Yield Management Pricing: Business as Unusual

As anyone in the hotel business will tell you, there’s no typical day. Trends over time, yes. But knowing exactly what’s going to happen on any given day? No! Let’s face it: yield management pricing—the art of selling a finite number of hotel rooms to the right customer, at the right time, at the right price—is at best an educated guess, even with powerful software tools available.

 

Perhaps you’re thinking, “If yield management pricing is a shot in the dark, why do it?” However, consider the following:

  • Your resource (the hotel room) is perishable. If you lower your price in a misguided effort to fill rooms, you’ve shut out the customers willing to pay more, and you can’t recoup that profit later. It’s “expired” and doing nothing but negatively affecting your bottom line.
  • If you research your hotel’s booking history, you’ll have the basic knowledge to set optimum room prices for the future. You’ll know about how many rooms to offer to budget-minded leisure travelers, and how many to hold for business travelers who don’t mind paying full price.
  • While it might seem counterintuitive, it’s perfectly fine to let a customer go who is unwilling to pay full price, and hold that room for the customer who values your hotel’s combination of quality, service, and amenities.

 

The Bucket List

Unlike a retail store, which must charge the same price for the exact same product, you have the freedom to take what is essentially the same product (the hotel room) and offer it at different prices to different types of customers.

 

Going back to the previous example, you can divide your finite supply of hotel rooms into two “buckets”—leisure travelers (discounted rate) and business travelers (full rate). You can certainly categorize as many types of travelers you want and give each a bucket, but for the purposes of this exercise, we’ll just use two.

 

Let’s say you have 100 rooms to sell for any given night. The leisure travelers’ discount bucket holds 25 rooms, and the business travelers get a rack rate bucket holding 75 rooms. About two months ahead of a given date, say March 1, the leisure travelers have snapped up those 25 rooms allotted to them.

 

When the 26th leisure traveler calls, do you dip into the rack rate bucket and give them that room at a discount? In general, no. The discount rooms are full. Selling one more room at a discounted rate will cut into the healthy profit margin you need to stay a viable business.

 

As March 1 approaches, business travelers—who tend to reserve rooms closer to their arrival date—will reserve the rooms in the bucket reserved for them. Ideally, if you’ve done your homework by looking at past demand, all those rooms will sell to travelers who are eyeing the calendar more closely than their wallets.

 

Fast-forward and it’s February 28. Two rooms remain in the business travelers’ bucket. Do you break down and sell them to leisure travelers hoping for a last-minute discount? Again, no. You’re better off letting that room stay clean and ready to sell for full price the following night.

 

On the other hand, on the off chance your 75 business traveler rooms are sold for that night but your leisure bucket still has a room rattling around in the bottom, you should definitely expand the business bucket for that 76th business customer willing to pay full price.

 

To Learn More

Interested in this topic? Our series of articles takes a more in-depth look at yield management pricing. Click here.

 

If you desire personalized assistance, let Smart eHotels™ show you how yield management pricing can improve your hotel’s bottom line. Contact us today!

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