Revenue Management 101 – Part 3

By Ira Vouk, August 23, 2018

Welcome to part three of the revenue management series. If you missed part one where we discussed the basics of revenue management and measurement metrics, or part two where we covered dynamic pricing as a first step, you may want to go back to catch up. In this segment, we’ll go over setting stay restrictions.

STEP 2: SETTING STAY RESTRICTIONS

In addition to establishing Dynamic Pricing, there are a few other non-pricing methods you can use to increase revenue and profits. One such method is setting stay restrictions and controls, which helps you maximize revenue potential through managing busy peak days and adjoining shoulder days. The two main restrictions used in the hotel industry are:

Minimum length of stay (MinLOS)

This restrictor requires that a reservation is made for at least a specified number of consecutive nights. It allows you to develop a relatively even occupancy pattern during high demand periods or special events. Specifically, the minimum length of stay restriction helps keep an occupancy peak on one day from reducing occupancy on shoulder dates.

MinLOS can also be applied with discount rates. For example, guests may have to pay rack rates for shorter stays but they can enjoy a discount on longer stays.

Closed to arrival (CTA)

This restrictor keeps guests from arriving on a specified date. You’ll use CTA in two cases:

  1. To limit the number of arrivals on a given day (to reduce the burden on your front desk, for example, in preparation for a large group arrival).
  2. In conjunction with MinLOS restrictions, to achieve even occupancy during peak demand dates that are longer than 1 night.

In general, stay restrictions allow hotels to filter less profitable clients during peak demand seasons, thus increasing the resulting room revenue. It is important to note that these restrictions should only be used when estimated sales flow is sufficient enough to achieve high occupancy without the loss of revenue. 

The purpose of booking channel management is to maximize your revenue by restricting certain distribution channels with different profitability margins at different times.

 

STEP 3: MANAGING BOOKING CHANNELS

Hospitality operators have various booking channels with which to apply their pricing distribution practices, including direct bookings, walk-ins, online travel sites, travel agencies, opaque channels, corporate contracts, and others. The purpose of booking channel management is to maximize your revenue by restricting certain distribution channels with different profitability margins at different times.

The concept:

Different distribution channels are configured into a small number of groups, each managed simultaneously. As in the case of high demand, it may be beneficial for you to close less profitable distribution channels in order to maximize the resulting yield.  This will slow down your property’s booking pace but will increase the resulting room revenue via the ADR growth.

How it works:

Booking channels are represented in a hotel’s Property Management System (PMS) through Rate Plans. Many of these rate plans are manageable (i.e. can be closed or opened at a specific point in time for a specific date range). For effective Revenue Management, it is important to have a full list of all rate plans with corresponding margins and discounts off of rack (also known as ‘the BAR rate’) then to group them into 3 or 4 categories based on their profitability level (or, their “proximity” to rack rate). After that, manage these by closing the more expensive (and least profitable) channels when  demand and booking pace is high. Then sit back and watch your ADR go up during the high demand periods, which leads to a proportional increase of your profits.

Example:

Let me give you an example of effective channel management to illustrate how this works:

Let’s imagine that a hotel has 6 different rate plans (this is simplified for the sake of the example, as we know in actuality this number can go up to 20-30 or even 50 in many cases). The rate plans are: RACK, AAA (5% off Rack), AP (15% off Rack promo), OTA (20% off Rack), OPAQUE (30% off Rack), LASTMIN (35% off Rack).

Looking at these rate codes, one can see they’re not equal in the size of contribution to the bottom line profits. With that in mind, let’s group these plans into 3 different categories, based on their profitability level (from the least expensive and most profitable channels to the most expensive and least profitable):

RACK, AAA – group #1

AP, OTA – group #2

OPAQUE, LASTMIN – group #3

When this exercise is done, simply start managing your channels by closing groups #3 and #2 for those dates where you can sell your rooms via group #1 alone, without having to offer deeper discounts. I.e., if your weekends always sell out, you may try to restrict group #3 from booking those dates and see how this affects your occupancy and resulting ADR. For higher demand dates (special events) you can close groups #3 and #2 altogether. Group #1 will always remain open.

Make sure to check back periodically for cases when the channels need to be re-open, if real demand turns out to be slower than anticipated.

There’s one more thing to keep in mind as you open and close these various booking channels. In some cases, you may be unwilling to close a particular rate code, due to contracts with different companies that require Last Room Availability, or brand policies, etc. Place those in category #1, which is not closeable. Everything else should be split among your other categories, according to profit margins, and managed as described above.

Stay on the lookout for our next post where we’ll be covering the technique of overselling and managing group and corporate business.

About Ira Vouk

Ira is Pricing Intelligence Product Manager for Cloudbeds. Ira is also the co-founder of iRates. She was selected as Top 5 Revenue Managers in the country in 2013 by HSMAI. With a background in sociology and marketing research, she has been able to apply her knowledge and experience to the hotel industry and develop many innovative ideas.

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