How does overbooking influence hotel revenue?

Aug 16, 2019 | Channel Manager, Revenue Management

Booking cancellations and no-shows are common phenomena throughout the hospitality industry. While they disrupt normal functioning of a hotel, they also afford an excellent opportunity to generate additional income. Unfortunately, using this opportunity to your advantage is harder than it seems – you need to be able to identify certain regularities, trends and patterns in guests’ booking behaviours. You will also need to forecast such trends and behaviours with precise accuracy based on available data. Yet, the potential benefits for the hotel may prove big enough to be worth the risk. How to make extra revenue and turn overbooking into success? How to create an effective overbooking strategy?

Mission: optimization

Generally speaking, the most fundamental task for a person in charge of hotel’s revenue, that is executive director or revenue manager, is to take all possible actions aimed to maximise yield for the hotel owner. It takes well-planned strategies and bold improvised decisions on many levels to achieve this challenging aim. Broadly understood optimising and managing hotel revenue, including mapping out the overbooking strategy, is a good example of a hotel management field that requires an extensive experience, industry knowledge as well as up-to-date advanced analyses and prognoses. Properly defined revenue management strategy can boost hotel’s financial results and sustain clients’ loyalty and satisfaction on a stable level.

In the recent years issues concerned with revenue management and overbooking have been broadly discussed. While a few years ago hotels would mostly shape their own price policy and continuously adjust it to the changing market, today this process is largely automated. This was achieved through including Revenue Management Systems into standard hotel system architecture consisting of PMS, Booking Engine and Channel Manager. Yet it’s wrong to assume that investing in innovative technological solutions will be an answer to all problems. While Revenue Management Systems facilitate the work of both reception and management staff, their operation needs to be continuously controlled, optimized and adjusted to the changing environment and individual business objectives.

Cancelled bookings and overbooking

In principle, hotel policy is to avoid confirming more rooms than the available capacity of a hotel at a certain time, yet hotels often take the risk of overbooking and confirm more reservations than they can in fact accommodate. Why is that? The answer is simple – overbooking is probably the most efficient way of boosting hotel’s financial results. Booking cancellations happen in every hotel, to a greater or lesser extent. If done early enough, chances to sell the room again are fairly big. The situation is more complicated if a client decides to cancel their reservation last-minute. Situations like this one are not uncommon. On one hand, hotels accept a certain amount of reservations not guaranteed with advance payments, business travellers, on the other hand, happen to change their plans, while tourists can fall victims to flight delays or other chance events. Hoteliers are also well acquainted with the type of customers who do not show up despite having booked and paid the room.

Taking the above factors into consideration, it is clear that achieving 100% occupancy and, consequently, using full economic potential of the hotel is virtually impossible. To reduce revenue loss, hoteliers increasingly decide to implement overbooking strategies in their establishments – it means that some of the rooms are sold twice as it is calculated that otherwise the rooms would remain unused due to booking cancellations and no-show guests. The challenge here is to implement a strategy that would, on one hand, boost the hotel profitability as expected without compromising guest satisfaction on the other. Unsurprisingly, it is not an easy task. Tourism industry tends to be capricious and tightly correlated with weather conditions, economy and chance events that can turn long-traced tendencies upside down. All this makes estimating cancellation factors and no-shows all the more difficult and complex. What’s worse, defining separate factors for different types of rooms or time remaining until arrival is recommended to obtain possibly accurate data. Estimates accuracy plays a vital role in the process and it’s dependent, first and foremost, on the amount and quality of back data – preferably collected in a central property management system (PMS). Based on this data it is possible to forecast the number of booking cancellations, no-shows, understays or stayovers.

Auto-replenishment

Accurate factor estimates are a key to success only in theory. Experience shows clearly that, to implement overbooking strategy, we need to assume a broader perspective on the situation. Nowadays hospitality services are sold through a range of channels, directly (through reception staff, call centres and hotel booking systems), as well as via multiple OTAs. The latter sales channel is guilty of complicating our task, as many OTA services have designed and implemented a series of tools allowing for active handling of the cancelled reservations. One of the most common tools is the auto-replenishment. In a fully unattended, automated way it puts rooms vacated due to booking cancellations back up for sale. According to Booking.com statistics, as many as 73% of such rooms are successfully sold again, thus having a positive impact on the hotel’s financial results, yet it seriously inhibits effective implementation of the overbooking strategy.

How to solve this problem? Not all repeated bookings done via OTAs are welcome at a certain moment but have to be accepted due to certain agreements in the cooperation terms. To avoid repeated booking you can raise the price of the room or limit the demand on the room otherwise – e.g. setting MinLOS to 3-5 days. Taking such action should bring the expected result, yet it requires higher staff involvement. It would be much more reasonable to implement solutions bringing the same effect with minimum staff involvement. We will discuss it further in the text.

Optimal system infrastructure vs overbooking

A precondition for an efficient and smooth operation of a hotel is the automation of its repeatable processes with technological solutions available on the market. It is no different in the case of overbooking as it can be effectively managed via the products offered by YieldPlanet.

Our Channel Manager uses centralised allotment to continuously implement overbooking strategy, at the same time avoiding the situation when some guests need to be walked to another establishment. This system allows for overselling the hotel capacity, yet it preserves the auto-replenishment blocking rule which means that rooms vacated through booking cancellation are not put up for sale again. Revenue rules are another new function to do the overbookings in a controlled manner and manage them effectively. You can execute this strategy by differentiating room availability and prices in various channels. It is vital that the prices are high enough – in the worst case scenario the staff will be able to walk the guests to nearby establishments of the same or higher category without paying extra costs. At this point it is worth pointing out that if you decide to start implementing overbooking strategy in your property, you need to have detailed procedures for situation when you need to walk your guests. This includes a list of trusted hotels that will accept your guests.

Therefore, you might want to consider adding an advanced Revenue Management System to your hotel system architecture – e.g. YieldPlanet’s Price Optimizer. RMS will further automate auto-replenishment avoidance process in individual OTAs through adequate price or MinLOS manipulations, as described earlier in the text. As the burden of manually modifying room offer parameters will be taken off of the revenue manager, they can gain save a significant amount of time to optimize currently applied strategies, perform in-depth analyses of customer behaviour patterns and search for new ways of boosting the property profitability.

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