Common hotel revenue sinkers include selling inventory too soon and too low – spillage – or not selling enough during high demand, leaving you with last-minute discounts. Spillage, spoilage, and overbooking can destroy your bottom line. Discover how to avoid them and grow your revenue.
NB: This is an article from Revenue Team by Franco Grasso, one of our Expert Partners
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Revenue management is a complex discipline worth implementing. When practiced fully, it reduces or eliminates bottom-line drainers such as spillage, spoilage, or overbooking and improves your hotel’s online reputation.
Take the 2020 shutdowns.
Some analysts predicted it’d take three or four years before hotels fully rebounded. Yet, there are plenty of examples where that didn’t happen. Our experience shows many hotels bounced back to 2019 RevPar and even exceeded it by 15 to 40% as early as 2021.
Look Back to Go Forward: Revenue Management in Practice
A key to a successful hotel revenue management strategy is applying past historical data to future projections. Those hotels that remained open during the pandemic closures and implemented careful revenue management strengthened their position in the market.
Take the 2020 and 2021 years. Despite pandemic restrictions, many hotels that stayed open relied on revenue management principles to keep their staff and achieve a positive GOPPAR (gross operating profit per available room) and EBITDA (earnings before interest, taxes, depreciation, amortization).
Remaining open heightened their online visibility and increased bookings because there was less competition. Thanks to their effective strategy, many of these hotels bounced back to pre-pandemic levels quicker than expected. Smart hoteliers are putting several foundational elements in place for 2024.
Key Revenue Management Trends for 2024
Effective revenue management includes a blend of technology, smart online marketing, competition analysis, and demand forecasting, to name a few.
For example, guest behavior has changed. Today’s travelers book within a shorter window, and they want to book online with flexibility. It’s essential to meet or exceed your guest’s expectations to maximize your hotel’s revenue.
One of those expectations is an up-to-date online presence. Current photos and plenty of current and positive reviews mean your property will see more guests. If you haven’t updated your online channels in recent weeks, it’s time to do so. Additionally, you want to implement a review program, so you constantly have new (and positive) reviews. These help your property stay at the top of the OTAs for maximum visibility.
Of course, visibility on Google and Otas also means more chances to get direct bookings (phone calls, emails, website reservations) through the so-called billboard effect provided by these giants. Plus, such visibility enhances the possible ancillary revenues (f&b, parking, room service, etc.), which benefit the TRevPAR (Total Revenue per available room).
Additional trends include identifying opportunities to close gaps and avoiding often misunderstood industry terms such as spillage, spoilage, overbooking, oversell, denials, and regrets.
Let’s look at these common sources of lost revenue.
Understand the Revenue Drain of Spillage, Spoilage, Denials, and Regrets
Whether you’ve been in the hotel business for years or are new, these terms bear a quick review within the discipline of revenue management.
Take spillage and spoilage: how can you recognize them?
As you know, appropriate pricing is key to any profitable hotel. Yet, there’s a delicate balance between booking up early at a low rate and selling just enough rooms early and increasing your rates as you get closer to the check-in date so you can have 100% occupancy at market rates.
However, if you load your inventory into your channel manager and sell out your rooms weeks or months before check-in, that’s spillage. And you’ve just lost revenue.
It’s a prevalent concern. Fortunately, you can rectify this problem by identifying the reason(s) your hotel encounters it.
Here are some of the most common reasons hotels have so-called spillage:
- Incorrect starting prices (too low)
- Lack of sales monitoring and control on the booking window
- Lack of control or incorrect pricing for through Tour operators, wholesalers, and various allotments
- Incorrect or absent rate dynamization (technology can help!)
- Failure to account for probable events on a specific date
You may nod your head as you read through these. You recognize them as problems, and maybe you can guess which ones are draining your revenue already.
The first step to stopping the spill is recognizing when this spillage tends to occur. Did you sell all your rooms at a low rate without realizing that’s when Taylor Swift’s tour was in your city? Are you overdue for a review of business contracts with tour operators and event planners? Do you lack the right technology to coordinate your inventory?
A channel manager synchronizes inventory and rates on all platforms so you have an at-a-glance overview. Combine that with calendars of area events that bring demand and your competitive standing, and you’re better equipped to manage your inventory.
Now you have context, and you reduce your inventory on the channel manager for future dates, which helps you prevent selling rooms at below-market rates. You can keep an eye on the market and add inventory at appropriate rates as demand increases.
Revenue management is strategic. There’s no reason to put all your inventory online and bookable at one time. If you do, there’s no chance of increasing rates as demand increases.
Meanwhile, spillage means you sell your rooms too early at below-market rates. But “spoilage” is the opposite. This is when you’ve held out your inventory for too long and now have too many unsold rooms.
Like overripe produce at the market, you’re stuck in the position of offering last-minute discount rates or losing your inventory. Sometimes, this works out, but it can also lead to cancellations by guests who see the new rates. Then, they turn around and rebook at the lower rate.
On the other hand, sometimes hotels start out with a high rate, and potential guests book the competition. Appropriate pricing is a delicate balance requiring experience, technology, and data analysis.
Like spillage, there are common problems with spoilage that you can avoid.
- Incorrect starting prices (too high)
- Too fast dynamization of rates
- Lack of monitoring of the booking channel
- Possible stay restrictions (Minimum Stay – Non-Refundable Rates)
- Lack of statistical analysis
Either way, the hotel faces lost revenue.
Spillage has you selling the rooms too early for low rates, while spoilage leaves you frantically trying to sell at last-minute rates. Neither scenario produces long-term profitability.
But wait, there are two more common ways hotels can lose out on revenue.
Denials and Regrets: Yet Two More Ways to Miss Revenue Goals
Have you ever had a guest call or email inquiring about a room, and you have to deny them because you’re already booked?
This could be a spillage problem (if it’s early.) Denials are usually offline requests via email or phone, and the way to avoid them is to note denials on your PMS or RMS. Then, when you review your future pricing, you can use them as a guide.
For example, if your hotel books out three or six months in advance, this is usually a combination of spillage and denials. If you review your historical data, you’ll probably see plenty of early bookings at low rates. The way to address this is to limit how much inventory you allow on your channel manager early until you can better assess the market demand for that time.
Ideally, you won’t have to deny potential customers unless you’re truly booked out at market rates.
But what about regrets? This is the hotel industry version of an abandoned cart. Guests start the booking process but abandon it along the way. This often happens because they find a better price elsewhere. Or, you might have restrictions such as a no-cancellation policy that sends them elsewhere. Remember, today’s guests want flexibility.
To determine if you have too many of these so-called “regrets,” you want to record them through your PMS or RMS tool to compare.
Often, denials and regrets are symptoms of underlying spillage and spoilage problems. Once you’re in the habit of recording these incidents, you can start to spot patterns and address the root cause, creating an environment for happy guests and an increased bottom line.
Two more common problems are overbooking and overselling.
What About Overbooking and Overselling?
While spillage and spoilage may indicate a lack of revenue management, overbooking can be revenue management tactics designed to maximize revenue and 100% usage.
For example, when your Revenue Manager sells more rooms than you have available, there’s a data-backed reason behind it designed to balance out these common concerns.
- last-minute cancellations
- no show
- early check out
- late check-in
- invalid credit cards
- bad weather conditions
Revenue managers try to account for certain statistical variables so they can compensate for potential cancellations. When everything works out, it’s a smart move.
One way to overbook successfully is by ensuring your guests arrive and pay.
When you take deposits or pre-authorized credit cards, then you’re protecting your revenue. When you pre-check the credit card validity and properly gauge last-minute cancellations, inclement weather, etc., you can achieve the right balance of overbooking.
Of course, if you have every guest show up, you’ve sold more rooms than you have available, then you’ve oversold, and now you need to rebook them to another hotel and hope they don’t leave you a bad review.
It’s a balance.
Forecast Hotel Revenue in 2024
Travel demand is back in full force, but guest behavior has changed. Guests want flexibility, personalization, and enhanced technology.
How do you account for these preferences while managing your profitability?
One is to assess your peak season, location, and competition. If you’re a summer resort hotel, you don’t want to offer all your inventory online at a low rate in February. Rather, drip inventory over the next few months and know the best reservations for your average daily rate (ADR) leisure travelers will come in within the last week or two.
However, you have to keep a close eye on your daily historical data, guest segmentation, and competition to make this work. It’s essential you have high online visibility. Your property needs high scores on Booking.com and other OTAs, plus recent reviews and current photographs and descriptions. A strong online presence is essential for prospective guests to find your hotel.
When your online presence combines with effective revenue management, then you sell your rooms at profitable rates that meet market expectations.
2023 summer travel was at all-time highs around the globe, and there’s no reason to think 2024 won’t be the same. Your goal as a hotelier is to get to 100% occupancy at the highest ADR. It’s challenging but can be fun.
Data-Driven Decisions Boost ADR
You need the right technology to play the revenue management game. You also need trained analysts to pay attention to the day-to-day and make suggestions.
For example, your RMS gives your Revenue Manager the past data to compare. Past trends can help them prevent spillage or spoilage. Revenue management isn’t a one-and-done approach. You want to balance each week and season with past data, including cancellation statistics, denials, and regrets. Together, this data helps you make profitable decisions.
One tip from the Revenue Team by Franco Grasso is to review cancellation and no-show data. Take invalid credit cards; if you have a high number of them, then you can check them all prior to peak dates and apply the right overbooking tactic so you avoid no-shows and late cancellations.
Many times, the summer travel season focuses on resort areas like the mountains, beach, and quiet countryside, but city-based hotels benefit from these approaches too.
Start today with the right revenue management strategy for your situation and avoid revenue loss from spillage or spoilage.
Download the 5 Revenue Management Tips ebook for ways to implement revenue management in your hotel successfully. Whether your hotel is in the city, country, beach, or mountain area, you’ll prevent spillage and spoilage when you pair your high-demand periods with the right inventory control and market demand rates. Click here to download the ebook “5 Revenue Management Tips for Hotels.”
