Yield Management Strategies: The Right Hotel Room Pricing, Part 3

In Part 1 of this series, we took an overall look at yield management strategies as they apply to setting the right room rate for your small or independent hotel, and talked about the first segment of the four basic segments of the yield management cycle: forecast demand.

In Part 2, we began breaking down the second segment of the cycle: optimize demand.

This time, for Part 3, we’ll finish up with demand optimization. Next time, we’ll move on to the third segment of the yield management cycle: control demand.

Group Bookings

So far we’ve worked with scenarios that involve one customer booking one room for one or more nights. If only it was always that simple!

As word spreads that your small or independent hotel is the place to be, you are going to have customers who want to reserve a block of rooms for a family event, group vacation tour, or maybe a business conference. Most, if not all, event organizers expect a special discounted rate for booking multiple rooms for multiple nights.

Let’s go back to our example of a ten-room, $100-per-night model hotel. You’ve received a request to reserve a block of five of your ten rooms for a weekend writers’ retreat, two nights over a Friday and Saturday. What price do you set for those rooms?

From our previous examples, we already know that you won’t accept anything less than $70 per night for your rooms. Let’s pretend it’s your high season and the hotel is routinely full of customers willing to pay full price. So, as you can see, you don’t have much incentive to accept the group booking unless the group is A) willing to pay full price for the rooms, and B) guarantee that all those reserved rooms will be filled with paying customers.

If it’s your low season, however, a request to reserve five rooms in advance is definitely more interesting. What kind of discounted rate can you offer the retreat organizer?

Let’s assume that from past history, you know that five customers will book a full-price stay over that weekend, filling half your rooms. Your expected revenue is:

($100 per night X 2 nights) X 5 expected bookings = $1000

Now take that expected revenue and divide it by the number of rooms requested for the retreat:

$1000/5 = $200

Take that $200 and divide it by the number of retreat rooms (5) times the length of stay (2) :

$200 ÷ (5 X 2) = $20

Twenty dollars off the full room rate of $100 per night is $80. But hold on – your rate floor is $70. You can offer an additional $10 discount without hurting your bottom line. You can, of course, negotiate for a higher rate, but you know what your minimum is, below which you will reject the booking.

Again, this is a greatly simplified scenario designed to show you, in a nutshell, how group bookings work. You may run into a situation where two groups want your facility over the same nights. You can’t accommodate them both, so you will need to calculate which booking to accept, and which one to reject. And how many rooms will you be willing to block at any given time, possibly at the expense of sure-thing bookings?

Unless you’re a whiz at math and can whip up calculations like these at the ding of a desk bell, an automated application will be a big help in implementing yield management strategies.

Additional Considerations

Just what you wanted to hear, right? More to think about! Let’s say your hotel has additional, revenue-producing features, like a restaurant or gift shop. Different classes of customers are more or less likely to use these facilities.

Business conference attendees will probably enjoy having an on-site restaurant and bar to retire to after a long day in seminars. Vacationers are more likely to grab a souvenir at the shop, but may go elsewhere for meals. Therefore you may market your facility more aggressively toward business customers, and concentrate less on the leisure travel crowd.

Then there are other expenses that apply to some customers, but not all:

  • Credit card fees
  • Travel agent commissions
  • Reservation channel (CRS) fees
  • Maintenance and cleaning expenses, which will vary by type of room (e.g. basic double to multi-room suite)
  • Frequent customer points/discounts

Optimizing demand for your small or independent hotel comes down to knowing your target customer base, what they will pay, and what expenses different sub-categories of your target customer tend to rack up. Once you know what variables go into your sales model, you (or your automated application) will know exactly what room rate to charge.

Next time, we’ll move on to the third segment of the yield management cycle, control demand.

2 thoughts on “Yield Management Strategies: The Right Hotel Room Pricing, Part 3

  1. Pingback: Yield Management Strategies: Right Hotel Room Pricing - Part 5 by Smart eHotels

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