Thoughts on Maintaining Rates and Avoiding Price Wars
By Stan van Roij, Managing Director, Easy (Ez) Revenue Management Solutions Ltd
“How can I maintain rates in a downward market, and how can I avoid a price war?” is a question that is asked over and over again, and although plenty of answers have been given over the last few years by many people, the industry never ceases to ponder this dilemma.
By no means do I claim to know it all, however in my experience there are a couple of simple, and in most cases, obvious things to keep in mind that do help to avoid a price war and that do help to maintain rate levels.
De-bunking the myth of lowering rates
First things first: are we talking about a lower ADR or a lower selling rate?
We’ve all heard and seen the articles about how rates are decreasing in a downward economy. However, I challenge this, as in many cases it is actually not so much the selling rates that are going down, but the overall ADR as a result of a different client, market or distribution mix.
If you change your client, market or distribution mix, your ADR goes down (or up, depending obviously on the changes in that mix) without actually having changed your selling rates. We all know that. But that also means that if you see the ADR of the competition go down in your daily, weekly or monthly benchmarking report, it might be for the exact same reasons. So dropping your rate as a reaction to lower ADR on the part of your neighbours might not be the right move, as much as it might start the beginning of the downward pricing spiral.
Demand forecasting and sellable rates
It is essential to have a good and accurate demand forecast, and to do so, automated software systems are these days almost indispensable, since the markets, and also the intelligence out there, are very complex and there is a great deal of information to take in. In any case your demand forecast is crucial to establishing the right pricing strategy.
Once you have established your demand forecast, use this as a basis to set your rates at such a level that they capture the desired volume of your demand forecast.
Obviously you must balance your demand forecast with your remaining supply and any committed obligations, such as corporate contracts, FIT and/or group allocations, before you can know how much demand you want to capture.
Another point to consider, which goes hand in hand with demand forecasting, is to set rates at sellable levels to begin with. Starting at high levels, discovering the demand is not being captured and as a result having to drop the rate, only acts as a trigger for price wars.
Stick to your strategy
It is known that pick-up now comes in much later than some years ago. This is the ‘New Now’ and is here to stay. These days we should all be used to these patterns - note, we are not speaking of a trend anymore, but of a pattern - and hoteliers who use automated revenue management software have the benefit of actually keeping track of it. And just to be sure, this pattern applies to Best Available Rates, Promotional Rates, Group Rates etc.
This ‘New Now’ also means that you should not start to play panic football, when 10-5 days out, there are still plenty of rooms to fill. Of course the lead time used here depends on your own market and business mix. If your recent history tells you that you will pick up the empty rooms, stick to your price strategy. Lowering a rate at the last minute is not going to help increase your ADR. You will most probably only lose a revenue opportunity and with that you will lose GOP.
Willingness to pay
It is generally accepted that the willingness to pay for goods or services increases when desire or need increases, or when the goods or services become scarce. For instance, if you need to attend a gala dinner, you are willing to pay more for your dress or tuxedo if two days before the event you still haven’t found anything to wear.
So, closer to the arrival date, the willingness of travelers paying for a room is higher than, say, three months before. Therefore lowering rates at the last minute will not do you any good; again you will most likely just lose revenue and profit.
I am not advocating that you should hike up the rates the day before arrival, but if you keep this principle in mind, it will help you stick to your pricing strategy, rather than lowering your rates.
Establish your price elasticity
Keep track of your price and related pick-up changes and calculate your price elasticity. It will give you confidence to actually stick to your strategies, as in many cases you will see that the price change has not resulted in increased volume. The best example is still Sunday night in an urban business hotel. Reducing the price to an absolute minimum will not make any incremental business traveler spend on Sunday night if the destination can be reached early on Monday morning.
Do not fight the problem with price if price is not the issue
How often do we hear: “let’s lower the rates” in times of low demand? In many cases it is not price that causes people to not travel or stay at hotels. When companies have strict policies that strictly forbid their employees to travel to a destination, a low price will not ensure more travelers coming through your door. If people are scared to travel - due to unrest or instability in a country, or to potential danger threats - they will not travel, no matter how low the price.
Therefore ensure that you know what the real issue is and then react with the appropriate P out of the marketing mix (remember the 4 Ps). Do not immediately turn to the P of Price.
Ensure that everyone in your organization realizes the impact of a price reduction. How many more rooms do you need to sell to keep the same revenue, and how many more rooms do you need to sell to maintain the same profit levels? If a rate of US$ 150 is lowered by 10%, it would mean selling an additional 11-12% more rooms to break even on revenue, but could mean selling an additional 15-20% more rooms to break even on profit.
It’s always the others...
Finally I would like to share the following with you.
Listening to many hoteliers, I constantly hear how they blame others (i.e. the competition) for starting a price war. A pan European study by Simon Kucher & Partners showed that in 9 out of 10 situations it was believed that the price war was started by others. Mathematicians know that this is not possible. So ask yourself: are you gaining market share by lowering your rates, or are you just starting yet another price war? If you stick to the above simple but effective principles, price wars and lowering rates can be largely avoided.
Stan van Roij is a highly motivated and versatile executive who boasts a 20+ career spent entirely within the hospitality industry – over fifteen of which were in managerial roles. In 2011, Mr. van Roij took a bold but confident step away from the operator side of the industry and into the realm of the hotel technology vendor. He currently is Managing Director of Easy (Ez) Revenue Management Solutions, provider of SaaS Revenue & Yield Management software and consulting services. As an operator, Mr. van Roij gained many years’ experience of EzRMS™ - the Revenue Management Syste provided by EasyRMS. Mr. van Roij can be contacted at +44 (0) 20 7495 0773 or firstname.lastname@example.org Extended Bio...
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