Two American economists, Paul R. Milgrom and Robert B. Wilson, were recently awarded the Nobel in economic science on improvements to auction theory and inventions of new auction formats — innovations that have had huge practical applications when it comes to allocating resources. Such practical applications exist in hospitality and can help hoteliers generate more profit and better guest experience.
Such applications, for example, can tackle one of the biggest pain-points for hoteliers – unsold premium inventory – and can be used by every hotel that has a good range of categories, the more expensive of which is harder to sell.
Guests are more likely to buy a standard category than to spend the extra upfront on a suite when booking their stay, whether they buy direct or via an OTA. To avoid having vacant rooms in the premium categories and to drive occupancy up, hotels can either sell their premium rooms for a standard price or overbook their standard categories and then give away complimentary upgrades which result in the same – guests pay the standard price for premium rooms.
Guests are much more likely to be attentive and responsive to upgrade offers in the post-booking period, and even more – pre-arrival, but such offers must be personalized, very focused on one significant stay enhancement for the guest and their value should be super attractive to make the guest increase his spend and take on such offers.
So how to price an upgrade?
Humans rarely choose things in absolute terms. We cannot really know, without additional information or context, what is the objective value of something. Rather, we focus on the relative advantage of one thing over another and estimate value accordingly.
For this reason, two guests can value the same upgrade very differently, making it very hard for the hotel to price the upgrade. An upgrade to the Junior Suite, regularly priced at $225 per night could worth only $100 for a guest who is keen on spending his days outdoors, but could be $175 or more to a couple of guests celebrating a special occasion.
Pricing such an upgrade at $150 per night will cause the hotel to lose money twice: The first guest would find it too expensive and would not go for the upgrade (He might as well end up in the Junior Suite for free given a complimentary upgrade), and the couple would find the upgrade very attractive paying for it 50$ less than they would have spent. The accumulated subjective values of the two types of guests are $275, but the hotel managed to generate only $150, leaving $125 missed revenue.
What auctions have to do with it?
Auctions help to sell a variety of products, including diamonds, minerals and online advertising. They can also take on various characteristics: Objects can have a shared, common value for all bidders (such as commodities like oil) or private values that vary across bidders (like art). Bidders may know exactly what the object’s value is, or they may have imperfect information. Bids can be open, meaning everyone can see them, or close.
The first to adopt auctions in the travel industry were the airlines. Taking off with unsold business or first class seats is an undesired business result. So they leveraged technology to offer their passengers a “last minute” chance to upgrade to one of their unsold seats. This, and other smart upselling and cross-selling is responsible today for 19% of the airlines’ revenues.
How does it work?
- A few days before the flight’s departure, the airline sends upgrade offers to segmentized passengers offering them to upgrade their seats to a higher class.
- Passengers digitally bid for a seat upgrade from their home, office or mobile phone.
- Shortly before the flight’s departure, winning bids are automatically upgraded based on the remaining unsold seats on the flight.
The same problem and solution apply off course to hotels’ premium room inventory. This creates a non-dilutive incremental revenue generation for hotels, allowing them to engage their guests in the most inspiring way possible, introducing to them options to enhance their stay for a value beyond any expectation, while being able to sell their premium inventory for a full price until the very last minute.
To make things even more interesting, Data Science can predict which upgrade is the best to offer a specific guest, and the connectivity revolution between PMSs and other technology companies can leverage real-time inventory analysis to maximize hotels’ profits and make much better experiences for their guests.