Mr. van Meerendonk

Revenue Management

All About Pricing: Should Competitors Influence Your Strategy?

By Paul van Meerendonk, Director of Advisory Services, IDeaS Revenue Solutions

After 18 months of financial uncertainty, it is now widely accepted that a recovery is underway across the global hospitality sector and that some regions (in particularly the Asian hotel sector) have recovered faster than expected. On a positive note, the faster return of demand indicates that many hotel executive teams have done better to plan for a return in demand than in previous recessions.

Such has been the recent growth in demand across the Asian hotel sector that Jonas Ogren - Area Director for STR Global - commented that 'Revenue Per Available Room (RevPAR) for the region as a whole is certainly on the rise and has been for the past 10-12 months. On a rolling 12 month basis, RevPAR levels are now (as of August) only 10% off levels just prior to the Global Financial Crisis. USD RevPAR in Asia Pac as a region has grown more in the past 10 months than it did in two years prior to the crisis - so it's definitely coming back very strong'

However, despite the improving financial outlook there is also an increase in competition across the hotel industry, which means that hoteliers around the world must continue to work on developing a consistent, long term pricing strategy which includes a rational approach to competitor pricing rather than simply reacting to any competitor price change.

One of the most significant, profit-impacting decisions all hoteliers face is very simple: successful pricing. While it seems like a simple decision, it is also inherently complex and not without its risks. Pricing correctly has shown to be the fastest and most effective way to increase profit across all industries - including hospitality - but even with demand returning in the hotel sector and increasingly sophisticated pricing support technologies, few hotels are still executing it well.

What Drives Dynamic Pricing?

The basis of accurate hotel room pricing around the world has always been length of stay, rate management and overbooking management. The new reality for the global hospitality industry is that revenue management and dynamic pricing, a competency based on demand, length of stay and product mix, are inextricably linked. Dynamic pricing approaches demand as a function of price and the most optimal price obtained through a more complex pricing strategy increases revenue. In the long term, pricing optimization will replace the traditional approach to revenue management because, to put it simply, a hotel that charges at a fixed room rate can leave a great deal of money on the table.

Market pricing involves being able to sell a maximum amount of rooms and associated packages through the balancing of perceived benefits and price. Factors including market position, market segments and current and future competitors influence the strategy. How a particular hotel decides their own pricing strategy ultimately depends on the product they are offering, the market in which they operate and their competitors. When all these factors are taken into proper consideration, pricing becomes dynamic as a direct result. There are a range of different factors that need to be taken into consideration when determining how best to implement dynamic pricing strategies. The positioning of key products to key market segments is a vital aspect of dynamic pricing. Hotels must gain an understanding of the competition, in terms of both existing and future competitors and what they are offering consumers, to enjoy a strong competitive advantage.

Dynamic pricing requires hotel pricing or revenue management tactics to be a high level combination of inventory control, pricing / channel controls and business intelligence and an automated tool set for setting pricing and resetting that pricing, based on rapidly changing market demand. The most important part of dynamic pricing is the Best Available Rate (BAR), which is the recommended rate for unqualified business when there is no pre-agreed rate. This is the optimal rate to quote based on the probability of booking the guest and requires the correct balance between demand and price.

Due to its complexity, dynamic pricing is not without its challenges. One of the most inherent and common challenges for hoteliers with the implementation of dynamic pricing is a lack of clarity and consistency through companies at different times. The best available rate is often perceived as the all important "anchor rate," meaning the rate has to be positioned correctly at all times, and this can be troublesome. Using a structured and consistent approach to setting the BAR structure that includes a relationship between price, value and benefit is one way to face this challenge. The key to a successful dynamic pricing competitive strategy is to minimize deviations and ensure a logical, clear structure that everyone in the organization understands.

To react or not to react?

While the outlook for the hotel sector is largely positive, Jonas Ogren - Area Director for STR Global - notes that: 'Most of this growth has been driven by increased demand and strong occupancies in the vast majority of markets. With a few exceptions, average rates have been returning later and at a slower pace. In many markets the strong occupancy growth came at the expense of depressed rates resulting from aggressive discounting well into 2010. The good news is that most markets now seem confident enough to bring rates back and as a region year-to-date year-on-year growth figures just recently moved into positive territory.'

Aggressive discounting to help stimulate demand (such as that which Jonas Ogren highlights helped spur occupancy growth) can have serious long term consequences. Consumer behavior research has shown that customers establish a reference price for a good or service based on previous experience and use this reference price to evaluate whether a future price they're offered is reasonable or fair. The more and longer hotel room rates are discounted, the more likely that the discounted rate will become the reference price, and the more difficult it will be for hotels to recover their value in the minds of the consumer. Maintaining rates reduces the risk that the reference price will be replaced.

The worst thing a hotel can do in times of strong competition is offer a short term discount to gain an edge over a competitor and then reduce services (to help accommodate for the price reduction) that differentiate its property from the competitors. In order to fight commoditization brought about by excessive focus on price, hotels must maintain service levels and brand focus. Every customer that comes through the door needs to understand what makes your property different and special, and what makes your brand unique, whether they are a loyal customer or came in because of a discount.

If a hotelier is unable to convince customers that their product is worth more than their competitors' through "soft" factors beyond price (assuming that location is equivalent), then they've become a commodity. Price then replaces brand, service standards and physical property as the key driver of purchase decisions.

A strong analytic strategy, supported by solid data collection, integration and quality is essential, now more than ever when demand is rising along with competition. Every price and promotion strategy should be carefully planned with all stakeholders participating. The team should evaluate why the pricing decision is being made and whether the promotions supports or grows the brand promise. If the decision is strictly made because a competitor lowered its rate, then you need to go back to the drawing board. Once put into place, you must follow up. Analysis of response rates and change in demand patterns will ensure you measure success and can make course corrections when required.

Looking to the future

Smart hoteliers should understand that no matter the economic outlook, impulsive pricing decisions that benefit the short term must be replaced with strategic, consistent decisions. As dynamic pricing continues to evolve and become more complex with its multiple distribution channels, hotels will find greater benefits from thinking beyond the short term and will have to take into account an increasing number of variables impacting price, demand and in turn performance.

As Director of Advisory Services for IDeaS Revenue Solutions, Paul van Meerendonk leads a global team of revenue management advisors focused on hotel revenue optimization projects. Mr. van Meerendonk is responsible for global development, management and operations of the Advisory Services team. He oversees the hiring, training and management of industry-leading consultants located in London, Beijing, Singapore and Atlanta. Mr. van Meerendonk also represents IDeaS on industry thought-leadership initiatives related to trends and best practices within revenue management, including authoring a number of white papers, conducting public speaking engagements, as well as leading key client webinars with an average audience of over 200 global representatives. Mr. van Meerendonk can be contacted at +44 (0) 118-82-8100 or Extended Bio...

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