Revenue Management Practices - Using history to fight against chasing the market to the bottom

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November 01, 2009
Revenue Management
Tim Coleman

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© 2009 Hospitality Upgrade. No reproduction without written permission.

Technology has always been a necessary precedent for revenue management. Without it, the science has not been able to advance. Consider this, according to the Holy Bible; hotel revenue management was needed over 2,000 years ago: how many shekels would Joseph have paid for a room at the inn with a nine-month pregnant wife sitting outside on a donkey? So, why did it take so long for hotel revenue management to come along?

Actually the answer is pretty simple. Some predecessor systems were needed to pave the way and provide the data needed to make good room allocation and pricing decisions. Primarily, an electronic reservation system was needed that could keep track of the rooms and bookings and provide the industry with statistically reliable information like booking pace and the dynamics of no-shows and cancellations. But until the late 20th Century the industry did not have one. This is not an indictment of the hotel industry pioneers; even if they had a good idea of what they wanted and had written the functional specs, the decentralized structure of the industry did not allow for the capital it would take to build one. Prior to the late 1900s there were many independent hotels and few real large chains. Also, the strategic business unit, or profit center, in the industry was the individual hotel, not a network. A hotel with a few hundred rooms could not afford a million dollar electronic reservation system on its own.

In the early days of the United Air Lines merger with the Western International Hotel Management Company, some of the best minds of both companies got together to spec out an automated reservation system, but it carried a price tag that no hotel company (or even United Air Lines) could afford. So, in order to meet the “affordable cost constraint,” they came up with a trick that basically used the existing airline reservation system and substituted “hotels” for flights and “rooms” for airline seats. The rest of the system and infrastructure was actually the same.

Westron, as it was called, had many shortcomings for hoteliers. For example, rooms had to be described in a three-character code. The first character represented the quality of the room, the second character was the number of beds and the last character was the bed type. A1K was a good quality single with one king bed. But the system also had some key advantages; it came with some communications and messaging ability, a central reservation capability, and an almost unlimited expansion capacity. Even so, it was expensive and Western International Hotels had to recoup the investment by selling the software to its competitors like Marriott, Hilton and Holiday Inn. From these humble beginnings, each chain added enhancements; THISCO came along to interface with all the airline systems; the airlines started placing their systems into travel agencies; and the move to electronic mass distribution of hotel rooms was on.

One problem still to overcome was the three-character inventory code, like A1K. The primary way a hotel could raise rate was to cut off availability of lower-rated rooms like C1K and B1K. Ultimately, six-character availability was developed that allowed for a room type and a rate code to be opened and shut. For example, B2QAAA (a discount rate, double room for AAA) could be closed but B2QRAC (the same room at the rack rate) remain open.

So, why the history lesson? It is said that those who do not study history are bound to repeat it. Ideally, when a hotel runs out of B1K rooms, they will only have the A1K (higher priced rooms) available. But in today’s economic environment, the public is so value conscious that competitors all keep their lowest rated rooms available. So, you have a Hobson’s choice: If you close out your cheap rooms, you risk going out with a lower RevPAR as your expensive rooms lie empty, so your only real option is to oversell your cheap rooms and upgrade into the unsold more expensive accommodations. In today’s market, the majority of revenue managers are following Hobson’s choice. Most automated revenue management systems appropriately optimize RevPAR and provide a hurdle rate that sets a lowest selling rate that then applies to your room/rate matrix so they support this decision.

But do not confuse revenue management science with its underlying principles. After you overbook your least expensive rooms, you can use a solution, such as the Nor1 eStandby Upgrade™,  to up-sell your guests to the better rooms on a discounted, but space available basis.

Don’t give up on revenue management principles and look for creative solutions. I can’t promise RevPAR increases in this down market, but you will outpace your competition and your RevPAR index will show it.

Tim Coleman is a revenue management consultant and chairman of the HSMAI Revenue Management Special Interest Group. He can be reached through www.revenuemanagementtools.com.

 

Three very important revenue management practices should always be at the center of your thinking; so, you are constantly fighting against rate discounting and chasing the market to the bottom.

1 At every opportunity, seek ways to fence off the low rates you must offer. This starts with making sure who is eligible for the rate you are matching.

2 We are constantly being exhorted to segment our marketing efforts, but many properties are uncertain how to set up offers for each segment, let alone figure out which guests fall into which segment. Allow your customers some product choices, and they will segment themselves. Even though the market is very price sensitive these days, there are always people who will opt for a better value than necessarily the lowest price. Make sure you include at least one price point above your base price. It can be based on any differentiators like room size, view, amenity, floor, elevator proximity or elevator lack of proximity. Be smart enough to leave the option open.

3 When you absolutely positively need to discount, try to use the opaque channels first. This will ensure that any customers who want your specific property and are willing to pay for it will not get the discount.

www.revenuemanagementtools.com


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