Imagine a 100 room property called the Vista Hotel. This hotel caters to mid-market travellers and offers the basics that guests expect from a hotel without providing many additional amenities. The manager of the Vista Hotel, Linda, follows one of the hospitality industry’s oldest kernels of wisdom—heads in beds equals success. Linda is somewhat savvy about revenue management, but her primary goal is always to maximize occupancy on any given night.
The Vista Hotel is sustainable financially, but revenue is flat even when bookings are high. The problem is that Linda, like many hotel managers, has opinions about occupancy that aren’t backed up by data, and they are ultimately hurting her business.
There are three particular misconceptions about occupancy that are still prevalent in the industry, and that have the potential to stunt a hotel’s growth. Let’s review these misconceptions and discuss how Linda and other hotel managers just like her can adjust their revenue mindsets.
Myth #1: Occupancy Should be the Target for Maximization
Turning on your hotel’s ‘No Vacancy’ sign can feel like a victory, but it doesn’t necessarily translate to the balance sheet. If the Vista Hotel books 80 rooms at $100 each, it makes $8,000. If it books all 100 rooms at $75 each, is makes just $7,500. Higher occupancy is not valuable unless it offsets the drop in average daily rate (ADR).
However, consider the difference between Vista Hotel selling 80 rooms at $100 each (thereby making $8,000 in revenue) or selling 100 rooms at $80 each (thereby also making $8,000 in revenue). It’s the same result, right? Well, not quite. Linda must also factor in the operational expenses that result from having more rooms occupied, such as housekeeping and utilities. Assuming the cost per occupied room is $10, then, in this example, the first scenario will create $7,200 in revenue while the second scenario will create $7,000 in revenue. So, even when a 100% occupancy rate drives more revenue, it still delivers less profit.
Linda’s focus on high-volume bookings is actually hurting the Vista Hotel. The better approach is to shift the hotel’s focus from high volume bookings to high profit bookings, as this approach will have a more favourable impact on the bottom line.
Myth #2: Occupancy Should be Forecasted
Like most of her peers, Linda forecasts occupancy for each season, sets targets, then measures the performance of the Vista Hotel based on the number of guests. This approach makes sense when room rates are locked in and occupancy is the only indicator of revenue. But now that Linda is using more dynamic pricing structures, the old forecasting model is largely irrelevant.
Once price fluctuations, stay restrictions and channel differences come into play, there are a number of extra variables impacting revenue. It’s Linda’s overall revenue management strategy that matters, not the nightly occupancy rate.
Therefore, a better strategy would be for Linda to link forecasted levels of demand with revenue potential rather than occupancy. Understanding how many guests will want to stay at the Vista Hotel over a given period allows Linda to calibrate ADR to drive maximum revenue. That way, even if the hotel is not entirely occupied, it is maximally profitable.
Myth #3: Occupancy Should Be the Indicator and Trigger for Price Adjustments
One day, Linda receives an alert from her outdated PMS system telling her the Vista Hotel is 80% occupied and should therefore consider a $20 rate increase. What is missing from this alert is the date this 80% occupancy will occur. If it’s tomorrow, it makes more sense to lower room rates and fill the remainder of the hotel. If 80% occupancy is occurring in 2 months time, however, it makes more sense to increase rates and capitalize on the high demand.
The pace of the demand is also important. If the Vista Hotel is at 70% occupancy with more reservations coming in daily, it makes sense to raise rates. If the occupancy level hasn’t changed in a week, it makes more sense to lower rates.
When Linda bases price adjustments on occupancy rates alone, it puts revenue in jeopardy. Rather, triggers should account for occupancy time frames as well as the speed of bookings. That informs ADR which goes directly to the Vista Hotel’s profit margin.
The myths about occupancy were true once, but they have fallen by the wayside given the dynamic nature of today’s revenue management. As hotels begin to update their offerings and approaches they must update their assumptions as well. Instead of worrying about heads in beds, Linda and all other hotel managers should focus their efforts on dollars and cents.
With RoomKeyPMS in place, revenue management become simpler and more sophisticated at the same time. Contact our team to start taking control of your bottom line.
Photo Credits: Shutterstock / Soloviova Liudmyla