Denihan chief customer officer Tom Botts, as part of a panel at The Beat Live conference in New Orleans in October, sought to reveal some of the mystery behind hotel revenue management and the seemingly erratic behavior of hotel pricing and availability. An edited summary of his presentation follows, as prepared by Travel Procurement senior editor Michael B. Baker.
If you have a last-room availability agreement, sometimes you still can see rooms available but find that you're unable to book a room. Yes, we do that sometimes. Why is that?
It's all just math. An important thing is price optimization. Not surprisingly, the lower the price, the higher the demand, and a single price does not maximize revenue. There will be some guests willing to pay more and some willing to pay less.
You also must find a way to fix capacity. Unlike airlines, I cannot move capacity at a hotel easily. The hotel just sits there. Too little discounting in the face of weak demand is going to result in a lot of empty rooms, and I'm going to lose money. If there's too much discounting early, I'm going to run out of rooms and not have enough for those last-minute guests—many of them business travelers.
So, when is revenue management most effective? I have to segment my customers.
People are willing to pay different amounts, so we can create fences using advance purchase, nonrefundables—things that airlines also use—that enable me to charge different prices for basically the same room. Variable costs also have got to be low.
How do we measure success? It's by revenue per available room (RevPAR), the tradeoff between rate and occupancy. Very simply, that's the average daily rate times the number of occupied rooms.
At the same hotel, I could have one night selling 80 percent of the rooms at a rate of $313 a night. On another night, I could sell 50 percent but at a rate of $500. Both nights have the same RevPAR. So, would we rather have more occupancy or a higher rate?
Yes, with lower occupancy, I could find lower costs in servicing fewer guests. If it's a heavily unionized hotel, however, it might not be able to pull back on labor. Hotels also are interested in ancillary revenue. If there are more people in rooms, there are more chances for people to buy room service and all the other things we love to sell to you.
Most hotels are watching how they compare against their competitive set. They submit their data to [hospitality research firm] STR in Nashville, pick a competitive set and get a number back every day to see how their hotels compare in terms of occupancy, ADR and RevPAR.
We look closely at actual forecasting and bookings by segment. We also can look in terms of the days of the week and the type of production that comes into a hotel. On a Friday, we might have a lot more wholesale and leisure, while during the week, we have a lot more corporate business.
So back to the original question: How does our revenue strategy affect room availability?
Depending on the strategy, we might simply close off rooms for whatever reason, not allowing anyone to arrive. Or, we might require a minimum length of stay, and this might depend on when you're arriving. If you're looking to arrive on a Sunday in Manhattan, I might happily take you regardless. If you're arriving on a Tuesday, I might want you only if you have at least a two-night stay, for which my costs are lower. Hotels also might require you to stay through a certain day of the week, regardless of the total length of stay, to build occupancy on a soft spot. We'd take any length of stay so long as it included a Thursday, for example.
As shopping tools like tripBam gain traction, it will be interesting to see how it all plays out in the revenue management space as well.
There will be opportunities created for some with that platform and losses for others. For smaller hoteliers in particular, who want to be able to shift share, it could be an interesting play.
This report originally appeared in the November 2014 edition of Travel Procurement.