We recently had the opportunity to ask Dr. Chris Anderson, associate professor at Cornell’s School of Hotel Administration for his perspective on upgrades and upsells as part of a revenue management strategy. Read More
No matter what size hotel you work in, all successful revenue management strategies are based on the ability to forecast demand accurately and, therefore, predict the optimal rate based on that demand. This is where a demand-control chart can come in handy to help determine when to change your rate based on demand, separating the “hot” zones (high reservations-on-hand) from the “cold” zones (low reservations-on-hand). Knowing how and when to use a demand-control chart can enable you to plan your room rates for top revenue every time.
The major use of a demand-control chart is to help determine when to change your rate based on demand. When your forecast, or estimated demand, is above a certain level, you will close (or raise) room rates. When the forecast is below a certain level, you will open up (or lower) room rates. Similar to most approaches to setting rates, this one has advantages and disadvantages.
- easy to use and implement (a simple spreadsheet will do)
- can be applied to other parts of the business (ballrooms, restaurants, etc.)
- does not consider length of stay
- lumps all demand together even though different market segments might have different demand
Steps in Creating a Demand-Control Chart
To develop a demand-control chart, we develop the forecast, determine trigger points, and then determine the minimum rates to quote.
1. Develop the Forecast
The best way to develop your forecast is based on past experience. Take a look at your reservations from the last several years. What was your demand? What was your actual occupancy? Using historical data, you can make a pretty good prediction, or forecast, for what the demand will be for the future.
For example, you may calculate the forecast for each day for the next few months based on the same days for the past five years. The demand-control chart to the left shows the forecast for a 250-room hotel for part of the month of June, in both numbers and percentages.
2. Determine the Trigger Points
Trigger points signal the opening or closing of a rate class—the hot and cold periods. If the forecast predicts that demand will be above a trigger point (a hot period), close (raise) the appropriate rate classes; if predicted demand is below a trigger point (a cold period), open (lower) the appropriate rate classes. Your firm may have multiple trigger points. For our example hotel, our trigger points are:
- Cold Period: 70% occupancy or below
- Hot Period: 100% occupancy or above
3. Determine the Minimum Rate
Determine the minimum rate to quote based on the forecast and trigger points. In this chart we have two trigger points: 70% and 100% (which makes 71%-99% occupancy our Warm Period). For each hot, warm, and cold period, you will want to determine your minimum rate.
- If our forecast is under 70%, it’s cold and we set the minimum rate at €250.
- If the forecast is hot, the minimum rate is €425.
- If the forecast is between 70% and 100%, it is a warm period, and our minimum rate is €325.
Develop Your Own Demand-Control Chart
Try your own hand at developing a demand chart for your hotel to get a better understanding of how you can easily and simply predict demand and determine the best pricing strategy for you. Click the thumbnail to the right to download the Demand-Control Chart used in Dr. Chris Anderson’s eCornell course Price and Inventory Control. It has already been filled in with example data to get you started, but you can easily plug in your hotel’s forecast, determine your own trigger points, and set your minimum rates depending on your hot and cold periods.
Note: The demand-control chart is a spreadsheet in .xls format and opens best in Microsoft Excel or OpenOffice Calc.
Potentially the best way to strategically assess new channels is to first ask, “Do they offer benefit to both suppliers and consumers?” While suppliers often speak negatively about OTAs, the value proposition is clear on both sides as they provide a great shopping experience to consumers and considerable reach and revenue to suppliers. While some newer channels should be analyzed at really a property level for their true incrementality, the burden really lies at that compset level – will a hotel lose market share if they don’t participate with a certain provider when their direct competitor is?
Also, when analyzing your hotel and your competitive set through the lens of social media lens, recognize that there may be a direct impact to your top line revenues if there is clear distinction between properties in the eyes of potential customers. So when considering a new channel, a good first step is to evaluate the opportunities from both parties and if the channel fails to deliver to both key parties, it may not be around for the long haul.
This is the summary from a paper I co-wrote with Jay Hubbs, Vice President, Regional Sales, ReviewPro entitled The Ever Evolving Distribution Landscape – A Focus on Emerging Channels:
I was in NYC last week, along with Hotel Administration Dean Michael Johnson, to present my new research on how travel review web sites and hotel-industry elasticity are forming a tidal wave of change in 2013.
We were at the Westin New York at Times Square in Manhattan, as part of the Inside Cornell series, a monthly series featuring researchers and experts working at Cornell University’s centers in Ithaca, Manhattan and around the world. Click here to view the video.
In this interview with VTV, I discuss the results of a research study called “The Billboard Effect”, conducted in partnership with JHM Hotels and Expedia. In the study, four properties were cycled on and off Expedia over a period of three months.
– Hotel placement on Expedia results in a 20% increase in bookings on other channels
– Reservations made on other channels (call center, brand.com, other sites) offset reservations made on OTAs
– Rates attained while being listed on Expedia were about 2-3% higher
The bottom line: Hoteliers need to think of OTAs as marketing vehicles versus reservation engines.