What is overbooking?
A seller with constrained capacity and perishable inventory sells more units than he has available to protect himself against unanticipated no-shows and cancellations
What is the cost of denied service?
- Cost of compensation to walk guests
- Provision cost [meals / transportation]
- Re-accommodation cost
- Ill-will cost
Who should you NOT walk?
VIP, club members, honeymooners, special requests, multi-night stays, single female and business travelers
Who should you walk?
Single-night arrivals with no history and leisure guests
How do you prevent overstays on critical days?
Flag reservations without clear departure date and confirm and enforce the departure date upon check-in
How do you reclaim rooms?
Compare the daily housekeeping report to PMS
Check out-of-order rooms
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What characteristics does a firm need to have in order to apply overbooking?
- Constrained and perishable capacity
- Advanced bookings
- Cancellations and no-shows
- Uncertain availability
- Cost of denied service is relatively low
Which industries have the highest importance of overbooking?
- Passenger airlines
- Business hotels
- Rental cars
- Air freight
Which industries have the lowest importance of overbooking?
Cruise lines
Resort hotels
Sporting events, concerts, and shows
What is Risk-based overbooking?
Balances the expected cost of denied service with the potential contribution from additional business
How do you calculate the overbooking ratio?
Walk cost / (walk cost + empty room cost)
Empty room cost = room rate - variable cost
What are the steps involved in risk-based overbooking?
- Calculate the overbooking ratio
- Use historical data to find the distribution of no shows and then cumulative probabilities
- Look for the first cumulative probability that is the same or larger than the overbooking ratio
- The no-show number corresponding to the identified probability is the number of rooms you should overbook
What is inventory management?
Inventory management is the process of allocating and adjusting room inventory availability at each rate class to maximize profits
What are the three key components of inventory management?
- Capacity allocation
- Network management
- Overbooking
What is capacity allocation?
- Determine the booking limit for each rate class.
2. Important for selling a constrained capacity with multiple rate classes, such as a hotel
What is network management?
Managing bookings across a network of resources
How do you use overbooking in inventory management?
- Determine the booking limit with uncertain no-shows and cancellations
- Important when cancellation or no-show results in little or no penalty
- Resort hotels do not overbook because of high perceived cost of denied service
What is the relationship between inventory management and price management?
Price management adjusts price to affect demand whereas inventory management adjusts inventory based on demand
What are the three capacity allocation terms?
Resource
Product
Rate Class
What is a resource in inv. mgmt.?
In a hotel, room-nights are inventory
Room-nights are the resources used to make products
What is a product in inv. mgmt.?
A product is what customers seek to purchase; a product may require two or more units of resources.
A hotel product is defined by the combination of arrival date and length of stay.
What is rate class in Inv. Mgmt.?
Rate class is a combination of a price and rate fences based on a particular product. More than one rate class can be tagged with a product
What is the purpose of capacity allocation?
- A booking limit is set for each rate class
- To avoid accepting low-rate bookings while rejecting high-rate bookings
- A trade-off between spoilage and dilution
What is spoilage?
Reserve too much inventory for high-paying guests and some rooms end up not sold
What is dilution?
Fail to reserve enough inventory for high-paying customers and rooms are sold to early arriving, low-paying customers
What is attrition?
Promised bookings fail to show up
What are the two steps that happen after optimal capacity allocation?
Booking control (decide whether a booking should be accepted or not) Stay control (Goal: improve occupancy on low demand days/reserve inventory on high demand days for rate increases)
What are the different stay control methods for revenue management?
Closed to arrival
Maximum length of stay
Minimum length of stay
Full pattern length of stay
What is Closed to Arrival? (CTA)
A date on which guests are not permitted to start hotel stays, but guests can stay through from previous arrival dates.
What is Maximum length of stay?
- A guest checking in on a certain date can only stay a certain number of nights
- Prevents the reservations at discounted rates staying through the sold-out period
- Used on high demand days to bring up the bookings in the prior low demand days
What is Minimum length of stay?
- A guest checking in on a certain date has to stay at least a certain number of nights
- Used on high demand days to bring up the booking in the following low demand days
What is Full pattern length of stay?
Arrival based restriction that may allow a guest to stay for 1, 2, 4, or 7 nights but not for 3, 5, or 6 nights
What are customer related reasons for no-show?
Failing to cancel, multiple bookings, reservation on wrong dates
What are hotel related reasons for no-show?
Keying in wrong data, miscommunication
How do you reduce no-show and cancellation from customer’s perspective?
- No-show or cancellation policies
- Offer discounted, non-refundable bookings
- Remind customers through text, email, instant message
- Package deals
How do you mitigate negative outcomes of no-show and cancellation from the hotel’s perspective?
- Last-minute discounts: use “opaque” channels to avoid hotel reputation damage and long-term customer relationship
- Efficient overbooking
