Demystifying Price Optimization

By Kelly McGuire Vice President, Advanced Analytics, Wyndham Destination Network | July 06, 2014

Most revenue management experts agree that in order to continue to drive revenue and profits in a changing marketplace, the hotel revenue management discipline must evolve from revenue management to price optimization. As hotels make this important shift, it is crucial that executives understand what price optimization is, how it relates to revenue management, and what advantages will be gained from this approach. In this article, I'll briefly describe how pricing in hospitality and travel has evolved over the past few decades, then I'll define price optimization and describe why it is important for hotels to leverage this approach.

A History Lesson: Yield Management in the Airlines

Yield management, as a discipline, started after deregulation in the airline industry, as a method for airlines to control the number of discounted fares they sold. They forecasted demand by fare class and "protected" a certain number of seats for higher paying fares. Fences (rules to qualify for purchase) were created around the discounted fares, such as advanced purchase or Saturday night stay, which discouraged those that would pay a higher fare from booking the lower fares. As this business process evolved, and more discounted fares were developed, mathematicians began to model the problem to find the mathematically optimal protection levels that would maximize revenue. The output was the number of each discounted product to sell in order to maximize revenue. The early systems developed for this purpose were known as yield management systems.

After the carriers began to move towards "hub-and-spoke" itineraries, where a significant percentage of passenger itineraries involved a stop at the carrier's hub, yield management systems needed to account for the large numbers of connecting passengers produced by the hub and spoke approach. This involved managing demand for a specific segment (known as a "leg") of an itinerary when many different kinds of itineraries (all with different values to the airline) also flowed over it, and optimizing the availability of different fares on these connecting itineraries. This is called the "network effect". (In hotels, length of stay creates a similar issue.)

This practice was highly successful for the airlines, generating interest outside of the airline industry. Yield management, or revenue management as it came to be known, was specifically designed for industries that met certain necessary conditions: fixed capacity (only 75 seats on the plane or 300 rooms in the hotel), perishable produce (once the plane takes off, you can't sell the empty seat), time-variable and segment-able demand, advanced reservations (requiring inventory to be "protected" for more valuable business), and low cost of sale. Hotel companies began to adapt the airline methodologies to their business problem, as did some cruise lines, retail, and media companies.

Then Things Changed...

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Coming up in March 2019...

Human Resources: An Era of Transition

Traditionally, the human resource department administers five key areas within a hotel operation - compliance, compensation and benefits, organizational dynamics, selection and retention, and training and development. However, HR professionals are also presently involved in culture-building activities, as well as implementing new employee on-boarding practices and engagement initiatives. As a result, HR professionals have been elevated to senior leadership status, creating value and profit within their organization. Still, they continue to face some intractable issues, including a shrinking talent pool and the need to recruit top-notch employees who are empowered to provide outstanding customer service. In order to attract top-tier talent, one option is to take advantage of recruitment opportunities offered through colleges and universities, especially if they have a hospitality major. This pool of prospective employees is likely to be better educated and more enthusiastic than walk-in hires. Also, once hired, there could be additional training and development opportunities that stem from an association with a college or university. Continuing education courses, business conferences, seminars and online instruction - all can be a valuable source of employee development opportunities. In addition to meeting recruitment demands in the present, HR professionals must also be forward-thinking, anticipating the skills that will be needed in the future to meet guest expectations. One such skill that is becoming increasingly valued is “resilience”, the ability to “go with the flow” and not become overwhelmed by the disruptive influences  of change and reinvention. In an era of transition—new technologies, expanding markets, consolidation of brands and businesses, and modifications in people's values and lifestyles - the capacity to remain flexible, nimble and resilient is a valuable skill to possess. The March Hotel Business Review will examine some of the strategies that HR professionals are employing to ensure that their hotel operations continue to thrive.