The hospitality industry has been following revenue management practices for decades now.
Today, dynamic transient pricing is considered the industry standard for pricing guest rooms. Now, as rate transparency and channel complexity has increased, we hear hotels asking, “Can I manage my property’s revenue just by adjusting rates?” and “Why do I still need to manage rate availability?” It is clear that there is confusion in the hospitality industry regarding dynamic pricing and its role in maximizing profitability. The confusion around pricing approaches has paved the way for vendors to claim to have complete revenue strategy solutions, even though the solution may address only the pricing aspect of revenue management, and ignore rate availability management and its benefits. Simply put, hotels cannot maximize their revenue or profitability solely by managing rate prices.
Daily pricing and the limitations of “pricing-only” decisions
To articulate the limitations of “pricing-only” approaches, let’s work on an example. Daily pricing (as opposed to arrival or length of stay pricing), is favored by many channel partners for its simplicity. However, daily pricing introduces difficulties in optimizing revenues. The reason for this is that with daily pricing, all guests from a particular segment or channel will pay the same price for each night, regardless of length of stay, and regardless of their willingness to pay – which is contrary to good dynamic pricing practices. This issue becomes much worse when availability controls are not available or used.
Take the following example of two nights for a particular property. The hotel has 20 remaining rooms available on day one, and 10 rooms on day two. There is demand for 10 rooms for one night stay for day one – at a Willingness to Pay (WtP) of $100. There is demand for 10 rooms for a one-night stay for day two – at a Willingness to Pay of $200. Finally, there is demand for 10 rooms for a two-night stay arriving day one – at a Willingness to Pay of $300.
|Guest segment||Day of arrival||Length of stay||Remaining demand||Willingness to pay||Pricing-only: No availability controls||Optimal revenue: Availability controls|
|X||1||1 night||10 rooms||$100||$1,000||$1,000|
|Y||2||1 night||10 rooms||$200||$2,000||$0|
|Z||1||2 nights||10 rooms||$300||$0||$3,000|
A “pricing-only” decision is clear – set the rate for day one at $100, and the rate for day two at $200
Unfortunately, because availability controls aren’t used, this decision isn’t actually optimal, and revenue will likely be lost. What happens if all of the Segment Y books first? No rooms will be left for Segment Z for a two-night stay. The hotel will end up with 20 room-nights instead of 30 room-nights, and generate a total revenue of $3,000.
The optimal revenue management decision is to set the rate for day one at $100, and the rate for day two at $200 – but then close the latter for arrivals on day two
With this additional inventory control in place, the revenue in this example rises from $3,000 to $4,000 resulting in a 33 per cent revenue increase from these rooms. Furthermore, the occupancy rate increases from 66 per cent to 100 per cent. By using the combination of optimized rate pricing and optimized availability, the value of the decisions increase dramatically.
The above example is a simple illustration for one property, for two nights and three guest segments.
It should be clear that expanding this example to what happens in the real world can quickly become complicated. Simply put, a revenue manager with a pricing-only system at her disposal will not be able to manage these situations effectively, thereby leaving money on the table, regularly.
In conclusion: Hotels should optimize both pricing and availability
With constant increase in market pressures and channel complexity, it is easy to miss the ongoing importance of valuing inventory and using availability controls. However, as the above example clearly demonstrated, hotels that optimize BOTH rate pricing and availability will outperform hotels that restrict themselves to managing pricing alone. Whether you are managing simple transient rates and controlling for complex length of stay interactions, setting appropriate availability controls in conjunction with rates can add significant value to your revenue management decisions.
By Alex Dietz and Tugrul Sanli
Alex Dietz is the Advisory Industry Consultant for IDeaS and the Advisory Product Manager at the SAS Institute, and Tugrul Sanli is the Senior Director for Advanced Analytics at the SAS Institute. Alex is Principal Industry Consultant for SAS Institute’s Hospitality and Travel Global Practice, and a 25-year veteran of pricing and revenue management solutions development and consulting in the hospitality, travel and retail industries. Before joining the Hospitality and Travel practice, Alex worked as the Product Manager for SAS Markdown Optimization – a price optimization solution used by leading fashion retailers – a position he held with SAS for five years. Prior to joining SAS, Alex was the Vice President of Revenue Management and Marketing for Raleigh-Durham based Midway Airlines from 1998 to 2002, reporting directly to CEO Robert Ferguson. Alex began his career with American Airlines, where he acted as Internal Product Manager for American’s industry-leading revenue management systems. Following his time with American, Alex joined SABRE where he acted as Product Manager for SABRE’s airline revenue management solution, and also led SABRE’s pricing and revenue management global consulting practice.
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