How can you be sure of your decisions when you are not an expert? 4 Ways to Make Sure Your Decision Will Make Money
Does this situation speak to you?
You want to change a price or length of stay, but are stuck in doubt: is it really a good decision? Do I take the risk of not having sales? Aren't my eyes bigger than my stomach? What if I lost money in the end?
Rest assured, this feeling is normal. And I will go even further: even with 10, 20, 30 years of experience it still exists. Because each case is different, it is worth asking the question.
In this article, I will share with you what the experts do to be certain of their decision. These methods are simple and you can easily apply them to your own business.
First of all to introduce our topic: what is a good decision?
Although this may seem obvious, it is important to clarify this point because a good decision can take many different forms.
So a good decision should allow you to earn more money, because:
– what you would have sold, you will sell for more
– what you would not have sold, you will sell (even cheaply)
– you avoid losing money (a decision which reduces charges for example)
But then if all this is so scientific and mathematical: why is it so difficult to be sure of making a good decision?
Without getting into counter psychology, it should still be noted that any revenue management decision involves risk-taking. And that until proven otherwise no one has the ability to predict the future with 100% certainty. Doubt about what can happen is therefore at the origin of the difficulty.
In addition to risk management, the problem I frequently observe is:
– not looking at the right information to decide or
– looking at the right numbers, but not analyzing them correctly.
The good news is that you are not alone and that you are reading the right article to benefit from the experience of someone who has experienced this feeling for 10 years! First as an analyst on everyday cases, then as a manager on more complex cases.
Here are 4 ways to make sure your decision is the right one and will save you money. The ideal is to be able to achieve all four points in the event of a difficult decision.
1 – Look at your own past figures to get your bearings
First of all, check your past performance on the usual key revenue management indicators: per day for a hotel or per week for an apartment. These indicators are: occupancy rate, average price, turnover and revpar.
The questions to ask yourself to enlighten yourself are as follows:
In similar times have you already been able to sell at the price level you are planning or in the quantities you are planning?
If your ambition is unprecedented, will the means you put in place be sufficient to achieve your objective?
Have you already tried it and what was the numerical performance of the test?
Note a few points of vigilance
– Remember to compare yourself to equivalent periods: do not compare the performance of a very strong event week with the performance of a slow week in the heart of winter. Take a good look at the same time.
– Finally, be vigilant about capacity variations if you work for a hotel. Occupancy rates (unless they include blocked rooms) can give you a skewed view. For example: a 100% occupancy rate even though you had 3 rooms under construction. The actual occupancy rate of your establishment was not 100% in the end.
2 – Look at market figures to challenge yourself
Once you have been able to look at your own numbers, the second important point is to open your analysis to the rest of the market.
If your performance is good: are you the only one? Is the market perhaps doing even better than you? How does the market achieve turnover? (with a high price and fewer sales or with a reliable price and many sales for example)
Same question if your performance is bad.
Three simple rules to help you
- Always look at the performance first.
- If your revpar is better than the market: determine if it is because you are selling more in price or more in volume. This is a priori a good practice to duplicate elsewhere during the year.
- If your revpar is less good than the market: study the reasons for this underperformance, is it linked to prices that are too high or sales volumes that are too low? And correct your strategy accordingly: if you sell too little you may be too expensive, if you do not sell expensive enough, do a price increase test.
If you want to learn market figures (with Airdna) in more detail, don't miss my free webinar to learn how to use it.
Note a point of vigilance
– Always compare apples to apples.
Compare yourself to establishments of the same type or size, in the same city.
Also compare identical amounts: check if the prices include cleaning fees, commissions or tourist taxes. Because it is very quick to compare two average prices while completely forgetting that one of the figures includes commissions and the other does not, for example.
3 – Estimate the break-even point numerically
Once you have looked at the numbers for your room(s), as well as the market numbers, you are left with one option, which is to assess the volume of sales needed to make this decision financially profitable. (the dead center)
I will detail this point by example.
You usually sell week 49 of the calendar at €56 per night and sell 3 nights out of 7 which brings you a turnover of 168 euros for that week.
You decide to lower your price to €45 to sell more nights:
– If you still only sell 3 nights: you will earn €135 (<€168) your decision was not good, because you did not generate additional sales.
– On the other hand, as soon as you sell one night more than your usual performance (i.e. 4 nights) you earn €180 over the week which is already higher than the previous €168.
So your decision is good based on an increase in the volume of nights sold by + 1 night.
How can you use this calculation to make your decision?
If you hesitate to make a decision, for example, if you doubt the merits of lowering your price from €56 to €45: calculate from what additional sales volume, your turnover becomes greater than that of the 'last year.
Then ask yourself: does it seem like achieving this additional performance? Can the price reduction really produce this additional sales volume?
This method obviously works in one direction and the other: for an increase and a decrease in price.
4 – Allow yourself to make mistakes, but monitor the performance of the decision
Finally, when you have completed the 3 previous steps, if you are still hesitant, go for it. Indeed, if you are there, this means that:
– on the one hand that you have not found any element which blatantly shows that the decision is bad and
– other than that your hesitation is perhaps more due to fear (but no one blames you for that, it’s human) than to a real financial risk
So you have to test and see.
But be careful not in just any way! And especially not by jumping, on foot together, with eyes closed, into the abyss in the hope of surviving.
My recommendation to make sure everything goes well (i.e. you don't lose money) is to launch your new price and monitor (every 2 or 3 days) how sales are going.
Observe whether sales are happening faster or slower than usual.
So, if you lowered prices: sales should be faster. If this is not the case, give your price enough time to prove itself and then reconsider your decision.
Conversely, if you have increased them: sales can be slower without this being a problem. Be careful, however, not to let the usual reservation deadline pass.
For example :
During a week of very high demand, you sell three months before the arrival date, whereas your usual reservation time is rather 1 month before the arrival date.
Your prices are lower than the market: you therefore decide to increase them.
If instead of 3 months before, your sales are made 2 months before everything is fine.
On the other hand, if almost 1 month from the arrival date you still have not completed the period: be alert, because you will pass the usual reservation deadline and run the risk of having difficulties in ultimately completing.
You've probably already heard about Airdna's benefits to help you maximize your revenue.
But this surge of figures leaves you unmoved?
I share with you how I use this tool, with my 10 years of experience in revenue management, so that you are as comfortable as I am with Airdna.
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