|by Graham Young, October 2005
What do the hotel industry, consumer electronics, retail, and the package delivery businesses have in common? More than you think. Each industry is struggling with managing group rates; all are working to understand how to keep promotions from cannibalizing current offerings; and in each market shoppers are price sensitive because of the Internet, seasonality and other outside factors. Now several hotel companies are looking over the fence and boosting their bottom lines by applying successful revenue management strategies modeled from other industries.
The key to doing this is a thorough understanding of the buying dynamics and influences in a number of industries. With its experience in service- and product-based markets supporting Fortune 1,000 clients, Manugistics has identified several revenue management best-practice areas from other industries that it is leveraging for hospitality chains.
We discovered three rate-setting challenges common to retailers, delivery companies, consumer electronics chains and hotel companies. Each organization is:
Group pricing and the auto industry
Group pricing optimization is one of the most complex calculations for hotel chain revenue management directors. Before they can generate a proposal for group business, managers must accurately forecast sleeping room pick-up, food and beverage revenue, meeting space value, incidental spending, and the value of possible future client business. Based on these estimates they need to deliver a bid low enough to win the business against competing hotels, but high enough to maximize profitability. They must also balance all of these considerations against the potential value of other groups requesting the same dates and space. This is similar to the auto industry. When a customer requests a block of units, let’s say 50 yellow cabs or police cars, managers need to know how much to offer so that the chance of winning the deal is very high. Bids must consider the mix of sedans, mid-sized vehicles or minivans, the accessories that are requested, how long the account has been buying from the manufacturer and what other manufacturers are submitting. Solution: We learned that after group rate forecasting is finalized, a company must also accurately estimate response to its pricing, something best done if there is historical win/loss data. Our rate management scientists created realistic computer models that accurately forecast buying behavior at different price points with different service offerings. When our team applied the results, the payback was an immediate revenue improvement.
Promotions forecasting and the grocery industry
Short-term promotions that cannibalize higher rated offerings is another problem that confronts nearly all industries. We gained valuable understanding of the relationship between price and demand from our work maximizing promotional revenue for a large United Kingdom-based grocery chain. Before you say that retail is nothing like the hospitality business, consider that when a retail store discounts pricing on a brand of cereal, it cannibalizes the sale of similar higher-priced products. In Hospitality, Internet discounting cannibalizes higher room rates for nearly every property. Solution: By measuring customer response to price changes in other industries, we developed effective promotions models which improve hospitality revenues.
Price sensitivity: At what price do clients stop buying?
For hotel operators the crucial question is not if ADR will be lowered by Internet discounts, but at what price point the downward movement will begin. By employing sophisticated price-elasticity modeling, we learned to predict buyer price sensitivity in many industries including consumer electronics. Now we are using that knowledge to build pricing strategies that synchronize rates with promotions for hotel operators. What makes the hotel industry unique is that rate analysis must go beyond pricing because guests often contribute considerable incidental revenue and may represent repeat business. What is the lifetime value of a guest? To what extent should a hospitality company reduce their room rate to account for the fact that a guest has been loyal in the past? An extreme example would be gaming companies, who not only reduce the room rate to zero, but upgrade the suite for their best guests. Rate optimization modules predict guest spending in a flexible framework to forecast total guest revenue for any type of property, full- or limited-service, luxury to budget. The result is a system that predicts a promotion’s total revenue impact on guest value at multiple price points under varying conditions.
Hospitality is applying rate maximization tools from the retail, consumer goods and auto industries that are already proving their bottom line value.
Graham Young is business development vice president for Manugistics’ Revenue Management Group and has been working with chain hotel clients for more than 15 years to develop solutions that maximize client revenue.
About Manugistics Group, Inc.
|Also See:||Manugistics to Showcase Next-Generation Chain Group Pricing Technology; In the ‘Year of ADR,’ Chain Hotels Capture More Group Business; Manugistics Centralized Solution Drives Higher Daily Rate / June 2005|
|Manugistics Senior Executives to Address Industry Professionals at HSMAI Revenue Conference and MIT INFORMS Event / June 2005|
|Omni Hotels Reaps Revenue Increase with Manugistics and The Rainmaker Group / Powerful centralized automated revenue management solution maximizes room value while recognizing loyal customers / June 2005|