Mr. van Meerendonk

Revenue Management

All About Pricing: Why Assuming is Dangerous When it Comes to Revenue Strategies

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

With the world economy better resembling a roller coaster ride, hoteliers need to have an effective pricing strategy to maximise profits, while riding out the ups and downs in the market. Currently transient demand in the US hotel sector is breaking all records, yet subsequent price increases are not keeping pace. Since April 2010 the increase in average daily rates has been growing at half the speed that it dramatically fell, when the full impact of the global financial crisis kicked in September 2008. The European economy is still in turmoil, with daily ups and downs, leaving the direction for the hotel industry hard to predict.

If forecasting was easy, all weathermen would be rich. In these erratic and uncertain times, pricing decisions will have one of the biggest impacts on hotel profitability. It is more vital than ever that revenue managers understand industry best practice and the latest supporting technologies to ensure their hotel rooms and services are priced at the right rate regardless of periods of high or low demand.

A successful market pricing strategy will mean maximum sales of rooms and additional services, through the balancing of perceived benefits and price. In developing this strategy, customer responses to price changes, market position and competitors pricing must all be assessed. The new reality for hotel pricing is that revenue management and dynamic pricing, a competency based on demand, length of stay and product mix, are inextricably linked. Dynamic pricing finds an optimal price through a sophisticated pricing strategy, based on demand as a function of price, to maximise revenue. There are a range of factors that need to be taken into consideration when determining how to successfully implement dynamic pricing strategies.

Look at the facts

Even with demand returning in the hotel sector and increasingly sophisticated pricing support technologies, few hotels are executing pricing strategy well. While it can be easy for emotions or gut feelings to influence decisions, revenue managers must put these aside and take a data driven approach to pricing - based on facts.

As a starting place, hoteliers need to ensure they have detailed data that is both historical and forward looking. Historical data should include the number of occupied rooms and revenue broken down into market segments by day, for a sufficient period of time to make fact based decisions. If data is then collected every day following it will allow hoteliers to establish simple booking pace forecasts by segment and day of week, from which they will be able to compare to historical data. If this is done consistently, it will allow hoteliers to quickly adapt to any changes when demand picks up and enable them to tweak their strategies accordingly. Sometimes something as simple as comparing occupancy and average daily rates (ADRs) can provide deep insights into pricing and revenue management opportunities, for example by assessing when ADR and occupancy do not move in tandem.

Take care with competitors

The uptake of web and mobile technologies has made it possible for prospective customers to quickly and easily find the cheapest prices available. But hoteliers need to be careful not to get sucked into continually matching competitor prices, and start a price war. This can erode profit margins ever further and damage a hotel's positioning. The longer a hotel discounts its rate, the more likely this lowered rate will become the reference price in the minds of consumers, making it harder for a hotel to lift its rates back to the original price.

While it may seem logical that lower hotel prices would stimulate demand for the hotel sector in general, demand for hotels has been found to be relatively inelastic. This means that when prices drop, the increase in demand won't be enough to offset the decreased rate to maintain revenues. Price wars create a lose-lose situation, therefore price matching and deep discounting should be avoided.

But of course competitors' prices and offerings cannot be ignored either. First and foremost for the successful optimisation of revenue performance it is crucial hoteliers take a long term, strategic view, including a rational approach to competitor pricing. In the long-run this will be far more profitable than impulsive pricing decisions, which only have short term benefits.

To do this, it is crucial that hoteliers understand who their true competitors are. Competition comes in many forms. A hotelier may think that the three big brand hotels down the road are their biggest threats, but anything from a hotel in an entirely different county to a family member's house can be in competition with a hotel's ability to sell its rooms and services. While it is easy to overlook these indirect competitors, it is just as easy to assume certain hotels are main competitors, when a closer look may reveal in actual fact they are not.

To avoid common pricing and competitor strategy mistakes it is important hoteliers research their competition. Information is a key commodity for the hotel industry and it is imperative hoteliers start collecting information, not just about their own patch, but on competitors as well.

A good starting place is for hoteliers to understand where their hotel sits compared to others, on both price and a guests' perceived value. Perceived value is derived from the hotel's attributes, including its location and amenities. One useful way hoteliers can get a clear picture is by mapping the information on two axes, with the vertical axis representing rate and the horizontal representing average value. Hoteliers should use their own hotel as a reference at point zero, where the two axes cross. Next competitors should be plotted against the reference hotel. This will quickly show which competitors pose a real threat or not. The biggest threats are those which have more attributes and are less expensive, appearing in the bottom right quadrant. To gain an edge on the competition in this matrix, it will be obvious that hoteliers will either need to look at changing price or perceived value offered.

In analysing competitors it is also important to take seasonal changes into account, including weekday versus weekend patterns and on and off peak seasons, which could affect where a hotel sits in relation to another on the graph at different times.

Make a strategy

Once hoteliers know where their property sits in relation to competitors and the company has identified its own trends in ADR versus occupancy, management can start putting strategies together to find the optimal set of prices and maximise profit. To minimise the reliance on reducing room rates to attract customers in a competitive environment, hoteliers should look at ways to increase their competitive advantage through increasing their value offering, including during periods of low demand. This should also include targeting specific customers, with price and value to capture a range of markets. The positioning of key products to key market segments is a vital aspect of dynamic pricing.

Although demand is on the rise, hoteliers considering increasing prices accordingly must look at where they sit alongside their closest competition and remember that the only way to operate at higher rates than competitors is to deliver true value that cannot be matched. It is crucial that additional value is emphasise to potential customers, otherwise a hotel risks losing potential guests to the competition.

Any changes in price should be monitored closely for impact on levels of demand. This information can then be used to control demand accordingly, using daily revenue management and pricing strategies.

In addition to ensuring the correct prices are allocated to the correct rooms, it is also vital that these rates are distributed and shown to all available channels to maximise bookings. Hoteliers must ensure their hotel is well represented in all key channels. Establishing win-win relationships with those distribution partners can really help generate incremental business. It is also important hoteliers to use historical and future channel benchmarking information from third party vendors to understand where they are falling short against their competition and when competitors are moving their rates.

In these interesting times, an effective pricing strategy that makes the most of latest technologies is a way that revenue managers can maximise profits, in the face of waning or soaring demand. Having the right information is also key, as well as continually monitoring impacts caused by changes in strategy. While it is important to take competitors into consideration, when looking to maximise revenue, it is also important that long-term strategies win out over short-term price wars, which make everyone worse off.

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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