In previous articles we have covered identifying your ideal customer, how to most effectively reach that customer through online marketing, and how to define your message and your unique brand. By now you know that there’s more to running a small, independent hotel than throwing open the doors and cashing the checks (or swiping the credit cards).
Now that you know how to reach customers, you have to set the price you’re going to charge for your product – your hotel’s rooms and amenities. The process of determining what to charge is called a “yield management strategy.” No independent hotel is too small to use yield management strategies to set the right hotel room pricing.
What is Yield Management?
In a nutshell, yield management can be defined as selling a product or service to the right customer, at the right time, and at the right price. Yield management strategies can be applied to virtually any type of business that:
- Has a fixed number of products to sell. Examples include hotel rooms, airline or bus seats, or rental cars.
- The product’s value is time-constrained, meaning that after a certain date or amount of time, the product loses value.
- Different customers are willing to pay different prices for the same product or number of products.
Now, before your head starts spinning, let’s break it down as to how yield management pricing applies to your small or independent hotel (and it does apply, whether your hotel has ten rooms or ten thousand).
- Your facility has a finite number of rooms.
- Once all the rooms are rented for the night (whether the hotel is full or not), you’ve hit the revenue ceiling for that night. As another example, your facility could be further limited by season, such as a summer beach destination or a winter ski mecca.
- Customers who book far in advance generally expect to pay a lower price than those who book on impulse, close to their desired check-in date.
As another example of value constraint, let’s say you offer a two-night package deal for two for Valentine’s Day. Restrictions could include offering only a certain number of rooms under that package, or requiring that the package be booked by a certain deadline, after which it is no longer offered.
Another common strategy is to offer a special rate on multi-night stays, but only if the stay includes a Saturday.
Additionally, your hotel could be hosting a business conference and you are offering a special room rate for registered conference attendees. Those who book extra nights outside the specified conference dates are charged the regular room rate for those nights.
There’s a Formula For That
It sounds counterintuitive, but the objective of yield management strategies for your small or independent hotel is not to simply increase room rates, or only to increase rate of occupancy. It’s to maximize the average revenue per available room, per night.
To put it mathematically:
Revenue per available room = average room rate X occupancy rate
Let’s plug in some hard numbers.
An average room rate of $100, times an average occupancy rate of 50% means the revenue per available room (RevPAR) is $50. This is a highly simplified demonstration, of course, but you get the general idea.
Obviously, your goal is to increase that dollar amount, but simply increasing the room rate isn’t necessarily going to do it for you. There are a number of forces impacting demand for rooms at any given time, and your goal is to find the balance between room rate, costs, and occupancy that maximizes revenue.
Understanding the four segments of the revenue management cycle will help you reach this goal: forecast demand, optimize demand, control demand, and monitor demand.
The starting point is to forecast demand for your limited commodity. Now don’t start shopping for a crystal ball. You, the small/independent hotel manager, are the best “weatherman” when it comes to forecasting demand.
If you’ve been in business for any length of time (or did your homework in hotel management school), you’ve already noticed there’s a pattern as to when demand for rooms blows hot and cold.
You already know that booking too many one-night stays on a popular night like a Saturday means you’re forced to turn away more customers who want to book multiple night stays that include that hot Saturday and a less-popular “shoulder” night (a night adjacent to a traditionally popular night). The trick is to estimate in advance how many rooms you want to hold back for those more-profitable, multi-night customers.
While you can make some reasonable assumptions based on day of the week, time of year, even current economic conditions, you can never be 100% certain that there will be demand for X number of rooms on this or that specific date.
But with the right data, you can get reasonably close.
- Historical data
While you can’t be sure past ups and downs will be repeated, noting consistent patterns in historical data can be useful in forecasting the future. Examples are the rise and fall of bookings by day of the week and season of the year. You can be reasonably certain that spikes in bookings for special times, like Christmas, will repeat; an unseasonable cold or warm snap that spurred an unanticipated spike in last-minute, impulse bookings should be left out of the equation. “No show” patterns should also be a part of the picture.
Remember that just having mountains of raw data won’t do you much good if you don’t have a way or organizing and interpreting it. This is where knowledge of a good spreadsheet program comes into play.
- Teasing out the details
How detailed do you want this analysis to be? Keeping in mind that more detail isn’t necessarily better when it comes to forecasting, your analysis can be broken down in any number of ways. For example:
– Room type
– Rate range
– Length of stay
– How far in advance the average customer books a stay
– Days when demand outstripped supply, and by how much (and why)
- Setting limits
How often should you perform a forecast, and for how many days? Three-month forecasts the first of every month? Four-week forecasts every other week? Two-week forecasts once a week? If you’re crunching numbers manually, forecasting takes time out of your busy schedule, so you’re more likely to do it less often and peer farther into the future. If you invest in a software program or hire a service to do it for you, you’re more likely to get more involved in detailed, shorter-term forecasting.
Next week, we will continue our look into the four basic segments of the yield management cycle.
Ready to zero in on the right rates for your small or independent hotel? Contact us today!