Yield Management in Hostels?

In my recent travels in Europe I have again had significant exposure to the Hosteling Industry. As readers of this blog will know, we can't help but seeing Operations Research or opportunities in our daily lives. Sure enough we find ourselves analyzing our surroundings and considering the pricing structures of our hostels. In this article I hope to begin an exploration of pricing strategies in the hostel industry that I will continue after I have collected some of your thoughts and more of my own.

The Hostel industry has been rapidly developing throughout the world. According to Wikipedia, youth hostels had their humble origins in German Jugendherberge (1912), non-profit hostels for youths by youths. Fast forward to today and you can witness the evolution to profit-maximizing corporate hostels sometimes exceeding 500 beds.

That said, sophistication in the industry seems to be developing more slowly. In particular, possibly due to it's origins, there is significant resistance to profit-maximizing activity like yield management. I also believe that there is a growing suite of hostel management IT systems with some direct interfacing with booking websites. I can't claim to be an inside expert in the industry, though we did have a nice informal chat with the manager of a small-to-medium-sized non-profit hostel over beers in Munich.

Youth hostels face a problem that is similar in some ways, but different in others to that faced by traditional hotels. Apart from the obvious similarity of product, the primary similarity is that both face an expiring good that is booked ahead of time and cannot be stored.

Hostels, however, do not have business customers. Traditional revenue optimization approaches for hotels centre around price discrimination. With leisure customers and business customers that can be separated by booking time, hotels can sell rooms early at a discount to money-saving leisure customers and sell the remainder later to late-booking, price-insensitive business customers. Hotels can sell some rooms to leisure customers who would otherwise have gone to the competition had they been charged full price, and hotels can then later sell the remaining rooms at a higher price to business customers who would otherwise have only paid the flat rate that leisure customers pay. Hostels on the other hand face an exclusive stream of budget-sensitive travellers. The differentiation achieved by time of booking is thus only a question of how far the customer plans ahead and may say little about their willingness to pay.

Hostels have a wider range of product. I'm not an expert in the hospitality industry, so maybe I can ask our readers to confirm this, but I believe your typical hotel offers simply twin, triple, double, queen, and king rooms. The Meininger City Hostel and Hotel in Munich, Germany for example offers 9 distinct products on hostelworld.com: Single Private Ensuite, Twin Private Ensuite, 3 Bed Private Ensuite, 4 Bed Private Ensuite, 5 Bed Private Ensuite, 6 Bed Private Ensuite, 6 Bed Mixed Dorm Ensuite, 6 Bed Female Dorm Ensuite, 14 Bed Mixed Dorm Ensuite. Something that bears noting is that for the most part these products can be ranked such that any customer will unconditionally prefer one over those below it. For the most part, no customer would prefer to sleep in a 14 Bed Mixed Dorm when they could be in a 6 Bed.

Other factors relevant to the question of YM in hostels: I estimate that the majority of hostel stays are booked through internet booking websites, with the majority of those coming from hostelworld.com. The majority of these bookings are thus made after some moderate price comparison making the market fairly competitive. Many of these bookings will also be made factoring in reviews of the hostel. Sometimes hundreds of website users will have given the hostel a rating for things like security and cleanliness.

The lack of business customers does not mean that hostel customers cannot be segmented. I propose that hostels face two main types of customers. One group comprises the shoestring customers, willing to do anything to save a dollar (or a euro or a pound, etc.). The other group is more differentiating, willing to pay slightly more for a smaller dorm. I'm still working out the significance of this for myself.

I believe there is an opportunity there. Some initial research based on my own experience and some creative use of hostelworld shows that hostels often fill from the bottom up. That is that the largest dorms with the cheapest beds are the first to fill up, and the smaller rooms frequently go empty during the week. This may be a sign that the supply of hostel beds does not match demand. This may show that there are more small dorms in the market than desired and fewer large dorms.

I welcome any comments on the topic. Is there a business opportunity here, or is it just academic? Is the current state of IT and sophistication in hosteling sufficient to work on elementary yield management? Most hostels have a Friday-Saturday price, and everyone in Munich has a low season, high season, and Oktoberfest price, but could we go further?