Hotel revenue management

Accepting reservation requests beyond hoteL capacity. Although not strictly an element of pricing, another component of a successful pricing program is determining how many reservation requests to accept beyond the hotel’s capacity. As the number of future cancellations and noshows are not known with certainty, this reflects the level of risk the hotel is willing to take to ensure that every room is occupied on a soldout night.

TỔ CHỨC KHAI THÁC HÀNG

KHÔNG 1

GVHD: Nguyễn Nam Thanh

Thực hiện: Nhóm 6

Veritec Lodge

 A hotel with 300 rooms.

 An annual occupancy percentage of 65%.

Table 13.1 Impacts of increasing occupancy percentage

Increase occupancy

percentage from

65% to:

Increase

in room nights

Incrementa

l revenue gain (%)

Table 13.2 : Impacts of increasing occupancy percentage

Annual

occupancy

(%)

Annual revenue ($ million)

Incremental revenue gain (%)

Annual net revenue ($000)

Incremental gain in profits (%)

How can a hotel achieve these gains?

5 opportunity areas

Improved pricing and demand management during peak demand periods

Communications: among hotel staff and with

prospective customers

Market segmentation

Opaque pricing

Performance measurement

Pricing and revenue

management

3 objectives

Stop demand

 Using forecasts of future room supply

 Demand at alternative price levels

An effective pricing program

Stimulate additional

demand

by promotional prices

Table 13.3 Comparison of impacts from LOS controls versus increasing price

In this scenario, not all of the hotel rooms are occupied on Wednesday night, reflecting the uncertainty associated with holding back rooms for longer stay reservation requests In actual implementation of LOS controls, some hotels have claimed revenue increases of 8 10 percent or even more when compared to increasing rates on peak nights (Aeronomics, 1992).

Accepting reservation requests beyond hoteL capacity Although not strictly

an element of pricing, another component of a successful pricing program is determining how many reservation requests to accept beyond the hotel’s capacity As the number of future cancellations and no-shows are not known with certainty, this reflects the level of risk the hotel is willing

to take to ensure that every room is occupied on a soldout night.

Unoccupied rooms on a sold-out night are termed spoiled rooms These are rooms that could have been sold but are not, because the hotel decided to stop taking reservations, effectively turning away demand in advance of the check-in date Unoccupied rooms

on dates that are not sold out are not spoiled rooms, as there was insufficient demand to fill them Spoilage can be measured as a percentage of available rooms or as an absolute number.

Many hoteliers take a conservative approach to managing spoilage That is, they are cautious about the number of bookings taken in excess of the hotel’s capacity They are willing to let a few rooms go empty on

a sold out night in order to avoid the situation where guests with reservations show up to check in, but the hotel does not have rooms to accommodate them

While this is reasonable, it is also costly Hoteliers frequently fail to realize that this forces potential guests

to stay at competitor properties, rather than allowing them to stay at their most preferred location If the hotel does have empty rooms on the sold out night, then not only did the hotel give up revenue it could have received, but the hotel also ends up falling short on customer satisfaction

The following example illustrates why this foregone revenue can be significant and worth pursuing In addition, the example provides some insight into why we call this invisible revenue.

Consider a hotel with 250 rooms, a 70 percent annual occupancy rate, an ADR of $150 and 30 sold out nights during the year Further, assume a two night average length of stay and that the average occupancy on sold out nights is 97.6 percent That means that on, six rooms are empty on dates that the hotel stopped accepting reservations

What is the financial impact of reducing the number of empty rooms on sold out dates to three?

It may be worth noting that with 97.6 percent

occupancy on sold-out nights, there may not be strong pressure for analysing why the occupancy rate was not higher Reducing spoilage by 50

percent to three rooms, that is, increasing the

occupancy rate from 97.6 percent to 98.8 percent

on a relatively small number of nights per year may not be deemed worthy of significant effort

When approached from an annual revenue or occupancy perspective, the impacts seem minor

• Annual occupancy rate would increase by

approxi mately 2/10 of 1 percent.

• Annual revenue would increase by approxi

mately ¼ of a percent.

The impact of the incremental revenue on the hotel’s profitability is much larger.

If the hotel’s profits were 5 percent of gross

revenue and if 80 percent of the incremental room revenue from selling these three additional rooms

on the 30 sold out nights goes to the bottom line

The hotel’s annual profits might increase by more than 4 percent!

NOW THAT probably would attract the a ttention

of many hotel executives

When more aggressive booking policies are adopted, a hotel also needs to adopt policies and procedures that enable staff to deal effectively with guests with reservations wanting to check in when the hotel does not have rooms available.

And that’s why we frequently refer to the revenue that comes from decreasing spoilage as invisible revenue No one may pay attention to its absence, but when the additional revenue has the potential to increase the hotel’s profits by several percentage points, everyone appreciates its presence.

Does this mean that more expensive rates should always be quoted first?

For example, when a customer enquires about the lowest rate available, it may simply be best to start with that rate rather than force the customer to first listen to the wonderful options that come with more expensive rooms

Hotels with the most successful pricing programs have also recognized the value of obtaining input from multiple

departments.

MARKET SEGMENTATION

 Weekday hotel occupancy tends to be low, although weekend occupancy rates are quite high Competitor chains tend to have stronger brand equity and loyal followings due to their loyalty programs Thus far, EZStay has not initiated a loyalty program

 Less than 10 percent of EZStay’s guests pay the full rack rate

These rates vary by hotel, ranging from $69 to $129 More than

60 percent of the guests receive a discount of at least $20

 Although EZStay’s rates are generally similar to its competitors, perhaps slightly lower, its physical product is equal to and

probably better than most of its competitors Many corporate

travelers, however, tend to stay at competitor properties This may

be due in part to EZStay’s regional rather than national presence and also due to its lack of a loyalty program

 The pricing department has organized a meeting to discuss what actions it might take to improve the financial position of EZStay What should be done?

Which market segments currently provide customers?

Provides a framework for evaluating how to prioritize deeper penetration into the customer segments that currently provide customers versus stimulating demand from other customer segments, as this helps frame the challenges with stimulating additional demand from different sources

Which segments are not currently providing many

customers but could be?

→

2 1

www.PowerPointDep.net

2 questions simultaneously

2 approaches can be taken

 A rather common tactic is to take a broad and relatively untargeted pricing action Frequently, this translates into offering a discounted price

 An alternative approach is to take a more directed

action that is targeted to reach a specific set of customer segments

 These customer segments may or may not be ones

that currently provide the hotel with many guests In our experience, this second approach tends to be a far more effective way of increasing revenues and profits

 To illustrate the potential risks of a broad discounting program, consider a hotel that receives an average price of $70 for its rooms and has an occupancy rate of

 To generate less revenue than what was earned at the higher rate , is rather high Demand for the hotel has

to increase quite significantly for the discount to be profitable

 As increased occupancy levels result in additional variable cost, the occupancy level required to break even is higher.

 Corporate travelers seem to be a customer segment worth pursuing.

One way to attract COPORATE

be offered

The product can be offered to

Business

traverler

package

Frequent traveler package

• Note that the potential for revenue dilution is

very small.

• The frequent traveler package is estimated to be dil

utionary only if it attracts less than one

incremental guest per night

It is also possible that  the program will be 

financially beneficial

 if it induces some gue sts to  “buy up.”

Aimed at attracting  less pri

ce  sensitive guests

EZStay has incentivized

travelers to try one of their

properties

rather than stay at a competitor

property, but has done so in a

way that minimizes

the risk of revenue dilution.

-OPAQUE PRICING IS A WAY THAT COMPANIES

SELL THEIR MERCHANDISE AT HIDDEN, LOWER PRICES

- One type of price discrimination.

-The target product is one who will purchase a

product or service primarily based on price and

not based on the company’s amenities, reputation, etc…

 The website will reveal the name of the hotel but doesn’t allow for refunds , changes or

 Guests are demanding too much for what they pay, or whether resorts are raising people’s hopes

 Guests hopes by offering lower rates and then not

delivering the desired experience

 Loyalty club members

 May not have good feedbacks.

 Capacity control and pricing decisions are highly intertwined

 Consider a somewhat simplified situation where you have only one room left to sell in a hotel for

an upcoming Tuesday night

 You receive a request for a one-night stay from someone who is willing to pay $120 for that night

 If you turn down the request, you believe there is

a 50 percent chance that you will receive a request for a four-night stay from someone else who is willing to pay $120 per night

 But, if you turn down the request you believe there is a 50 percent chance that the room will go empty on Tuesday night

 1 What should you do?

 2 Does the hotel’s reservation system support what you want to do?

 3 How do you demonstrate that you made the right decision?

The scenario in which you refuse the one-night stay reservation request

in anticipation of receiving a four-night stay request, but that demand does not materialize and you end up with an empty room

In short, you may have taken the action that in the long term would maximize the hotel’s profits, but not necessarily have done so in this particular instance Performance measurement tools become absolutely essential

 Having suitable performance measures, quantifying the impacts

of your pricing decisions and providing feedback to staff on the impacts of their pricing decisions are critical for estimating the level of success of a hotel’s pricing program and justifying investments to further enhance it

 As the saying goes, “you get what you measure.” Choose the wrong performance measures and your hotel is likely to be led down paths that are not as financially productive Performance measures such as occupancy and average daily rate are only part of what’s important

 Revenue per available room, or REVPAR, provides a way of combining both of those measures into a single performance measurement While that’s better, it’s still not enough as REVPAR also reflects the impact of factors external to price

 It is important to define measures that estimate the impacts of pricing decisions In some cases you can use narrowly defined performance measures, such as those that focus on spoilage levels In other cases, more elaborate methods such as the method of comparable challenges may be needed This method enables making quantitative estimates of the impacts of pricing decisions by normalizing for market conditions existing

at the time of the decision

 By doing so, this method provides greater insight and accuracy than more standard approaches such as year- over-year comparisons or comparisons to competitive sets

As discussed in this chapter, pursuing profit maximization through enhanced pricing capabilities requires a combination of advanced pricing analytics and adopting appropriate internal business processes Although the financial benefits of improved pricing may be as great, if not greater, than those resulting from changes in operations or purchasing supplies (Marn et al., 2004), the benefits are not nearly as obvious; implementing performance metrics and establishing feedback mechanisms designed to measure, illuminate and communicate these benefits are essential to establishing an effective pricing program Otherwise, a hotel’s scarce resources of staff time, as well as money for investing in business improvements, are likely

to be prioritized for other areas