Out of all the sources of revenue in a hotel, rooms are the most important, so the aim of hotel managers is always the same: sell the right room at the right price to the right customer at the right time.
This principle of inventory optimization sounds nice and straightforward, but achieving it consistently is easier said than done. Rooms inventory is constantly changing and there are so many variables at play.
In addition to direct bookings (hotel website, phone, email, walk-ins), hotels source their business from a variety of channels such as bed banks, online travel agencies, global distribution systems and metasearch engines.
These are efficient ways of providing hoteliers with the supply of heads on beds that they require. The downside is that the competitive nature of the online supply chain and bulk purchasing deals can put downward pressure on revenues for hoteliers.
Generally speaking, hoteliers are very good at filling their lower-priced room categories but less successful at selling the suites or deluxe products that command higher price points and profit margins.
High occupancy levels are a key measure of success in the hotel industry, but all too often they are achieved by excessive last-minute discounting and no-cost upgrades.
In fact, during busy periods it is common practice for hotels to overbook their rooms inventory. This is done because on any given night there will be a certain number of guests who, for whatever reason, never arrive.
Most hotels experience a no-show rate of between five and 15 percent. Last-minute cancellations and guests not turning up mean the rooms sit empty and become revenue losers.
To protect themselves from this lost revenue, hoteliers might overbook their rooms by up to 15 percent.
Risks of overbooking
Overbooking has been part of the hotel industry for centuries. But it is not without its risks. The hotel may have to turn away a guest with a confirmed reservation. When this happens it’s called ‘walking.’ A hotel employee must face the customer’s anger and ‘walk’ him or her to another nearby property.
Overbooking is stressful for everyone involved and yet it happens more often than we might think. Understandably, hotel operators choose to keep quiet about it.
Occupancy versus costs
Unsurprisingly then, some believe it’s a mistake for hoteliers to focus so much on occupancy as a key measure of success.
In addition to the stresses caused by overbooking, running extended periods of high occupancy can result in higher maintenance and refurbishment costs.
Additional metrics such as costs per occupied room (CPOR), average daily rate (ADR) and gross operating profit per available room (GOPPAR) need to be tracked alongside occupancy to gain a true picture of hotel performance.
In some cases, high occupancies and an emphasis on filling low-value room categories can result in higher costs and lower profits, says Tim Kolman of consultancy Neoteric Hospitality. He provides the following example for a 100-room hotel:
80 percent occupancy at $100 per night
80 x $100 = $8,000
Costs per occupied room = $20
80 x $20 = $1,600
$8,000 – $1,600 = $6,400 profit
100 percent occupancy at $80 per night
100 x $80 = $8,000
Costs per occupied room = $20
100 x $20 = $2,000
$8,000 – $2,000 = $6,000 profit
If we extend the above examples over the course of an entire year, the difference in profit is $146,000. Although these are over-simplified scenarios, they confirm that some high-occupancy situations can lead to lower profits if hoteliers are focusing on occupancy instead of maximising total revenue.
Shift the business mix upwards
The solution is to achieve a better ratio of low to high-value bookings. If hoteliers can shift at least some of their discount bookings into higher price points, it’s a win-win situation that not only delivers more revenue at higher profit margins but frees up the easy-to-sell rooms once again.
Even shifting a small percentage of bookings from discount to rack can result in a significant increase in top-line revenue.
Post-booking inventory optimization
Just as some hoteliers may be focusing too much on occupancy as a key performance indicator, the industry tends to obsess about getting the bookings in the first place, but ignores the opportunities to increase revenue after a booking is made.
Historically, hotels have followed the airlines when it comes to sales and marketing innovations. Airlines have been very good at generating extra revenue from existing ticket holders by selling upgrades or extra services. In 2019, they made $109b from ancillary services.
It is now time for hoteliers to catch up.
Rather than obsessing over how to get more customers, there is a great deal more that hoteliers can do to maximize the value of the bookings they already have.
It is much easier to sell to existing customers than to new ones. The trick to upselling and cross-selling is making an appropriate offer at the right time.
And yet choosing the right time to upsell is not easy. It’s probably not when a guest is checking-in. The guest will be tired and eager to get to their room and the receptionist will want to deliver a quick service, especially if there are other guests waiting in line.
Digital is better
UpStay is a SaaS (software as a service) upgrade solution that removes the complexity of upselling for hoteliers.
Crucially, the process is carried out digitally prior to arrival. The guest receives a personalized email offer to upgrade his or her room a few days before check-in. Guests choose how much they would like to bid for the room upgrade. Shortly before arrival, guests are notified if they were successful in their bid for the upgraded room.
There are several benefits to this approach:
- The UpStay Upgrade Solution removes the risks and uncertainties associated with face-to-face upselling.
- Instead, hotel employees are freed up to concentrate on other areas of customer service.
- The UpStay Upgrade Solution empowers the guest to decide, in her own time, whether to upgrade.
- The bidding process puts the guest in control of how much extra they are willing to spend; it’s fun and creates an exciting sense of anticipation.
- The UpStay software easily integrates with commonly-used hotel PMS and CRM.
- It’s completely automated and powered by artificial intelligence resulting in no overhead costs.
Supporting the hotel industry’s post-Covid recovery
The UpStay Upgrade Solution is supporting the post-Covid recovery. It is enabling hotels to leverage unsold room categories to generate extra profit and receive a completely new automated revenue stream.
On average, Upstay results in 15% of room bookings being upgraded (three times higher than the industry standard) with an average extra spend of $247 at resorts and $141 at city hotels.
At the Les Bains De Lavey 69-room resort in Switzerland, using the Upstay Upgrade Solution resulted in a new annual passive profit of $30,000. At the Jordache Hotel Group in Israel, the software generated an extra $150,000 in one year.
Hoteliers have long struggled with the complexity of room inventory optimization. Finally, UpStay is providing an entirely new approach – refreshingly simple, guest-centric, and intuitive.
Ben Walker has 20 years of experience in the hotel and travel sectors. He has worked as PR & communications manager for TRI Hospitality Consulting London, the creators of HotStats, the hotel market benchmarking, financial analysis, and performance reporting solution. He has also been the business editor of The Caterer, and communications manager and editor for the international professional body, the Institute of Hospitality.