In the world of business, where systematic problem-solving and decision-making are the norm, the use of algorithms provides a wealth of advantages for hotel owners when it comes to managing revenue and increasing profits.

Published: 24 Nov 2010

In the world of business, where systematic problem-solving and decision-making are the norm, the use of algorithms provides a wealth of advantages for hotel owners when it comes to managing revenue and increasing profits.

The use of algorithms – which are defined as a precise rule, or set of rules, specifying how to solve a problem - can be a very effective way for business owners to accurately conduct calculations, process data and gather important information about the buying habits of consumers.

Particularly in the field of hotel revenue management, which heavily involves the application of different tactics to predict consumer behaviour and optimise product availability, using algorithms allows revenue managers to solve problems with a sequenced, scientific decision that encourages the examination of wide ranging factors. With algorithms, coming to conclusions becomes more of a rational process, producing better and more profitable results for the business.

Yet, many hoteliers are still skeptical of using algorithms, especially when they are the basis of new and advanced software that can come up with optimal rates and manage them across multiple channels, automatically and in real time. What these skeptics may not know is that we all rely on algorithms in many instances in our everyday lives.

Did you know that airlines’ onboard navigation systems which are used to navigate passengers along specified routes and land them safely, avoiding bad weather elements and other factors that may impede flight safety are based on algorithms?

Did you know that every time you do a search on Google, an algorithm is used to generate the search engine results?

Did you know that the stock market also relies on software heavily based on sophisticated algorithms to trade millions of dollars every day?

And that’s not all… did you know that mail carrier companies like UPS and FedEx also utilise programmes based on algorithms, as do financial institutions, and even the military?

So, if we’re willing to trust these algorithm-based businesses with our money, our mail, our information searches and our safety, why wouldn’t the hotel industry put their trust in algorithms as well?

Much like in the process of buying and selling stocks, hotels constantly face the challenge of selling their rooms to the right customer, at the right place, for the right price, at the right time. While this sounds like a simple enough idea, how can a hotel make sure it’s getting to these potential customers at the right time? This is where the use of algorithms becomes essential.

In order to make the most of their sales, in turn, earning the most RevPAR and profits, hotels can greatly benefit from the use of complex algorithms to adjust room rates based on market demand and competitor rates; control inventory, ensuring no hotel room is being let go for little or no profit; and manage the hotel’s presence among every possible online channel.

Algorithms take the guesswork out of a revenue manager’s job because these systematic formulas leave little room for mistake when it comes to determining information like that of current trends, competitor rates, market supply and demand. Keeping hotel revenue managers certain they’re always dealing with accurate information allows them to, along with hotel management, operations and sales departments, spend more time and effort in dealing demand shifts, cancelations and walk-ins.

Maximising Profits

By being able to come up with the most accurate information, the use of algorithms can help determine crucial information like demand for past dates and the average length of stays. Using algorithms, hotel revenue managers can also make forecasts and predictions more easily to ensure they are always selling their hotel rooms at the most profitable rates. Rather than simply accepting bookings as they come, the information generated by these algorithmic sequences affords hotels the opportunity to conduct their sales more strategically and reserve space for more valuable forecasted customers. This way, hoteliers can be ensured their hotel rooms are alwayays selling at the highest possible price based on the current levels of demand.

On the other hand, in a market where supply is high and demand is low, the use of algorithms helps reduce the risk of hotels setting prices that are too high and having their rooms go unsold. In the hotel industry, this is extremely valuable, as hotel rooms are a highly perishable commodity. Therefore, it is imperative that hoteliers plan strategically to make the most of their sales and ensure that their rooms aren’t going unsold as each hotel night unsold is revenues lost for the property.

Maintaining a Competitive Edge

The concept of hotel revenue management is still fairly new but it is already proving to be beneficial for the industry. Affinia Hospitality, for example, reported a 17% increase in revenue (over the year prior) after the company implemented a manual RM strategy. Harrah’s Entertainment, meanwhile, reported a 13% increase over the previous year once the company began using a revenue management strategy. And other systems currently available on the market can offer RevPAR increases of more than 100% so RMS are definitely an operational imperative for hotels looking to maintain a competitive edge.

Besides generating increased profits, these systems put hotels that implement revenue management practices at a significant advantage over those who don’t. How so? For one, these revenue management strategies allow a hotel to monitor its competitors’ rates, as well as their supply and demand, at all times. This allows hotels to adjust their rates accordingly and continue to remain a step ahead of their competition. Additionally, because the use of algorithms allows hoteliers to forecast trends based on historical data and other factors, these same hotels will always be able to determine the moves of their competitors before they make them, as well as determine the best decisions for their own property based on the state of the current market.

The Next Generation of Hotel Revenue Management

With the growth in popularity of the online channel and the constant emergence of new technology that give customers new ways to book hotel rooms (ie. mobile phones and devices like iPads), the process of revenue management becomes increasingly difficult to manage. Information is constantly changing, making it harder and harder to keep track, and harder and harder to price accordingly. This is why, rather than utilising these algorithmic practices themselves, hotel revenue managers can significantly increase their productivity by investing in automated revenue management software that uses these very same scientific algorithms to study competitor trends, maintain rate optimisation and keep track of historical data and booking trends simultaneously.

In a market where supply is high and demand is low, the use of algorithms helps reduce the risk of hotels setting prices that are too high and having their rooms go unsold.

In the hotel industry, this is extremely valuable, as hotel rooms are a highly perishable commodity. Therefore, it is imperative that hoteliers plan strategically to make the most of their sales and ensure that their rooms aren’t going unsold as each hotel night unsold is revenues lost for the property.

The best approaches to revenue management in fact, include those that use RevPAR as the dominant metric and utilise systems that can enhance revenue managers’ efficacy, rather than making them spend all their time manually keeping track of never-ending calculations and pricing updates. With an automated revenue management system that determines information using complex algorithms, as well as continuously managing information 24/7, revenue managers now have the opportunity to think proactively, not reactively and focus more on optimizing processes and developing and implementing long-term pricing strategies that are most beneficial to increasing revenue.

So what are you waiting for… isn’t it time that you implemented algorithms into your hotel’s revenue management strategy?

(This article has been contributed by Jean Francois Mourier, CEO of RevPar Guru).