Did that title get your attention? I thought it might.
My wife and I are headed on a Caribbean cruise next week. While I typically make vacation plans in advance of our departure date, I decided to experiment by holding out to watch what fares would do for our desired itinerary as the date drew near. From experience booking cruises in the past, I was already aware that cruise lines often lower their fares to stimulate late bookings for unsold cabins. From my experience with revenue management, I was also aware that empty staterooms equate to a lost revenue opportunity for not one single night but the entire duration of the cruise, from both the cruise fare and a decent amount of ancillary spend by passengers. This is not a desirable result for the cruise operators.
The website of the particular cruise line we are using also displays the specific stateroom availability along with pricing. I watched changes in availability almost daily to see if fare decreases would result from a lack of bookings over a certain period of time. Sure enough, sales seemed slow and we saw the fare drop by $100, then again by $100, and then once more by the same amount before we finally booked about a month before sailing. For the two of us, we saved a total of $600 compared to when we first started looking at taking the trip.
In revenue management terms, this is a concept sometimes known as "reverse yielding." For businesses that take advance reservations, it's the practice of dropping rates or fares as the date of service draws nearer. Our experience with our cruise got me thinking about when this works or doesn't work for the business that employs this approach, as well as how customers might perceive the fairness of this practice. Here I will take a look across three industries and assess the effectiveness and fairness for each.
In broad terms, it's generally correct to price highest during periods when your demand is strongest. Cruise customers are strictly leisure travelers, and the majority tends to want to lock in vacation plans well in advance. Therefore a cruise revenue manager might be correct to fill as many cabins as possible at a higher fare well before departure, then lower pricing to fill remaining cabins closer in, when demand is weaker. Cruise line policies usually restrict refunds within a month or two of the sailing date, which helps protect them from customers canceling their cruises and rebooking at the lower price.
For the cruise customer, perceived fairness may depend on the visibility of the lower fares online as the cruise approaches. But cruises may be the only sector left within the travel industry where booking via a travel agent is still fairly prevalent. Hence, close-in prices are not as visible to booked passengers. For those that do check up on pricing online after booking, a "valid for new bookings only" tag sometimes displays next to the lowered fares. While this may serve to reinforce the cancel-and-rebook policy, it probably doesn't do much to quell a customer's uneasy feeling that they perhaps overpaid for their cruise.
Airline pricing is perhaps the most dynamic of the three industries examined here. Fares change daily based on subtle adjustments to the demand and availability forecast. Most airline customers book non-refundable fares, which helps airlines yield prices up or down as necessary to achieve the optimal result for each flight. But more often than not, fares are highest when booking at the last minute, due to the strong demand coming from business travelers needing to travel on short notice - somewhat reverse of the cruise scenario.
I think that most travelers are used to the variable pricing structure employed by the airline industry. Booking a specific flight at a specific time will inevitably be a bit of a "gamble," given that fares might increase or decrease should the customer wait to book. Most travelers are probably aware that the best prices are typically available further in advance of a travel date.
Like cruises or airlines, hotels certainly prefer to sell out their rooms completely at the highest possible rates. But reverse yielding to fill "distressed" inventory is probably most likely to backfire in the hotel environment if done incorrectly. There are a couple of reasons for this. First, most hotels offer a high degree of flexibility around canceling reservations. A customer who has already reserved a room at a higher rate can easily cancel and rebook the lower rate they might see online as long as it is outside 24 hours prior to arrival. Second, depending on the nature of the hotel, lowering pricing for last-minute availability might dilute revenues, particularly from business travelers who may have been willing to spend more to get a room on short notice, analogous to the airline example. Hotels that are caught with the need to reverse yield late in the game often have missed their demand forecast, having held out for bookings at a higher price that never materialized.
I'm sure hotel customers have no problem with this, given their ability to cancel and rebook. If a hotel is reverse yielding in a more correct manner, they are employing some other "rate fence" such as using an opaque booking channel like Hotwire.com, where they can mask their brand and still keep rates up through direct booking channels.
Of course there is some degree of risk for a customer who waits to see if prices will drop and by how much. As I waited to book our cruise, I was crossing my fingers that pricing wouldn't suddenly jump, or that the stateroom category I desired wouldn't sell out.
In all three environments, it's important for operators to be mindful of how they may be "training" their customers to behave in a certain way, as in reference prices. If repeat customers are savvy enough to recognize a recurring pricing trend, the operator is likely to miss out on full revenue potential over time. The more "rate fences" that can be employed while reverse yielding, the better. Perhaps the cruise line might have removed the option to choose a specific stateroom at the lower prices - a strategy that just might have led me to pay a little more for the freedom to choose our cabin.