Managing hotel revenue is key to business success and profitability. However, cognitive biases can lead to less-than-ideal decisions. Understanding these biases and their effects on revenue strategies is crucial for hotel managers who want to maximize their revenue.
NB: This is an article from Catala Consulting
Subscribe to our weekly newsletter and stay up to date
This article looks at the different cognitive biases that can affect revenue managers and offers tips on how to reduce their impact.
What is a Cognitive Bias?
A cognitive bias is a pattern where people deviate from rational judgment, creating their own “subjective reality” based on their perceptions. These biases help the brain simplify information processing, but they often lead to distorted perceptions, inaccurate judgments, and illogical conclusions (which can have serious consequences on the hotel’s performance).
Common Cognitive Biases in Hotel Revenue Management
Anchoring Bias
Anchoring bias happens when people rely too much on the first piece of information they get (the “anchor”) when making decisions. In hotel revenue management, this can occur if managers set room rates based on initial figures without adjusting for changes in demand or market conditions. For example, setting rates based on old data without considering current trends can result in missed revenue opportunities.
Confirmation Bias
Confirmation bias is the tendency to look for, interpret, and remember information that supports one’s preconceptions. In revenue management, managers might focus on data that confirms their existing beliefs about pricing strategies or market trends, ignoring contradictory evidence. This can lead to persistent but ineffective strategies.
Overconfidence Bias
Overconfidence bias leads managers to overestimate their knowledge, abilities, or the accuracy of their predictions. This can result in setting overly ambitious revenue targets or underestimating the risks of certain strategies. Overconfidence can prevent managers from seeking out or paying attention to advice and data that might lead to better decisions.
Recency Effect
The recency effect is the tendency to prioritize recent information over older data. Hotel managers might focus on the latest booking trends or recent competitor actions, ignoring long-term data that could provide a more accurate picture of market conditions. This bias can cause managers to make reactive decisions that aren’t aligned with overall revenue strategies.
Availability Heuristic
The availability heuristic involves making decisions based on readily available information rather than all relevant data. In hotel revenue management, this might mean relying on recent experiences or easily accessible reports while neglecting a comprehensive market analysis. This can lead to poorly informed decisions that miss critical factors affecting demand and overall strategy.
How Cognitive Biases Affect Revenue Management
Cognitive biases can significantly impact revenue management by leading to decisions that don’t align with optimal strategies for maximizing revenue. These biases can cause managers to:
- Set inaccurate pricing: Anchoring and overconfidence biases can lead to pricing that doesn’t reflect current market conditions, resulting in lost revenue or reduced occupancy.
- Ignore relevant data: Confirmation bias and the availability heuristic can cause managers to overlook critical information that could inform better strategies.
- Make reactive decisions: The recency effect can lead to short-term, reactionary decisions focusing on short term gains that undermine long-term revenue goals.
Reducing Cognitive Biases in Revenue Management
To reduce the impact of cognitive biases, revenue managers can adopt several strategies:
Data-Driven Decision-Making
Using data-driven decision-making processes can help counteract cognitive biases. Advanced analytics and revenue management systems that integrate comprehensive market data provide a more objective basis for pricing decisions (removing emotions and ego from the decision process).
Diverse Perspectives
Encouraging input from a diverse team can help identify and counteract individual biases. Different team members may notice different trends and provide a broader range of insights, leading to more balanced decision-making. Invite diverse team members to revenue meetings and be open-minded about the different perspectives/ideas brought to the table.
Regular Training
Regular training on cognitive biases and their impact can help managers recognize and reduce these biases in their decision-making processes. Awareness is the first step toward addressing cognitive biases effectively.
Scenario Planning
Implementing scenario planning can help managers consider a wider range of possibilities and outcomes, reducing the likelihood of overconfidence and anchoring biases. This approach encourages thinking beyond the most immediate or apparent data points.
External Audits and Reviews
Periodic external audits and reviews of revenue management strategies can provide an objective assessment and highlight areas where cognitive biases may be affecting decisions. External consultants can offer fresh perspectives and identify biases that internal teams might overlook (consultants will – and should – challenge you when necessary).
Be Aware Of Your Cognitive Bias and Optimize Your Performance
Cognitive biases are a natural part of human decision-making processes and can significantly impact hotel revenue management. By understanding these biases and implementing strategies to reduce their effects, revenue managers can make more informed and effective decisions. This, in turn, can lead to optimized strategies, better market positioning, and maximized revenue.
Read more articles from Catala Consulting
References
- Ahmat, N., Radzi, S., Zahari, M., Muhammad, R., Abdul Aziz, A., & Ahmad, N. (2011). The effect of factors influencing the perception of price fairness towards customer response behaviors. Journal of Hotel and Tourism Management.
- Chan, E., & Wong, S. C. K. (2006). Hotel selection: When price is not the issue. Journal of Vacation Marketing, 12(2), 142-159.
- Choi, S., & Mattila, A. (2005). Impact of information on customer fairness perceptions of hotel revenue management. Journal of Hospitality & Tourism Research, 29(4), 463-475.
- Sayfuddin, A., & Chen, Y. (2021). The signaling and reputational effects of customer ratings on hotel revenues: Evidence from TripAdvisor. International Journal of Hospitality Management, 97, 103065.
- Tanford, S., Raab, C., & Kim, Y. (2013). A model of hotel defection at the purchasing stage. Journal of Hospitality Marketing & Management, 22(2), 183-203.
- Das, T., Teng, B., & George Washington, B. (1999). Cognitive biases and strategic decision processes: An integrative perspective. Journal of Management Studies, 36(6), 757-778.
- Chira, I., Adams, M., & Thornton, B. (2008). Behavioral bias within the decision-making process. Journal of Business & Economics Research, 6(8), 11-20.
