News for the Hospitality Executive
Schooled By Wall Street: Using Stock Market Principles
for Optimum Hotel Revenue Management
by Jean Francois Mourier
September 28, 2010
Cost, inflation, supply and demand are all basic economic principles that have been used in business for many years, but unfortunately, they aren’t often underlying principles for many properties’ pricing strategies.
Unlike other industries, the hotel industry has developed its own set of revenue management principles that rely greatly on ad-hoc strategies, particularly when it comes to dealing with the constantly changing nature of their business. As technology continues to progress and as consumers’ buying habits change accordingly, traditional hotel revenue strategies are proving less effective when challenged by emerging online sales channels and quickly fluctuating prices.
But this isn’t a new problem. There is another industry that has faced these same challenges (and triumphed) - the stock market.
The hotel business and the stock market have much more in common than what it appears at first glance. Both are greatly influenced by external factors and depend greatly on the actions of consumers. They also routinely face uncertainty through the course of normal operations, are subjected by forces of supply and demand and react to competition.
Where the stock market differs from the hotel market is in how it has reacted to these challenges. The stock market embraced technology to manage ever-changing prices and allow for shares to be traded more quickly and for the highest profit possible. The hotel industry, on the other hand, has continued at the status quo, expecting yesterday’s pricing strategies will continue to be effective today, even though the market has completely changed.
Which industry has it right? What tactics should hoteliers be adopting in their revenue management strategies?
To properly illustrate the differences between the two industry’s responses to similar challenges, let’s examine how the use of traditional hotel revenue management tactics would be detrimental to today’s stock market, in order to show how pricing hotel room rates like stocks can actually prove to have many benefits for hoteliers.
Market Driven Pricing
Unfortunately for public companies, they don’t have a great deal of control over how much their shares are worth. They can increase the value of their shares becoming more profitable as a business, but in the grand scheme of things, the share prices are controlled by the market and by consumers who dictate what the product is worth.
The same goes for hotels. With the increase in transparency that online bookings offers, consumers are able to make their room choice based on price, ensuring that hotels offer competitive pricing. Of course, hotels will always have the option to reject the prices dictated by consumers; however, most likely this will mean that the hotel will lose out on the sale because they aren’t pricing themselves competitively.
Like public companies, hotels can also have some degree of control over their rates by working to increase their star rating and customer reviews, two key factors in moving a property into a higher comp set.
One of the most common revenue tactics in the hotel industry is that of historical pricing. While this can often give good insight to hotel activity during holidays, events, and seasons in general, it only covers one aspect of a comprehensive pricing plan and shouldn’t be the only factor upon which room rates are based.
In the stock market, multiple pricing strategies are used, such as studying current supply and demand, available inventory, and the availability of multiple sales channels—particularly online. These are all factors that can – and should be – factored into a property’s revenue management strategy as well, especially when it comes to technology and the online channel. In 2009, 60% of leisure travel and 40% of business travel were booked online, which showcases the tremendous impact that technology has on the industry as a whole, and the impact that it should be having on hotels’ pricing and revenue management strategies.
If the stock market continued to use only historical pricing as the basis for all of their calculations, there would be no way for traders to receive accurate information on the current demand for their products, nor would they have an idea as to what sales channels were being utilized for trading. Without this extra information, there’s no way to determine accurate pricing for stocks, which would be damaging for success of the market.
When it comes to the stock market, even those who work in the industry know that trades continue to be made even after the official close of a day because of electronic trading. Because travel is a truly global industry, potential travelers can book their hotel with an OTA at any time of day or night depending on their time zone. From a hotel revenue standpoint, a great deal of money could be earned if only revenue management staff could work 24 hours a day, 7 days a week since on evenings and weekends, rates aren’t being adjusted to reflect the changing rates of the competition within a destination in real-time.
Just as technology has enabled stock traders to get up-to-the-minute information, hotel revenue management technology is available and can enable revenue managers to manage their inventory and pricing through the same type of sophisticated automated systems. These revenue management systems analyze data, make real-time pricing changes, update each online distribution channel automatically, adjust inventory and place the property in the ideal OTA page position to ensure the highest number of bookings at the highest rate possible. These systems work 24/7 to make sure that a property never leaves money on the table, and to ensure that the revenue manager can do what he (or she) does best – making strategic, proactive pricing decisions and working with the marketing, reservations and sales teams to make the hotel run as profitably and successfully as possible.
But what if the stock market still used old-school methods and ignored the revenues being lost overnight and on weekends, when the stock market wasn’t officially open?
Sales profits would be inaccurate, as would the number of sales. Traders would constantly be working with past and possibly irrelevant information, which is not profitable in any business.
Optimal, Dynamic Pricing
Another familiar tactic of financial experts, particularly those who work with commodities, is optimal pricing. For hotels it’s a more unfamiliar concept, but that doesn’t mean it cannot be applied to hotel revenue management. From a financial perspective, the hotel room—much like a gallon of milk or a loaf of bread—is a relatively uniform product with high perishibility. But as financial markets determine prices by factors such as current market conditions, hotels often assign a rack rate—or base rate—and tweak it for potential customers from there, lacking a range when it comes to strategy. With sophisticated hotel revenue management systems, optimal pricing can be determined using a combination of traditional hotel and financial strategies and that rate can be continually updated in real-time.
If stock traders didn’t use optimal pricing, they simply wouldn’t ever be able to make maximum profit from trades. If a certain good or service is in high-demand and a trader doesn’t know this, they may sell a stock for significantly less than what it’s worth. On the other hand, if there is little or no demand, a trader might lose opportunities for profit by pursuing the wrong trades.
Creating a Multi-Dimensional System
The stock market highly relies on a sophisticated system of algorithms, channel management, and analysis of market and historical conditions to ensure all bases of optimal revenue management are covered. The combination of the four ensures that our markets continue to thrive, painting a very clear picture for hoteliers and revenue managers: the hotel industry can benefit from the adoption of stock market principles in the area of revenue management, especially in today’s world that relies so greatly on fast-paced technology updates.
By ignoring the importance of technology and real-time pricing updates in a hotel’s pricing strategies, a hotel is leaving money on the table.
So if the stock market can do it, why aren’t you?
Feeling inspired? Want to find out how your property can implement stock market principles in your revenue management strategies to increase occupancy and RevPAR? Contact Lou Wolfson, Business Development Director, REVPAR GURU at 1.786.478.3506 or firstname.lastname@example.org
About REVPAR GURU
|Also See:||The Irresistibility of the Obvious; How a new trend in revenue management and metrics is missing the point / Jean Francois Mourier / July 2010|