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Working on a Rate Offering that Captures "Demand"
to Maximise the Overall Revenue



By Ritesh Gupta
July 25, 2011

There is definitely a lot of value in accurately predicting demand at every price level for hotels, rather than simply assuming that the past will repeat itself, says Frederic Deschamps, Vice President Global Revenue Optimization, Carlson Hotels Worldwide. A forecast of demand to come at every price level gives the RM area a “sand box” where different rate structures and distribution strategies can be tested.

One of the critical developments for revenue management (RM) in the hotel industry is that the customer is armed with better information. The customer can compare prices quickly across the consideration set.
 
RM has responded with the “rate of the day” approach, but that only partially captures the revenue opportunity. Some kind of rate optimisation is also needed to prevent that rates gradually slide towards the lowest rate in the set, says Frederic Deschamps, Vice President Global Revenue Optimization, Carlson Hotels Worldwide.
 
For its part, Carlson Hotels has developed the ability to set prices dynamically based on publicly available competitive rates and levels of demand at each rate level. It allows the hotel to balance the “pull” that its property has with the competition it faces for a given level of demand and maximise its revenue.
 
Rate optimiser
 
Deschamps says a rate optimisation system does not depend on the hotel’s occupancy and is therefore more robust for situations where occupancy is low or highly variable. It’s important to note though that a rate optimiser does not automatically raise rates, but will also recommend lowering rate when it’s in the hotel’s best interest to do so.
 
The key benefit, according to Deschamps, is that a rate optimiser will typically recognise an opportunity to raise or drop rate ahead of when the hotel might otherwise have, which provides the hotel a critical headstart on the competition. Deschamps says he wouldn’t be surprised if functionality that optimises based on elasticity and publicly available rates becomes a standard feature of any revenue management system.
 
Opportunity
 
Deschamps says one as-yet untapped areas is to introduce a notion of value for the underlying hotel product. Rate optimisation, as good as it is, still depends on the formed opinion of consumers (expressed through his/her price elasticity) to maximise revenue. There is an opportunity to influence that formed opinion by balancing price with product variables in the optimisation algorithms. Collecting that data reliably and processing it consistently across the consumer's choice set remains challenging, as well as picking the relevant product dimensions to set rates, says Deschamps, who is scheduled to speak at the forthcoming Travel Distribution Summit North America 2011, to be held in Las Vegas (19-20 September) this year.
 
“The challenge is to find variables that consistently drive product preference across every consumer group, and to find those variables amongst them that constitute a differentiation opportunity. I have to say that this is still work in progress. But the CRM area will get us close to solving that problem one customer at a time,” shared Deschamps.

Deschamps spoke to EyeforTravel’s Ritesh Gupta about forecasting demand, optimal price for any product and other issues. Excerpts:
 
Revenue management in hotels is constantly evaluating several issues at this juncture - dynamically measuring the responsiveness of guests to price changes, RM tools and ancillary revenue streams, and automated systems. How do you assess the future of RM in this industry?
 
Frederic Deschamps:
 
The industry has undergone some major and permanent changes in distribution with a lot more transparency across all channels.
 
One aspect that hasn’t changed is that variable rates are good for the hotel and the consumer.  The closer the rates reflect the balance between supply and demand, the closer the rates are to revenue-optimal for the hotel and to fair value for the consumer.

Can you provide an insight into initiatives being taken by the industry to maximise profits by accurately forecasting demand by segment, and setting price and availability restrictions to ensure access for the most valuable customers?
 
Frederic Deschamps:
 
The evolution we're seeing is that hotels are moving toward using rate to select which customers get access to room inventory and away from using inventory controls. With that comes the opportunity to offer the customer the removal of rate restrictions for a price, so the customer can buy flexibility only if they need it.
 
We’re seeing this piecemeal approach more and more, which underscores the importance of setting the base rate correctly.

How has the sector gone about predicting consumer lifecycles? What do you recommend when it comes to segmenting customers according to their value, preferences and purchase behaviour?
 
Frederic Deschamps:
 
CRM (customer relations management) is an important part of maximising revenue as it gives us insight into each consumer’s specific preferences and their “willingness to pay”. 
 
I think that this will be used to provide the customer a customised shopping experience on the brand web, where only choices they are interested in will be offered, which will make the shopping experience more convenient. It will also allow us to complicate the rate structure overall since any one customer will be exposed to only the portion that is relevant to them.

The modern RM is no longer the record keeper of the past and instead is far more reactive to market conditions, in tune with sales plans and the RM professionals are being described as decisive forward thinkers who are innovative and creative. How do you think this all is reflecting the approach of RM professionals today as far as forecasting is concerned?
 
Frederic Deschamps:
 
There is definitely a lot of value in accurately predicting demand at every price level for our hotels, rather than simply assuming that the past will repeat itself. A forecast of demand to come at every price level gives the RM area a “sand box” where different rate structures and distribution strategies can be tested. This in turn removes some of the risks and costs of doing these experiments live and it delivers to the customer what they want faster.
 
We spend our time now almost exclusively validating forecasts and the rate structures we deploy against them. 
 
Historical analysis has become a very small part of what we do as things just change too fast to learn much from the past and how that applies to the future.

Whilst RM systems go a long way in identifying opportunities and maximising revenues they are not capable of business forecasting and this still remains an area where Revenue Mangers have to improve. What’s your viewpoint regarding the same?
 
Frederic Deschamps:
 
When it comes to overall market-wide demand then yes there is room for improvement there. However, we've found that we can shield ourselves fairly effectively from that blind spot by having a system that reacts quickly to deviations from its own forecasts, for whatever reason.
 
There are so many variables at play that determine demand levels for a hotel that at the end of the day, we've found that spending time reacting to changing demand forecasts rationally is the most leveraged activity.

How can one optimise initiatives focused on up-selling or cross-selling ancillary offerings?
 
Frederic Deschamps:
 
We think that it’s a combination of offering the customer relevant customised options only so they’re not overwhelmed and do not tune these options out, and to offer these options at a fair price. You can basically apply the usual forecasting and optimisation methods to the products as well.

It is being highlighted that price elasticity measurement is something relatively new in RM and will likely find an application in the ancillary revenues. What’s your viewpoint regarding the same?
 
Frederic Deschamps:
 
Absolutely, because the optimal price for any product is relative to demand for it and available alternatives. That said, we worry about customer acceptance of this, because the customer tends to equate the value of a product to the physical attributes, and doesn’t necessarily “see” the competition for it from other customers.
 
For example, you should be able to charge more for breakfast at peak time although the food is exactly the same. Dim Sum restaurants in Hong Kong go the other way and discount up to 50% if you show up off peak. But I'm not sure that all customers worldwide are ready for this. It's a significant opportunity though as hotels grow their ancillary revenue base.

Travel Distribution Summit North America 2011  
Frederic Deschamps, Vice President Global Revenue Optimization, Carlson Hotels Worldwide is scheduled to speak at the forthcoming Travel Distribution Summit North America 2011, to be held in Las Vegas (19-20 September) this year.
 
For information, click here:


About EyeforTravel
EyeforTravel is a leading media company specializing in business intelligence for the travel and tourism industry. EyeforTravel provides a series of senior executive travel conference on a diverse range of topics including travel distribution, online marketing, social media, mobile and revenue management.  EyeforTravel also provides some of the most in depth research into global online travel markets and trends. For more information visit www.eyefortravel.com
 
Contact:

Rosie Akenhead
Global Events Director
rosie@eyefortravel.com
Toll Free 800 814 3459 ext. 7229
 
Or
 
Marco Saio
Global Events Director
marco@eyefortravel.com
Toll free 800 814 3459 ext. 7219


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