www.hoteldoctor.eu.pn
Price Management in Hospitality The profit potential from cost-cutting initiatives has now become relatively limited for established hotel chains. Pricing on the other hand can still have a swift and significant impact on profitability, as hotel chains have started to dedicate resources to this field, but still lack professional processes. The challenges for hotels when improving their management of pricing range from a limited understanding of basic pricing concepts at the hotel level (e.g. price elasticity, value-to-customer, profit impact of pricing decisions), to the need for more strategic decision making on this topic by top level management (e.g. definition of the brand’s dynamic pricing model). The focus of the discussion here is how these challenges and the current revenue crisis can be tackled with a series of “profit initiatives” carried out over the short, medium and long-term, and which are based on concrete experience from projects conducted by Simon Kucher & Partners, the world’s leading pricing advisor, for several hotel chains across the globe.
Profit Initiative 1: Get the price-value position of your hotel right (Short Term) Whilst analyzing the price-value relationship and competitive benchmarking help positioning the hotel in the right “ballpark”, actual tests of customers’ willingness-to-pay are usually the best method to pinpoint optimal prices. Optimal prices can indeed only be defined when there is knowledge about one hotel’s specific price elasticity, and not only about the market’s price elasticity, which is a good starting point but not sufficient as it does not account for the potential premium a brand or specific location commands. In reaction to the current downturn, most hotels are actually moving rate levels without precisely knowing what volume they will create and what profit they will lose or gain: in a cyclical and competitive industry as is the hotel industry, this is not affordable! Price elasticity can be simply described as the change in occupancy given a certain change in price. In concrete terms, a precise measurement of price elasticity will give the revenue manager a better idea of the volumes expected at different price points and for different customer segments. For example, for midweek stays in business cities (especially from Tuesdays to Thursdays), the changes in volume in response to price will probably be low given that demand is significantly higher than supply. Whilst for the week-end, customers have greater choice with many more competitor hotels to choose from so volume changes in response to price changes will be higher (Fig. 1).
www.hoteldoctor.eu.pn Information about price elasticity will also give clear indications on the boundaries to be used for the definition of revenue management rules at the local level (i.e. at which level of demand can price levels be changed, what will the impact of a given price increase be on occupancy etc.), which will help to avoid inappropriate pricing moves, too often seen and usually altering a brand’s price image.
Several types of price tests can be conducted to develop knowledge about price elasticities. A simple exercise is to increase or decrease rates systematically in small increments and observe the impacts on occupancy. Such price tests should be conducted for different rates and dates (e.g. high demand level rates, weekend rates, etc.) as there is not a single elasticity for the hotel, but multiple elasticities for the different segments that the hotel targets and attracts. A “pricing segmentation” can then be derived and used to determine concrete and differentiated actions depending on the tolerance to rate changes (the so-called “elasticity”) by the different segments. Other methods relying on customer surveys can also be employed to measure price elasticity, such as Price Sensitivity Meters, Conjoint Measurement, etc (these techniques are described in details in a separate paper). They prove to be a useful complement as the price range that can be tested is broader than in real-life tests as those described above. On top of these, SKP has devised expert-judgment approaches that rely on the experience of local management, and which are thus usually quicker and easier to implement. Interestingly, the difference in opinions on price elasticity given by General Managers, Revenue Managers, Reservation Managers and Sales of a same hotel can be significant. Reaching a consensus on this metric and then on the appropriate pricing strategy of the hotel is thus essential, beyond the Yield Meetings which have developed as a norm in the industry and which usually address the tactical aspects of pricing.
www.hoteldoctor.eu.pn The development of a higher level of knowledge on price elasticities (by customer segment, and through the identification of the drivers of elasticity) ultimately allows hotels to better steer the revenue impacts (REVPAR) of pricing and revenue management decisions, and even more importantly their profit impacts (GOPAR). This knowledge is the prerequisite for a professional pricing process and successful price performance. Without this information, revenue management systems are simply useless. Profit Initiative 2: Stop profit drains by enforcing terms & conditions effectively and setting the right indexation of rates (Short Term) Another important requirement is having appropriate booking terms and conditions to prevent low rates designed for price sensitive customers from being purchased by price insensitive customers. More often than not, such “fences” do exist but they are simply not implemented or enforced as originally planned. For example, hotels offer advance purchase rates that supposedly offer discounts for customers who book well ahead of their arrival date. It is often observed that these advance purchase rates simply remain open much closer to the arrival date than planned or are closed then re-opened again, defeating the object of rewarding early booking. Another example is when discounts are given for the booking of consecutive nights (i.e. peak-nights of Wednesday and Thursday combined with off-peak nights of Friday and Saturday), yet the discount is still given when the customer cancels part of the stay. If a hotel uses several rates, it also needs to be very careful about their relative positioning with respect to time. The gap in absolute value does not need to be constant across time (see developments on dynamic pricing below) but should be carefully defined as significant RevPar increases can be achieved through an appropriate use of price gaps between rates aimed at facilitating up-selling. For example, our experience with an international hotel chain has shown that:
Increasing the gap between the fully flexible rate and a 45-30 day advance purchase rate from 20 to 25% increased the bookings on the advance purchase rate by 10%, while bookings on the fully flexible rate only decreased by 2% Decreasing the gap between the fully flexible rate and a 3 day advance purchase rate from 10% to 8% increased the sales of the fully flexible rate at the expense of the advance purchase rate, yielding a 0.5% average price increase
Of course, the relative positioning of rates needs to be assessed for each chain individually with the precise conditions for each rate and local aspects being taken into account. Profit Initiative 3: Define or challenge your dynamic pricing model (Medium Term) A lot has been said and written on dynamic pricing, especially on its technical aspects, but the crucial strategic question to be answered before entering these discussions is often overlooked: what is the appropriate dynamic pricing model for your hotel brand or chain? For this, it is necessary to determine which booking pattern you want to drive customers towards (which will of course be very different across brands).
www.hoteldoctor.eu.pn In addition, the ability of your revenue management teams to implement the dynamic pricing model chosen should be taken into consideration to answer this question, as implementation requirements are very different from one dynamic pricing model to another. The two main models that can be considered relevant in the hotel industry (compared to other industries engaged in dynamic pricing) are the ascending and flexible model. The aim of the ascending model is to increase prices for the main rates as time progresses. In a flexible model, many more adaptations and alternative directions can be conducted over time, based on occupancy evolution and the evolution of competitors’ prices. As several rates co-exist, it is also important to specify whether to apply a parallel model (where rates evolve with the same pattern and the gap between rates is always constant) or a shrinking model (where rates evolve with different patterns and the gap between the cheapest and most expensive rate tending to decrease as time progresses) as shown in Fig. 2. From experience, a shrinking model allows for improved pricing optimisation and better customer education to dynamic pricing. However, it is very difficult to ensure that hotels apply it properly. A parallel model on the other hand, with clear and fixed indexation levels between rates, is easier to implement. With stable price gaps between rates, the parallel model also has the advantage of communicating a clear value for the conditions offered by each rate.
For either of the above models to work, very specific rules need to be devised to trigger the correct price adjustments at the correct time (e.g. usual triggers include day and booking limits). These should be specified at the hotel level since it is important to choose limits that are relevant for the local market. Therefore, one key step is to analyse what the dynamic patterns of local competitors are (i.e. how many days before the check-in date a given rate is closed, when and how many times are prices increased, etc.), which can be done by compiling several months of competitors’ pricing data through various sources and designing the right tools to draw the price curves of competitors. Whilst the design of such tools is not discussed in detail here, it is definitely a key issue in ensuring the success of a dynamic pricing strategy.
www.hoteldoctor.eu.pn Profit Initiative 4: Define state-of-the-art up-selling schemes at check-in and booking (Medium Term) At check-in, the most common up-selling scheme used (but not yet implemented in many properties nor always optimized) is the offer of a higher category room made to the customer on arrival at an incremental cost (i.e. room supplement), which is lower than that would have been paid at booking. This usually requires going through the guest list each and every morning and analyzing which customers are likely to be interested by such an offer. The room supplement is often static, which may no longer be relevant when dynamic pricing is in place: as the initial price paid by the customer at booking is not the same throughout year, the room supplements could also be revised regularly, whilst keeping it at a reasonable level of complexity for the front desk agents. Usually, such upselling schemes yield revenue improvements of 1 to 3% only after a few weeks of training and implementation‌which is also pure profit for the hotel! Up-selling at booking is also a great opportunity at the brand level, given the increasing number of reservations made through the Internet. Nonetheless, the paths through websites are often still very complex for the customer. For example, a large number of options is offered rather than a customized set of options relevant for each customer segment. A deeper analysis of past booking data offers valuable insights on the relevant set of upselling options to be shown to each customer, and can thus help increase revenues significantly for each individual segment. Also, the categorization of rates should be simplified and carried out to maximize the chances that customers will book, and at the highest rate. In many cases, hotel chains websites fail at creating the necessary level of confidence that allows securing the booking at a decent rate, which in many cases leads the customer to shop around before potentially coming back. Profit Initiative 5: Support implementation by setting up a price monitoring function and price trainings (Long Term) Successful price management requires executive leadership from the very beginning. Many hotel chains have however left hotels with a high level of flexibility and poor guidance in their pricing decisions. There is no doubt that the knowledge of local competition/customers is essential and must be integrated into price setting decisions, but inconsistencies to the brand’s pricing policy due to a too high level of flexibility can also cause significant damage to the brand’s pricing image and should thus be avoided at all costs. Having clear and consistent guidelines is an important way to help hotels in applying the right pricing decisions, but is only relevant if supported by thorough and close monitoring. Not only should past pricing performance be analyzed, but also the upcoming pricing strategy, which involves examining a set of indicators and practices (e.g. closing/opening of rates, price gaps, etc.). Such a monitoring function will help to assess the performance and practices of hotels whilst at the same time stimulate the hotels to implement better pricing decisions and thus increase profitability.
www.hoteldoctor.eu.pn Lastly, many managers involved in pricing on the regional or local level could also benefit from more pricing training to further engrain pricing fundamentals as well as strengthen their thinking in the tactical and strategic aspects mentioned above. We often find that many managers not only lack state-of-the-art tools, but the strategic background that is necessary to support sound pricing and revenue management decisions, and also a clear understanding of the brand’s specific pricing policy. Trainings are especially important as staff turnover at the regional or local level are high in the hotel industry. Overall, the existing hotel pricing processes obviously “work”. However, developing a better knowledge on elasticity, paying more attention to better guidelines, educating hotels in decision making, maintaining pricing consistency (i.e. to willingness-to-pay, value offered) etc. will not only improve the processes’ effectiveness but ultimately, improve profitability.
Read and download free professional hotel guides:
www.hoteldoctor.eu.pn