The sale of hotel rooms in Priceline.com and other similar sites poses a dilemma for hotel managers. The ambiguous nature of the site means that the only decision factor of the eventual guests is the price. This can put revenue managers in the difficult position of losing money in two distinct ways.
by Glenn Withiam*
This dilemma encourages many hotels to offer only surplus inventory on Priceline. If that's your opinion of Priceline, Cornell professor Chris Anderson invites you to take another look. As explained in a new study from Cornell's Hospitality Industry Research Center, revenue managers can use Priceline's daily reports to determine which degree of discount is most likely to be accepted. The study "Optimizing the Hotel Revenue Expected from Priceline" is offered at no cost in chr.cornell.edu.
Anderson acknowledges that most hotels would prefer to maintain as much control of their distribution as possible, especially by encouraging their guests to make reservations through the chain's website. However, the existence on the market of numerous online travel agencies (in particular, Travelocity and Expedia) has motivated potential guests to compare prices. Even as hotel chains work to standardize their prices across different channels, an appreciable number of customers are willing to use Priceline and accept the risk of bidding on an unknown hotel hoping to get a good discount. To the extent that hotels need to exit part of their inventory at prices with mandatory rebates, it is possible that the same industry has incited such a practice.
Who gives more?
By analyzing the daily sales report that Priceline delivers to its hotel customers, a revenue manager can calculate the best possible discount based on each expected arrival day. The report allows you to classify the auctions by date of registration, and see the number of bids and the anticipation with which the expected registrations are being made. Most importantly, the report tells you what rate the bidder offered and whether that rate was accepted by another hotel. Thus, it can calculate the frequency of a particular tariff and, more specifically, of a specific discount percentage.
At this point arithmetic becomes too complex to explain here. The good news is that Anderson explains the equations needed to calculate your best discount (showing your work) and also provides a tool in a spreadsheet with the equations already installed. This tool allows you to enter your details to know the optimal discounts based on the number of days prior to arrival and the number of rooms that your revenue managers have determined will be offered to Priceline. The tool in the spreadsheet is also offered in chr.cornell.edu.
Anderson advises revenue managers to consider incorporating Priceline's discount model into their revenue management system. Although bidding for quarters at auction sites is often necessary to help decongest the market, Anderson sees another advantage in bidding some of the inventory to Priceline, as long as it's done at the right prices. Their argument is based on customer search procedures. He notes that many of them begin the search for a room by offering a bid on an auction site. If that is not possible, they can then check with online travel agencies or the hotel's website. If it is true that prospective guests begin their search with an opaque auction site, information about such searches would function as an important indicator for projection systems. Thus, with this mechanism not only would rooms be sold at the optimal price, but such relevant information could help revenue managers in their future rate-setting decisions.
* Director of Publications at the Cornell Center for Hospitality Industry Research.
