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Yielding room types and the power of open pricing

I still get plenty of questions about exactly what open pricing is and how it works. And more pointedly, how the hell is it even possible. Earlier this month I spent hours in panels and at parties at HITEC and ROC answering those questions.

Yes, it is possible, practical and, most importantly, profitable to yield all channels, segments, room types and offers independently, without ever having to close any off. There are hundreds of hotels around the world doing this right now.

The idea I detailed more than two years ago in a blog post is that hotels are severely limiting their revenue potential by using a fixed-tier strategy centered on Best Available Rate or other length-of stay restrictions. It’s basic economics: The more price points you have available to meet your demand, the more potential revenue you can capture.

Most hotels today, even most revenue management systems, still only really yield the public BAR rate and then all other rates move up and down in lockstep based on predetermined fixed discounts. For example, a AAA rate is usually 10% less than BAR and an OTA package rate may be 30% less. When demand is high, hotels close those channels or add length-of-stay restrictions rather than sell discounted rooms they know will sell at full BAR. Why not move the AAA rate to 1% less than BAR and leave the channel open, take advantage of the Billboard Effect and not risk losing a customer who might want to book a seven-night stay and miss seeing availability if the channel is closed for that one day?

I love what Jason Thielbahr, SVP of revenue and distribution for Red Lion Hotels, said about using open pricing in this HSMAI white paper introducing the concept:

“By yielding out business using restrictions, we’re telling customers no at different levels. We’ll always be saying yes, at every level, but at our price. Every single rate code in our network has inherent demand to itself and we want to maximize that demand.”

That’s exactly right. Open pricing is about never closing the door on a guest who wants to book your hotel. By closing channels and requiring extra stay dates, hotels are at best confusing customers; at worst, turning them off. Open pricing allows discount channels to be yielded up rather than shut off. As a result, open pricing empowers hotels to optimize every single booking and drive more profitable revenue.

Room-type pricing might be the easiest way to see how this really works. It’s one area revenue managers have always wanted to yield, but never been able to. At most hotels and casinos, the different room types vary in price by a fixed-dollar amount. For example, a king room might be priced $50 more than a double and that difference is hard coded into the PMS and always remains the same. With open pricing, that modifier could be $25 if there is less demand for king rooms on a particular day, or $100 if there is a run of king rooms sold.

Imagine a hotel with just those two room types. It’s in a city, near a convention center, and predominantly filled with business travelers typically seeking out king rooms. The modifier, rightfully so, should be $50 or more on most days. But if some weekend there’s not a convention in town and a local event is drawing families instead, the usually less desired double-double rooms may be in more demand and king rooms left empty. In that instance, why not yield up doubles and actually charge more for those than kings? This ensures doubles are available for guests who need them and more price conscious guests who don’t have a preference can opt for the king. This boosts occupancy on king rooms and drives rate on doubles.

The next question I usually get: How is this possible and why haven’t we done it before? Open pricing enables hotels to create a complex matrix of prices, literally an infinite amount of rates always changing by segment, channel and room type based on demand. A more primitive and limited version of this can be done by hand, although it requires an immense amount of manual data entry changing rates, as I learned first hand at Wynn.

Otherwise it requires sophisticated technology and deep integrations and connections among hotel systems, from the PMS and CRS to a system that can act as the lone source of truth. Data must be transferred, accurately and securely, to not only forecast demand across different channels and segments, but then to optimize it with real-time pricing.

It’s possible and as many hotels are proving, it is quite profitable.

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