No doubt every hotel in the business is constantly looking for ways to yield more revenue from its rooms. Back in the day when selling a hotel room was only through one or maybe two channels, pricing a room was far less complicated. Then new channels of sales and distribution came along, smart technology was invented, more customer data and insights became available, and revenue management became part of the hospitality industry’s vernacular.
From the early days of yield management, beginning with lessons picked up from the airline industry in the 1990s, opportunities in hotel revenue management have grown tremendously. What began with seasonal and weekday/weekend rate changes has evolved into Best-Available-Rate (BAR) pricing and become the core of traditional revenue management today. This fixed-tier approach allows some pricing flexibility, but it’s far from dynamic and doesn’t really get to the true aim of revenue management, which is selling the right product to the right person at the right time for the right price.
A new method has emerged in the US and some early adopters in Asia are beginning to benefit from open pricing, a truly dynamic approach to revenue management that allows hoteliers to drive even more profitability.
With the fixed-tier strategy common in many parts of the world, hoteliers set the BAR, typically the lowest public price you would find on the hotel’s website, and rates on other channels and segments are adjusted based on a fixed percentage difference from the BAR. For example, if the BAR is set at $100 for any given day, the loyalty or promotional rate might be 15% less, OTA package rate 30% less, all the way down to opaque channels like Hotwire that might be discounted 40%. If the BAR goes up or down, so do all the other rates in unison.
Clearly the benefit of this approach is its simplicity, but hotels employing this method of managing revenues are missing the opportunity to use differentiated pricing applicable to different behaviours exhibited by people booking through different channels. Rather than setting one BAR and pricing all other segments and channels in lockstep, yielding each independently based on demand and price elasticity is more prudent. The more price points you have available, the closer you will get to capturing the entire revenue opportunity for each room.
Open pricing enables hotels to capture incremental revenue by adjusting rates on a daily or even hourly basis if up-to-the-minute market information reveals the need for these changes. This is based on the understanding that the right rate to charge for a room night is what the customer is willing and able to pay.
One of the biggest detriments of BAR pricing is what happens on high demand days when hoteliers typically close those discounted segments and channels because they know they can still sell out through higher priced and more profitable channels, like their own website. But when a traveller, maybe someone visiting from another country, is shopping one of those discount channels for a two-week stay and the search reveals no availability, the hotel has just lost 14 nights of revenue because they closed the channel on that one compressed date.