[MUSIC] Welcome back. I remember working in the reservations department of my first hotel on the East Coast of Canada. It was great there. They offered 10% commission on every dollar sold above $140. One day I was pretty excited because I just sold one of our five suites for Wednesday night at $280. It's $14 commission, awesome, right? Well five minutes later I got another call from a film crew that needed five suites for two whole weeks. Well, I took a deep breath, accepted the reservation and thought, I'll try to work my way out of this mess as soon as I'm off the phone. Please take a few moments to answer the following question. So this was my first confrontation with a recurring hotel problem number one, which is it seems like the moment you sold your last room, someone else will try to book a longer stay and have to be turned away. Take a look at the rooms on the books in blue, and then the turnaways in red for this five room hotel. Now why on earth did this hotel turn away a request on Sunday when they weren't going to be full, when they had three rooms available? Any ideas? Think about it for a second. Pause the video if you like. Well the reason is because the guest that wanted that Sunday night didn't just want Sunday, but they actually wanted Sunday, Monday, Tuesday, Wednesday and Thursday. Let's see how that looked. Since we are already sold out on the Wednesday, we're going to have to decline this request. The worst part about that is that reason why the Wednesday is sold out is because there's a reservation for just 100 Euros for one night. So now in effect, you've traded a stay of Sunday, Monday, Tuesday, Wednesday, and Thursday, so five times 100 Euro 500 Euros for just one night at 100 Euros. That means that if you had have taken that one night, you would have given up 500 Euros just to get 100 Euros. Even if it was at a lower rate, for example, a corporate negotiated rate of 80 Euros, that is still 300 Euros more than you would have got for that one night. The second problem is very similar. But instead of a longer length of stay, is a more important guest. Every December you see nativity scenes pop up all over in anticipation of Christmas. Today, it seems pretty crazy that there wouldn't be any room at the inn for the birth of one of the most important religious figures of all time. But then Mary and Joseph didn't have a reservation, and it was peak season. However for hotels, today the problem is our most valuable guests tend to behave exactly this way. I myself spent many years on business travel, and I would have to admit I was relatively price insensitive. But my booking window was notoriously last minute, because it's really difficult to schedule meetings long in advance, except perhaps when you're going to Germany. If you look at four common segments, it's pretty easy to see. Typically, the first segment to book, are the tour operators with their negotiated FIT rates. In this example, 25 rooms at 50 Euros. Then you might expect 25 rooms at a prepaid discount or advance purchase rate at about 75 Euros. Then shortly before arrival, the corporate guests with their negotiated rates start booking. In this case, 80 Euros. Then finally, the best available or bar rates. In this example 100 Euros start materializing once the advanced purchase rates are no longer being sold. Imagine, however, did you recognize long enough in advance that there was enough demand that you didn't need to offer that discounted advanced purchase rate and you are able to fill a hotel with just three segments. By not selling those 25 rooms at lower prices and waiting for the guests willing to pay a higher price, you could actually increase your revenue by 24% in this example. This is the same reason why as important as corporate guest are, many hotels restrict the corporate rates on days when they know that there is enough demand to sell those higher rates. And why many hotels in stop sales to tour operators to reduce the number of those very low FIT rates. Problem number three, no matter what price you charge it's probably the wrong one. Have you ever bought anything at an auction, eBay, for example? Did you ever get that sneaky suspicion that not a single person in the world was willing to pay as high a price for that thing you just bought? Everyone else said, okay, buddy, you know what? Not worth it to me. That is the winner's curse. And they say that the actual price of an item should be the price with the highest number of bids. Well, I think this helps to explain the idea that everyone has a different price that they are willing to pay. There are so many factors you have to consider. How much money you have. How much you value something. And everyone is different. The problem is no matter what price you charge, it is probably the wrong price, at least for the majority of people. So it is not about finding the perfect price. But instead, finding the price and volume relationship that will bring you the most revenue. This is usually not the highest or the lowest price, but it also depends on how many rooms you need to sell. Finally, the last main problem that revenue management helps hotels overcome, is the issue that whenever your hotel's going to be full, someone will cancel. This is especially true when groups are involved. In fact some studies show that as much as 30% of reservations made in hotels are actually changed or canceled. So in fact, cancellations happen all the time. They are, however, particularly annoying when there is enough demand to sell the hotel to someone else, but the cancellation came so late that the hotel was not able to resell the room. So although there are lots of great technical definitions of revenue management along the lines of business processes to maximize revenue given limited capacity, I like to think of revenue management as simply a way to overcome the most annoying and costly problems in hotels. Namely, the moment you sell your last room, someone else will call who wants a longer stay. Your most profitable guests will try to book when you are already sold out. No matter what price you charge, it's probably the wrong one. And finally, especially when you are sold out, someone will cancel, destroying that perfect 100% occupancy. For the rest of this module, we are looking at the most important steps in the revenue management process including data collection and aggregation, analysis, forecasting and of course making the right decisions. I hope you are excited as I am, so let's get going.
