In the previous article of the Revenue Journey, I discussed pricing strategies and their role in complete revenue management. While effectively setting prices is critical, the second, even more vital component, is managing your inventory.
Achieving revenue increases through a well-executed pricing strategy is significant. However, the true potential for additional revenue lies in inventory optimization. Here’s an example to illustrate this point:
Imagine you have a busy Wednesday, and you’ve raised your Best Available Rate (BAR) from $180 to the highest level of $200. Selling your last available room at this higher rate nets you an extra $20 in revenue. Now, suppose you’ve conducted a thorough revenue management forecast (remember, it’s segmented by day) and identified demand for a two-night corporate booking at a rate of $150 per night. If you only manage your pricing, you might stick with the BAR rate of $200, collecting that $50 premium for Wednesday night by declining the corporate booking. However, if you also manage your inventory, you can make a more advantageous choice.
By accepting the two-night corporate booking, you secure occupancy for Wednesday night at $150, and you gain an additional $150 for the Thursday night. Although you forgo the $50 premium on Wednesday, you ultimately generate an extra $100 in revenue overall. This integrated approach, which considers both pricing and inventory, defines complete revenue management—not to be confused with Total Revenue Management, which we will explore in a series in 2017.
Understanding Inventory Management
Successful inventory management encompasses several critical components. The primary goal of your Revenue Journey is to maximize revenue—not just to raise rates or fill the hotel, but to achieve the best possible mix of business, which includes an optimal combination of average rate, occupancy, length of stay, and room type distribution.
For instance, if you operate a small hotel with only five rooms, managing inventory manually may be feasible. However, when that same hotel has varying market segments and different booking lengths—such as one-night and two-night stays—the complexity of revenue optimization dramatically increases. When managing a property with 100 rooms, the challenges become even more pronounced, especially when considering the probability of different segments to materialize (which relates to business uncertainty), competitor rates, and the added value of bookings with ancillary spend at the property.
Inventory Management Controls
If you are managing inventory manually, the inventory management controls you employ will depend on your Property Management System (PMS) and how you operate across different channels. Here are some key inventory management controls to consider:
Minimum Length of Stay: This control helps maximize occupancy on shoulder nights, increasing revenue by ensuring bookings on less busy days before and after peak periods. It applies to all arrivals on the day the control is enacted.
Maximum Length of Stay: Use this control when you want to limit reservations for extended periods, either to avoid taking lower rates ahead of a busy period or to enforce specific rate plans that mandate shorter stays (e.g., two nights).
Close to Arrival: This control can enhance occupancy on the nights leading up to a busy day. However, it may have adverse effects on longer-staying guests with higher value, so it's typically best to use this setting with caution. It impacts all bookings arriving on the date the control is set.
Stay Through: This setting requires that any booking crossing a specified day complies with the established minimum stay requirement. For instance, if a minimum stay of three nights is set on a Saturday, only bookings of three nights or more will be allowed for that night.
Hard Close: This setting prohibits all bookings on a specific day when closed, regardless of the booking’s value or length. Use this option only as a last resort.
Room Type and Rate Type Settings: All of the previously mentioned settings can also be applied at the room type and rate code level, giving properties the flexibility to fully optimize their inventory.
Reserved Inventory: Specific numbers of rooms can be allocated for particular rates, room types, companies, or travel agents. This might be due to commitments made or optimization calculations indicating that capping certain rates is necessary for maximizing revenue, while still keeping space available for higher-rate bookings.
Complete revenue management encompasses all rates and room types, fully optimizing every aspect of the property’s inventory. By utilizing both pricing and inventory management controls, a savvy Director of Revenue can generate substantial revenue increases. In advanced revenue management systems, this level of inventory control is referred to as "full pattern length of stay," which is an incredibly powerful tool for revenue optimization.
Next Steps
Now that you have explored the Revenue Journey from Part 1 to Part 8, reviewed your processes, and implemented various revenue management components on a manual basis, it’s time to assess whether a revenue management system is appropriate for your property.
In the next article in the Revenue Journey, we’ll delve into how to evaluate and choose a revenue management system that best suits your type of property.
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