The Software Algorithm That Turns Hotel ‘Lookers’ Into ‘Bookers’
By Bill Robinson of The Huffington Post
I am always wondering how in the world the Online Travel Agencies (OTAs) like Expedia, Travelocity, Orbitz and others price their inventory. I mean how complicated must those algorithms be? And do they always work?
I can’t imagine that they do, there’s still too much unsold inventory in hotels worldwide; why don’t they just lower their prices to fill all their rooms? The answer is simple: they don’t know… and their software doesn’t know just how low their prices should go to fill the rooms. And I believe that up until now, they have consistently defaulted to leaving the room empty if they couldn’t get $100 per night or $50, whatever. But they certainly wouldn’t go to $20 or $10.
It’s the same riddle I feel about airplanes departing with empty seats; why don’t they sell those unused seats for 20 or 30 dollars just to drive a little additional revenue? I’m not sure but I believe that if they did sell every seat at what they determined would be a crucial ‘breaking point’ for a flyer wanting to go somewhere; they would probably not be in such bad financial shape. The problem for them (and hotels too) is determining how low to go to sell any empty inventory. They can’t, so they don’t.
Shouldn’t the goal be the same in the airline and hotel industry: full capacity at any fare/rate? Wouldn’t a better policy be “no plane leaves with an empty seat, ever” or “we’ll fill every room tonight if we have to let them go for $10?” Enter REVPAR GURU. This Miami start-up helps hotels determine this ethereal price-point and maximize the revenue yield for each property and its rooms. They do this with advanced “super-software” with rich algorithms that slice and dice online data instantly.
‘Rev Par’ is a crucially important hotel industry term and metric referring to the result of the average daily room rate multiplied by the occupancy rate of a hotel.
I confess now that I didn’t know much about the mechanics of the hotel and hospitality industry. But I quickly learned that just like every other sector, it’s been technologizing at high-speed over the last few decades.
And one of the key paradigm shifts that this new company has performed was that they took financial industry software algorithms traditionally used for predicting derivatives and other complicated financial vehicles and then applying them to hotel room rates and availability. This maximizes the revenue/profit yield.
You see, there are these poor souls called “revenue managers” at most larger hotels whose sole responsibility is to keep the hotel filled all the time at the highest possible nightly rates. Their daily task seems impossible on its face.
In the olden days, they put pencil to paper; a lot. Then for a few decades, they tapped their fingers raw on calculator buttons. None of this really did anything to increase capacity or room rates beyond what they would’ve had anyway. And unlike most hotel CEOs or GMs who in other industries wouldn’t normally know middle managers’ names, top hotel execs are positively on a first-name and looking-over-your-shoulder basis with their revenue managers; it’s intensely stressful.
two Frenchmen who moved to Miami.
In 2004, Perez was happily (but stressfully) directing sales at two hotels, The Palms and The National in Miami Beach. Perez, now a U.S. citizen, had been in Miami for years and had always worked at hotels in a sales and marketing capacity. “These things, hotel rooms… are perishable,” Perez said, “They are perishable units. After 9/11, we saw an explosion of online bookings for hotel rooms; it was wild, people booking from their planes on runways and all sorts of places where they never could before.”
Perez is fond of saying, “We’ve seen the shift, in the U.S. first, and then in Europe… and now it’s happening in Latin America and India, there’s a shift from offline to online. This shift cannot be stopped.”
Jean Francois Mourier had a very different beginning from Perez, having taken an intense interest in computers in his native France in 1984; a full 20 years before he would meet Perez in Miami.
Mourier’s father was a full-fledged rocket scientist, so young Jean Francois was quite naturally drawn to computers. At some point while living in France, Mourier who had already lived in America decided he “didn’t like the French and stayed inside all the time programming in Basic.” The Basic programming language, Mourier says “was really too slow for Space Invaders, so I jumped to Assembler and then C plus plus.”
Soon, Mourier would go to work for European financial services giant ING in London. “When I was working in the financial markets,” Mourier remembered, “my sword, my advantage was computers.” This was a guy for whom computers held a real joy, I thought as I listened to him speak and he saw them not just as fun, or a work utensil but more like a means to a very important end: reducing manual labor.
One of the things Mourier seems most proud of is his effort to save time through his programming. “My boss would regularly create a wall of paper and I told him ‘there’s got to be a better way.’ So I coded something I called ‘Live P&L’ which took an activity he used to take 3 hours per day to finish and did it for him in one minute.”
“During the ‘Russian Ruble Crisis’ of 1998,” Mourier said proudly, “my desk at ING made more than $40 million from the programs I originated.”
Migrating from ING to the Merrill Lynch office in London, Mourier continued his miraculous use of computers and macroeconomics to make financial analysis easier and quicker.
Then, one of life’s scariest moments: Mourier’s 18-month old daughter contracted antibiotic-resistant pneumonia in what Mourier described as a “life and death situation.” Months of hospital-sitting his sick child left the cold-blooded Merrill Lynch with no better solution than to let Mourier know he “lost his job.”
Mourier must have wondered, “What next?”
So after being callously let go from his executive position at Merrill Lynch in London, Jean Francois Mourier pondered his next move.
But it didn’t take long for the effervescent Mourier to make that move.
In October 2003 he and his family moved to Miami and he started a new and prophetic career in the U.S. hotel industry. Starting work in a much different environment from the lofty confines of ING and Merrill Lynch, Mourier attacked his new, somewhat lower stratum position as revenue director for The Palms and The National hotels with zeal.
“The hotels first employed me to do reports,” Mourier said somewhat dejectedly, “I did this once or twice and got really bored. So I decided to automate the whole reporting process. I created robots to go out and shop for hotel rooms with my competitors; looking at what the competition was doing and adjusting my prices.” Hmmm, talk about ‘secret shoppers.’
Perez recalls, “When I first met Jean Francois, I was getting paid based on the amount the two hotels were making, so I was highly motivated to get a system like the one Jean Francois told me about. Before Jean Francois arrived, we were meeting to discuss bookings, occupancy and profits three times per week, Monday, Wednesday and Friday for about two hours each day; it was a gigantic waste of time,” Perez said. What they needed was an intelligent system for pricing and filling their hotel rooms — “to turn lookers into bookers,” as Perez says.
“I was raised in an environment,” Perez added, “where the basis of sales and marketing was relationships not computers. But I was forced into understanding the value of using a lot of CPUs and tremendous computing power; I saw how quickly and efficiently it could handle the enormous amount of data that needed to be grabbed, crunched and analyzed.”
The system looks at so many variables, Mourier told me, that it would take someone years to analyze them all and by then the data would be stale. These include hotel competitor’s prices locally and globally; rates in the same time period; prices of sold-out properties and so on across the board. “With all of this information,” Mourier declared, “it’s (the software) able to make a decision that is efficient… effective in terms of the sales. It doesn’t have emotion.”
So Perez and Mourier were trying to put together a system, service or software product that would make the aforementioned harried hotel revenue managers’ lives bearable. To help transform them into a Revenue Manager of the future.
Perez went on to say that he and Mourier wanted to install a system at the Palm/National hotels, which would take into account “the human aspects and psychology of consumer hotel booking not just mechanical software.”
Very quickly after an initial installation, the new software took the two hotels’ occupancy rate “from 65 percent to 98 percent,” according to Perez. It would seem that the two friends had teamed up to create ‘The Holy Grail’ of hotel RevPAR improvement.
But though their success was encouraging, there was still the fact that they were working for others not themselves. “Wow,” said Perez, “I thought ‘wouldn’t it be great if we could do this for other hotels?’”
Though they felt ambivalent, in January 2008 the two headed off to start REVPAR GURU. “We had two or three hotels as clients,” Mourier said seriously then quickly joked, “we went out and bought 60 computers which we put in a garage; there were wires running everywhere and we were like Einstein blowing up fuses in the power supply.”
After the usual entrepreneurial seizures and a lot of late nights, REVPAR GURU released their first product for hotel clients. Looking like a continuously updating and perpetually recalculating dashboard, a client has an amazing snapshot of their and their competitors’ rates and occupancy allowing them to make the critical pricing decisions rapidly.
The REVPAR GURU system allows hotel owners and staff to monitor many of their key metrics while in the office or on the fly.
Using some pretty nifty online marketing tactics such as an online “Results Calculator” which when a hotelier enters a few simple numbers the app churns out an estimated increase in revenue when using these advanced software algorithms.
The company is focused with laser-like intensity on the online market for its service and is very jazzed about social media’s potential for the hotel industry. Mourier was recently interviewed by a hotel industry analyst and talked specifically about “Social Technology’s Impact on Revenue Management.”
REVPAR GURU has had numerous hotel GM clients who explain how this new system is beneficial to their business.
Currently, the company prices its service according to the number of rooms at a client hotel. Whether they will go to a more traditional software-licensing model based on a per-seat or per-server basis is anybody’s guess. I could see it going either way.
One thing was most striking to me: the way these two Frenchmen took a bit of complex financial algorithmic code and jury-rigged it neatly into a hotel industry innovation. Intriguingly, this might mean that the same code is transferable to other industries.