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Demystifying the Magical Pricing Potion


By Jean Francois Mourier 
November 22, 2011

You may not know it, but the grandfather that is today’s hotel industry room rate optimization technology just celebrated an anniversary – and a big one at that. Fifty-nine years ago this month, UNIVAC (Universal Automatic Computer), the 16,000 lb, 500 vacuum tube-equipped behemoth performed the unthinkable: it correctly predicted in an early call the 1952 president election of republican Dwight Eisenhower with a less than one percent margin of error in the electoral vote count and an equally slim three percent error in the popular vote. CBS News at the time, fearing the computer’s error, refused to announce the results. It preferred to rely on its experts’ gut instinct.
 
The “Electronic Brain’s” Hotel Career Shift
If UNIVAC could have, it would have checked itself into a luxury hotel and then laughed itself off to the proverbial bank. The stunning prediction marked the first time a computer accurately predicted an election. By 1956, a host of so-called “electronic brains” were putting their thinking caps on to again make that early call. As the saying goes, in terms of computerized election prediction, the rest was history.
 
So of course, this little story begs the question, “What does all this have to do with hotels, revenue managers, and pricing systems?”
 
The answer is simple – and comes without vacuum tubes. Just like the technology, software and algorithms that went into UNIVAC, so too does a carefully attuned calculus comprised of today’s modern rate optimization systems. In other words, pricing a hotel room rate fairly, one that is both reasonable for the customer and for a revenue manager’s bottom line shouldn’t be rocket science, nor should it require a magic wand or an apothecary’s potion. Like successful election predictions, various intelligence-specific factors are taken into account.
 
The REAL Abracadabra Behind Pricing
Above all, dynamic pricing is essential. Dynamic pricing is an umbrella term that encompasses others, and is an effective way for revenue managers to evaluate multiple pricing metrics in real time. This includes real-time price comparisons to competitor hotels, as well as monitoring instant changes that affect those rates. Another component is a hotel’s historical prices. But it’s important to note that this metric is increasingly less of a factor when figuring a current or future rate. Historical prices are very good at faithfully reporting back to the revenue manager a past room rate, but is a very poor predictor of what the new rate should be, i.e., the future.
 
Other pricing systems partially determine rates based on room rate elasticity, or the flexibility of price based on consumer demand. For instance, travelers regularly expect room rate hikes during peak seasons like the upcoming holidays. Travelers accept and pay those rates and rather than diminishing demand over higher prices, demand actually peaks. Thus, holiday hotel room rate prices are said to be relatively inelastic, or inflexible.
 
Another component to modern software-driven hotel room pricing is rate optimization. And part of that fair rate is based on your hotel’s clout relative to the competition. Increasingly that clout is based on where your hotel lands in basic Google searches as well as online travel agent (OTA) rankings. Other factors that are part of the pricing mix include: booking patterns by day of the week, time of day booking patterns, special events, room size, guest reviews, and booking pace. Seven days a week, 24-hours days, all of these factors, and others, are re-evaluated in real-time in order to establish the perfect rate at the very moment a room is booked.  

Breaking the Spell: Poof!
In the end, today’s modern hotel room pricing software, unlike its UNIVAC grandfather, is more a forecaster of appropriate (and best) pricing than a predictor of room rate outcomes. Hoteliers and revenue managers have come a far way since the time of Eisenhower’s shattering win in 1952: no longer are their internal room rate calculations performed, pardon the pun, in a vacuum, or guessed at peering through a crystal ball, but rather in an open, transparent and real-time interactive environment. Finding the right price is not about lowering rates or relying on what’s worked in the past, it's about reaching the perfect "sweet spot" - that ideal rate that will convert a looker into a booker, be it a business or leisure guest.  
 
Without gazing into any crystal ball, I can tell you that automated pricing programs and their intelligence-gathering abilities will grow increasingly complex – and importantly, extremely helpful to the revenue manager, pulling in and analyzing greater and greater amounts of data to make more informed decisions. While in some ways, thanks in part to meta-search engines and OTAs, customers have as much or even more access to current room rates data than revenue managers, that imbalance is likely to even out.  
 
Hopefully, my commentary has demystified some of the magic that we seek out when it comes to pricing rooms.  In any case, it’s time to put away the magic wand and rely on science and technology, and intelligent software to make those on-target and critical pricing decisions that hotels’ profitability rely on.


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. 
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Contact: 

REVPAR GURU INC. 
786-478- 3500 
www.revparguru.com

 

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Also See: Getting Into Bed With The Enemy: Like Any Relationship, It Pays To Know Your Partner / Jean Francois Mourier / October 2011

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Shifting From Manual to Automatic in Revenue Management / Jean Francois Mourier / July 2011

Going with GOPPAR? Not so fast, RevPAR is still the best metric for revenue managers / Jean Francois Mourier / June 2011

Protecting Your Brand from Discounts; The Real Economic Impact of Losing Rate Discipline / Jean Francois Mourier / June 2011

A Tale of Two Strategies; Contrasting boutique and chain hotel revenue management approaches / Jean Francois Mourier / May 2011

The Great Debate: Humans vs. Automated RMS: Their strengths, weaknesses and what responsibilities are best suited for each / Jean Francois Mourier / April 2011

When Every Second Counts: Secrets for making the most out of the new last-minute booking trend / Jean Francois Mourier / April 2011

Rev Up your RevPAR In 4 Different Ways / Jean Francois Mourier / March 2011

Pricing Beyond the Comp Set And other new pricing strategies that really work / Jean Francois Mourier / March 2011

Schooled By Wall Street; Using stock market principles for optimum hotel revenue management / Jean Francois Mourier / February 2011

System Underload; Inefficiencies in RMS Systems are Costing the Industry Dearly / Jean Francois Mourier / February 2011

Revenue Management: Back to Basics: The Importance of Revenue Management Principles / Jean Francois Mourier / January 2011

Revenue Management: Profiting from the Industry’s Growth in 2011 / Jean Francois Mourier / January 2011

Home For the Holidays: Tending to Hotel Operations When Your Revenue Manager is on Vacation / Jean Francois Mourier / December 2010

The World of Revenue Management: Past, Present & Future; Looking back on hotel revenue management in 2010 and what the industry is expecting for 2011 / Jean Francois Mourier / December 2010

All Science, No Guesswork: The Benefits of Algorithms in Hotel Revenue Management / Jean Francois Mourier / November 2010

The Great Debate: Humans vs. Automated RMS: Their strengths, weaknesses and what responsibilities are best suited for each / Jean Francois Mourier / October 2010

Rate Parity vs. Rate Integrity—What is Rate Integrity? / Jean Francois Mourier / October 2010

A New Day For Timeshares; Using automated RM systems for running your timeshare company / Jean Francois Mourier / October 2010

Best Practices in Revenue Management, Part 3; Automation, Channel Management and Decision Making / Jean Francois Mourier / September 2010

Best Practices in Revenue Management, Part 2; Rate discipline, the leveraging of real-time information, and price prediction / Jean Francois Mourier / August 2010

Best Practices in Revenue Management, Part 1; General revenue management and strategic pricing / Jean Francois Mourier / July 2010

The Irresistibility of the Obvious; How a new trend in revenue management and metrics is missing the point / Jean Francois Mourier / July 2010

Pricing Beyond the Compset - And other new pricing strategies that really work / Jean Francois Mourier / June 2010

A Tale of Two Strategies; Contrasting boutique and chain hotel revenue management approaches / Jean Francois Mourier / June 2010

Historical 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
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