Sorry, We Are Full! Why 100% Occupancy May Not Always be the Best
The cliché of being successful by driving the Hotel to the perfect 100% occupancy, it is many times a concept still hard to die.
NB: This is an article from Revenue Acrobats
Too often, hoteliers get either anxious about selling the last room available or euphoric to create a solid “safe” occupancy base for the future. This way, they lose the sense of what the real goal should be: to optimize RevPAR.
RevPAR optimization should look beyond the single peak days, to capture the best incremental revenue by looking at the big picture, factoring the pre- and post- stay days’ revenue opportunity.
The revenue displacement (to accept one type of customer business and displace -not accept – another type of customer business) is to be considered in the assessments: over a sold-out day, how much loss of demand entails any early arrival or extended departure bookings? Assuming a Hotel with an average length of stay of 3 nights, a single day of sold-out can cause a huge revenue loss over the neighboring days.
The estimate of the potential displacement is naturally linked to the moment: the further we are from the booking window, the riskier it is to create the infamous “occupancy safety baseline” because if too early, it is difficult to predict exactly how the market and the demand will move in that specific period, and be able to optimize it accordingly.
On the other hand, falling into the temptation to fill last-minute empty rooms by leveraging the price alone can be just as wrong if we don’t consider the market, the supply and price sensitivity. (in addition to the value vs price, which, however, deserves further insights)
A hotel with 90% occupancy can generate a higher revenue than the same sold-out hotel, in the same demand conditions.
The optimal combination of ADR and occupancy leads to the definition of the RevPAR which is the only index able to measure the effectiveness of a strategy. However, with a holistic approach to Revenue Management, we cannot ignore the TRevPAR (Total RevPAR) and optimize the total revenue by looking beyond the rooms alone.
On potential sold-out days, very often hoteliers concentrate just on the inventory management, neglecting the segment management: to whom are we selling the last rooms and how much incremental ancillary revenues / extra spending can the customer bring us?
A new customer costs on average 5 to 15 times more than a returning one. Losing a loyal customer by refusing reservations due to lack of availability can result into a huge investment needed to acquire new demand, with the risk of not being able to fully replace the business lost.
These considerations are not meant to demonize the 100% occupancy strategy but are an invitation to make decisions based on numbers and evaluate all aspects, pros and cons of a fully booked day.
The costs of sold outs are devious and hidden, but with an approach and vision beyond the single day – assessing the booking window, revenue displacement, ancillary / extra revenue, competition, demand, price sensitivity and customer loyalty – it is easier to make thoughtful decisions that bring the Hotel to the achievement of the best possible RevPAR.