Many of you have read my father, Robert G. Cross’s, book, Revenue Management. Published in 1997, it is considered by many to be the pre-eminent book on the discipline. In revenue management circles, it is often referred to as “The Book.” Many have studied the Seven Core Concepts of Revenue Management he outlines, and might be surprised that, 27 years later, thousands of hoteliers and multiple Revenue Management System (RMS) providers still overlook Core Concept #4: “Save your products for your most valuable customers.”i
My dad was a pioneer of revenue management, starting the first revenue management department at Delta Air Lines in the early 1980s. The discipline was called Yield Management then because the team used data and analytics to “yield” the availability of fare classes on busy flights to conserve inventory for the most valuable customers. Delta’s success in driving $300 million in revenue uplift led to widespread adoption of revenue management across multiple industries, including hospitality.
The Book says it best: “The problem of perishability of valuable assets was at the origin of RM. You can’t sell an empty seat on an airplane that has already taken off. You can’t sell last night’s empty hotel room.”ii Early adopters of RM in hotels realized that there was a tremendous opportunity to yield demand by length of stay (LOS). Capturing excess demand on peak nights helped fill the hotel on surrounding shoulder nights. Greg Cross, who pioneered RM at Hilton in the 1990s, used to tell his Revenue Managers, “I don’t need YOU to sell this hotel out on Tuesday nights. This hotel sells itself out on Tuesday nights. I need YOU to sell this hotel out on Monday nights and Thursday nights.”
The Rise of Open Pricing
Over the last decade, Open Pricing has gained traction in the hotel industry. The approach is based on two key ideas:
- Allowing for unlimited incremental price points on the demand curve rather than fixed Best Available Rate (BAR) tiers; and
- Keeping inventory available across all channels, even during peak demand periods.
The first aspect—flexible, dynamic pricing—has proven highly effective in boosting revenue and has become a standard feature of modern RMS. However, the second aspect—never restricting availability—has significant drawbacks.
Lessons from the Origins of Hotel Revenue Management
Marriott was an early adopter of revenue management, working with Aeronomics to build an RMS called DFS (Demand Forecasting System) to forecast demand and optimize LOS restrictions by rate plan and room group. One notable test site was the Munich Marriott. During Oktoberfest, hotels would generally raise their rates and close out all discounts. However, DFS recommended a different strategy—keeping some discounts open for LOS patterns that included shoulder nights before and after the peak days of the festival.
The results were staggering: “Although the average daily rate was down 11.7% for the period, occupancy was up over 20%, and overall revenues were up 12.3%.”iii By strategically managing inventory, the hotel was able to drive more revenue while maintaining a strong guest experience.
The key takeaway? Hotel room nights are a perishable asset. Forecasting demand and optimizing inventory controls by LOS was the original revenue management opportunity in hospitality. Over 30 years ago, enterprise chains built out teams, processes, and systems to capture this opportunity. That opportunity remains today but requires yielding to capture.
In Part 2 of this series, we’ll explore why Open Pricing, despite its benefits, often falls short of maximizing revenue and profitability—and why hotels should revisit the fundamental revenue management strategy of Optimized Inventory Controls.
If you’re concerned that Open Pricing is costing you revenue and want to explore how an Optimized Inventory Controls strategy could benefit your business, set up a 1:1 call with an expert on our team.
And for an even deeper look at Optimized Inventory Controls and its advantages over Open Pricing, check out my full white paper on the topic: The Hidden Cost of Open Pricing
[i] Robert G. Cross, Revenue Management, 1996, p.61
[ii] Robert G. Cross, Revenue Management, 1996, p.135
[iii] Robert G. Cross, Revenue Management, 1996, p.141
