Hospitality industry, you missed a spot!
Dear Diary,
After I got off the phone with a hotel owner, I was thinking about how staffing issues are affecting hotel’s pricing strategy in the US. The multimillionaire industry of hospitality is one of the most important ones regarding employment, not only for the number of people involved but also for the wide range of qualifications among the employees. From cleaning staff to software developers and mathematicians, a lot is happening behind the front desk and the industry is facing sweeping challenges.
Airlines, Hotels, and Car Rentals have one thing in common, due to the nature of the service they offer, each time they are not sold out, money is lost! An empty seat, room, or car not been used represents money left on the table! As these industries live day by day, hour by hour, their rates are highly dynamic. To keep up, they use tools called Revenue Management Systems (RMS). RMS collects multiple variables such as historical data on rates and occupancy, competitor pricing, among other factors to forecast demand and optimize prices for future days. The overall aim is to maximize total revenue.
COVID-19 had sharply plugged this industry for obvious reasons. Fortunately, the situation is getting clearer and the demand for hotels rooms has returned almost to pre-pandemic levels. Nevertheless, hotels are having trouble satisfying this demand due to short staffing. In the words of a hotel owner: “People prefer to live on social assistance rather than work here”. Cleaning staffing issues have considerably increased the average time it takes to accommodate a room. So as the room’s cleaning capacity is not constant, and contrary to the other variables in the RMS, it relies entirely on human input, the exact number of rooms that are going to be available each day is decidedly unpredictable. This leads to an optimization problem for RMS as it does not know whether to price to fill 100 rooms or 20!
As the nature of the service has changed from a fixed offering capacity to a variable one, hotels have shifted their pricing strategy to constrain or expand their demand using rates. In other words, the room’s price is now strongly influenced by the cleaning and accommodating capacity. It was not in the RMS design to face these new conditions, so without full information on the true available capacity, key inputs are missing for making pricing decisions and so, they are not able to reflect true market conditions. That is with they are turned off by hoteliers that decide to price more humanly. Relying on their experience and intuition rather than a computer system.
So, is this a game-changer or is it going to be tidied up?
The key stands on whether the housekeeping issues can be solved so that the offering capacity changes from a variable to a fixed one. In economics, an entire field of study called Contract Theory focuses its attention on how different agents interact and make contractual arrangements. One of the factors is an employee’s opportunity cost of not accepting a job offer. Right now, the opportunity cost is low or even negative if they lose unemployment insurance. The US government is aware of this situation, which is not affecting only the hotel industry and has strict politics such as demanding people prove that they are actively seeking a job as a counterpart for getting economic help. So, if the opportunity cost is reversed, the drivers for all the economic agents (Government, hotels, and workers) will be aligned as they used to be.
All in all, as we are overcoming the COVID-19 condition, in my opinion, this situation is going to be normalized as people will eventually have to go back to their jobs.
In the meantime, my recommendations are:
· Pay special attention to the operations and cleaning methods to make them work as smoothly as possible
· Invest in new cleaning methods to decrease the labor/cleaning-capacity ratio
· Updated as much as possible the number of rooms available on RMS so it has live information
· Focus on the whole week saving the higher number of rooms available for days with higher average daily to maximize revenue week by week rather than day by day
These might not be the perfect conditions of RMS, but they are still the best option when it comes to pricing. Good coordination among all hotel areas and an active feed of information on RMS could represent an opportunity to perform way better than competitors! So, things have changed but we should investigate the areas of opportunities and adjust our methods to perform the best we can and make changes looking into the future rather than just hoping for this situation to end. More challenges will appear in the future and are from this kind of situation that the industry will evolve into new superior phases.
