n the last article of the Revenue Journey I spoke about pricing and pricing strategies. I mentioned that setting your pricing is one part of complete revenue management. The second part, even more critical, is managing inventory.
The revenue increases that can be achieved with getting your pricing right are large, but optimizing your inventory is where additional money in revenue management is made. And here is why.
Imagine you have a very busy day, a Wednesday, and you have raised your BAR rate from $180 to the highest level, $200. When that last room gets sold, you have gained $20 in revenue. Now, let’s say you have done your revenue management forecast (remember it is by day by segment) and you know that you still have demand for a 2 night corporate booking at a rate of $150 per night. If you can only manage your pricing you would put the BAR rate at $200, as this will give you $50 more for that Wednesday night than when you would take that corporate booking. If you would however manage your inventory and can decide to take a corporate 2 night booking, you have an added advantage.
Firstly you fill on the Wednesday night and secondly you get $150 for the second night, the shoulder night. So although you lost $50 on the fully booked Wednesday, you gained $150 on the Thursday night, overall gaining $100 in additional revenue for the hotel. Looking at both price AND inventory is called complete revenue management -not to be confused with Total Revenue Management, about which we will publish a series in 2017.
Managing inventory has several components to it. We need to keep in mind though that the goal of our Revenue Journey is to maximize revenues. Is it not to only maximize rate, or fill the hotel, but to get the best possible mix of business, with the best combination of average rate, occupancy, length of stay and room type mix.
If you have a small hotel, let’s say 5 rooms, this is still manageable on a manual basis. But imagine you have 5 rooms, 2 market segments, and bookings for 1 and 2 nights length of stay. Instantly the choices you have to make to optimize your revenue in this case has multiplied. If you have a property with 100 rooms…. Well, you can see where this argument is going. And I haven’t taken into account yet the likelihood of segments to materialize (which we call uncertainty of business), competitor rates and their impact on your property and additional value of bookings when they have ancillary spend at the property.
Inventory Management Controls
If you are managing a property manually, depending on which PMS you have and how you manage your different channels, you can use various inventory management controls. I will go through them.
– Minimum length of stay – This control helps to increase occupancy on shoulder nights. The additional occupancy on shoulder nights drastically helps increase revenue. It impacts shoulder nights both before and after a busy day. This control impacts all bookings arriving on the day that the control has been set.
– Maximum length of stay – This control is used if you don’t want reservations made for a longer period of time, either because there is a busy period coming up and you don’t want to take lower rates during that period, or, you may have a certain rate that is for a limited length of stay, e.g. 2 nights. This control impacts all bookings arriving on the day that the control has been set.
– Close to arrival – This control helps to increase occupancy on the nights prior to a busy day. It does not work for the shoulder nights after the busy night if bookings should arrive on those busy nights. Preferably this setting is not used as it has the possibility to reject longer staying business with a high value for the property. This control impacts all bookings arriving on the day that the control has been set.
– Stay through – Any booking that crosses the day with this restriction in place is subjected to the setting. If the setting is set on a Saturday for minimum stay through of 3 nights, then any booking with a length of stay of 3 nights or more can stay on the Saturday night.
– This is typically called a ‘hard close’ – No bookings at all can be made for a certain day that has a ‘closed’ setting, regardless of value or length of stay. This setting should only be used as a very last resort.
– Room type and rate type setting – All above settings can also be set at the room type level and the rate code level. This ability gives the property the best possibility to revenue completely revenue manage their inventory.
– A specific number of rooms is set aside for a certain rate, room type, company or travel agent. This is either because a certain commitment has been made, or because optimization calculations have indicated that a certain number rates sold should be capped to optimize revenues and keep sufficient space available for higher rates to book.
Complete revenue management touches all rates and all room types and fully optimizes all parts of the property’s inventory. The granularity of options when using pricing AND inventory management controls allow the savvy Director of Revenue to gain substantial increases in revenue. In the world of complete revenue management system this level of inventory control is called full pattern length of stay, an extremely powerful revenue management tool.
Now that you have gone through the Revenue Journey #1 – #8, you have reviewed your processes and you have implemented the various components of revenue management on a manual basis, it is time to start reviewing whether a revenue management system would be appropriate for your property.
In the next article in the Revenue Journey, I will discuss more about how to review and choose a revenue management system that works best for your type of property.