. Reactivity: By seeking "the right customer," hotels might adopt a reactive approach, trying to fit guests into their existing offerings rather than tailoring experiences to guest needs.

Proposed Definition:

"Understanding and meeting the right customer's needs, with the right product, at the right price, through the right channel, at the right time."
  1. Customer-Centricity: Prioritizing customer needs can increase guest satisfaction, leading to repeat business and referrals.
  2. Long-Term Loyalty: Hotels can foster long-term relationships by meeting customer needs, ensuring a steady stream of repeat guests, and reducing customer acquisition costs.
  3. Holistic Approach: This definition considers the entire guest journey, from understanding needs to ensuring they're met through the proper channels and products.
  1. Potential Complexity: Adopting a holistic, customer-centric approach might require more complex systems and processes, leading to initial increased costs.
  2. Transition Phase: Transitioning from a traditional to a new approach might entail short-term disruptions and potential revenue dips before the benefits manifest.

Generic or differentiated

While the traditional definition has proven effective for many hotels over the years, it seems particularly apt for more generic, standardized hotel offerings where the primary guest requirement is a bed for the night. In such scenarios, where the product is relatively uniform, and the guest's primary concern is functional, optimizing revenue through capacity and price management makes perfect sense.
However, for luxury hotels or resorts that offer a plethora of facilities, products, and services, the guest experience becomes paramount. These establishments aren't just selling a room but an experience. Here, every touchpoint, whether the spa, the gourmet restaurant, the recreational activities, or the room itself, contributes to the guest's overall perception of value. In such contexts, a transactional approach might fall short. Instead, understanding and catering to guests' nuanced needs and desires becomes crucial.
The proposed, customer-centric definition aligns more closely with this latter category of hotels. It emphasizes the importance of understanding the guest's journey and ensuring that every interaction adds value. For luxury hotels and resorts, the potential benefits of this approach are manifold. By fostering deep guest relationships and ensuring outstanding experiences, these establishments can command premium prices, enjoy high levels of repeat business, and benefit from positive word-of-mouth, all of which contribute to sustained success and profitability.
While the traditional definition might fit more for standardized, functional hotel offerings, the proposed definition is arguably more suited for luxury establishments aiming to deliver a comprehensive, memorable guest experience. It's about aligning the revenue management approach with the brand promise and guest expectations.