Any hotelier faced with more guests than available rooms may experience a sense of unease at the prospect of potentially taking a hit to the property’s reputation. Yet despite the possible risk, many hoteliers are able to successfully execute overbooking strategies that leave no revenue on the table, while minimizing any adverse effect on guest experiences.
For some, deploying an overbooking strategy may at first appear to be certain to result in unhappy and frustrated guests. However, the key to a successful overbooking strategy is understanding exactly what it entails, how and when it should be deployed, as well as what the advantages and disadvantages are for a specific hotel business.
What is a hotel overbooking strategy?
While the hospitality industry has an array of strategies to increase booking reservation numbers, the purpose of an overbooking strategy is to generate revenue in the face of inevitable guest cancellations. From sudden illness to missed flights and other unexpected circumstances, guest cancellations can have a negative impact on hotel profitability if no action is taken.
With this in mind, the goal of a successful overbooking strategy is to predict the number of cancellations, in order to ensure that hotel rooms generate revenue, regardless of cancellations. While it may initially seem like guesswork, hotels continue to prove that, when armed with the appropriate data, 100 percent occupancy can be achieved, while minimizing the risk of guests being turned away.
What is the most common reason hotels overbook?
A hotel’s decision to deploy an overbooking strategy is frequently made in an attempt to combat the multitude of cancellations, no shows and early checkouts on a daily basis that can drastically upend a property’s ability to accurately predict revenue and profit margins.
Left unchecked, such situations can lead to budget imbalances and an otherwise profitable hotel spending more than is being earned. With many of today’s guests preferring to book online, one statistic that should give hoteliers pause to consider why an overbooking strategy is essential is the fact that almost 20 percent of online bookings result in cancellations.
What are the advantages of overbooking?
When performed correctly, an overbooking strategy can provide hoteliers with the opportunity to mitigate revenue losses and achieve full occupancy, resulting in sustainable long-term financial growth. With all rooms continuously occupied, hotel businesses also gain the ability to operate beyond their traditional profit margins.
For a booking channel manager, an effective overbooking strategy can also prevent increasing numbers of cancellations from resulting in lower hotel rankings on OTA searches. Other hotel operations to benefit include sales teams, who would otherwise need to start from scratch as a result of last-minute cancellations, leading to increased pressure to re-fill vacant rooms.
What are its disadvantages?
No business strategy comes without a certain degree of risk, and the same is true when it comes to overbooking practices. The most obvious challenge is that a hotel’s cancellation or no show forecast has the potential for miscalculation, with more guests ultimately arriving than a hotel has available rooms.
If handled incorrectly, such instances can lead to poor guest experiences that wreck any chances of earning or maintaining guest loyalty. With affected guests able to easily share their experience with others by leaving negative online reviews via social media, a poorly planned overbooking strategy can jeopardize a hotel’s ability to attract future guests.
How to plan and execute a hotel overbooking strategy
As with any aspect of hotel revenue management, access to both relevant and timely data can make or break a hotelier’s ability to implement a successful overbooking strategy. Rather than take a stab in the dark to estimate the potential number of cancellations, hotel industry professionals can instead turn to their PMS and booking engine for high-value insights.
Using booking analytics obtained from such systems, hotels can uncover historical trends and patterns pointing to a more accurate number of upcoming guest absences. For example, hoteliers may be able to determine that a higher rate of cancellations arise from individuals traveling alone or those who book using an OTA.
Yet to be successful, hoteliers must take into account the fact that compiling data is a time-consuming process, with data sets subject to sudden change that can reduce forecast accuracy if not timely acted upon.
To sidestep this challenge, hospitality industry businesses are increasingly adopting analytical software that can compile relevant data not just automatically, but in real-time. To ensure heightened effectiveness in predicting cancellations, data sets that should form part of any analysis include:
- The number of available rooms
- The anticipated number of walk-ins
- Cancellations or no shows for the same period during previous years
- The total amount of reservations featuring a payment guarantee
- Projections on potential understays or overstays
Analytical tools can also look beyond prior booking history and incorporate external factors such as time of the year or the presence or cancellation of upcoming events that can likewise have an impact. Other examples further include changes in weather, flight cancellations, local traffic as well as an increase or decrease in Google searches for a specific region.
Better still, analytical platforms can identify and track the reasons behind guest cancellations and no-shows. When armed with this information, hoteliers can begin to adopt measures that reduce the likelihood of a guest making a sudden change of plans.
How do hotels handle overbooking?
To ensure a successful overbooking strategy, once equipped with the necessary analytical tools, hotels must determine their comfort level, in terms of achieving 100 percent occupancy versus the potential for a guestroom to be reserved for more than one guest. A cancellation forecast regardless of the use of data, is nonetheless an estimate of potential guest behavior.
A good practice that hotels can follow is setting a threshold for the number of guests turned away when reaching full occupancy. For example, a hotel able to reach occupancy goals during five consecutive days should aim for turning away a guest on three days out of the five. Anything more risks damaging the hotel’s reputation. Anything less means potentially losing out on revenue.
How to compensate guests when they can’t be allocated a room
The key to a successful overbooking strategy is recognizing that some guests will be inconvenienced, so to safeguard the property’s reputation, it pays to have a backup plan to minimize disruptions to affected guest travel plans.
Ideally, a hotel should form partnerships with other properties in their area who can serve as a nearby alternate location to house overbooked guests. This option can include offering guests a discounted price, or hotels can form an agreement where each offers to take in displaced guests at no additional cost. Free transportation to the alternative hotel should also be provided.
Tips to follow to create a successful strategy
While attempting to identify a hotel’s acceptable level of actual guest overbookings is crucial to an effective strategy, there are other factors that can likewise influence a hotelier’s rate of success:
- Place a limit on the number of overbookings: Nothing could be worse for a front desk than a multitude of guests showing up with nowhere to stay. Managers should avoid this risk by placing a cap on the maximum amount of overbookings allowed across their various booking channels.
- Review cancellation policies: Hotels should provide themselves with at least 24 hours to resell rooms affected by a guest cancellation. Cancellation policies must keep this need in mind to avoid last-minute pressure to occupy rooms that will otherwise become vacant.
- Accommodate guests according to price range: Guests paying a higher rate should always be prioritized over those booking for less. This not only increases a hotel’s profit margin, but also ensures that guests paying for premium service are always taken care of.
- Maintain a list of overbooked guests: Creating a list of guests subject to potential overbooking versus those who have a guaranteed room can prove highly valuable in sidestepping any check-in surprises. Such lists can be used to remind guests that their reservation isn’t assured until they confirm their pending arrival.
Mistakes to avoid
In conjunction with what hotels should do to maximize overbooking strategy success, there are also a number of factors that hospitality industry professionals should be aware of that can jeopardize their efforts:
- Not using a channel manager: Cancellations can wreak havoc on a hotel’s ability to maintain an accurate list of available inventory if channel management software isn’t used. To prevent guests from being needlessly turned away, all channels need to be consistently updated which is simply beyond the capabilities of manual processes.
- Not having a recovery plan: Adopting an overbooking strategy with no consideration of how to treat affected guests is likely to end in disaster. Hotels should not just have alternative accommodations in place for the overbooked night in question, but for multi-night stays, and should attempt to win back guest trust with service upgrades.
- Not training staff to adequately handle overbookings: While employees may have hospitality training, handling overbooked guests is a particularly tricky situation that must be handled with absolute care. Ill-prepared staff who do not know how to diffuse a guest who is experiencing frustration can make a bad situation potentially much worse.
What the industry research says
With the advent of AI and machine-learning, the ability for hotel management to deploy a successful overbooking strategy, while minimizing disruption to guest experiences, has only increased. For example, a study was recently conducted where researchers utilized a machine-learning model to examine 13 variables related to the booking process. These included:
- Reservation date
- A stay’s start and end date
- How far in advance a reservation was made
- Number of weekend days included during the stay
- Deposit amount
- Booking method
- Nightly price
- Number of adults in group
Using these variables alongside their generic algorithm, the researchers were able to predict cancellation volumes with 98 percent accuracy. With such enhanced reliability, the risks of a hotel experiencing actual instances of guest overbooking grow much smaller, while the potential to maximize revenues by filling otherwise empty rooms significantly increases.
In a separate study, researchers evaluated an array of relationships including pricing parity and room availability on OTAs, a hotel’s pricing on its own website, and compensation rates in order to determine potential levels of profitability and risk. Ultimately, the study determined that a hotelier’s level of compensation to denied guests is central to overbooking strategy success.
This is due to the fact that compensating denied guests represents a significant cost which inevitably influences a hotel’s comfort level in accepting overbookings from third-party OTAs. The less reservations a hotel is willing to accept, the less a hotel’s offerings will be promoted as OTAs lose the incentive of receiving a commission.
Such results further strengthen the concept that a successful overbooking strategy requires a harmonious balance, with hoteliers more than ever needing to analyze various data sets in order to adopt an approach specifically tailored to the goals and needs of their business.
Those that minimize compensation levels and maximize acceptable levels of overbookings stand to gain the most profit, yet at greater risk of damaging reputations. Those performing the opposite are bound to substantially underperform in obtaining revenue. The key, therefore, is to find the optimal middle ground where guests can be fairly compensated without eating into the profits that an overbooking strategy is meant to protect.
Maintaining Sustainable Business Growth
In today’s hotel industry climate where a number of factors can result in a drastic change to reservation volumes, adopting a successful overbooking strategy has become essential to maintaining a consistently profitable business. Without one, hoteliers risk not only losing out on increasing revenue but also boost the likelihood of guests experiencing frustration.
Fortunately for hotels currently considering whether they should deploy their own overbooking strategy, advanced tools and best practice guidance are now widely available to assist them. It is ultimately up to each hotelier to determine how such platforms and industry knowledge can be applied to the unique needs of their business and guests to ensure long term success.
Graduated from Standford University, Arielle has over 5 years of experience in the Hospitality industry. She holds an MBA in business administration from the IDC Herzliya, Israel. She currently works as Account Manager at UpStay, building and maintaining strong, long-lasting customer relationships. She is deeply passionate about helping hoteliers unlock significant new revenue streams from unsold premium inventory.