Implementing an Appropriate demand – driven Inventory Control Strategy

Once a hotel knows the cost of each channel, then a demand-driven inventory control strategy, taking into consideration the channel costs, needs to be executed. Applying stay controls can be a very complex issue and many hoteliers underestimate the impact the controls have on revenues — both positively and negatively. If used without a complete understanding of the full impact on all stay patterns, stay controls can ultimately be devastating to a hotel’s revenue (domino effect). If applied properly and carefully, the hotel can truly capture the optimal business. However, if applied without an understanding of the impact, the hotel can miss opportunities and turn away significant amounts of business.

Prior to applying inventory controls there are some items that must be understood and considered. The first is the general rule of thumb that in order to apply any stay control(s) there must be periods of excess demand. Otherwise, the hotel will be turning away business unnecessarily. More about this and its impact will be addressed in the stay pattern management section.

Before any inventory control strategies are implemented it is also important to know the impact of overselling, walk costs, channel management, and managing group wash. Each of these areas has a direct impact on inventory control.

Overselling

Management wants to ensure the hotel reaches its maximum potential capacity for any given stay pattern in order to maximise revenue. Sometimes that means selling out the hotel to 100% capacity. It is often necessary to oversell the hotel in order to achieve this goal.

Overselling is the practice of accepting more reservations for a particular day than there actually are rooms in the hotel. This is in order to compensate for the estimated wash factor. The wash factor is the hotel’s estimate of no-shows plus cancellations and early departures.

Knowing how much to calculate as a wash factor can be quite challenging. The wash factor is determined by taking the historical no-show and cancellation information that is being tracked by the hotel and comparing it to the current booking pace activity. Additionally, it is important to look at the number and breakdown of arrivals. For example, the number of guaranteed reservations versus non-guaranteed reservations will be a factor in estimating potential wash.

When considering an oversell strategy it is important to include all costs associated with this — both tangible and intangible.

“Walking” is the result of what needs to happen when a hotel is oversold and the no-show plus cancellation estimate is too high. This means that a guest has a guaranteed booking at a hotel but the hotel will not be able to accommodate the guest for that night. Therefore, the guest is “walked” to an alternative hotel facility. The process of “walking” can be handled in two different ways. The first is probably the most common practice. The guest arrives at the hotel to find that the room reserved is not available and they will be staying at an alternate location — ideally already selected and reserved by the “walking” hotel. The second and less common practice is when a hotel contacts the guest prior to their arrival to inform them of the alternative hotel arrangements. This latter practice typically happens in a situation of extreme oversell.

The costs associated with “walking” are both tangible and intangible as stated above.

Some of the tangible costs are obvious such as the payout to the receiving hotel to which the guests are being sent, and any corresponding transportation costs such as taxis. These are normally absorbed by the hotel needing to “walk” their guests.

The intangible costs are a little bit more difficult to identify and many times are not weighted as heavily as they should be. Some intangible costs associated with overselling thus resulting in a “walk” are:

• A potential loss of a customer to the competition. This guest may not return again regardless of the efforts made by the hotel to make the situation as comfortable as possible.
• Loss in the hotel’s reputation due to the need to walk the guest. Unfortunately, viral marketing can work in reverse in this type of situation. Customers who have had a bad experience with one hotel can verbally spread the word and the hotel may develop a poor reputation.

A pound value should be put against both of these items so it can be included in future displacement analysis.

One other point that needs to be considered is a cross between the tangible and intangible costs and that is distance between the original hotel and the location to which the guest is walked. This can vary based on the time of year. For example, during a peak time in England, a hotel in Manchester Centre will have a very difficult time finding an available hotel within a reasonable distance. Therefore, the pound value that is placed on a “walk” during peak time in central Manchester should be much higher than it is at other lower-demand times of the year.

The following is an example of how to arrive at a “walk” cost.

The “walk” cost is important to take into consideration when implementing inventory management. If the controls are not appropriately applied, and the hotel has to “walk” customers, it is important to understand the complete impact for the hotel.

That being said, it is important to understand that the practice of overbooking which results in “walking” is a cost of doing business. There is a risk involved but hoteliers should not be in fear of implementing this practice as, if done right, it can greatly help to optimise revenues. As long as the hotel does not find a large number of “walks” being done regularly, then this is something that must be worked into the overall strategy and even budgeted for.

Stay pattern Management

In addition to a demand-driven inventory control strategy, stay pattern management can further enable a hotel to maximize revenues. A reservation’s stay pattern is the combination of arrival date and length of stay.

When maximizing revenue you want to accept the optimal number of reservations for each stay pattern, not the greatest number of reservations for each individual day.

The reason for this is because taking as many reservations as possible for one day could preclude a longer length of stay that includes that day, thus losing potential revenue for the surrounding days. This lost revenue may not be made up by shorter lengths of stays running through those surrounding days.

Example:

Stay Pattern 1 Arrival 10th November, one-night stay

Stay Pattern 2 Arrival 9th November, three-night stay

If all available rooms on 10th November were sold to Stay Pattern 1 and then a request was received for Stay Pattern 2, the hotel would have to turn away Stay Pattern 2, thus losing potential revenue for 9th November and 11th.

A day’s total unconstrained demand is the sum of room nights from guests wanting to arrive on that day plus room-nights generated by guests who would arrive earlier and stay through.

Stay pattern management works to achieve the optimal mix of stay patterns through each potential sold out date by limiting the stay patterns going through that date. Because the overall objective is to maximize revenue and not occupancy, it is possible to have a solution in which a potential sold-out day does not sell out and yet revenue is still maximized.

This lesson will help you to understand the impact of pricing on the bottom line and comprehend the importance of strategic pricing and why it is a priority over tactical pricing.

Once the revenue strategy is secure, it is vitally important to accurately price the perishable room inventory. Industry experts indicate that when a hotel realizes revenue growth through rate, 95% flows to the bottom line, and if the growth comes through occupancy, approximately 50% flows to the bottom line.

This drives home the importance of pricing and the impact of appropriately developing a hotel’s pricing strategy and managing the tactical execution of the strategy.

In the past, revenue management practices had a strong focus on the management of stay controls, such as length of stay requirements in an effort to maximize revenues, and pricing was secondary. Today, the focus has grown to place more of a priority on the importance of pricing strategies.

Pricing strategies allow hotels to charge different room rates for the same or similar rooms according to customer’s characteristics and needs. For example, a senior citizen traveler looking for a discount has different needs, different characteristics and a different willingness to pay than a corporate traveler has. As a result, they may book the exact same room but pay a much different price. Along with the different price there may be certain booking requirements or unique restrictions.

Once the market segments are defined for a hotel, it is up to the revenue manager to ensure a healthy mix of the segmentation.

Since hoteliers offer multiple rates for essentially the same room type it is critical to understand the importance of pricing and all it encompasses. We will continue in the next article to explore strategic pricing and the various pricing-related elements.

Developing a long term pricing strategy is a very important part of a hotel’s overall revenue management process. Proper creation of a pricing strategy and proper deployment of that strategy will ultimately provide the hotel with an opportunity to identify and capture the optimal revenue opportunities.

Too many hoteliers take a tactical approach as opposed to starting with a strategic approach. Developing a long-term strategy allows hotels to look out into the future and do a proper analysis of the realistic needs and opportunities and determine the most appropriate pricing for their hotel in the current marketplace. This is the best approach and is a good start to ensuring the hotel has an eye out to the future and is focused on long term benefits.

Strategic pricing allows hotels to be proactive and provide guidelines and plans for the entire hotel sales team to effectively sell the products.

Pricing guidelines will allow the sales department to effectively and confidently quote rates for the future because they will know the price points for specific demand periods and specific dates. With pricing guidelines, sales will have the opportunity to analyse the potential business themselves and work quickly with the customer without having to take the time to discuss pricing with the revenue director unless there is an unusual circumstance. Ultimately this allows for more empowerment and confidence in the sales department as they will have a solid understanding of the hotel’s future outlook, peak demand times and times of need.

Strategic pricing done right offers the following benefits:

• Reflect overall corporate or hotel strategies such as maximum growth, maximum revenue or new market growth objectives;
• Communicate positioning, image and branding for targeted segments;
• Communicate expectations of product quality, status and value to prospective customers;
• Determine long run revenue flows and ROI;
• Be used as part of the process for building long term customer relationships.

Creating a Pricing Strategy

Creating the pricing strategy should include all of the revenue team members. This is something that has to be done as a team and not by one person alone. Each revenue team member will have a unique perspective and important input. Additionally, this will ensure buy-in to the final strategy is positive across the board with everyone who must support the strategy moving in the same direction.

Creating a proper pricing strategy requires an understanding of customers’ willingness to pay, customer segmentation, consumer psychology, competitive value analysis, market research, value creation and, of course, revenue management.

Every pricing strategy must address the following elements:

• S.W.O.T. analysis – provides a solid understanding of the hotel’s unique attributes, strengths and weaknesses for both services and product.
• Market position – every hotel must put together an analysis that allows careful evaluation of the hotel compared to its competitors. It is important to understand the market position of the hotel within the competitive set. This will be an important part of determining the pricing for the hotel.
• Seasonal demand – one of the fundamentals for a pricing strategy is to understand market demand for the various seasons in the marketplace. Flexibility for seasonal rates must be taken into consideration.
• Day of week demand – in addition to the seasons, it is also important to take into consideration day of week flexibility. What are the hotel’s peak days throughout the week? What are they for each season?
• Customer segmentation – understanding the customer segmentation specific to the marketplace and to your hotel is critical. Every hotel must identify the target customer segments appropriate for the hotel and accordingly create price points to satisfy each segment.
• Special need periods – identify the hotel’s need periods and areas of opportunity for promotional offers. This may include holidays, special events in the marketplace or low demand times. Identify these times and create promotional offers as part of the hotel’s overall strategy. This will ensure the team will not need to create something last minute and potentially miss an opportunity.

The successful development of business is absolutely impossible without innovation in the hotel industry today. It is more and more difficult to engage new clients by using traditional methods – time does not stand still and the requests of the target group change at the speed of light. But how to satisfy the desires of customers in the new year, and, more importantly, how to improve the service through the use of new technologies?

There is no better advertising than a product that speaks for itself – this has been confirmed during the most important event of the last month, the International Consumer Electronics Show (CES 2018), which was held at the Las Vegas Convention Center.

The event presented a huge number of new products and unique innovative technologies in the consumer electronics industry, including those that not only can increase interest in your hotel, but also change the attitudes and help you to see simple things in a new light.

Here’s a list of powerful reasons to consider innovation as the key elements of marketing this year.

Keep up with the times

To keep up to date and stay in line with reality is a difficult task for any kind of business. The 21st century is so much different than the past times due to the rapid development of technology, which gives you free and accessible opportunities to develop and grow your business. The improvement of existing items of daily use and the constant search for alternatives creates the necessary atmosphere in the business infrastructure and makes a positive impression on visitors.

Convenience

Simplicity is synonymous with convenience. Everything that makes life easier makes it more pleasant and less stressful. Modern technologies are aimed at helping people to feel the comfort that lacks in solving complex daily tasks, eliminating problems and in finding answers to questions. What, first of all, is the hotel room – rest, and what can be a more attractive element for a person than comfort, and, of course, relaxation?

Design

In the planning of the upgrade, your hotel is not impossible to forget about the interior space and design. Some of the interior design trends of this year are closely connected with the style of the digital technologies (e.g. Monochrome and Comfort spaces). It means that this connection gives a great opportunity to improve a hotel interior, change your approach to innovations if you didn’t get a chance to do it before. Remember: your style is your calling card.

“There is no better advertising than a product that speaks for itself”.

Functionality

Comfort in the hotel is closely related to the functionality. High level of functionality in the room allows the client to relax and feel in the “hands” of professionals. To spare relieve a guest from unnecessary inconveniences, to replace two actions by one and to facilitate the stay in a hotel are possible with the help of clever and stylish equipment. This is called the luxury and care of guests.

Self-explanatory

Collaboration and cooperation with world brands, improving the digital and interior design and functionality of hotel rooms, tracking trends – all of these are a guarantee of profit for a modern business. The hotel, which has earned authority, thanks to the quality of provided services and its modernity, is doomed to success because its “face” and brand are direct advertising of its services.

In turn, we advise not to ignore the technologies and development of the world of innovation, because technological progress is a direct and obvious way to win the audience trust and, of course, an extraordinary and useful way of thinking about the successful development of the hotel business.