We recently had the opportunity to ask Dr. Chris Anderson, associate professor at Cornell’s School of Hotel Administration for his perspective on upgrades and upsells as part of a revenue management strategy.
When are upgrades and upsells useful?
Upgrades are especially useful when there is a mismatch between supply and demand. There are several reasons why capacity mismatches may occur in practice, including forecast errors and strategic supply limits that aim to skim revenues from customers with high willingness to pay. Upgrades become a key managerial lever in the case of travel and service industries in general when capacity is relatively fixed and difficult to change in the short run as demand fluctuates over time.
How are upgrades useful?
Upgrades help balance demand and supply by shifting excess capacity of high-grade products to low-grade products with excess demand. Upgrading allows firms to get consumers to commit to purchases at lower prices and then extract additional revenues with the upgrade/upsell.
What are some of the main concerns with upgrading?
In addition to potentially not having enough high-valued inventories available, upgrading can create strategic consumer issues especially for those receiving free upgrades. Consumers tend to expect upgrades and may become dissatisfied if usual upgrades become unavailable.
What type of data do you need to determine if and when you should upgrade?
The key to proper management of upgrades is a solid understanding of total demand for higher-valued inventory and when this demand materializes. Essentially you must be able to estimate the likelihood that you won’t need that high-valued room once you’ve upgraded it and made it available to a lower-valued customer.