News for the Hospitality Executive
| by Hotel Compete
Revenue Management (RM) and Pricing have been around now for decades. Since US Congress passed the Airline Deregulation Act back in 1978 RM has moved from airlines, to hotels and on to other industries. 34 years later hotels have RM and pricing systems, channel management tools and supporting data that make it easy to keep prices right where they need to be.
An outsider reading the current industry commentary and best practice would surely conclude that hotel pricing is highly dynamic, with smart technology balancing supply and demand in an environment of constantly-changing prices. But is that what really happens? Pricing is a hot topic right now, not least because hotel Average Daily Rates (ADRs) appear to be on their way back up after several years in the doldrums. It is tempting to conclude that rising ADRs are connected to greater sophistication in pricing. But not tempting enough to draw the conclusion without testing it first.
Earlier this year Hotel Compete began collecting data to test
this hypothesis. We gathered a random sample of rate changes from a
range of stay nights from February to late July 2012. The sample
includes almost three million stay night rate observations, from just
over 32,000 US hotels. The analysis monitored the rate changes applied
by hotels on specific stay nights to understand the frequency and
magnitude of rate changes.
The pie chart above summarizes the industry-wide average rate changes during the period measured. The stand-out finding is that on almost 50% of stay nights there was no rate change at all throughout the booking cycle. In other words, the RM and pricing activity in all hotels in the US market is restricted to only half of all stay nights. Of course, the 48% does not apply to every hotel – many do a great deal of pricing and many that do very little. But it still suggests an enormous and surprisingly untapped opportunity for our industry.
It also hints at a bias in our industry analysis. Hotels have the habit of treating ADR and Rate as if they are the same thing. They are not. ADR is the average revenue that a hotel gains from each room sold, ie net of local and group discounts and merchant OTA commissions. Crucially, ADR is invisible to people booking hotel rooms, whereas rate is both highly visible and highly influential to a hotel’s profitability. Hotels that neglect their selling rates in favor of focusing on other ways of increasing ADR incur a considerable risk, as this next piece of analysis shows.
When the same analysis is run for the top five and bottom five brands (based on brand RevPAR Index) in the US market the rate change dynamic is even clearer. Among the top five brands there were 14% fewer stay nights which saw no rate change, and the incidence of relatively large rate changes was proportionally much higher than the national average. Conversely, for the five weakest US brands the incidence of zero rate changes was 67% – i.e. the hotels made no changes at all to their rates for two thirds of their stay nights.
Of course, there is nothing surprising about poorly-preforming hotels doing less RM than their more premium counterparts. Hotels that perform well tend to be in markets with other hotels that perform well, and greater competition means greater need for RM. But still – when the lodging industry’s data, technology and know-how is only ever touching a maximum of 33% of all stay nights, an opportunity clearly exists.
Hotels that do not change their rates through central channels
are likely to be losing business from their increasingly connected
customers. Hotel pricing and RM technologies have evolved with a
natural focus on the most lucrative opportunities – ie large, city
center hotels. But with almost 50% of all stay nights completely
inactive in revenue management terms it seems that the industry still
has a lot of work to do.
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