We have already looked at some key terms in the field of hospitality in a previous blog. So what are some other terms worth pointing out?
There are a number of key terms that relate to the hotel booking process and the channels which are used by customers to reserve hotel rooms. For example, what does the term ‘booking window’ signify?
This refers to the length of time between the dates when customers book a hotel stay and when they actually arrive at the hotel.
Hotel room nights are ‘perishable’
The notion of ‘booking window’ is important for hotels due to the ‘perishability’ of the product. You may associate ‘perishability’ with rotting fruit or vegetables, but here it refers to the fact that once a given night is over it’s gone for ever.
For instance, the night of 15 October 2021 can never be sold again. Thus, the closer a given date becomes, the more urgency there is to fill any still-empty rooms. Normally, hotels will offer cheaper rooms that are reserved far in advance (usually to leisure traveller or maybe conference goers).
Meanwhile, corporate business travellers who often reserve with a shorter booking window will pay a higher price. And then there are, of course, discounted last minute sales, when the hotel is eager to gain maximum occupancy before an approaching date on the calendar.
Rack Rate
Rack rate is a classic hotelier term, even though it’s rather old-fashioned given the growing usage of fine-tuned revenue management techniques which attempt to adjust prices in function of current demand, as described below. The rack rate can be taken to mean the standard, non-discounted room rate.
Revenue Management
Revenue management, or what used to be called yield management, was originally developed by the airlines following the deregulation of airfares. The goal of revenue management is to extract the maximum revenue from a hotel’s client base through adapting prices to the changing demand profile for a hotel’s services.
Factors that affect demand for a hotel are seasonality, days of the week and important events held at the destination. For instance, during the 2018 FIFA Football World Cup, which was held in 11 Russian cities from 14 June 14 to 15 July 2018, room prices at some hotels in the cities where matches were played increased by 300% on the days the matches were played, according to a study of the REGNUM news agency.
Channel Management
The hotel booking process has grown increasingly complex in recent decades, especially due to the development of numerous online channels that can be used to search and book hotel rooms.
Channel management refers to how a hotel’s available rooms are allocated to the various distribution channels, so as maximise net revenue. For instance, how many rooms should be allocated to a major OTA like Booking.com where the commission rate could be between 15% and 25%? Or, how much should be spent on Google advertising and for which dates?
Finding the right mix is a tricky endeavour which has given rise to the need for skilled channel managers whose task can be crucial to a hotel’s profitability.
Dynamic Packaging
Hotel rooms have been sold as a part of a package for decades before the rise of the Internet. Since the 1960’s, tour operators like TUI or Thomas Cook have been selling packages typically including a flight, accommodation and transfers from and to the airport at the destination.
For over 20 years, OTAs (online travel agents) like Expedia have allowed customers to dynamically package their own travel packages, through combining flights and hotel rooms to suit their specific tastes and budgets.
EBITDA
EBITDA is a financial acronym that has wide application beyond the hotel sector. It means ‘earnings before interest, taxation, depreciation and amortisation’. The concept of EBITDA is important for understanding the underlying financial performance of a hotel. Looking only at the net income of a hotel property can give a distorted view of the true health of the business and render comparisons with other properties more difficult.
By stripping out interest payments, which are dependent on the amount of debt the hotel carries, tax expenditure, which depends factors extraneous to the hotel’s operating performance, as well depreciation and amortisation, which are non-cash charges, an owner or investor can get a true idea of the cash flow that the property is generating. Cash flow, not accounting net income, is the key metric for judging the success of a hotel operation.
