Let’s talk about one of your least favorite topics: revenue management. Wait! You're about to stop reading because either:
But, after we review the basics of what revenue management means, we’re going to discuss a killer tool offered by Cloudbeds® that:
Every hostel could benefit from either managing their revenue more effectively or saving time implementing their revenue management strategy, so whether you’re an excel linear programming and regression analysis wizard (few people) or a total revenue management novice (most people) this article will have something for you.
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Before we even mention Cloudbeds’ revenue management tool, let’s start by reviewing the basics. revenue management is a touchy subject with most hostel operators. Some think that it’s too complicated for them so they don’t bother even thinking about it. Others think of revenue management like it is the same as exercising. You know that it’s good for you, and you should be doing it, but most of us don’t like it or don’t have enough time, so we neglect it. So what is revenue management again?
First, a quick mention of what revenue management is not: Revenue management is not looking at your reservations calendar, taking a peek at what the other hostels are charging on Hostelworld and saying, “Hmm. I think we’ll be full this weekend. Put the prices up $5.” Revenue managers use tools, not crystal balls. It’s a science, based on measuring data, not gut feelings.
Revenue management is the application of disciplined analytics that predict consumer behaviour at the micro-market levels and optimize product availability and price to maximize revenue growth.
Yikes! That’s scary and it sounds hard. But let’s put it into simpler terms:
The primary aim of revenue management is selling the right product to the right customer at the right time for the right price and with the right pack.
Okay, that sounds a little bit simpler. Thanks Wikipedia! Hostels have different rooms and different kinds of customers. Travelers book at different times and some are willing to pay more than others. Not that hard to understand. But how do you actually figure out how to sell your different rooms to different customers at different times with different prices?
In theory it’s simple. You record data on Average Daily Rates, Occupancy, Pick up, and use that data to make predictions on demand and make pricing decisions. You then track the outcome of those decisions to see how accurate your predictions were. You constantly refine the way you make those predictions so that gradually, week over week, month over month, year over year, you maximize your hostel’s revenue by making sure you sell the right bed, to the right traveler, at the right time, for the right price.
If you are already doing this - if you’ve got a nice spreadsheet that you’ve been using for the past couple of years to record this data and make revenue management decisions - that is fantastic. You’re probably in the top 5% of hostels for revenue management practices. However, most hostels don’t do this. It takes a lot of time to track all of this data and it takes a lot of know-how and experience to use this data to forecast how your prices will affect your availability. Even though it’s time consuming and hard, it’s still really important. But instead of hearing it from me, let’s hear from a certified revenue management expert
Ira is a product manager at Cloudbeds. She is the genius behind their revenue management tool, the Pricing Intelligence Engine™ (PIEⓇ). Besides working at Cloudbeds, she’s a certified Revenue Manager and she literally wrote the book on revenue management. Ira sat down with me in San Diego and answered some simple questions about revenue management for hostels.
“They are missing out. You’re leaving money on the table, by either selling out too fast or having too many empty rooms. We’ve seen pursuing a revenue management strategy increase Year over Year topline revenue by up to 20%”
Hands down this should be a must read for every hotelier. At less than 100 pages, it does an incredible job describing high level concepts AND providing actionable recommendations. Unless you have formal training I guarantee this will open your eyes to all the faulty assumptions that you have been making when managing your inventory/rates.
Wow! Making 20% more money without changing a thing. No renovations, no extra free amenities for guests, just getting smarter about setting your rates. There seems to be a lot to learn and do when it comes to revenue management. What’s the 80-20 rule on revenue management?
"Dynamic pricing is the revenue management strategy that yields the most results. Your rates need to fluctuate based on the demand conditions in your market. If you’re not charging optimal rates you’re losing money."
"Ideally you should be doing it on a daily basis. If that’s not feasible, you should at least be doing it weekly. If you’re using a spreadsheet to do it manually it could take an hour. If you’re using Cloudbed’s PIE it can be automatic. PIE shows you the current demand situation, the booking pace and what your competitors are charging."
Most hostel operators don’t have an extra hour free in their day. No wonder revenue management is so frequently neglected.
"The next level of revenue management is using Length of Stay restrictions. A LOS restriction is another layer to filter the demand. Sometimes there are reasons why you can't raise your rates above a certain level. Stay restrictions can help push the profitability further, past the abilities of dynamic pricing. In addition, LOS helps "drag" the shoulder dates along with the peak dates, thus increasing revenue on additional dates that otherwise would be unsold. So it also pushes profitability past the capacity of a single high demand date that has a limited inventory. You can only sell X number of beds on a high-demand date. But then you also have X more on the day before and X more on the day after."
"So, for example, during your peak season a lot of travelers want to come and stay at your hostel, more travelers than you can accommodate. Dynamic pricing is your first filter that you use to reduce the number who will want to stay. Then, by requiring, for example, a 2-night minimum length of stay restriction, this filters out even more potential guests."
"The third level of revenue management is deciding when to stop using OTAs or other less profitable channels and only sell your beds directly on the website or to walk-ins at a higher rate. During period of high demand in dynamic markets like city centers, hostels can take their beds off all the OTAs and sell them directly."
That sounds risky. If your competitor’s beds are still on Hostelworld, won’t they get 100% of the travelers until they’re full and the remaining guests start looking beyond Hostelworld?
"OTAs should not be the only way travelers find your hostel. Your hostel should do its own marketing. Investing in Search Engine Optimization and digital marketing is cheaper than paying commissions to the OTAs."
I couldn’t agree more. Encouraging hostels to pursue a more active marketing strategy is something I do frequently.
Is it like digital marketing where last year you’re learning SnapChat, this year you’re learning Instagram, and who knows what you’ll have to figure out next year to compete?
"Things change slower in the revenue management world than in the digital marketing world. The hospitality industry is very conservative. The fundamentals of revenue management are not new. They were developed by airlines in the 1980s. And yet, right now only about 10-15% of the global hospitality industry uses revenue management tools. A lot of them use their gut feelings but they don’t use actual tools. This is despite the fact that the science is more than 30 years old."
That’s encouraging for hostel owners. Create your revenue management strategy, continue to fine tune it, but be able to capture the added revenue year after year.
"It’s definitely a big factor in the decision making process. Very few Property Management Systems offer a revenue management solution. That’s why I found Cloudbeds to be a great match for applying my skills and knowledge because they embrace revenue management. It’s important to note that every revenue management software solution needs to be able to integrate with a Property Management System. PIE is integrated into the PMS so that it can pull your occupancy and other relevant data about your property and your competition and push new prices based upon the rules of your dynamic pricing strategy."
So if you’re going to get serious with revenue management, either make sure your Property Management System gives you the tools to make it easy or get ready to spend a lot of time with Microsoft Excel. Thanks so much Ira for helping hostels understand revenue management!
Now that we’ve covered revenue management, let’s talk about PIE. If you’re happy with your PMS’s revenue management tools, prepared to manage your revenue manually with a spreadsheet, or you won’t ever change PMSs in a million years, I suppose you can stop reading this article here. For those who don’t have a PMS or would be willing to switch to Cloudbeds if the benefits justified the hassle I want to explain this tool because it makes something so important but complicated so easy and fast.
PIE automates all this revenue management work for you. First it collects your data and all the data on your competitors for you. Know exactly how full you are right now in comparison to this time last year. Know instantly how much the hostel down the street is charging today for next month. It’s constantly collecting this data and notices when they change their prices. No manual data entry, no refreshing Hostelworld to see the other hostels’ rates. PIE puts all this data at your fingertips without you lifting a finger. If PIE stopped there, it would be a killer feature. It would be so much easier to make revenue management decisions if you didn’t have to waste any time collecting and tracking all the metrics on your hostel and your competitors.However, that’s only act one for PIE. Act two is setting up rules. You can set rules for PIE to follow when certain conditions are met. You configure the rules for PIE to either trigger changes automatically without even needing to press a button, or, you set the rules to trigger a notification so that you still have control over every change. “PIE, whenever my competitors drop their prices and we’re now the most expensive hostel in town, automatically lower our prices.” Done. “PIE, let’s normally have a 2 night minimum in summer, but if it gets to 1 week before the date and there are still unsold beds, ask me if I want to remove the restriction.” Will do boss. “PIE, whenever the hostel is 90% booked, put the rates up.”
Using PIE means you get the benefits of revenue management without all the time consuming headaches. If you don’t use PIE or a tool similar to it, you’ll waste a lot of time doing revenue management that you could spend on something else. Either that, or you won’t manage your revenue properly and you’ll miss out on lots of opportunities to make money.
Does your hostel already have a Property Management System? If you’re already using Cloudbeds, it’s a no brainer that you should be using PIE. If you already with a competing PMS, is it worth switching? It might be. Your Property Management System is like the central nervous system of your hostel, and switching can feel like undergoing brain surgery. You definitely shouldn’t have surgery on your brain if there isn’t a very compelling reason for it.
My question for you is, does your current Property Management System make it as easy and fast to manage your hostel’s revenue? If the answer is yes, you can easily manage your revenue with your current PMS, then you should stick with it. If the answer is no, revenue management would be a complicated time-suck with your current PMS, PIE might be a strong enough incentive to switch. As we’ve established today:
It enables your hostel to make extra money without doing anything besides optimizing who books your hostel, at what time, and for what price.
It involves lots of numbers and data. You rather be out there interacting with your guests than staring at spreadsheets.
Revenue management requires collecting lots of data. It take a lot of time to get all this data on your own.
As a result, without having the right revenue management tools, your hostel would most likely A) Neglect to effectively manage its revenue, costing you potential income, or less likely, B) Manage revenue manually, costing you time spent creating and updating spreadsheets.
Cloudbeds did not pay me to write this article. I heard about PIE when I attended HostelSkills Lisbon and I thought it was such a game-changer that I asked them for more information.
If your hostel wants to check out Cloudbeds, please use this link so they'll know I referred you. You'll get a $50 credit and I'll get paid too, which will enable me to keep offering free weekly updates on hostel management topics you care about.
Byron has worked with hostels big and small, city and rural. His first job was as a receptionist in San Francisco and his favorite was leading the events for a 500-bed hostel in Sydney. Besides all things hostel related, he enjoys motorcycle riding, especially because it's the perfect way to get from hostel to hostel!
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