The hospitality industry has become a very dynamic one in recent years. Revenue Management strategies that would have once been deemed acceptable and rational, are no longer efficient. Be a next-level Revenue Manager and avoid the three big mistakes that are commonly made with making pricing decisions.
Firstly, despite what many Revenue Managers think, occupancy is not the deciding factor of how profitable a hotel is and should not be their main priority. Higher occupancy will actually result in lower profits if, in order to achieve it, the ADR is dropped to a rate that is not compensated. Take this simple example- A hotel with 100 rooms sells 90 of them, at a 100 euro rate. This results in 9000 euro in revenue. The Revenue Manager then decides to set a 100% occupancy goal, selling 100 rooms at an 85 euro rate. This results in only 8500 euro in revenue. You must find the right balance between occupancy and ADR in order to achieve your highest potential profits.
Furthermore, even if an ADR reduction is compensated by an increased number of bookings, don’t forget about the extra operational expenses that come with renting more rooms! So when you’re faced with a thin option between higher occupancy or higher ADR, bear this in mind before making your choice. It’s usually better to focus on ADR in properties with no extra revenue-generating departments, like restaurants, bars and spas.
Making pricing decisions based on occupancy alone is a big mistake and can lead to revenue losses. An important factor to consider is the number of remaining days before arrival. For example, 70% occupancy tomorrow is very different to 70% occupancy 90 days from now. In the first case, you should lower your price to sell those remaining rooms. The second case indicates high pick up outside of the standard booking window, which should lead to increasing the room rate in order to benefit from the high demand.
Another price adjustment trigger is the booking pace, which gives a better insight into room demand. Say, for example, the occupancy for the upcoming weekend is at 70% and each day for the last 7 days has seen a significant percentage of bookings for that weekend. This demonstrates a high demand, which allows for a price increase since the pickup indicates early sell out at the current price. In another situation, no reservations have been booked for the weekend during the last seven days, and the hotel received 3 cancellations yesterday, so the occupancy dropped from 73% to 70%. Although the occupancy and the number of remaining days are the same in both situations, this second scenario shows that demand is weak or the room rates are too high. Therefore, a smart Revenue Manager will make an opposite price adjustment, lowering the rates to stay competitive. This confirms that occupancy alone cannot provide enough information for effective Revenue Management decisions.
Another misconception that is still prevalent among many Revenue Managers is that they should base their prices on their competitors’ rates. Certainly, it’s important to always be aware of your competitors’ rates. However, that’s not to say that you should prioritise their prices over your hotel’s actual supply and demand. Different types of travelers are looking for different kinds of accommodations at different times. Even in the unlikely case that your competitor has identical features to your own hotel, your comp sets may not always be skilled in current Revenue Management strategies. How do you know they’re accurately following demand fluctuations and are instantly reacting to these fluctuations with optimal pricing? Your competitors might not be aware of the true demand in your area, let alone for your hotel. Therefore, by following their prices, you may sell out way too early or be left with many unsold rooms.
Furthermore, your competitor may have just booked a large group reservation that resulted in an increase in price for transient business. With fewer rooms to fill, they can afford to increase their prices for those that are leftover. However, the true demand for your hotel hasn’t changed, so by following their pricing decision, you will be left with drastically diminished occupancy rates.
So, now you know what not to do, what you should do is concentrate on increasing actual profits and focus on the real demand flow. Just by making this simple shift in thinking, you’ll be much more in line and clued in with where the hospitality industry is going these days. In turn, that will help your property be more successful!