Hotel Online
News for the Hospitality Executive

.
advertisement

 
 

The Fallacy and Failure of Fade Rates


By  David K. Hayes Ph.D., Allisha A. Miller, Joshua D. Hayes MA,
Peggy A. Hayes & Gene M. Monteagudo MS
December 14, 2012

Guests arriving without a reservation represent the least expensive distribution channel possible for a hotel. Despite that, a surprising number of revenue managers (RMs) do not pay enough attention to these guests. In fact, the revenue strategy utilized to address these guests is often counterintuitive. As a result, it is ultimately counterproductive.

Experienced managers know that walk-in guests arrive with buyer characteristics that should make selling to them relatively easy. That is, they want a room and are physically present on the property. Ask any front desk staff member to recount the typical walk-in guest’s conversation and this is what they will tell you are the guest’s first question: “Do you have rooms available?”

If the answer is yes, the next question is invariably: “How much are they?”

It is the response to this question that differentiates the good from the bad (or even the ugly!) approach to customer-centric revenue management. Walk-in guests seek to buy their rooms for use now. As a result, some RMs mistakenly instruct their front office staff to quote these arriving guests the hotel’s full rack rate. So far so good. If rate resistance is encountered, however, the staff is authorized to offer the guest one or more fade rate (i.e. a lowered rate) alternatives.

In some cases, increasingly lower fade rates are authorized for use until the sale is ultimately made. The philosophy of such hotels is one of, “Don’t let ’em leave” without making the sale!

On its face, the rationale for this approach is perceived to be simple and logical. If rooms are still available for sale late in the day (when walk-in guests typically arrive), such rooms will likely go unsold that day. The walk-in guest may represent the hotel’s last chance to sell a vacant room before its revenue potential disappears forever. Because that is true, continues the rationale, a room sale made at any price above the hotel’s total cost per occupied room (CPOR) represents positive revenue and thus it should be made. If you really think about it, however, you immediately recognize four revenue optimization errors associated with utilizing fade rates:

1. They undermine the concept that the hotel’s rooms have an express value.

It replaces that concept with one that implies a room’s value is equal to the price preferred by the individual walk in guest seeking, of course, to pay the least amount possible. David Roberts, revenue management guru at Marriott on the website www.marriott.cncbc.com. (developed for the T.V. show “Hotel: Behind Closed Doors at Marriott”) refers to hotels that utilize fade rates as those that are actually “training customers not to book in advance,"  in the hope of getting a better deal, and paying a lower rate, at check-in.

That's why Marriott doesn’t do it.

2. It requires front office staff training that is simply unrealistic.

Excluding those lodging facilities consisting of less than 15 rooms, there are approximately 48,000 hotels in the United States. Of those, over 40,000 have 150 rooms or less and are located in suburban areas or small towns. To assume that hotels of such a size employ hourly staff fully prepared to analyze buyer’s rate resistance and then skillfully negotiate price with buyers is naïve on the part of the hotel chain RMs who promote such tactics. It is also naïve on the part of the RMs who embrace the tactics. In most smaller (and many larger) properties, the front office staff will simply avoid confrontation by initially quoting the lowest authorized fade rate.

3. It miscalculates costs.

The true cost of selling a room at a too-low fade rate is not its CPOR expense total or even damage to net ADR yield. Rather, it is the long-term damage to pricing that inevitably results when front office staff realizes management does not hold firm to the notion that the room products being sold are truly worth their asking price. These staff will retain that negative lesson.

4. It seeks to establish price based only on what is best for the seller.

If they are honest, revenue managers will admit that the use of the fade rate is not intended to provide the customer greater value. It is a strategy that seeks only to optimize short-term revenue for the property. In nearly all cases, and in nearly all businesses, if the goal of a sales strategy is not designed to provide value to customers and it does not tend to enhance long-term revenue optimization, that strategy will be ineffective.

The better approach to walk-in room sales is a different strategy and one that is builds RevPAR on a long-term basis while being unmistakably customer centric.

Note: This article originally published today, December 14, 2012 at www.hotel-online.com. Reuse by other media or news outlets or organizations is prohibited without permission. Personal use and sharing via social media tools is encouraged. All rights reserved by the authors.



About this Article:
This article is based on information published in Revenue Management for the Hospitality Industry by David K. Hayes, Ph.D. and Allisha A. Miller. © 2011 John Wiley & Sons, Inc.  All rights reserved. To purchase this book or obtain information about bulk sales, please contact specialsales@wiley.com

About the Authors:


David Hayes, Allisha Miller and Gene Monteagudo operate Panda Professionals Hospitality Management and Training (www.pandapros.com).
 
They offer training (in Spanish and English) on applying the power of customer-centric revenue management to radically increase revenue and expand profits. For information about training and coaching services provided by PandaPros, contact amiller@pandapros.com

Joshua D. Hayes, (MA: Stanford) is a graduate instructor enrolled in the Ph.D. program at the University of California: Davis and is a Panda Professionals consulting author in the areas consumer sociographics and data analysis. Peggy Hayes is Director of Editorial Services at Panda Professionals.


Article Contact:

Allisha Miller
Panda Professionals

1715 Jolly Road
Okemos, MI 48864
amiller@pandapros.com


.
Receive Your Hospitality Industry Headlines via Email for Free! Subscribe Here

To Learn More About Your News Being Published on Hotel-Online Inquire Here

Also See: What Revenue Managers Can Learn From Movie Theater Owners: Lessons in Arbitrage / David K. Hayes Ph.D., Allisha A. Miller, Joshua D. Hayes MA, Peggy A. Hayes & Gene M. Monteagudo MS / November 2012

When Quality Just Does Not Matter: You Can't Sell What People Don't Value / David K. Hayes Ph.D., Allisha A. Miller, and Joshua D. Hayes, MA, Peggy A. Hayes / April 2012

Battling the Cheeseburger Mentality: Customer Centric Revenue Management in the F&B Department / David K. Hayes Ph.D., Allisha A. Miller, and Joshua D. Hayes, MA, Peggy A. Hayes / November 2011

Hospitality Pricing: What's Up With That? Six Truths Hoteliers and Restaurateurs Can Learn From Each Other / David K. Hayes Ph.D., Allisha A. Miller, and Joshua D. Hayes, MS. / May 2011

Net ADR Yield: A New Tool For The Thoughtful Revenue Manager's Channel Evaluation Tool Box / Dr. David Hayes & Allisha Miller / January 2011

What Is A Fair Price? - And Who Gets to Decide? What Customer-centric Lodging Revenue Managers Need To Know / Dr. David Hayes & Allisha Miller / November 2010

.

To search Hotel Online data base of News and Trends Go to Hotel.OnlineSearch

Home | Welcome | Hospitality News
| Industry Resources

Please contact Hotel.Online with your comments and suggestions.