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How Open Pricing Enables More Flexible Cancellation Policies

It’s the age-old issue for any industry that deals with perishable inventory: On one side you get a bad rap for overselling or overbooking, while on the other side last-minute cancellations leave you stuck with unsold goods.

If you give too much on either side, you’re going to lose a lot of money.

We all agree overbooking is extremely frustrating for the guest and should be minimized. But allowing guests to cancel up until the day of arrival without penalty is an enormous risk to profitability. Therefore, it’s smart and completely within their rights for hotel brands to enact stricter policies by asking guests to give at least a 48-hour notice when canceling, or otherwise incur a fee.

Brand behemoth Marriott International was the first to revise their cancellation policy to 48 hours in June of this year. Shortly after, Hilton followed suit. In a recent call with stock analysts, Hilton CEO Chris Nassetta discussed the reasoning behind the move.

“Many customers have been trained to make multiple bookings and … cancellations have, in some markets, skyrocketed,” he said. “So the idea is we’ve got to be able to understand what people want to do a little bit earlier, a little bit closer in. We can't have it be within 24 hours, just because we can't manage that last-minute inventory.”

He’s right. Last year, we dug into our numbers, and properties using GameChanger averaged about 16 canceled rooms per day. It’s nice to see Hilton and Marriott listen to their owners and respond with plans to protect their revenue.

The Next Step for Cancellation Policies

Extending policies to 48 hours is a step in the right direction but only a small win in the larger battle. As Nassetta indicated, hoteliers must find a way to entice travelers to book earlier and, perhaps more importantly, stop cutting rate at the last minute to fill rooms. These efforts would decrease travelers’ incentive to cancel and re-book and deter the use of last-minute, deep-discount distribution channels.

Hilton is testing ways to layer some incremental opportunities on top of their 48-hour cancellation policy, Nassetta said. While he wouldn’t provide details, one option is to create “fully flexible pricing structures and semi-flexible pricing structures that would require a cancellation within seven days,” he said.

Hearing Nassetta say that hit home to me, because as you know we built Duetto nearly six years ago on the idea that hotel rates should be much more flexible and change in real time based on a number of factors. We built this model, what we coined Open Pricing, so that hoteliers could ditch their static discount rates and instead yield all segments, room types and channels independently of each other.

While we knew Open Pricing would allow hoteliers to move away from the unconventional Best Available Rate (BAR) and length-of-stay strategies, even we underestimated its power. Because Duetto’s GameChanger sends a truly dynamic rate to the PMS, it limits the amount of rate codes that need to be manually opened and closed when it’s time to shut off discounts.

A Peek Into Flexible Rate Structures

Allow me to get slightly technical for a minute.

It has become industry standard to offer lower rates to travelers who will book a non-refundable room rate. Travelers can pay more for a more flexible booking.

One strategy to entice earlier bookings and deter cancellations is to increase the flexible rate incrementally as the booking date approaches. In a traditional pricing environment, where your non-refundable rate is a static discount off BAR, the only way to accomplish this is to tie each incremental discount to a separate rate code. This means managers must manually open and close rate plans in their PMS when they want to change the publicly available rate.

So to accomplish what Nassetta is describing in a traditional RMS-PMS relationship, revenue managers would have to set separate rate codes for 7 days out, 6 days out, 5 days out, etc., and then close those channels to change the rate each day.

We wouldn’t call this a fully flexible pricing structure.

With Open Pricing, hotels set a dynamic rate that automatically adjusts by whatever sets of demand or parameters you choose. Instead of lock-step changes, your non-refundable rate is yielded completely independent of BAR, taking booking window into account if you so choose.

Time for Change

In general, hoteliers have been slow to understand the effect of price elasticity on their business.

For example, even after the last recession, many hoteliers practiced what I call “reverse yielding,” which is starting far out in the booking window with a rate that is too high. Without an RMS and sometimes even without a revenue manager, management begins to panic as the booking date gets closer and there is unsold inventory, and a natural reaction is to drop rate.

Because of this, we’ve trained customers to believe there is always a hotel room open and that waiting until the last minute will result in a lower price.

Now travelers are even more savvy, and tools that shop and re-book up to the last day are designed to take advantage of lenient cancellation policies. It’s time hoteliers get in front of the issue with a smart strategy, and kudos to Hilton for taking the first step.


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