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January 20, 2020

What is Revenue Optimization?

Put simply, revenue optimisation means setting the best possible price for your hotel rooms based on the information available. It means determining not just a good price, but the best price.

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What is 'price optimisation'?

Put simply, revenue optimisation means setting the best possible price for your hotel rooms based on the information available. It means determining not just a good  price, but the best  price.

How do we define 'best'?

The best price is the price that means that you make the highest possible profit. But it does so within given constraints that you set up because you are looking at the long-term as well as the short-term.

What sort of constraints?

Although you may make the most profit if you charge $300 for your rooms you normally sell for $100, you may not wish to do so for fear of making people unlikely to book in the future. This is an important consideration.

Equally, if you price your rooms too cheaply, you may fill up this time, but you may also worry that this cheapens your hotel in the eyes of guests.

Looking at the long-term means that we need to keep prices within certain bounds, even if going outside them would make more income in the short term.

How do you know how price affects the number of guests?

The prediction of how many guests you will get (which can be described as the demand for your rooms) is based on past data, both from your hotel and other hotels. Using the information about how changes in price affected demand in the past helps us to estimate what will happen in the future.

We use this information to predict how many guests you would expect to get at every given price, and the range that it could be in. We then come up with the price that means that you make the most profit.

Why do you say 'profit' and not 'revenue'?

We know that guests are not free. You need to pay for cleaning their rooms (even if it is just with your time) and breakfast. For heating and breakages. An good price optimization algorithm takes this into account.

Does this mean I'll always be full?

Simply speaking, no it doesn’t. Being always full means that you are almost certainly charging too little. You could make more profit if you charged more – so the optimisation algorithm will put your price up.

The idea is to always be somewhere around full. And in quiet season to be fuller than the average.

We had a chat with revenue management expert and Director of Masters at Les Roches Global Hospitality, Scott Dahl about what exactly price optimisation means for hotels and what you need to consider when implementing price optimisation strategies. To find out what he had to say, watch the video below. 

RPG: What is price optimisation for hotels? 

SD: I mean it’s exactly what it says. It’s getting the price right. But the devil’s in the details a little bit. 

I think in price optimisation you really have to consider a couple of things. You have to consider what people have to pay and you really have to consider what kind of alternatives they have, because if there is nothing available within what they are basically willing to pay but the trip is non-negotiable for them for some reason, their willingness to pay is kind of out the door, then it’s really market conditions. 
So I think when you start talking about pricing it’s those two components. So when you start optimising pricing you have need to think, ‘what’s happening in my own building?’ – in other words, ‘what’s my availability, how much product do I have?’. And you need to consider what’s happening in the marketplace. And there’s products like RoomPriceGenie, for example, that does a very good job of that, it does a very good job at looking very far forward. Its very easy to optimise pricing when 90% of the rooms are sold because you can look at what’s been sold and you can understand probably what you need to do with what remains to be sold. But the real art to it is understanding what the price needs to be before you already start selling rooms in order to experience what the price should be. And I think software like RoomPriceGenie, for example, that looks out that far and looks at the market and can really understand the difference between one set of dates and another with just a few bookings and some market conditions which I think is really key to being able to optimise your prices effectively. 

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