Hotel Online  Special Report

   
The New Market Segmentation and Pricing
Model for Independent Hotels

 
by Brenda Fields, May 2004

One of the single greatest challenges facing independent hotels today is pricing. Pricing the inventory effectively can lead to profitability and helps lay the foundation for long term success. But, pricing the inventory ineffectively can lead to disaster

Frequent questions asked by hoteliers today are: 

  • Should Rack Rates be established for positioning, even though Promotional Rates, frequently discounted by 50%, are usually in effect?
  • How and when should discounts be used?
  • How are rates managed and maximized when a considerable proportion of the inventory is guaranteed to one or more third party Internet distribution agents at the lowest rates?
  • How can tracking of corporate account production be managed effectively when these accounts are booking Promotional Rates through the GDS?
The dilemma goes on and on because we have been using a market segment and pricing model that has not grown with the times. During the last decade, two simultaneous factors impacted the market place and customer buying practices: (1) the dramatic drop in demand (2) and the widespread use of the Internet for booking rooms. Capitalizing on this situation, third party Internet companies seized the opportunity to grow their businesses.  Hotels were eager to work with them, and customers were eager to use them as confidence and security in buying goods and services on-line increased.

Historically, pricing was pretty straightforward. Pricing was set at one rate, Rack Rate. Those rates were posted on cards and placed in racks at the front desk. As technology became more sophisticated and hoteliers became more marketing savvy, market segments began to evolve. Each segment had its own buy decision and its own travel trends. An in-depth understanding and skillful integration of those segments placed the hotel in a greater position to maximize rates and occupancies. This was all made more manageable by the improved high tech nature of the newer hotel operating systems.

As the new technology was developing, corporate travel departments, as well as the independent consumer, turned to travel agents to get the best discounts. As the GDS technology influenced booking and buying practices, additional segments were created, resulting in the following market segment model:

  • Rack Rates: Without any affiliations to warrant discounts, the Rack Rated customer paid the published rate, which was the highest rate.
  • Consortia Rates: This was the same customer who booked through a travel agent using the GDS and received a 5%-10% discount off Rack Rates.
  • Corporate Rates: Having met the hotel’s qualifying criteria, such as volume, businesses were guaranteed discounted rates.
  • Group Rates: With a block of rooms, rates varied based on time of year and the nature of the group.
  • Weekend Rates: Individual leisure travelers, usually within a drive distance to the hotel. 
  • Promotional rates: These rates were originally used sparingly and used as a means to stimulate business by using discounted rates to anyone, regardless of affiliation. 
By understanding each segment and its role in the individual hotel, hoteliers created pricing and yield management systems and procedures which resulted in maximum performance.
  • Rack rates were set to establish positioning; used as a basis for discounting; and used as a yield management tool for average rate maximization during high demand.
  • Consortia rates were typically discounted 5%-10% off Rack Rates in order to capture a savvy traveler educated to ask for discounts through his/her travel agent, and to strengthen the travel agent’s value to the customer.
  • Corporate rates were negotiated to get year-round volume business for corporate accounts.
  • Group rates were usually filler business and negotiated based on demand periods.
  • Promotional rates were typically the lowest rates offered and are now being used on a daily basis. (Used in this way, market segments have virtually disappeared.)
But, as demand dramatically declined, independent hotels were most significantly impacted. In most cases, they did not have the financial resources and cooperative marketing opportunities of the chains. At the same time, the third party Internet booking companies were well positioned. Customer buying habits had changed significantly. As customers began to feel more secure in buying products and services online, use of the Internet become a tremendous resource for the consumer. As the third party Internet companies grew in popularity, independent hotels found a new source of business, with little expense involved.

What has now emerged is the realization that the Rack Rate segment no longer exists. The Internet has created brand new distribution channels, directly reaching the end user and/or allowing the third party booking parties to profit as travel agents did until recently. The Internet booking companies, in order to ensure profitability, have adopted more of the airline pricing strategy, i.e. setting rates on a daily basis. These rates can vary significantly from day to day. The hotel industry will be hard pressed to revert to the old pricing model, now that the public has been conditioned to shop for prices.

Therefore, in order to respond to the changed market place relative to the Internet and to effectively compete against chain hotels as well as other independent hotels, flexible pricing is key. But in order for hotels to create and maintain pricing credibility, it is still important for hotels to move away from competing on price alone. This strategy has been universally unsuccessful and will always backfire. 

Some suggested steps to realign rates and segments to the changed market place; gain control of business; and increase profitability are:

  • Create an online booking presence.
  • Ensure that the hotel’s online booking engine is part of the hotel’s web site, and controlled by the hotel, not by a third party or GDS-based system. 
  • Ensure that the online booking engine is the best and accomplishes the hotel’s goals.
  • Ensure that the online booking engine is easy to use from a customer’s perspective.
  • Expertly create and maintain an online distribution and maximization strategy to ensure the hotel’s visibility.
  • Promote and ensure that the lowest published rates are on the hotel’s own web site, to promote customer loyalty, as done with the airlines.
  • Establish a new market segmentation model, for greater control of the business. Eliminate RACK RATE and replace with SELL RATE, defined as Rack, Promotional, Consortia, and any other customer not affiliated with any discount.
  • A simplified sample version is:
    1. Sell Rate
    2. Corporate Rate
    3. Group Rate
    4. Weekend Rate
  • Establish the Sell Rate based on anticipated demand patterns, after the core business and group blocks are factored in. The rate fluctuates on a daily basis.
  • Set rates in all market segments within the range of your competitive set to establish positioning.
By understanding how the Internet and customer buying habits have forever changed and how they impact the way hotels do business, will place owners and managers in a position of strength in managing the day to day business; achieving profitability; and demystifying many of the rate and segmentation questions.

About the author: 

Brenda Fields is a sales, marketing, and rooms specialist in the lodging industry.  She has created and implemented highly successful marketing and yield management programs for hotels, from small, boutique hotels to large, convention hotels.  Her twenty-year experience includes serving as Vice President of Marketing for a luxury hotel and conference center in Manhattan, owned by Harry Macklowe, real estate developer.

Additionally, Brenda has had extensive experience in pre-openings and repositioning and was responsible for the successful opening and stabilization of Paramount Hotel in New York City by developing and executing a direct sales and yield management program as well as a national and international marketing campaign.  Paramount Hotel was one of the first “boutique hotels” developed by Ian Schrager. The strategies and structure developed and implemented are used as the prototype for new acquisitions. 

As an independent Marketing Consultant, Brenda applies the formulas for success she developed over the years to assist owners in achieving targeted results despite market conditions.  Her mission is to insure that owners achieve success for the long term as well as the short term, by developing a comprehensive strategic plan which creates a solid foundation and protects the property(s) against changing market conditions.

With a “who’s who” roster of clients, Brenda has worked with a number of industry leaders and real estate investment companies including Starwood Lodging Corporation, Vornado Realty Trust and Planet Hollywood, John Hancock Mutual Life Insurance Company, Olympus Real Estate Corporation, Gotham Hotels and Apple Core Hotels, among others.  Her growing consulting practice for independent properties includes clients such as The Kitano Hotel, New York; Founders Inn and Conference Center in Virginia Beach, VA; Woodlands Resort and Inn, Summerville, South Carolina; Bel Age Hotel, Los Angeles, CA; Mondrian Hotel, West Hollywood, CA; and many others.

A native of Kentucky, Brenda holds a B.S. in Psychology and English from Murray State University.  She is lives on Manhattan’s Upper East Side and enjoys cooking and entertaining in her cottage in upstate New York.

Fields & Company is located at 500 East 77th Street, Suite 1101, New York, NY 10162; 212-734-2152; 212-734-1617/fax; brenda.g.fields@verizon.net.

This article is the property of Brenda G. Fields and cannot be reprinted or copied in part or whole without the written consent of Brenda G. Fields.


 
Contact:
Brenda Fields
500 E. 77th Street, #1101
New York, New York 10162
brenda.g.fields@verizon.net

.

Also See: Boutique Hotels: Rethinking the Fundamentals in a New Business Environment / Brenda Fields / February 2004
Room Configuration - Are Your Rooms Configured for the Best and Highest Use? / Brenda Fields / January 2004
Direct Sales - What to Expect from Your Hotel Sales People and How to Get Results / Brenda Fields / August 2003
Boutique Hotels: How to Survive in a Down Market - Getting Back to Basics / Brenda Fields / May 2003
Industry Marketing Pro Brenda Fields Opens Consultancy Focusing on Independent Properties / January 2003


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