Pricing Decisions Associated with Hotel Booking
ABSTRACT
This paper demonstrates a particular model for making the pricing decisions associated with hotel booking. Implementing such pricing decisions that are designed to optimize the profitability of the hotel forms part of a policy commonly referred to as yield management. The model utilizes fore casts of demand in individual market segments to capitalize on the willingness of people in one segment to pay more than people in another segment. The procedure for doing this is necessarily time-based since the market segments are differ entiated also by the timing of bookings relative to a rental date. The procedure for making the pricing decisions is de scribed and an example is given. Unlike the commonly in voked marginal revenue models, this model is optimal and requires fewer assumptions about the demand process. It is shown that the procedure has rather modest information re quirements and is based on data that is typically available through market research. We also show that the procedure demands minimal amounts of CPU time making it applicable even in small hotels.
INTRODUCTION
The term "yield management" is used to label many approaches to maximizing the profitability of a hotel through manipulation of its pricing and booking policies. The goal of a yield-management system is to consistently maintain the highest possible revenue from a given amount of room capacity. To achieve this goal, the yield-management process includes determining policies for overbooking and allocating hotel capacity to customers of different revenue-generating potential through discriminatory pricing. Ideally, both of these policies should be concurrently incorporated in a hotel 's reservation system. However, it is beyond the scope of this paper to prescribe an optimal policy for simultane ously planning both functions in a coordinated manner. The objective of this paper is to present a model developed for the pricing policy.
The overbooking policy deals with the likelihood
This paper demonstrates a particular model for making the pricing decisions associated with hotel booking. Implementing such pricing decisions that are designed to optimize the profitability of the hotel forms part of a policy commonly referred to as yield management. The model utilizes fore casts of demand in individual market segments to capitalize on the willingness of people in one segment to pay more than people in another segment. The procedure for doing this is necessarily time-based since the market segments are differ entiated also by the timing of bookings relative to a rental date. The procedure for making the pricing decisions is de scribed and an example is given. Unlike the commonly in voked marginal revenue models, this model is optimal and requires fewer assumptions about the demand process. It is shown that the procedure has rather modest information re quirements and is based on data that is typically available through market research. We also show that the procedure demands minimal amounts of CPU time making it applicable even in small hotels.
INTRODUCTION
The term "yield management" is used to label many approaches to maximizing the profitability of a hotel through manipulation of its pricing and booking policies. The goal of a yield-management system is to consistently maintain the highest possible revenue from a given amount of room capacity. To achieve this goal, the yield-management process includes determining policies for overbooking and allocating hotel capacity to customers of different revenue-generating potential through discriminatory pricing. Ideally, both of these policies should be concurrently incorporated in a hotel 's reservation system. However, it is beyond the scope of this paper to prescribe an optimal policy for simultane ously planning both functions in a coordinated manner. The objective of this paper is to present a model developed for the pricing policy.
The overbooking policy deals with the likelihood
References: Brumelle, S., McGill, J., Oum, T., Sawaki, K., Tretheway, M. (1990), Allocation of airline seats between stochastically dependent demands. TRANSPORTATION SCIENCE 24, 183-192. Curry, R Glover, F., Glover R., Lorenzo, J., McMillan, C. (1982), The passenger mix problem in the scheduled airlines. INTERFACES 12, 73-79. Kimes, S Ladany, S. (1976), Dynamic operating rules for motel reser- vations. DECISION SCIENCES 7, 829-840. Lee, A Lieberman, V., Yechialli, U. (1978), On the hotel overbook- ing problem: an inventory problem with stochastic cancellations. MANAGEMENT SCIENCE 24, 1117-1126. Orkin, E Pfeifer, P. (1989), The airline discount fare allocation problem. DECISION SCIENCES 20, 149-157. Relihan, W Rothstein, M. (1971), An airline overbooking model. TRANS- PORTATION SCIENCE 5, 180-192. Rothstein, M Rothstein, M. (1985), Operations research and the airline overbooking problem. OPERATIONS RESEARCH 33, 237-248. Thompson, H Williams, F. (1977), Decision theory and the innkeeper: an approach for setting hotel reservation policy. INTERFACES 7, 18-30.