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What Not to Do in Revenue Management – Part Two.
By Jean Francois Mourier, CEO of REVPAR GURU
Thursday, 4th October 2012
 
You probably saw Part One of this series run here in early September, but in case you didn't, I'll get you up to speed.

"What Not to Do in Revenue Management – Part One" offered the following don'ts:
  • DON'T Think That Your Customers Know Anything About Your Comp set
  • DON'T Use Stagnant Rates
  • DON'T Forget to Replenish your Inventory Online
  • DON'T Overcomplicate Your Job
  • DON'T Be Afraid of Technology
Today, we're going to examine the rest of the cardinal sins of revenue management.
 
DON'T Overestimate/Underestimate Your Property's Star Rating
It is very common for revenue managers to incorrectly list their property's star rating on the OTAs in order to fulfill certain beliefs.
 
Some revenue managers consistently overestimate their property's rating. The thought process behind this decision is based on the fact that the person setting their pricing figures that if they have a higher star rating on the OTAs (and a price to match, of course), then customers will automatically accept paying a higher rate. Not true. If you are a four-star with a five-star price, you have a problem. Come back to reality.
 
But by the same token, don't underestimate your star rating, thinking that it will please your customers when they arrive and see that they are getting four-star amenities for a three-star price. This will only hurt your revenues in the long run. Again, not a good strategy.
 
The reality is that customers are always looking for the best rate for the best property – which means that they are first choosing by rate and then by amenities, location, etc. So make sure that you are honest about your property's star rating so that you are able to earn the most revenue possible for each booking, while keeping your customers happy. 
 
DON'T Discount Your Rates as the Arrival Date Approaches
Again, there is a logical explanation behind this mindset; in a perfect world, pricing from high to low would "train" consumers to book their stays well in advance in order to save money. But especially today, as last-minute booking apps and websites are becoming more and more popular, this pricing strategy can cost a hotel millions of dollars.
 
Instead of high to low, the best strategy is yielding – fluctuating your price up and down according to the market, demand, competition, etc. to always find the "sweet spot" that increases bookings and revenues.
 
DON'T Increase Your Rates As Your Occupancy Increases
Many hoteliers increase their rates dramatically when they reach 80% occupancy, which is completely counterintuitive. If your current pricing strategy has effectively sold 80% of your rooms, then why fix what isn't broken? By increasing rates abruptly, you end up pricing yourself out of the competition, and most likely, slowing or freezing sales altogether.
 
DON'T Think That Customers Care About Room Types
Consumers don't care about room types in their initial search. A customer's three basic search criteria are price, star rating and area (within destination).

Once they've narrowed down their search to a few hotels (based on those factors), they will start thinking about room types. At that point, it's important for hotels to have as many options for room types and upgrades available through the hotel booking website, but on the OTAs, simple is better (3-4 options is plenty!). Stick with the basics: standard, oceanview, suite, etc. to ensure that customers don't get confused.
 
DON'T Get Stuck in Pricing Patterns That Don't Work
Psychology has told us throughout the years that consumers respond more favorably to prices that end in 9 (as in $149, instead of $150). But setting room rates based on this knowledge could actually be costing your property business.
 
On the OTAs, your page position is based upon a customer's search terms, and the most common way that customers sort hotels on OTAs is by price (low to high). Therefore, offering a lower room rate will result in higher placement on the page and a greater likelihood that a customer would choose to book with your property.
 
Here's an example: if one property in your destination and star rating is charging $150 a night, it is a safe assumption that most other hotels will be trying to price their rooms slightly lower than that. So instead of pricing your room at $149 like everyone else, discount your rate slightly off that rate in order to win customers' business.
 
Another pricing pattern that doesn't work is the common practice of discounting by $10. This pattern doesn't work because a hotel ends up giving away too much of their revenues unnecessarily.
 
Let's use the above example to demonstrate my point. If most hotels within a destination are charging $149/night for their rooms, if you are a believer in the $10 discount rule, you'll list your rooms at $139. Yes, you'll probably get the booking but you'll be losing out on $10 of revenue per room. Instead price your room at $144. You'll only give away $5 of revenue per room and you will still get the customer's business.
 
Think about it this way: if you are able to earn an extra $5 on each booking that you make, you could be earning thousands of dollars of additional income each year based on this small change in your pricing strategy. Makes sense right?
 
Finally, we've saved the best (or in this case, the worst and most egregious mistake) for last…
 
DON'T Offer Customers a Lower Rate Through the OTAs
Many hoteliers and revenue managers choose to offer customers a better rate through the OTAs, than the direct channel. This is counterintuitive because in reality, you should be incentivizing customers to book direct (where you don't need to pay high commission rates). Of course, because of rate parity, you can't offer a lower rate through the direct channel but consider offering consumers other incentives, like a free upgrade, free food and drink, free parking in order to sweeten the deal and encourage travelers to book directly.
 
One final thought: if a consumer calls your property to ask if you can match an OTA rate, your reservations team should be empowered to do so. This is the PERFECT opportunity for you to convert this customer into a direct sale, rather than sending them back to the OTA to get the best rate and then paying a commission on the booking. 
 
Well, that's it, that's the list of what NOT to do in revenue management. Now comes the tough part – will you update your pricing strategy to avoid making these mistakes?
 
About REVPAR GURU
REVPAR GURU provides hotels around the world with an alternative revenue management software system designed to deliver maximum bookings and profits, as well as the convenience of full automation and integration 24/7. As REVPAR GURU's custom-designed Yield Dynamic Price Engine is the only real-time revenue management system available on the market, it meets the rapidly changing needs of hotels looking to increase their competitive advantage in an increasingly difficult marketplace. REVPAR GURU's system offers dynamic rate optimization, real-time pricing, integrated internet and extranet yield channel management and GDS sales distribution, to increase a hotel's RevPAR intelligently and effectively, while maintaining rate integrity and automated rate parity. Since 2004, smart hoteliers worldwide have used REVPAR GURU's software system to increase occupancy, average daily rate (ADR) and RevPAR.
 
Headquartered in Miami, Florida, additional information can be found at
www.revparguru.com or by calling +1.786.478.3500.
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