Yield Management Strategies: The Right Hotel Room Pricing, Part 4

Now that we’ve discussed how to forecast demand and how to optimize demand, we’ll talk about how to control demand.

“Control demand?” you may ask. “My small or independent hotel is full almost every night. What’s there to control?”

Plenty, if you’ve been doing your due diligence and keeping track of your historical data.

Even if you’re selling every room, every night, there are always yield management strategies you can use to make sure you’re maximizing EMR (expected marginal revenue, discussed here) on each and every room.

Transient Reservations

Bookings from transient customers – that is, customers who are not part of a group or corporate contract – can be controlled in a couple different ways into order to maximize EMR.

  • Strategic
    Types of strategic controls used to target a special rate to a specific type of customer include:

    • Reservation must include a Saturday
    • Rate only applies if two guests are in the room
    • Advance reservation required (typically 14 or 21 days)
    • Requiring nonrefundable payment in advance

These strategic controls can be implemented manually at the front desk or within your chosen automated central reservation system (CSR). Certain types of strategies may “fence out” certain types of customers from making a reservation; for example, a customer that wishes to book only one night of a high-demand weekend. On the other hand, a business traveler who might have been willing to pay more could be fenced out, as well. However, the long-term trade-off could be worth it if your temporary special rate attracts a customer who might not have otherwise booked with you.

  • Tactical
    This type of control is applied to a special discounted rate that is tied to a specific date of arrival. For example:

    • Customer must arrive on a specific date
    • Customer must book a minimum number of nights
    • Customer is limited to a maximum number of nights
    • Customer must stay through a typically less-popular shoulder night

A tactical control can be used independent of, or in addition to, a strategic type of control. Which types of tactical controls you can use in a CSR depends upon which system you’ve chosen to use. Just be wary of a few common mistakes:

  • Be aware of your facility’s typical booking cycle. If a significant percentage of your transient customers book 10 to 14 days in advance, setting a tactical control outside that window could miss your target audience.
  • You will also to be aware of how far in advance to set these controls in the CSR – it won’t do you much good to input control settings seven days in advance, when the automated CSR you’re using won’t be updated for another two weeks.
  • Be selective with the controls you choose. Employing too many restrictions at once could unintentionally block some customers from making a reservation that should have been accepted.
  • Don’t set it and forget it. Once you’ve implemented the controls, keep an eye on the system to make sure everything is working as you intended. You could have implemented a conflicting set of controls, or the administrators of the CSR could have made system upgrades that render your controls inoperable. The worst time to discover this is when it’s too late to fix it.

Special Circumstances

There may be times you want to offer special rates and/or employ strategic and tactical controls as far in advance as possible.

Let’s say that your small or independent hotel is located in a popular winter sports locale that has just been selected as a venue for the Olympics – four years from now. It’s not too early to plan your strategy for marketing, pricing, and the combination of controls to employ to maximize each room’s EMR.

As time passes and the event draws closer, keep an eye on the results of your yield management strategies, and be prepared to make adjustments based on the success of your strategy and what your competition is doing.

Next time, we’ll discuss the last spoke in the revenue management cycle: monitor demand.

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.

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!