News for the Hospitality Executive
By Jean Francois Mourier
August 12, 2010
This article is the second in a series addressing best practices in the area of hotel revenue management.Two weeks ago in this space, we discussed two prominent operational areas of hotel management, strategic pricing and the general conception and underlying attitudes of successful revenue management. When considering revenue management, though, more than these two aspects come to mind. In fact, the most visible aspect of revenue management in today’s operating environment is the use of the most up-to-date information available, one of the topics of today’s article. Another is rate discipline, which is subject to wide interpretation and can sometimes be at odds with other revenue management aims, like occupancy maximization. The third aspect of revenue management covered in this article is the important process of predicting future prices, and generating rates that align with those predictions.
These areas of revenue management are related to the first set of best practices outlined in our previous article: strategic pricing, which relies on both real-time information and accurate price predictions; and overall revenue management approach, which informs (or is influenced by) the concept of rate discipline. And like the revenue management strategies examined in the previous article, the best practices in the areas of information use, rate discipline and prediction have evolved over time. As little as ten years ago, the best, most recent information available about competitors’ rates came out in quarterly Smith Travel Research reports, or we discovered through call-around rates, GDS and rack brochure rates. Now, that data is constantly available and readily accessible – and I don’t mean in call-arounds. Likewise, price and rate prediction could only be achieved by consulting historical tables; rate discipline and its effects on brand identity and future room sales was barely considered two decades ago. Today however, the best revenue management systems employ sophisticated algorithms to generate optimal prices.
Rate discipline often comes up in reference to discounting or across-the-board rate cuts. The theory holds that deep discounts implemented to boost occupancy or stimulate demand (a common practice during the recession) deteriorate the hotel’s brand image. As mentioned, sometimes this practice can run contrary to other important aims, and sacrificing occupancy to maintain strict rate discipline can be as financially irresponsible as knee-jerk discounting. The best practice, then, is to dynamically adjust rates based on demand, without going too far in either direction.
The primary effect of rate discipline is felt on the hotel’s brand. Associations between price and quality are natural for consumers to make, and perceived quality is a central component to any hotel’s brand image. Therefore, a rate discount negatively affects a hotel’s brand. (This is a simplification, of course; many hotels define their brand by bargain prices, and a high rate does not guarantee positive brand development. A correlation does exist, though.)
This effect is real, and cannot be dismissed. Brands have immense value. According to a 2002 Interbrand study, brand value accounts for approximately 38% of the value of the companies that own them. If discounting is damaging to a hotel’s brand, and maintaining one static rate is equally detrimental to RevPAR and occupancy, then the solution lies in variable rate, modified in real-time to best match demand conditions. This eliminates the either-or quandary of whether or not to engage in across-the board discounting. Instead, the highest rate likely to generate a sale is presented to the right customer at the right time. This is achievable through the use of advanced revenue management systems, the best of which will also optimize page position on OTAs, manage multiple sales channels, and manage room inventory. To maximize occupancy and rate, however, automation is key. Rates must be modified subtly, in real-time, to avoid the pitfalls of wide-scale discounting.
In the end, just because a hotel offers a particular rate doesn’t necessarily mean a consumer will take that rate. Rate discipline through dynamic pricing provides a workable solution to this truism.
Using real-time information
The hotel industry, like everything else, has entered its information age. Compared to years ago, when information about everything from competitors’ rates to booking pace to demand levels was tightly held by a select few gatekeepers, all of the information necessary to set the perfect rate is available to hoteliers at all times. Unfortunately, most hotels fail to adequately access this information, or if they do, fail to leverage it effectively. The best practice in information usage is exemplified by the advanced revenue management systems in place at some hotels, which constantly consults demand levels and monitors competing hotels’ rates and make adjustments to the rate being offered based on this real-time information.
The reason this valuable information is now widely available is, of course, the advent of internet sales. Because every hotel posts rates online through various sales portals, those rates can be monitored. Because an increasingly high percentage of room sales are made through the online sales channel, demand levels can be assessed minute to minute. And because hotels have unfettered access to this information through the web, they can act on it in a quick and decisive manner. To do this effectively, however, hotels need the right tools; most often, these tools are found in a comprehensive, automated revenue management system that can, among other things, accurately predict movements in hotel room price.
Since revenue management involves a certain measure of prediction, it stands to reason that revenue management systems will draw from other industries where prediction is at the core of their business. Some revenue management systems incorporate option pricing principles to help generate optimal room rates. Other systems may also use primarily financial instruments to make predictions, or leverage emerging techniques like crowdsourcing or artificial markets. At any rate, the backwards-looking techniques currently in place at many hotels is fast becoming obsolete.
Predicting the direction of future prices may be a bit foreign to hotels, which often take a supply-side approach to rate setting. But the best practice in price prediction borrows from basic concepts in commodity and option pricing, which focuses almost exclusively on predicting what price the market will bear for a particular good in the near future. The hotel room, as a (relatively) uniform product with high perishability is as much a commodity as a bushel of corn. But as financial markets have mechanisms to determine the optimal price of a particular issue (futures markets, etc.), hotels often arbitrarily assign a rack rate, and (if they do) modify the rate presented to potential customers from there. A comprehensive revenue management system for hotels can set prices based on both historical considerations and current market conditions, giving it twice the range of more traditional pricing strategies.
Each of these best practices of revenue management- rate discipline, information usage, and price prediction- are integral to a comprehensive revenue management strategy. Like strategic pricing and the proper approach to revenue management in general, a hotel cannot operate to its fullest potential without engaging in the best practices outlined here. And while they may not be a magic bullet of lodging success, they can go a long way toward optimizing rates, generating positive and sustainable RevPAR, and gauging where rates ought to be in the near future – a key component of ongoing financial success.
Jean Francois Mourier is CEO & Founder of RevPar Guru, a company that has developed an alternative type of revenue management and real-time pricing solution (combined with automated online distribution) to help hotels maximize occupancy and increase their profits. The company’s Yield Dynamic Price Engine, an integrated revenue management and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving managers more time to run their hotels. You may reach him through www.revparguru.com or by calling +1.786.478.3500.
REVPAR GURU INC.
Practices in Revenue Management, Part 1; General revenue management and
strategic pricing / Jean Francois Mourier / July 2010
Irresistibility of the Obvious; How a new trend in revenue management
and metrics is missing the point / Jean Francois Mourier / July 2010
Beyond the Compset - And other new pricing strategies that really work
/ Jean Francois Mourier / June 2010
Tale of Two Strategies; Contrasting boutique and chain hotel revenue
management approaches / Jean Francois Mourier / June 2010
Pricing Is History, Well, Not Exactly; Examining the Role Historical
Pricing Should Be Playing in Hotels’ Pricing Strategies / Jean Francois
Mourier / May 2010
|Tipping Your Cap (Rate) - Why hotel owners need to pay attention to RevPAR / Jean Francois Mourier / April 2010|