Yield management effect

white paper Are your customers buying your shopping experience or someone else’s merchandise?

Electronic distribution channels and their inherent tendency to commoditize products are, in fact, not the major issue affecting hotel branding in the marketplace today.

Rather this distribution channel appears to be an enabler and accelerator for a more serious and intrinsic danger, namely variable demand based pricing systems – in other words, yield management systems. The very nature of these systems is to transfer one of the most powerful determinants of brand position (price) to the control of a mathematical model. This surely cannot be good for the brand!

Yield management systems pose potential issues for hotel brands for three reasons: the first, as mentioned above, is their insidious role as engine of commoditization of the industry (i.e. all hotels are the same); the second is the commoditization of the internal product (specifically, customers coming to believe that for all practical purposes, all rooms within any property are the same) and hence the gradual erosion of margin, leading ultimately, to a single (or at most double) tier pricing structure within the asset. The third is the elimination of pricing as one of the most salient cues of brand value and status.

Section 1: The Study and findings ♌

Background

In a study we conducted which included looking at the variable pricing structure

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able pricing system. In order to describe the process from the consumer point of view, we tracked prices in two Canadian hotel properties over a six week period in May/June of 2003.

in the hotel industry we were amazed at

The findings were surprising for several

the overall confusion and inconsistency

reasons:

faced by customers on a daily basis when

We had expected to see a great deal of

purchasing rooms in hotels. The study

movement in prices and price categories

was conducted on behalf of a client in a

over the time period. This was not the

non-hospitality category that was inter-

case, as can be seen in Charts 1 and 2.

ested in adapting a demand based vari-

Nor was there any effective change in the

♦

While an argument could be made

number of rooms available in each price

that this is harmless as long as it is

category (the on-line information repre-

invisible, the fact is that it is anything

sented “available” rooms in each category – and, with only a few exceptions, we did not see any price category fall out

May 20

Room Description Web

of the listings) Club room, king size bed, includes breakfast

Rate Quotes, Regular Room, Montreal Hotel 350

300

Traditional, king size bed,

Rates

250 Toll Free 200

$375

June 30

Travel Agent $299

Web

Travel Agent

$339

$339 $409

$229 $409

$630

$630

$630

$630

$216

$229

$189

$189

$289

$269

$246

$246

$319

$269

$269

$450

$450

$450

Online Agent

150

but invisible. Not only is it likely that traveling colleagues will compare

100 20-May 26-May 2-Jun June,9 16-Jun 23-Jun 30-Jun

rates, the on-line reservation sites of

♦

The complexity of room offerings de-

350

For any given room type, there were a variety of different prices, some differen-

300

tiated by minor service offerings (e.g.

Rates

250 b Toll Free

200

Online Agent

150

breakfast) and some with no differentiation at all. In other words, a customer can buy the exact same room in the same

100 20-May 26-May

2-Jun

June,9 16-Jun 23-Jun 30-Jun

livered to consumers (on the web sites) and travel agents (through Sabre) made the task of tracking the prices over time all but impossible

♦

the hotels make these anomalies starkly evident:

Rate Quotes, Regular Room, Vancouver Hotel

Rates displayed on the internet site at any given time were beyond confusing – for instance, a room in a specific category showed the following options consistently over the tracking period

hotel on the same night, booked at the same time, via the same distribution channel at a variety of different rates.

While we did not collect this data for our study, the examples shown in Charts 3 and 4 illustrate the point.

Viewing such discrepancies can’t help but persuade buyers that hotel rate assignments do not reflect any of the attributes normally associated with price variance within a given brand:

Page 2

♦

Degree of quality

♦

Degree of scarceness

♦

Degree of added value

rates. Recent actions by hotels to highlight (and guarantee) lowest internet rates clearly help this situation, but would be difficult, if not impossible, to manage

In the absence of this logic, it is likely

under this structure.

that the buyer will see rates as, from a

♦

The relationship of rates between the

practical perspective, arbitrary. Consum-

three channels were consistent for

ers who believe they are faced with arbi-

each property, but not between prop-

trary pricing become defensive, driven by

erties

a concern they will be the recipients of the negative side of the scale. As a re-

♦

Rates ranged as much as $20 in Vancouver and $36 in Montreal

sult, they are likely to insist on the rate they believe is the best “deal”, or they

♦

In Vancouver Travel agent pricing

are likely to walk away. This behavior is

was consistently midway between on-

most apparent in the retail automotive

line and call-centre

industry resulting from an engrained belief that the dealer is trying to take ad-

♦

In Montreal Travel agents consistently quoted a lower rate than on-line or

vantage of them. However, given the

call centre rates, both of which were

perceived behavior of hotel brands it is

always equal

not out of the question that this industry will similarly evaluated.

This complexity is compounded by the fact that these rates do not necessarily change in the same proportion at each given point in time in all channels – the “discount”, therefore, at any given rate point, is different, depending not only on when you book, but also on which of the different rates for the room you select (see chart Vancouver on-line rate vari-

If there is any doubt that there is a systemic level of confusion that consumers must find hard to avoid, the following charts should put it to rest. Travel agents are likely to be as confused as their clients. Furthermore, given the ever increasing pressure applied by hotels on agent commissions, it is unlikely that travel agents are will act in the interests of the brand to clarify this confusion.

ances, next page) Rates quoted by travel agents for the

Travel Agent Rate Quote Variance Montreal Hotel Monday June 30, 2003

same room choices over the period did not vary at all. Thus the difference beies over time, increasing the confusion and leading to situations where, travel agent rates can be lower than internet

$400 Rates $(Cdn)

tween on-line and travel agent rates var-

$300 $200 $100 $0 12

2

5

3

Number of travel agents

7

11

Vancouver Hotel On-line Rate Variances, Traditional King Bed Room $500

$450

Rate $ (Cdn)

$400 Rate A

$350

Rate B Rate C

$300

Rack Rate

$250

$200

$150 May 20/03 May 26/03 June 2/03

♦

♦

June 9/03 June 16/03 June 23/03 June 30/03

The range of prices available through

categories for a hotel in Boston that

travel agents in the snapshot survey

travel agents are required to navigate be-

varied as much as $115 from the

fore reserving a room for their client. In

highest to the lowest for the same

addition, we have spot checked a number

room in the same hotel on the same

of major hotel chains and find little differ-

date

ence in the complexity and confusion cre-

In the case of one of the hotels, there was a roughly even dispersion of quotations between the lowest ($229) and highest ($344) [Chart xx]. Noticeably, however, this pattern was completely different for the second hotel, where agents were divided into two camps, one camp quoting $229 and the other $269.

While this tracking is by no means an exhaustive study of the industry, it is indicative of the real world out there. Subsequent to this project, we periodically came across similarly confusing situations that clearly support the findings – the examples in the box show the 28 rate

ated by their on-line reservation sites.

Section 2: Observations

ers and consolidators. This probably

The core of the study involved two hotels

makes the most sense for leisure

and one point in time. In addition we

travel, and would need to be more

looked at several other properties and

sensitive to demand in order to be

chains on different dates to clarify spe-

successful.

cific points and add a level of greater

Airlines (who do not necessarily represent

confidence. Nevertheless, we cannot, and

best practice players in this arena) use

do not, suggest that the results are nec-

the opposite approach – fares increase as

essarily indicative of anything other than

you get closer to the departure date. This

these specific properties and dates. That

is designed to capitalize on the low de-

said, it is worth pointing out, using these

mand elasticity among high-margin busi-

two examples, a few of the issues identi-

ness travelers. Increasingly business

fied that should be of interest to brand

travelers are demonstrating that this as-

development managers.

sumption is flawed, and that they can and

In all cases other than travel agent

will plan in advance if there is a savings.

quotes, buyers are penalized for booking

The declining rate pattern detected in

early; in other words, rates achieved are

these hotels works directly against this

lower than the initial rates put on the

trend.

market. If the system is working, we assume this indicates that demand is low at the beginning of the period, resulting in a lowering of prices to increase demand later on. If this is the case, it suggests one (or more) of the following things are happening in the marketplace:

♦

The expected price is too high, reflecting an unrealistic rate structure.

This notion is further supported by the fact that rack rates bear no resemblance to quoted rates

♦

The marketplace has become wise to the system and customers simply wait until the last moment before booking

♦

The object of the pricing system is to replicate the “last minute” travel discount model used by travel wholesal-

Section 3: Effect on the brand

value, emotional preferences, personal

For purposes of this discussion, we un-

What makes all this particularly compli-

derstand “brand” to mean the net under-

cated for hotel companies is the fact that,

standing of the franchise resulting from

while the consumer may have a particu-

all impressions of the trustmark and

larly strong image of the brand, when he

products – the brand is the words, pic-

or she is booking the hotel, they are

tures and emotional impressions that

thinking about an individual product that,

come to mind when a person hears or

for purposes of the specific stay in ques-

sees the name, logo or trustmark of the

tion, is quite far removed from the brand.

company.

In each case, based on the location, the

In order to crystallize this “brand image” consumers combine personal experience (functional and emotional) with a variety of accepted cues, such as advertising and promotion, price, recommendations, published information, etc. As the purchase process moves further from the product (such as the process of booking a hotel migrating from the hotel and brand reservation service or travel agent to online) these external cues play an increasingly important role in building the ultimate brand image.

For all practical purposes (using an extremely simplified model), the brand serves two purposes for the consumer: It clarifies the competitive landscape and it defines the value proposition and hence determines how much more or less the product is worth relative to other choices.

validation, etc) attributes

competitive set changes as does the absolute cost (a hotel room in San Francisco is more expensive than in Sacramento).

Therefore, consumers must build a unique value proposition for each property. This is why a clear, uncompromised brand promise from the master brand is essential – this is the only constant that the buyer can rely on when making the purchase decision. Failing the existence of a strong brand, or if the brand is called in question on the hotel site, the buyer will necessarily default to a non-brand environment – i.e. they will see the products in the category as commodities to be evaluated on price alone.

With this in mind, we will look at potential effects of the yield management system as experienced in the two hotels in the study.

The value proposition is an individual cal-

1.

culation in which each individual takes

Changing the rate for the same room on

into account how much he or she will pay

the same date for no apparent reason

for value received from both functional

questions the inherent value of the room.

(amenities, convenience, room size, loy-

This is amplified by the confusion of rates

alty programs, etc) and abstract (badge-

presented as options to the on-line cus-

Commoditization of the industry

tomer (as well as the travel agent cus-

will default to the lowest quoted rate (and

tomer). Finally, the disparity between the

hope they will receive a better room any-

actual rates offered and the “rack rate”

way). Ultimately this suppresses margins

lends a tone of absurdity to the process

and deflates the brand.

and leads consumers to question the sincerity of the product. In that this is seen

♦ 3. Collapsing the value proposition – eliminating pricing as a brand

as not being isolated to one particular brand, it is becoming the accepted norm in the category.

value cue Given that price is the most important value “cue”, changing prices must impact

In addition, the vast number of corporate

value propositions. This it does in two im-

programs delivering discounted rates to

portant ways:

many (if not most) of the business travelers in the franchise, further reinforces the notion of arbitrary pricing.

Any value system is predicated on a transparent relationship between price paid and product/service quality received. In the current situation, this is clearly not the case – in any given booking situation there are a myriad of inconsistent pricing relationships regardless of which channel the buyer chooses.

2. Commoditization of the property itself

♦

Different prices for the same room at the same time

The way in which rates are presented on the web-sites and through travel agents confuses the consumer, resulting in what we might call “value-proposition stasis”.

How can a customer be expected to develop a clear sense of the value that the experience will deliver when there are several prices available at the same time for the same room. Without having done any consumer investigation on the point, we can only assume that the smart con-

As long as the overall pricing structure is

sumer will default to the lowest price and

arbitrary, guests will become more and

build a value proposition on that rate.

more immune to any form of differentiation. Thus, after realizing that they can pay less for a superior room than a standard room depending on when they book or how well they read the rate quotes on the internet, they are likely to start believing that while the rooms might be different, there is limited real value in that difference.

This effect can be managed quite easily – showing only the lowest current rate, adding booking or payment restrictions or other terms or in some way differentiating and explaining each different rate.

This serves the purposes of evening out the effective value and allows the customer to understand the value of the experience at a higher rate, discounted for

The result would be that in the absence

some inconveniences. At the same time

of a lower quote for a better room, they

the full rate optionh must be provided (if,

for instance, the “justification” for a lower

clude that this is not the fairest price

rate is a 24hour cancellation penalty, a

for the room (hence not a fulfilling

rate must be available that does not have

value proposition

the penalty condition attached)

♦

Rates changing over time

If a guest builds a value proposition based on a $100 rate on day-one, what conclusions can he or she draw about the value when they see the rate has moved to $120 on day-two:

♦

Case 1: the reservation is confirmed: If the reservation was confirmed, there would be a feeling that I “got a deal”, which makes the guest feel good, but might build a brand impression that it is only of value when it is discounted. Following this, the guest will be loath to pay full price under any circumstances. If the purchase is deemed a good value at $100 it will be considered a lesser value at $120 (unless the guest understands this lower price to be a specific deal offered for specific reasons for a specified length of time) In this case, by moving the price up the value perception has decreased among those who did buy at the lower rate.

♦

Case 2: the buyer does not make the reservation In this case, the buyer is likely to try to ensure that there are no equivalent products available at the initial good value rate ($100) before returning reluctantly to make the reservation, and he or she is likely to con-

If the price goes down to $80, the same conclusions apply in reverse.

Section 5: The role of the internet Our hypothesis is that this situation would remain true even if the internet had not entered the marketplace. However, as in any marketplace, access to timely information plays an important role – in this case it serves to spot light the pricing aberrations and hence speeds

essary, consolidators. In this model an internet discount would be applicable, and it would be up to the hotel and timeframe if lower prices would be available on travel sites – if they are, however, they would need to be built into a value added package of some description or accompanied by real restrictions that qualify the discount.

up the process. Consumers are ever

♦

more concerned about their own savvy

Revise the execution of yield manage-

as consumers and will work hard to en-

ment systems. Starting with the core rate

sure their dollar delivers the best value.

structure, developing a rack rate that is

Section 6: Solutions

somehow believable vis a vis actual rates

Is this a train that has left the station, never to return, or are there actions hotel brands can take to minimize the effect and turn around the process? It is true many (if not most) hotel brands are on the train and it has left the station.

Those, such as Four Seasons who never hopped on the train, seem to be building solid brands that support higher margins based on attributes and experience,

Option 2:

paid by guests. Rates quoted at the outset should be low in order to reward advance booking, gradually increasing over time so that late bookers (in fact business travelers who can and will pay the higher prices) pay the full freight. Finally, whenever there are rate variances on the same page (i.e. multiple rates quoted on the web) clear, logical reasons must be presented for the different rates.

rather than the shaky territory that other

♦

brands are being forced into – price/

While not directly an alternative remedy,

value differentiation. That said, there

it is a prevention as well as cure: focus

may be some immediate remedies that

on building a strong, differentiated brand

can be applied to minimize (or turn

that is experienced at every touchpoint –

around) these effects of revenue man-

at the very least, experienced consis-

agement:

tently in every property.

♦

These are only a few of what must be

Option 1:

Option 3

Jettison the yield management system

many remedies available. Which is best

and sell rooms on a constant inventory

can be the subject of many debates;

basis, offering consistent rate structures

however, that there is a need among

based on room type and seasonality, and

many hotel brands to find a remedy is not

offering negotiated volume rates to bulk

open to debate.

purchasers, wholesalers and, when nec-

Protean Strategies is a Toronto based management consulting firm specializing in developing brand strategies and providing a full range of consumer research services. Since its inception in 1997, the firm has provided breakthrough strategies for leading Canadian and US brands, including General Motors, Fairmont Hotels, Canadian Tourism Commission, American Express, Dell Canada, Energizer Batteries, Unilever , Procter and Gamble, Allstate Insurance and advertising agency partners in Toronto, Calgary, New York City, Chicago , London, Amsterdam, Frankfurt and Shanghai.

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