Driving Revenue With Dr. Ravi: The Bid Price Approach

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Hotels around the world are in hot pursuit of efficient revenue management methods that not only price their properties successfully, but also help manage their room availability, accept their most valuable demand across all arrival dates and maximize their revenue on shoulder nights. And for hotels committed to achieving their maximum revenue potential, an automated revenue management solution can fulfill their wish list with the powerful capabilities of the bid price.

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Developed by Dr. Ravi Mehrotra, co-founder and president of IDeaS Revenue Solutions, bid price helps hotels of any size optimize their revenue potential and has dramatically revolutionized the hotel landscape. Because of his endless dedication to developing bid price, innovative revenue solutions and pioneering the revenue management discipline, Dr. Mehrotra was recently honored with the Vanguard Award for Lifetime Achievement in Revenue Management by The Hospitality Sales and Marketing Association International (HSMAI).

To help break down the inception of bid price and its impact on the hotel industry, Dr. Ravi recently sat down to answer some questions about the approach that has transformed our industry.

EW: What led you to develop the bid price approach in the hospitality industry?

RM: The bid price approach was initially developed to help hotels determine which business to accept during high occupancy time periods when their market demand exceeds their hotel’s capacity. It allows hotels to effectively manage their inventory and, with its close relationship to price elasticity and demand, allows hotels to establish the optimal price for their unqualified business and flexible qualified business. While bid price may be known by many aliases (such as Marginal Revenue, Opportunity Cost or hurdle), we commonly refer to bid price as the Last Room Value (LRV) in our revenue solutions.

EW: An LRV isn’t actually a rate or price. Can you explain what an LRV truly is?

RM: An LRV or hurdle, as it can be commonly referred to in different selling systems, is a value assigned to a particular day that helps hotels optimize the available demand in the market. This value is not the price you should sell your rooms for, but rather the minimum value from your hotel’s established rate plans that you can expect to obtain from the available demand in the market. This hurdle value helps determine the optimal business to accept and maximizes shoulder night performance so longer length of stays are not turned away over sellout nights.

The LRV goes even further beyond helping hotels accept the right mix of business and manage inventory because it also plays a significant role in establishing a hotel’s optimal pricing. There’s an extremely intricate relationship between the optimal price, the bid price, and the relationship between price elasticity and demand. In fact, if you can determine any two of those values, you are able to identify the third. For example, if I know both the bid price and the price elasticity and demand, I am then able to identify the optimal price for any segment for any day.

EW: How do revenue managers use the LRV to build an efficient revenue strategy?

RM: A yieldable rate must meet or exceed the value of the LRV in order to be bookable. By analytically determining LRVs in an automated environment, you can optimize rate availability through various channels like voice reservations, booking engines and OTAs. As demand fluctuates, so should the LRV to accept demand for the rates and lengths of stay that will maximize revenue for a hotel.

EW: Without dismantling the engine under the hood, what components does IDeaS RMS use to determine an LRV?

RM: In order to determine an LRV/hurdle, you must first understand the demand that exists for a given day. To do that, you must be able to forecast the value and volume of that demand or, in hotel speak, the forecasted ADR and occupancy for each of your business segments.

A sophisticated revenue management system will also take into account the uncertainty of that demand by analyzing the booking patterns, pace and cancellation/no show patterns to truly optimize your revenue. IDeaS RMS analyzes all this data to determine and automatically deploy an LRV.

EW: How does the LRV compare to less flexible controls available to the industry?

RM: Hotels have had the ability to manage inventory through manual controls for decades. Most revenue management system providers give you access to these inflexible controls. However, in such a competitive, diverse and quickly evolving industry, hotels need to be able to do much more. IDeaS controls are unique in that they are flexible and do not require the user to manually configure or deploy them.

Let’s take an example of a week where a hotel is forecasted to sellout on Tuesday and Wednesday. Putting a Closed to Arrival on both days will certainly restrict business, but how would you accept a guest checking in on Tuesday – staying seven nights – and still offer them the appropriate discount incentive that shouldn’t be available to a guest only staying two nights?

Perhaps a minimum length of stay control is better suited for this scenario. Putting a three-night minimum on Tuesday and a two-night minimum on Wednesday could be a resolution; however, now someone could check in on Wednesday for two nights, while a guest wishing to check in on Monday for two nights is turned away. These types of controls do not achieve optimal revenue results – and still require time and manual deployment.

The controls that maximize your revenue strategy must be flexible and evaluate the value of each unique reservation inquiry – not set a blanket rule for the entire day. No one person or team can take the time to do this every day while keeping up with other job duties. This is why it is imperative your revenue management system can do this for you.

EW: How do you feel about being honored with the Vanguard Award for Lifetime Achievement in Revenue Management?

RM: Words can’t succinctly describe how honored I am, and I could not have achieved this recognition without support from my wife, Yasmin.  She taught me a lesson that is helping me now more than ever before:  To change anything in the world is to change the consciousness. To change the consciousness, you have to start with yourself.

I have done so much work on myself by learning from the scientists, mathematicians and revenue management gurus. I am passionate about sharing that knowledge with others and giving to others what I see standing on the shoulders of these giants.  It is important for me to transfer all my knowledge to not only young students, but everyone who wants to change how business decisions need to be optimized in an uncertain reality. I believe that this award has humbled me with the realization that I am truly a servant to the revenue management industry and it is my duty to transfer everything I have learned from others, my experiences and my imagination to others passionate about revenue management.

Albert Einstein once said, “If you can’t explain it simply, you don’t understand it well enough.” When I teach others about the relationship between imagination, mathematics and science, these are often the first words that spring to mind. I believe that I can explain to anyone with an open mind how to apply what Einstein taught as follows:

As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality. Imagination is more important than knowledge. For knowledge is limited, whereas imagination embraces the entire world – stimulating progress, giving birth to evolution. It is, strictly speaking, a real factor in scientific research.