For hoteliers, the challenge of revenue management (RM) is particularly complex. Luckily, as traditional approaches to RM evolves, so does the technology at the disposal of revenue managers. Adopted from the 2018 Smart Decision Guide to Hospitality Revenue Management, this blog post explains the advent of next-generation revenue management solutions, and delves into the topic of intelligent pricing.
Next-generation Revenue Management: Real Time Analysis
Revenue management has become increasingly complicated as the basic approach to pricing guest rooms has evolved from a technique that uses “best available rate” (BAR) pricing to one that uses dynamic pricing based on data-driven demand forecasts. BAR pricing yields one primary rate with tiered percentage or flat amount-based discounts off BAR differentiating prices across distribution channels. The discounts are usually fixed percentages that move up or down on different dates.
Next-generation techniques, on the other hand, make dynamic pricing and distribution decisions based not on BAR, but, rather, on real-time analysis of multiple data sources. At a minimum, these data sources generally include the hotel’s own historical data, its booking site data, competitor pricing data and competitive set and digital review data, much of which is available within the revenue management solution from third-party providers. With data access and technology capabilities evolving almost beyond recognition, hotel operators today have the opportunity to achieve the ultimate promise of revenue optimization: to sell the right space at the right price at the right time to the right guest.
Given the sheer volume of data, it is no longer feasible for revenue managers to spend their time manually reviewing one forecasting and demand report after another and analyzing mountains of data in their quest to make better pricing and inventory control decisions. Next-generation revenue management solutions allow revenue managers to focus their efforts on more strategic tasks and allows hotels to generate better business results. The ability to automate pricing and distribution decisions makes the business case an easy one from an ROI perspective. In addition to improving RevPAR and other key performance indicators, hotels can improve marketing and sales effectiveness, generate competitive intelligence, and gain insights into occupancy trends, guest demographics, market positioning and channel profitability.
Intelligent Pricing: The Result of Next-generation RM Solutions
With next-generation revenue management, the idea is to automatically forecast demand and capacity for a perishable product or service and then price that product or service in a way that maximizes profits for the business. Here, a key concept to keep in mind is price elasticity of demand. Demand is sensitive to changes in price and price is sensitive to changes in demand. Generally, hotels have a lot of elasticity because the main product in demand —guest rooms —is both perishable and fixed in capacity.
Questions that intelligent pricing addresses might include:
- What is the optimal price to charge in order to maximize revenue, accounting for the fact that demand will change as the price changes?
- What is the best possible rate for a guest room, taking into account the type of room as well as the length of stay?
- How can a hotel ensure that discounted price promotions won’t dilute revenue and profits in the long run?
Intelligent pricing addresses these questions by analyzing demand forecasts, competitor rates, price sensitivities and various other inputs and factors, including demand drivers like seasonality, day-of-week differences and market dynamics. Intelligent pricing is constantly evolving with new approaches to forecasting demand and dynamically pricing room rates based on expected demand and capacity. For example, with the ability to price room types, channels and dates independently of each other, some hotels are adopting a pricing strategy based on the idea that different prospective guests should be offered different rates depending on which guest segment they fall into as well as which channel they are using for booking their reservation. The important point is that intelligent pricing can translate into financial outcomes. Consider: A mere $2 reduction in the ADR for a 500-room hotel with a 75 percent occupancy rate would cost a hotel more than a quarter million dollars in lost profit in a single year. Advances in intelligent pricing are changing the revenue management game, enabling hotel operators to better optimize their business.
To learn more about intelligent pricing, using relevant data sources, identifying useful performance metrics, buying considerations and an evaluation checklist for your hospitality revenue management tool, and a list of must-ask questions, download the 2018 Smart Decision Guide to Hospitality Revenue Management.