Yield Management Strategies: The Right Hotel Room Pricing, Part 2

Last time, 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 covered the first segment of the four basic segments of the yield management cycle: Forecasting Demand.

Today we’ll move on to the second of four segments of the yield management cycle: optimizing demand.

Optimize Demand

In a perfect world, you’d book all your available rooms every night at the full room rate. Realistically, this isn’t going to happen every night of the week, but obviously you want to maximize the chance of booking as many rooms as possible any given night at the price you want customers to pay.

There are a few different tactics you can use to do this, but first you need to do the homework we’ve previously discussed – knowing your target customer and forecasting demand. This way, you’ll come up with a system to maximize revenue on both your typically higher demand nights, and those pesky, lower-profit shoulder nights.

This process can be complicated – that’s why there are a number of automated software programs to do it for you. But the basic concepts are relatively easy to explain.

Your Rate Floor
Let’s go back to our previous example where we used $100 as the desired room rate on 10 rooms. Looking at your historical data, you’ve figured out that your target customer will materialize and book an average of 70% of those rooms. This means that you’re pulling in a minimum average of $700 a night ($70 per room), and this is the minimum acceptable revenue. Now let’s throw a scenario at this bottom line.

You’ve booked six of your 10 rooms for tonight at $100 each, which means you’re sitting at $600, or $100 below your revenue floor. A potential customer shows up at the front desk, with $60 cash in hand. Do you take the cash and accept the booking? The answer is no. Why? Your historical data tells you that you have a high probability of booking that room at $100, so there’s no reason to accept the underpriced reservation. If you do, you’ve fallen below that $700 revenue floor.

“But it’s only one room, one night,” you say. “Why not take the money and run?” Let’s do a little more math. If you relent and accept 10 of these $60 bookings over the course of a month, you’re running under your $700 floor by $100. Multiply that $100 loss by 12 months, and that’s a good chunk of change you’re letting slip through your fingers.

Now, let’s pretend another customer shows up at the same time as the first one, only she has $80 cash in hand. Do you accept her reservation? The answer is “yes,” because she is offering you $10 more than the minimum you’ll accept, not $10 less like the first guy. You’ve sold that room at a $10 profit, and you still have a high probability that you’ll sell that seventh, $100-rated room.

In other words, it’s better to let a room sit empty than to sell it for less than it’s worth.

The Law of Diminishing Returns

It’s always important to remember that in the face of expected demand, the more rooms you have to offer, the lower your profit for each room will be – because demand isn’t necessarily going to go up simply because you offer more rooms.

Let’s knock a zero off our previous 10-room example. If you have one room for sale and seven customers calling every day to book it, clearly you’re going to fill that room every night. Now let’s add a zero to that 10. Increasing the number of available rooms to 100 doesn’t guarantee you’ll see a corresponding increase of 70 customers willing to pay that top $100 room rate.

If you’re consistently selling an average of seven out of 10 rooms a night, you want to fill those last three rooms without falling below your $70-per-room floor. You can come at this in a couple different ways – top-down, or bottom-up.

In the top-down scenario, you’ve filled those seven rooms at $100, and want to increase the probability of filling those last three. You lower the rate on those rooms to $90 and quickly book two of them. Then you lower the rate on the last room to $80 and nab the last customer. You’ve filled the rooms and stayed above your $70-per-room floor, pulling in $260 above your expected revenue.

In the bottom-up scenario, you go ahead and make three rooms available at a discount. Once they’re booked, you don’t discount any additional rooms – the remaining seven rooms are there for your expected customers at $100.

Either way, you’re more likely to attract a customer who might not have otherwise booked with you, you’ve stayed above your revenue floor, and you’ve added profit to the bottom line. Plus, once that “bargain shopper” sees that your hotel is worth every penny, there’s a higher probability they’ll book again at the regular rate.

Here’s Where It Gets Complicated…

In the real world, few (if any) small or independent hotels – even three-room bed and breakfasts – offer identical rooms at identical rates. There are usually different types of rooms, each type with its own rate and different numbers of rooms available at each of those rates (basic double, king double, suites, concierge floor, penthouse, rooms with a view, rooms without a view, etc.).

You’ve got customers who book one night, and others who book multiple nights (and expect a discount for doing so). Then there are groups who request one or multiple nights, and “frequent flyers” who qualify for a free upgrade.

What do you do when all your standard rooms fill up, leaving most of your higher-rate rooms unbooked? You start offering some of those rooms at a lower rate category, taking care to never fall below the revenue floor you’ve set. Customers who expected to get a standard room will get a nice surprise. But be careful of applying this concept in reverse – which can be and has been done, much to the annoyance of customers who pay a higher rate and end up with a standard room.

There are also ups and downs depending on the time of year, or even the day of the week. Take one of those special, high-demand times (like Valentine’s Day) where you might offer a two-night, discounted package and refuse one-nighters. Why? Because you know you’ll sell more packages and make more revenue even at a discount. Accept one-nighters on those high-demand nights, and you risk leaving that room empty on that crucial second night.

In addition, on any given night you may have rooms that are out of commission due to maintenance issues.

See what we mean about using a software program to sort it all out? There’s nothing wrong with doing that, but it is important to understand the “madness behind the magic.”

Does Length Of Stay Matter?

You bet it does! Let’s say you typically sell out on high-demand weekend nights, but usually have several rooms empty mid-week. It’s a Monday, and you have two rooms left for that night and several the rest of the week. Three customers walk in the door.

  • Customer 1 wants to book Monday night only at full price.
  • Customer 2 wants Monday and Tuesday, and has a discount coupon for $50 off a two-night stay.
  • Customer 3 wants to stay the entire week for your pre-set weekly rate of $500.

Which customer do you turn away? Let’s plug in the numbers:

  • Customer 1, one night @ $100 = $30 profit for the stay
  • Customer 2, two nights for $150 = $10 profit for the stay
  • Customer 3, seven nights for $500 = $200 profit for the stay

Factoring in the higher administration, housekeeping, and maintenance costs for shorter stays? Sorry, Customer 2…Customers 1 and 3 are in, you’re out.

Here again, a good software program will help you figure this out.

Next time, we’ll continue to discuss a few more factors that fall under Optimizing Demand, then move on to the third segment of yield management strategies, Control Demand.

Ready to zero in on the right hotel room pricing for your small or independent hotel? Let us help! Contact us today!

Yield Management Strategies: The Right Hotel Room Pricing

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.

Forecast 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!