Don't mistake inventory management for revenue management

by Marco Benvenuti, Co-Founder/Chief Analytics & Product Officer

September 10, 2013

Maybe this is something we should have written long ago. Revenue management is not inventory management. And inventory management is definitely not revenue management. The two are completely different. One is wrong and a huge mistake many in the industry continue to make.

Revenue management is a dynamic function, where the target—demand—changes every second, as should the strategy and pricing to reflect it.

Inventory management is managing rates to meet budgeted goals. It's pricing to sell rooms that fit into predetermined allotments projected in the budget.

Typically during the budgeting process, different chunks of the hotel are allocated to specific channels (, Expedia and other OTAs, etc.) and different demand generators (promotions, loyalty, group, etc.). Then the hotel works to fill all those buckets on a daily basis for the entire year. They may adjust the budget on a monthly basis, but it's all geared to meet those targets, and rates are adjusted to do just that, not because of actual demand. The end result is underpriced rooms, and the hotel sells out too early, or they're overpriced, and the hotel leaves valuable occupancy on the table. Either way, it's a costly mistake.

There are many hotels doing this, the majority I'd guess, and they are handcuffing themselves from being more profitable. It's the same idea I wrote about earlier in the "Time to Lower the Bar for Good" post. To capture as much money as possible, hotels should be determining the right rate for all the different segments of their business every day based on demand. Hotels should not be slaves to a structure and system predicated on budgets and tiered pricing.

Here's an example: The budget says the promotions department is projected to fill 1,000 rooms this month. They may not fill them when the hotel really needs them, they may (and probably will) provide them on days with strong demand and they'll end up flooding the market with promotions on days when it's not necessary. Here's another: Maybe a certain number of rooms have been allotted to specific OTA channels, so rates are lowered to meet those budgeted numbers when those rooms actually could have been sold for more elsewhere.

Sadly, this is pretty common. Sure, there are levels of sophistication beyond what I'm describing, where people may start with a budget and get a little more sophisticated along the way. Maybe it's somewhere between inventory management and revenue management, but the hotel is still performing worse than if they were strictly pricing based on demand.

I understand why budgets are necessary, even an important function of a hotel, but they're often little more than shots in the dark. Owners, general managers and financial officers need them for staffing and scheduling and cash-flow management. Revenue managers are usually the right people to do the budgeting—they've got the best information on demand and future trends—but that should be the end of it. The budget is for the GM and CFO. The revenue manager's focus should be maximizing revenue based on actual demand, not what's budgeted.

Even worse, some executives and general managers are incented to meet those budgets, so what do you think happens? They manage to meet the budget, and if it was too high, they'll overprice the hotel to try and reach it and fail. If it's too low, they'll meet the budget, but they'll leave money on the table not being as aggressive as they could and should have been. I've seen this happen first hand, at places considered on the cutting edge of analytics.

Don't leave money on the table. Revenue manage!