REVENUE MANAGEMENT

Simón Arteaga Quintana

Overbooking and displacement strategies
What is the Overbooking

 It is the situation that occurs when more rooms have

been accepted than are available. And the consequence
is that a customer who has reserved a room in a specific
Hotel cannot stay in it.
why it happens?

 The main cause of overbooking is the perishable nature

of the product that the Hotel sells: overnight. Being a
service, it cannot be kept in "stock". What has not been
sold today is lost.
How to fix it ?
Economic Factor and Emotional Factor
Displacement

 Displacement is the strategy we carry out when we

generate an overbooking in our hotel, that is, to which
guest we will take from our hotel
Example..
Otas and Metasearch
Price strategy
What to do to determine a pricing
strategy when the market is so wide
and dynamic?
1- the different interests of each type of guest are
estimated, the price that each one is willing to pay for the
same product or service, the possible clients, maintaining
the trust of the clients already loyal with exclusive
conditions, etc.
2- The price of each hotel unit must be directly linked in
real time to market conditions and availability.
What aspects should be taken into
consideration to develop the correct
pricing strategy for a hotel?
It is recommended that hoteliers take into account five
fundamental aspects that help them guide their pricing
strategy

1. Rates and commercial need

2. Channel distribution
3. Rate Strategy
4. Presentation of prices for guests
5. Each hotel has its focus
How to determine the correct pricing
strategy for your hotel?
Historical data
 Having an analysis of prices and previous sales will
always be beneficial for the hotel. In fact, the pricing
strategy is based precisely on this data, which can be
inter-annual, inter-monthly or all.
Segmentation
Each client is a world and that is why it is important to keep
in mind that not everyone has the same needs, possibilities
or preferences. The hotel must determine what your buyer
person is, what you are looking for in a hotel and how much
you are willing to pay. With this information the hotel can
adjust its proposal to the profile of its customers.
Pick up behavior:
In this aspect the channels through which reservations are
entering are taken into account.
Customer rating
 The hotel must analyze the perception that its customers
have before, during and after their stay
The competition
 Establishing a competitive set will allow the hotel to
determine the behavior of its competition, the rates it
establishes and the actions it performs in specific
periods. Thus, the hotel can establish strategies that
allow it, not only to achieve its objectives, but to stay
above its competitors.
Why we need different prices

Income without
obtaining

84 x 80 = 6.720 euros
(120x10) + (108x10) + (96x20) + (84x20) + (72x10) + (60x10) = 7.200 euros
ROOM PRICE
MUST COVER COSTS

MUST GENERATE CASH FLOW

MUST BE ATTRACTIVE & COMPETITIVE FOR THE

GUEST
THE PRICE DEPENDS ON...

o the product and service

o the market segmentation
o the season
o the room’s location
o the competitors
o economic fluctuations
CALCULATION METHODS

1. Floor and ceiling

2. The «Rule of Thumb» method – also called
the 1/1000 method
3. The HUBBART method – also called the
bottom up approach
4. Differential pricing
 FLOOR AND CEILING
o The maximum price (ceiling) will be suppressed
by competition price strategy
o The minimum (floor) will be governed by the fixed
costs that must be covered.

27
 THE RULE OF THUMB METHOD

The idea of the procedure is to establish a relationship

between the total investment cost to develop a hotel
(land, construction, furnishing, equipment, opening and
launch costs) and the fee to be charged.
Based on this statement, a formula was developed that
states that for every US $ 1,000 of cost a US $ 1 in room
rate must be reflected in order for the investment to be
profitable.
 RD 23

Rule of Thumb - Example

Total cost of the hotel (US $ 4,000,000), divided by the total

number of rooms (100) = average cost per room (US $ 40,000).
For every US $1,000.00 cost of each room must be charged a
US $ 1.00 in the rate
(US $ 40,000 / US $ 1,000 = $ 40 US).

29
 RD 23

HUBBART METHOD

The formula consists in defining the total

sales necessary to cover all the operating
costs and the desired benefits, forecasting
the percentage of occupancy estimated by
the hotel, so that according to the number of
rooms the hotel has, it is estimated the rate
to be set.

30
 HUBBART METHOD EXAMPLE

Assume that a hotel has 50 rooms and that the total sales
required to cover all costs and desired benefits are US $
547,500.00 Assuming that the hotel will operate at an
annual average of 70 percent occupancy, that is 12,600
rooms per year. (50 Habs. X 360 days x 70% = 12,600), the
average rate you must achieve is US $ 43.4, rounded US $
43.00. (US $ 547,500.00 divided by 12,600 Habs.)
 RD 23

Differential Pricing
We have the following data a bout the hotel:
Open all year (360 days)
200 rooms
75 % forecasted occupancy
A.D.R. Of $ 67.81
With the following business mix:

32
 RD 23

STEP 1
RACK 20 % of Mix at 100 % Rack
CORP 40 % of Mix at 80 % Rack
GROUP 40 % of Mix at 50 % Rack

= 100 % of Global Business Mix

33
 RD 23

STEP 2
Proportional coefficients:
RACK 20 % x 100 % = 2’000
CORP 40 % x 80 % = 3’200
GROUP 40 % x 50 % = 2’000
Total = 7’200

34
STEP 3
Forecasted Room Revenue
=
Days x Rooms x A.D.R. X Occ %
=
360 x 200 x 67.80 x 0.75 %
=
3’661’200.--

35
STEP 4
Forecasted Proportional revenue, per segment

RACK 3’661’200 x 2’000 = 1’017’000

7200
CORP 3’661’200 x 3’200 = 1’627’200
7200
GROUP 3’661’200 x 2’000 = 1’017’000
7200

36
 RD 23

STEP 5
A.D.R. per segment equals:

RACK 1’017’000 = us $94

360 x 200 x 0.75 x 0.20
CORP 1’627’200 = us $75
360 x 200 x 0.75 x 0.40
GROUP 1’017’000 = us $47
360 x 200 x 0.75 x 0.40

37