News for the Hospitality Executive |
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By
David
K. Hayes Ph.D., Allisha
A. Miller, and Joshua D. Hayes, MS.
May 16, 2011 Hotels and restaurants are
both segments of the hospitality industry. Managers in each of these
segments
would seem to have a lot in common. Both sell products (rooms, food or
beverages) and the best of them emphasize quality customer service as a
key means
of differentiating themselves from their competitors. When it comes to
setting
the prices for what they sell, however, they often seem to come from
different
worlds. 1. When guests contact a hotel and
request a price
quote on purchasing ten or more hotel rooms on a single night, their
call will
no doubt be transferred to the sales department where they will be
offered a
quantity purchase discount.
If, however, that same guest reserves a table of ten, for the same night, at a nearby table service restaurant no discount will be offered and, in most cases, a mandatory service charge (effectively a price increase) will be added to the guest’s bill. 2. When guests request a room rate quote on a hotel’s busiest night of the week they can expect to check into their rooms at the normal time, and pay a rate premium of 10-100% above the same room’s normal (rack) rate. However, if they go to a popular restaurant on its busiest night of the week they will A; wait a long time for their table, and B. pay the same menu prices they would pay on the restaurant’s slowest night. 3. When guests go online to make a hotel room purchase they will find literally hundreds of third-party intermediaries selling rooms for the same hotel property on both that property’s busiest and slowest nights. The rates to be charged and the fine print conditions of the sale can vary somewhat, but what will not vary is that the hotel itself will receive only a portion of the room’s selling price (in some cases as low as 50% of what the buyer pays for the room). The same guest going online to make a dinner reservation at a restaurant will get just that… a dinner reservation; and the restaurant will not pay a third-party intermediary a commission anywhere remotely near what their hotel counterparts routinely pay. 4. When guests arrive, with a confirmed reservation (at a hotel they have never stayed at before), and if the hotel is slow that night, the guest will likely be given a room upgrade at no extra charge to encourage them to come back in the future. If the same guest goes to his or her favorite restaurant (one they frequent at least monthly) on a slow night and orders a ten-ounce sirloin steak, they know there is zero chance they would be offered the option of paying the menu price for the ten-ounce steak but being upgrading (at no charge) to a 14-ounce steak. If these examples make you
wonder about the thought processes driving hotel and restaurant pricing
you are
not alone. No doubt, when considering hospitality industry pricing, our
guests also
wonder: “What’s up with that!?” To better understand why
hotel and restaurant pricing philosophy varies so much (and what
managers in
each of these two major industry segments can learn from each other
about
pricing) it helps to understand how the typical manager in each segment
first
learned about pricing themselves. If you pick up a course
catalog from any of the fine hospitality management schools you will
find, in
the majority of cases, that there is no separate course devoted solely
to
“Hospitality Pricing.” That’s particularly unfortunate when the impact
of
effective pricing on business profitability is fully understood. The
importance
of pricing to business success was posed succinctly by Warren Buffet, the
billionaire CEO of
Berkshire Hathaway, in a February 2011 interview with Bloomberg news
when he
stated: The single
most important decision in evaluating a business is pricing power. If
you’ve
got the power to raise prices without losing business to a competitor,
you’ve
got a very good business. And if you have to have a prayer session
before
raising the price by 10% then you’ve got a terrible business. Understanding the power of
pricing is
critical. Effective pricing allows you to capture an audience and
maintain a
successful business. So, where then do future hospitality managers
initially
learn about pricing? Restaurant
pricing is most often taught in “accounting” type courses by
“accounting” type
instructors. Whether the course is called Cost Control, Menu
Management,
Restaurant Operations, or something similar, practicing restaurant
managers
will immediately recognize the philosophy, language and formulas they
first
learned and now use. Thus, if you are a restaurateur reading this
article you
are no doubt fluent in the restaurant pricing language of portion
costs, food
cost %, contribution margin, prime costs, costs of premium liquors vs.
well
liquors and menu engineering. Most importantly, you have been taught
the
critical role of carefully calculating your costs prior to establishing
your
prices. Hoteliers
learn about pricing in “marketing” type courses taught by “marketing”
type
instructors. Whether the course is called Hospitality Marketing,
Hospitality
Sales, Front Office Management, Revenue Management or something
similar, hotel
managers will immediately recognize the philosophy, language and
formulas they first
learned and now use. If you are
an hotelier reading this article you are no doubt fluent in the
language
of ADR,
occupancy %, RevPAR, room type, rate parity and market share. Most
importantly,
you have been taught the critical nature of balancing room supply and
guest
demand when determining your room rates. To point out the
in-practice
differences in pricing philosophy between hard-core accountants and
hard-core marketing
professionals is to re-state the obvious to those hotel or restaurant
managers
who have spent much time in our industry. Nor does it really make any
sense to
say one approach is right and the other is wrong. It does make sense,
however,
for students of each approach to learn important lessons from the
other. What follows are three
truths hoteliers know about pricing (that most restaurateurs don’t
recognize)
and three truths restaurateurs know about pricing (that most hoteliers
don’t
recognize). All six truths are offered
in the spirit of improving customer-centric pricing decisions and
ultimately
greater hospitality industry profitability. At the very least, they
will no
doubt stimulate some lively debate. This is so because the authors
fully expect
some managers will embrace those truths ascribed to their industry as
“only-too-obvious” while at the same time outright rejecting as
“implausible” those
truths known by their industry counterparts. This article is written
for
those open-minded managers willing to consider new truths; even when
those
truths make them question their old beliefs. These are the managers
Oscar Wilde
was addressing when he stated, “The truth
is rarely pure …and never simple! Three
Truths
Hoteliers Should Learn from Restaurateurs
Restaurateurs’ Truth #1: Bottom-Line Profits
Outshine Top
Line Sales Hoteliers measure
percentage changes
in top line sales (ADR, occupancy %, and RevPAR) regularly and with
great
precision. The truth, as every restaurateur knows, however, is that
sales are
not nearly as important as profits. Food and beverage sales
made at
discounts significantly below regular menu prices simply for the
purpose of
increasing revenue volume do not often occur in the restaurant
industry. The
cost focus of restaurateurs just will not allow them to knowingly sell
at or
below their costs. Contrast that reality with
the
current hotel industry debate over the relative importance of revenue
per
available room (RevPAR) vs. gross operating profit per available room
GOPPAR as
a performance metric. The debate exists only because, in the view of
some hoteliers,
all sales which increase RevPAR (as every room sale regardless of its
profitability will do) are good sales. In truth, they are not. An industry that places a
premium on
top line revenue generation, rather than bottom line profits will
inevitably
make pricing decisions that favor the former over the latter. Some
inevitable
results? a.) Sales
professionals motivated to apply a “put head in beds at any cost”
mentality to their work
b.) Franchisors (whose incomes are primarily driven by top line sales) who promote questionable marketing campaigns and methods used to maximize RevPAR, rather than GOPPAR c.) Hotel owners deprived of rightful investment returns Restaurateurs’ Truth #2: Don’t Sacrifice
Pricing Potential Due to Diminished Demand. The economy is slowing.
Hotel
occupancies in an area are declining. Restaurant volume in the same
area is
down as well. The hotel industry’s dominant pricing strategy? Drop
rates and
use the Internet to widely publicize the rate reductions. The restaurant industry’s
dominant
pricing strategy? Stand firm on prices. The restaurant strategy
was summed up
nicely by Michael Woodhouse President and CEO of Cracker Barrel Old
Country
Stores. Speaking of his company’s decision not to reduce its prices
during the
“Great Recession” of 2009-2010 Woodhouse stated, “Once you devalue something, you’re digging a
big hole and it’s (tough) to get out of that. We’re not depending on
anything
happening in the economy, other than the day-to-day business of
treating our
guests right.” Translation:
“Don’t
expect to see solidly run restaurants utilizing Groupon on a long-term
basis.” But things are different
on the hotel
side. Every serious hotel
pricing study
ever undertaken shows the futility of lowered room rates in the face of
slackened demand. The research consistently shows those hotels that
reduce
rates the most in periods of reduced demand lose the most. Those who
reduce
rates the least, profit the most in the long term. Despite that fact, in the
hotel
industry the pain of occupancy rate declines is routinely compounded by
decisions to reduce rates because room sellers are convinced that
lowered ADRs
create greater demand for rooms. The truth is lowered room rates do not
create
higher room demand. They simply create lower rates. Bruce White, CEO White
Lodging
Services summed the industry-wide rate reduction problem up nicely in
the March
7, 2001 issue of Hotel Business when he stated: “As an
industry, we tend to overreact to the market, particularly in
periods of soft demand. We become our own worst enemy.” Any service industry (e.g.
hotels,
car rental companies, movie theaters and the like) that significantly
reduces
prices during periods of reduced demand will inevitably experience: a.) A race to the rate
bottom; as direct competitors are forced to match the lowered rates
b.) Reduced per-room sale profitability at a time when each profit dollar is precious c.) A very slow and painful multi-year recover process when the decision is made to increase prices to previous levels It is somewhat curious
that the same
hotel industry whose far-sighted leaders banded together in 1989 to
create the
THISCO switch (in response to escalating GDS access costs) now finds
itself
struggling to re-gain control of its rooms inventories and pricing
practices
from third-party internet sites that neither build hotels nor clean
rooms. It is even more curious
that many
hoteliers offer lower room pricing to online guests than to their own
walk-ins.
When pressed, these hoteliers would explain that their room rates have
to be
kept low on the Internet to ensure proper page placement (near the top
of the
search page list) and that third-party site operators will punish them
with
poor placement if rooms inventories are restricted or their prices are
too
high. The internet should not be
used as an
excuse to abandon pricing power. Restaurateurs know it is important to
make
their presence known via the use of advanced technology. The best of
them are
adept at utilizing Yelp, Facebook, Twitter, MySpace, iPhone apps and
all the
rest of the available technology tools to increase the ease with which
their customers buy directly from them
(re-read the last five words in this sentence and you will know what
restaurateurs know). Hotels have been content
to pay
astonishing amounts to third-party on-line travel agents (OTAs) selling
hotel
rooms and have, in far too many cases, ceded to these sites
ever-increasing
control over rooms pricing and inventory. If the hotel industry
continues to
rely on a distribution model that gives extraordinary power to its
third-party
distribution partners to set the terms of room sales it will inevitably
continue to experience: a.) The commoditization of
its products as the importance of service levels and brands are reduced
in guests’ eyes in favor of lowest price
b.) The ability of intermediaries to achieve even greater price and inventory concessions from franchisors and property-level room sellers c.) Continued lessened tax revenue to support local CVBs and tourism marketing services Is there another way to
go? Can a
business actually maintain complete control of what it sells and the
price at
which it sells it? Note to hoteliers; restaurateurs (and Southwest
airlines!)
know that they can.
Three Truths
Restaurateurs Should Learn From Hoteliers
If you think restaurateurs
simply
“get it” better than do hoteliers when it comes to pricing products,
think
again. No industry segment has a monopoly on truth. In fact,
restaurateurs can
learn a great deal about customer-centric pricing from the things their
hotel
industry counterparts know to be true. Hoteliers’
Truth # 1: Customers Don’t
Care About Costs Ask restaurateurs why
cheeseburgers
cost more on their menus than hamburgers and you will likely get a
perplexed
look, accompanied by the immediate answer that a cheeseburger costs
more to
produce than a hamburger; thus the higher selling price is clearly
appropriate. Hoteliers know better.
They
understand that buyers are absolutely unconcerned about a seller’s real
costs
and that, in especially in the service industries, a cost-based
approach to
pricing is simply ineffective. That’s because in markets where consumer
demand
is weak, cost-based pricing leads to higher prices than most customers
are
willing pay. In markets where demand is high, cost-based pricing leads
to lower
prices than most customers are willing to pay. If you immediately
recognize
that this is exactly the opposite of
the pricing logic that should be used by sellers in a service industry
then you
know what hoteliers know. It is a dangerous
assumption to think
that businesses can charge more for their goods and services simply
because the
business has added costs to them. Increased costs do not automatically
equate to increases in consumer perceptions of value;
a fact recognized by any business owner whose operating costs
continually
exceed his or her revenues. An increase in costs
cannot
automatically dictate an increase in selling price. In fact, the
opposite
should be true. The fact that beef costs have risen 20% does not mean
customers’ willingness to pay higher prices for steaks has risen as
well. An
appropriate selling price for a product or service must dictate its
allowable
cost. It is only when selling prices accurately reflect consumer
perceptions of
value that a business can ascertain the costs it can reasonably incur
while
still generating the profit levels it requires for long-term
sustainability. Hoteliers’
Truth # 2: The Hospitality Industry Doesn’t Sell…It Rents Service industries are
characterized in part by their
inability to increase supply in times of increased demand. Thus, a
hotel that
consists of 400 rooms simply cannot sell more than 400 rooms in one
night,
regardless of how many potential guests want to buy a room. A
restaurant with
200 seats can only offer that number of seats for sale during its
busiest, as
well as its slowest, periods of customer demand. Because the supply of
what is
sold to guests (hotel beds or restaurant seats) is restricted,
effectively managing
inventory (capacity) well is critical to business success. Airline executives
understand the important
relationship between capacity management and revenue and thus they
measure
their inventory utilization efficiency using PRASM (Passenger Revenue
per
Available Seat Mile). Hoteliers focus on RevPAR (Revenue Per Available
Room) a
similar measure that equates the ability of hotel management to
optimize the
pricing of available room capacity. Yet in the restaurant industry,
RevPASH
(Revenue Per Available Seat Hour) is a powerful but under-utilized
restaurant
performance metric. It shouldn’t be. Few restaurateurs regularly
monitor
RevPASH. They should. To best understand
RevPASH, it is important to recognize that
a restaurant has a fixed number of seats, each of which has the
potential to
generate larger or smaller amounts of revenue based on how many guests
are seated
per hour, how long each guest remains in the seat, and how much is
purchased by
each seated guest. Viewed from that perspective, restaurants don’t
actually
sell steaks; rather they rent seats
to people who may buy steaks. An increase in the number of restaurant
seats
occupied (rented) results in increased revenue. In a right-sized and
properly
managed operation, greater revenues should yield greater profits. The effective monitoring
and management of RevPASH is
designed to increase revenue by focusing on the duration of guests’
dining
experiences, as well as the amount they spend while seated. RevPASH
monitoring
can give restaurateurs a good idea of the speed at which a kitchen
produces
food and the speed at which guests are seated and served. Because that
is true,
an understanding of RevPASH is important both for its emphasis on
capacity
management and its decidedly customer-centric orientation. When restaurateurs
inventory their vacant seating as
carefully as they inventory the products in their walk-ins, they will
know what
hoteliers know. Hoteliers’
Truth # 3: Differential Pricing is Customer-centric
Pricing What do
hair salons have in common with restaurants and hotels? Each has a
limited
ability to serve their customers in periods of heightened demand. Hair salons are
constrained by the
number of chairs and hair stylists available at any one time. Hotels
have a
limited number of rooms. Restaurants have a limited number of seats. In the hotel industry,
hotel revenue
managers routinely implement differential pricing strategies.
Differential
pricing can be defined as the practice of charging different prices to
different buyers for the same product or slightly different versions of
the
same product. The use of differential pricing is widespread in the
hotel
industry. It is almost unheard of in the restaurant industry where it
is
typically perceived as inherently “unfair” to guests. It is not. To illustrate, assume that
on
alternating Fridays you regularly get your hair cut at your favorite
hair
salon. Next, assume it is the week-end of your local high school’s
Senior prom.
During this week, demand for hair salon services is exceptionally
strong. In
the face of extra-ordinary demand for what it sells, your salon’s
owner, like
any service provider whose inventory is constrained, would be forced to
choose
from one of only three revenue management alternatives. These are: A. Establish
one
price and then sell to customers on a first come-first served basis
until they
have exhausted their supply of products. B. Allocate
the limited supply to selected customers who meet established criteria
(e.g.
they are volume buyers, repeat buyers, they buy at certain times, or
they hold
other favored buyer status). C. Raise
prices
until demand is reduced sufficiently to equal the available supply. Of course, pricing experts
have the
option of A, B, or C, as well as that of fashioning a strategy that
combines
aspects of B and C into a customized approach (because these two
strategies are
not mutually exclusive). Now re-read the list of
options from
the perspective of you; a loyal salon customer. Which seems fair to
you? Which
seems unfair? Which would you like to see applied to you during your
next visit
to the salon during a Prom week? The perception of fairness
in pricing
is of prime concern to customers. Customer-centric pricing is an
approach to
pricing that directly addresses customers’ perceptions of value and
pricing
equity. Hoteliers know that all customers are not created equally; nor
do all
of your customers expect to be treated equally. Neither pricing approach A
nor C
identified above would likely make you feel your hair salon valued your
continued business. If the salon used approach “A”, you would likely
visit
another salon because your wait to get in your favorite salon (remember
it is
Prom week) would be excessively long. If approach “C” were implemented,
you
would pay substantially more this week than last week for the same
service.
Based on your individual customer characteristic (your frequent buyer
status)
you would, rightfully, expect the “special” treatment, differential
pricing,
identified in approach “B”. The individual buyer
characteristics
(e.g. age, frequency of purchase, timing of purchase, payment method,
among
many others) used to implement differential pricing strategies help to
ensure
fairness to customers and to optimize revenues. That’s because only
pricing
decisions made after fully considering each of your target markets’
individual
desire, ability and willingness to pay characteristics will best serve
them,
and ensure their long-term loyalty to you. Ultimately, the worth of
any product
or service can only be equal to the amount informed buyers are willing
to pay
for it. The actual determination of selling prices in the hospitality
industry,
however, is a nuanced process and it is highly influenced by the
perspective of
sellers. Based on the long histories of their industry segments (and
despite
their often differing perspectives) hoteliers and restaurateurs know
much about
products, services, customers, and pricing. It has been said that
education is
learning what you didn’t even know you didn’t know. When it comes to
pricing,
hoteliers and restaurateurs already know a lot. They can know even more
when
they learn from each other. About this Article: This article is based on information in Revenue Management for the Hospitality Industry by David K. Hayes and Allisha A. Miller. © 2011 John Wiley & Sons, Inc. All rights reserved. To purchase this book or obtain information about bulk sales, please contact [email protected] About the Authors: Dr. David K. Hayes and Allisha A. Miller operate Panda Professionals Hospitality Management and Training (www.pandapros.com) where they create and deliver innovative and practical educational materials and pricing-related seminars exclusively for those in the hospitality industry. Joshua D. Hayes, MS is a Panda Professionals consulting author |
For
More Information Contact: Allisha Miller Panda Professionals 1715 E Jolly Road Okemos, MI 48864 [email protected] |
Also See: | 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 |