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Will 2010 Be The Year Of (Missed) Opportunities?


By Klaus Kohlmayr, Director IDeaS Advantage
December 2009

As Hotels are entering into the crucial stage of setting their strategies for 2010, one of the biggest dangers is the continuing uncertainty about the future state of the economy.

While economists around the world are declaring an imminent end to the global recession, the biggest global chains continue to announce double digit drops in RevPar and ever increasing losses, indicating that "we can't see anything in our numbers at the moment to suggest we've hit the bottom".

As we have experienced in the last few months, 'A busy Hotel is a successful Hotel' certainly has been the mantra in many properties around the world as Hotels have attempted to maintain occupancies at the cost of often considerably lower rates -- and often to the detriment of long term revenue gains.

In this period of uncertainty, how does a Hotel set long term strategies for 2010? Who can predict how next year's economy is going to shape up and when demand is going to return if even the world's best economists are having difficulties predicting global economies for the next few months.

As shell shocked Executive Teams around the world sit down and finalize their strategies for the coming 12-18 months, how will they avoid making 2010 the year of missed opportunities?

Interestingly, a recent report from Accenture had the following to say on the trend to mass discount, when faced with weaker business conditions:

'In many situations, business leaders listen to salespeople who insist that the sky is falling, so they must have pricing relief. But savvy managers push back with queries about where, exactly, the sky is falling and where it isn't, and they continue probing until they learn where, in which markets, and with which customers and which product lines there is cause to be confident.' *

Savy Owners, Operators and Managers therefore should not only push back on dooms-day scenarios but put in place two key strategies for a successful 2010:

1) Maximize the revenue opportunities throughout the entire customer journey
2) Maintaining flexibility to adjust revenue optimization tactics as demand changes

Maximize the revenue opportunities throughout the entire customer journey

Even with lower occupancy levels experienced during the current economic crisis, there are plenty of opportunities for Hotels to increase revenues from existing customers.

"In developing a strategy for the 2010 pricing year, the executive team at any Hotel needs to ensure that they really have a full understanding of the revenue opportunities available to them. More than ever, it is a time for 'total hotel' revenue management so that all sources are maximized" commented Bernadette A Davis, Managing Director of the Asia Pacific Chapter of the Hotel Sales & Marketing Association International (HSMAI).

"Through a greater understanding of the needs of the customer, and the different financial drives around customers needs, Hotels can provide good value and meet their revenue budgets" Bernadette Daviswent on to explain.

A 'race to the bottom' is a short term pricing strategy with a potential long term impact. Once a mass discounting strategy is implemented, it is hard for a hotel to return to normal rates when demand increases, given lost brand prestige and market position.

Given the current operating environment, Hotels need to be smarter about how they price themselves and what incentives they are using / giving away to attract business. Overuse of incentives to attract guests can actually reduce the revenue coming into a particular a venue. According to Bernadette Davis, Hoteliers should be asking themselves: "Why provide an upgrade to the executive or concierge floor when the customer will pay the price difference from a standard room because they want use of the lounge for business meetings?"

Maintaining flexibility to adjust revenue optimization tactics as demand changes

With 81% of procurement departments of multinational companies believing that cost reductions in travel can be achieved mostly from hotels, the pressure to further reduce or at least maintain corporate rates for 2010 will only increase. A recent study by CWT in the US market confirms this expectation, with negotiated rates to fall by around USD 10.00 from current levels

Companies know that this is probably the last opportunity to get decent rate reductions. They will be keen to exploit this opportunity.

As long as demand remains weak, Hotel Sales Executives will continue to suffer from a lack of pricing and negotiation power, making any proposals for rate increases in most markets nearly impossible.

At the same time, with the future being more uncertain than ever, the appropriate negotiation strategies must be set to enable the Hotel to increase rates when eventually demand increases. Just as this year, corporate accounts returned to the negotiation table when demand declined, Hotels must insist that they should be able to do the same when and if demand increases.

For fixed rate contracts, this could take the form of offering time-restricted promotional rates, setting terms and conditions to at least review rates at either a certain time in the future (ie end of the December, end of Q1, 2010) or through negotiating multiple rates (and room types) that come into effect under certain conditions. In any case, negotiating flat or reduced rates should always include specific volume commitments by the client.

While this might be difficult for many -- especially larger -- companies to accept, dynamic rate contracts should be offered as an alternative. While dynamic pricing in the past has received a negative reception by many companies, this year's round of multiple re-negotiations by corporate clients has resulted in an increased interest of dynamic pricing as a cost and time saving alternative within the industry, with more buyers already adopting de facto dynamic pricing arrangements for travel this year.

Industry experts believe that Accounts will start seeing the benefits from a range of dynamic rates. Larger companies will begin to make noise about it, and smaller companies will then follow in their operations.

With the eyes firmly set at maximizing the revenue opportunities throughout the entire customer journey and sales strategies in place to maintaining flexibility to adjust revenue optimization tactics as demand changes, the industry should be able to avoid making 2010 the year of the missed opportunities.

References:
1 -- Andrew Cosslett, CEO of IHG, Wall Street Journal, August 12, 2009
2 -- CWT Forecasts 2010 Airfare Increases; Hotel, Car Rate Declines
3 -- Buyers Redefining Dynamic Pricing
* Marketing: How to Price Smarter in Uncertain Times -- John G. Hanson, George L. Coleman and Raymond C. Florio


About IDeaS Revenue Optimization
IDeaS, a SAS COMPANY, is the premier provider of Pricing, Forecasting and Optimization solutions and services. IDeaS’ Solutions are implemented via Software as a Service (SaaS) deployment with very little infrastructure, guaranteeing small upfront costs and easy implementation. IDeaS’ Services help at all levels of a client’s organization—strategic through operational— and our integrated approach differentiates IDeaS from the competition and creates the foundation for a successful partnership. Headquartered in Minneapolis, IDeaS has technology, support, sales and distribution offices in North and South America, the United Kingdom, Europe, Africa, the Middle East, Australia and Asia. For more information, visit www.ideas.com.

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Contact:

Mulberry Marketing Communications 
Megan Davidson
mdavidson@mulberrymc.com
(312) 664-1532

IDeaS Marketing Manager
Star Bazella
star.bazella@ideas.com
(952 ) 698 4200 
 

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Also See: IDeaS Announces Second Round of Winners of IDeaS Cornell Revenue Management Scholarship / November 2009

IDeaS Helps Hoteliers Gain Confidence and Validate Pricing Strategies with Launch of Rate Optimization Service; New service optimizes hotel’s rate spectrums, improves revenue without change to existing business practices / October 2009

IDeaS Revenue Management System Further Expands in Resort Segment with Addition of Grove Park Inn / August 2009

IDeaS Revenue Optimization and Multi-Systems Inc. Complete Certified System Integration / July 2009

IDeaS Revenue Optimization Brings Accuracy and Consistency to Forecasting and Reporting with IDeaS V5i Forecasting Solution / June 2009

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