We’ve all seen the advertisements, commercials, and gimmicks. Get your last-minute hotels here, they claim, for a fraction of the cost. Blindly book with us, they say, to save now and worry later.
We all know what happens next… You may land a hotel you’ve never heard of or get sent to a location you never knew existed. It’s not by accident, either. Travelers are more impatient and impulsive than ever, leading to more last-minute bookings. This is another way online travel agencies (OTAs) attempt to lure you in when your travel plans go awry or your painstakingly slow in-laws take months to plan a trip.
So, what happens when a hotel has unsold hotel rooms? Can travelers truly find last-minute bargains? Hotels, unlike OTAs, aren’t interested in putting a full-court press on consumers when the vacancy light still glows. It’s more complex than that. We’ll explain how hotels handle unsold hotel rooms, what effect, if any, that has on pricing, and where that leaves you, the customer.
Don’t Count on Last-Minute Discounts
Fact or Fiction: Travelers can benefit from unsold hotel rooms. Roomkey CEO Steve Sickel, who spent years in the hotel industry as a veteran InterContinental Hotels Group executive, considers this fiction.
Hotel prices dropping closer to the booking date is generally a myth, according to Steve. He notes how the hotel industry has enjoyed annual rises in both occupancy and price per room for the past 10-plus years.
“Demand and price for hotel rooms has never been higher in the history of modern-day hotels. In addition, the revenue management systems have become much more sophisticated and accurate in predicting demand and adjusting prices (generally upward).”Steve Sickel, Roomkey CEO
We’ll get into revenue management systems more below, but, in general, these pricing systems don’t recommend lowering rates only to attract guests. Some context: Hotels run the risk that higher-rated, refundable-rate reservations already on the books will cancel and rebook at the lower rate. Airlines use this same line of thinking. It doesn’t benefit a hotel to offer a $75 discounted rate on the original $100 price because, in theory, a guest who booked that room three months earlier under a flexible rate could just cancel and save a quick $25.
Hotels also don’t want to create bad habits where customers wait until the last minute to book. This throws off their entire revenue management system and would eventually lead to lower hotel rates for the hotel.
So, what if it’s 10 p.m., you need a room, and the hotel you visit has a big, bold vacancy sign. Do you have leverage? Not really, according to Steve. The hotel front desk staff doesn’t have the discretion to wheel and deal the price for a walk-up customer.
Hotels want to maximize revenue even if that doesn’t mean selling all of its rooms. Lowering rates to bring more heads in beds can be counterproductive. A hotel would rather have 50 guests paying $100 a night than 100 guests paying at a $50 rate. The reason for this is that for every room sold, they also have to factor in extra incurred costs from housekeeping, maintenance, and utilities.
In the event you do try and get a last-minute hotel deal, be wary of the potential gimmicks. “These sites are generally all hype and are working off a business model that was somewhat relevant 15 years ago, but whose applicability is all but extinct in today’s high-demand hotel market,” Steve said. “They are generally applicable to poor quality hotels who may do last-minute discounting because few people want to stay in that hotel.”
Unsold Hotel Rooms Are Perishable
Unsold hotel rooms are similar to perishable items you’d find at the grocery store. They are at their freshest further away from the expiration date. But once you get near, or exceed, the sell-by date, you throw away the item and deem it useless. With hotels, perishable inventory means the rooms “expire” each night they go unsold. This adds to the complications of accurately pricing rooms.
Since there’s no way to sell rooms that went unsold last night, or a month ago, hotels are motivated to do two things:
- Get the highest price it can for each room
- Sell the most rooms it can to maximize its revenue for each night it’s open
To better understand hotel pricing, here’s our guide on that topic. But as we were saying earlier, hotels use revenue management systems to maximize revenue. These complex systems use a predictive process that sorts through prior demand and industry trends. They are able to recognize various customer segments (leisure and bleisure travelers), the purchasing habits of each group (if they book long before arrival or wait until the last minute), and the price points they are willing to pay at particular hotels.
“That’s why there are multiple prices for a given hotel. It then sets prices for these segments and allocates a portion of the rooms inventory for each these prices,” Steve said. “As a hotel begins to book up, these revenue management systems get even smarter in predicting how much demand remains for a particular night and adjusts the pricing and rooms allocated to those prices accordingly.”
Do Unsold Hotel Rooms Affect Pricing?
So, now that we’ve outlined how pricing works, the important question is, how do unsold hotel rooms affect the price you pay?
Before we take an Olympic-style swan dive into that, let’s remember that maximizing revenue doesn’t mean selling every hotel room. Follow along with us here. Say, for example, there’s a 100-room hotel whose demand is split between leisure and business. And for this activity, let’s assume the price point for leisure travelers is $80 with business travelers set at $110.
A hotel, in theory, could sell the entire block to leisure travelers to generate $8,000 in revenue. Instead, the more cost-effective method is to sell its entire share of leisure rooms (50 rooms at $80 a night brings in $4,000) and target 80% of its business rooms (40 rooms at $110 a night brings in $4,400) to earn a total of $8,400.
As a general rule of thumb, leisure travelers book earlier and will pay a lower price compared to business travelers, who have a tendency to make plans within weeks or days of their reservation. As a result, hotels tend to discount their rooms well in advance of arrival to attract the leisure customer. Leisure travelers booking rooms in advance allows the revenue management system to adjust pricing for business travelers knowing they are less likely to fret about price changes.
There’s one caveat—the lower rates targeted to leisure travelers are often non-refundable since hotels know their plans are set and they are willing to trade flexibility for a cheaper room. More about refundable vs. non-refundable rates here: Breaking Down the Different Types of Hotel Rates.
It Pays to Book in Advance
Fifteen years ago, we might have recommended that you wait until the week or day of to get a better rate, but that outlook has since changed.
With today’s environment of high demand for hotels, high occupancies, rising hotel prices, and sophisticated revenue management systems, Steve says that the best and safest way to ensure a low rate is to book in advance. If you’re a massive procrastinator and have a habit of waiting, waiting, waiting, your chances only increase of being stuck with a higher-priced or lower-quality hotel.
One of our colleagues experienced this recently when booking a room for a University of Texas football game in Austin, Texas. A week prior, the only rooms left near campus were cheap motels and high-priced hotels that would set you back a paycheck.
The benefit of booking in advance often comes from flexible rates, meaning you can change or cancel your reservation later down the road if something comes up. You can take further advantage of this by using our Price Alert tool. This stress-free feature allows you to set a price alert for the hotel you’ve booked with, and it will notify you should a better rate come up so you can change the reservation to the lower price.
Setting up price alerts is easy. Simply make an account (we’ll just ask for an email to notify you—no urgency marketing from us, like those other folks) and once you find a property, look for the “Set Price Alert” button to use the feature. We do the rest for you, emailing you when the hotel rate drops below a certain value. By default, we set the alert feature to notify you when a rate drops by 5%. You can create your own percentage alerts by clicking the “Manage Price Alerts” button.
Thinking about planning a trip? Don’t wait until the last minute. Let us help you finalize your plans. We give you the option to compare loyalty rates from our hotel partners around the globe all in one place. If you see something you like, we’ll take you right to the hotel’s website to complete the booking process. We’ll filter out the nonsense so you can get on with your trip. No tricks. Just travel.
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