Revenue Sources of Hotel - Are You Leveraging the 80:20 Rule?

Do you know the major sources of revenue for your hotel?

Are you facing the typical post pandemic scenario of stalling revenue?

Is your competition forging ahead in market share while you lag?

The consequences are quite serious if you are.

Without having a good grip on your key sources of revenue, you may already be in trouble.

The 80:20 Rule may well be the solution you might have overlooked.

However, to keep the revenue graph steady if not climbing is easier said than done.

What are you doing to tackle this critical priority?

I will lay out a step by step system to identify major sources of revenue for your hotel business.

We will use a powerful principle called the 80:20 Rule.

This will allow you to focus your energy on these major revenue sources.

And keep your revenue graph steady.

You will want that right?

Let us then dive right in.

This blog post will cover: 

Revenue Sources and 80;20 Rule

In  the book publishing industry, there is a powerful business concept related to revenue sources.

This concept has now percolated to all other industries.

And that is the concept of Best Sellers.

What are Best Sellers?

Best Sellers are in a manner of speaking a business' bread and butter.

They are the Top Revenue Sources of a business.

In the hotel business, top revenue sources are:

• market segments in Rooms department and
• meal periods in the food and beverage department 

These are the ones which are raking in the highest revenue from all sources.

Top Revenue Sources also advance the 80:Rule philosophy.

Have you heard of the 80:20 Rule?

Why have I suddenly digressed to something you may not have heard of?

What is the connection with market segments and meal periods?

Let me explain.

The 80:20 Rule is one of the most universally applicable:

• doctrines or
• principles or 
• phenomenon (whichever way you want to call it).

It is a powerful rule about 

• priorities, 
• effort and 
• results.

The 80:20 Rule says: other things being equal, 20% of your effort produces 80% of results.

In other words, 

• among all the efforts that you put in,
• there is 20% which is actually producing 80% of your results.

This also means that the other 80% of effort is producing only 20% of your results.

Can you see where I am going with this?

Let me explain.

You must focus all your energies on the 20% that is raking in the 80% results.

And spend less time on the 80% which is only eking out 20% of results.

How Does 80:20 Rule Work?

Why is this rule universal?

Because it applies to organizations and any kind of phenomenon as much as it does personally.

If you were to look at the Paradise Hotel Market Segments (coming up shortly), you will notice application of this principle.

That:

• among all the market segments that contribute to the total room revenue, 
• there are some which are producing a big chunk of your room revenue.

What does understanding your Top 5 Market Segments of Room Revenue allow you to do?

It allows you to use the 80:20 Rule to focus on segments that are bringing in the majority of your room revenue.

Taking this a notch deeper, you should spend more time each month reviewing:

• the business volume (occupancy), 
• price (average daily rate) and
• RevPAR of these Top 5 Market Segments so that you can maximize your room revenue.

This also teaches you not to spend wasteful time on market segments which barely produce any room revenue.

Caution: this does not mean that those smaller segments are to be ignored!

It only means that you devote more time to the ones that are really boosting your room revenue.

Top Revenue Sources are the 80% results in the 80:20 Rule.

If you think about it, you will come to a conclusion.

That the Top Revenue Sources concept allows your hotel to utilize its scarce resources optimally.

80:20 Rule as a Revenue Strategy

Another reason the Top Revenue Sources philosophy works so admirably is in the arena of strategy.

You look puzzled.

Let me clarify.

It is one thing to use sources to identify top revenue earners once.

And totally a different thing to utilize it as a strategy.

I mean replicating that effort.

You spread the philosophy of identifying Top Revenue Sources in all areas of your performance measurement process.

In fact, you use it as a strategy to target those sources in your revenue generation effort.

Then you can move it to your expense management effort.

And finally to your profitability boosting effort.

Do you see where I am going with this thought line?

Top Revenue Sources can be used as a concept successfully in:

• expense management, 
• profit retention and 
• much more.

It is an entire paradigm.

You may now have a question.

How are Top Revenue Sources determined?

I am coming right to that.

Top Revenue Sources in Rooms Department

Take a look at the Rooms department Statement of Paradise Hotel below.

What do they show?

Paradise Hotel Rooms Dept Market Segments Revenue

You see above, the room revenue of Paradise Hotel categorized under different market segments.

What is the significance of market segments?

Market Segments are the building blocks of revenue generation and market share of a hotel.

Knowing your target audience is central to a successful revenue generation strategy.

If you were to classify your target audience into distinctive segments or profiles, you would get market segments.

Market Segments emphasize the diversity of your target audience.

It is generally a good strategy to have diversity in your target audience without spreading yourself too thin.

You broadly could have categories like individual and group, business and leisure and so on.

Why do I call market segments the building blocks of revenue and ultimately market share?

This is simply because market share mostly is a manifestation of revenue achievement.

And revenue is not achieved simply from one category of your target audience.

It is earned from multiple market segments which represent your target audience.

Which brings us to a critical question all hotel managers need to be asking themselves.

And not just the Revenue Manager.

Or those in the Sales & Marketing department.

But every manager in the hotel!.

Do you know the Top 5 Market Segments of your hotel revenue achievement?

Are you reviewing the top 5 market segments on a monthly basis?

Why top 5?

What is the big deal, you ask.

The big deal is that a hotel normally has:

• anything from 15 to 50 market segments 
• that are the building blocks of its rooms revenue.

Focusing on all of these is impossible.

It is also not necessary.

You will see that uncannily, the Top 5 [or 3 or 4] market segments have accounted for about 80% of the revenue.

Go on, check it out for yourself.

And now to the food and beverage department.

Top Revenue Sources in Food and Beverage department

How are top revenue sources determined for menu items in a restaurant?

Menu items are the smallest unit of revenue source.

To know how top revenue sources are determined for menu items, we need to dig into a powerful technique.

The technique of menu engineering analysis.

WATCH the short video (less than 5 mins) below.

How to Identify Top Revenue Sources

And now of course to the million dollar question!

How do you go about identifying which are your top revenue sources?

Awesome question.

I will be using a Food and Beverage department example but the same steps apply to Rooms department as well.

The only difference being that in Rooms department case, market segments will replace meal periods.

Let us now dive in.

Top 20 Revenue Sources in Food & Beverage

Here is the 9 Step process.

STEP 1

BEGIN with your revenue sources for each restaurant.

• Revenue Sources are your menu items in your restaurants
• You will first look at the revenue production of menu items

STEP 2

DOWNLOAD the menu item information from the Point of Sale System 

• Choose a particular period - at least six months. 
• This will allow you to eliminate any outliers and focus on items selling well consistently.
• Choose the six month period close to your current period so that you remain relevant
• Download menu items into Microsoft Excel spreadsheet
• So that you can perform filtering and sorting where relevant

STEP 3

SORT Downloaded Food & Beverage Revenue Dollar Column for each menu item in Descending Order:

• This will automatically list your menu items in the order of revenue achieved
• Highest revenue source menu items at the top and so on
• This is a process you should be doing on a monthly basis to keep tabs on which items are selling regularly

STEP 4

PICK Top 20 Menu Items based on revenue achieved for the period.

• Compare total of revenue dollar figure for the 20 menu items 
• With total revenue figure for all menu items to see how close to the 80% they are. 
• If they are much lower than 80% (say, below 70%, increase 20 items to 25 or 30). 
• Idea is to cover 80% of revenue or as close as possible
• These are the 80:20 Rule based items you should shower special attention on

STEP 5

THIS determines your Top 20 Revenue Items as Starting Points.

• You have just arrived at your Top 20 Revenue Sources in your restaurant - great start!
• But there are still some more steps to take for further granular analysis

STEP 6

PICK the Top 20 Prices OUT OF the Top 20 Revenue Sources

• You pick the Top 20 prices since Revenue is contributed by Price and Quantity Sold
• For the moment leave quantity sold alone (it can be analyzed similarly later)

STEP 7

You will probably DISCOVER a few things thus far:

• Your Top 20 Prices will not ALL be in the Top 20 Revenue List 
• This means that Price is not the Major Revenue Source for some or many of the Top 20 Items.
• A powerful piece of information for analysis later!

STEP 8

IDENTIFY your Top 20 Prices 

• Do this until you get your Top 20 Prices beyond the Top 20 Revenue items (may be in 30 or 40 list).
• You will already be beginning to see some amazing patterns emerge

STEP 9

A Few things to REMEMBER about Resident, Non-Resident Covers, Check and Revenues:

• It may not be a good strategy to depend only on resident covers which are captive from occupancy of your hotel
• Have a  separate strategy to add covers (thereby volume) to boost revenues. If necessary, promote this
• Non-Resident covers and revenue will ensure that you are not just depending on occupancy to provide covers

The Bottom Line Perspective

In all the hullabaloo about top revenue sources, you should not ignore a powerful phenomenon.

And that is the impact of the top revenue sources on the bottom line.

All the while, we talked about the revenue sources criterion.

There is another and possibly more critical analysis to be done.

And that is the top revenue sources from profit perspective.

This is an entire new ballgame.

And the heart of Menu Engineering Analysis.

A revenue source featuring in the Top 20 list may not make it to the bottom line list.

That should make you think.

Are your top revenue sources being achieved at the least cost or highest profit?

Key Performance Indicators like Net RevPAR come to mind.

In the food and beverage department, menu engineering analysis actually achieves this.

Your Takeaways

What do you think about the top revenue sources identification strategy?

Do you know your top revenue sources in your hotel rooms and food and beverage departments?

Are you spinning your wheels not leveraging the 80;20 Rule in your revenue generation strategy?

Leave comments below, I will be curious to know what you think about the topic.

If you have any questions or clarifications, write them in the comments below.

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