Revenue management systems can no longer cope with changed market conditions

Earlier this week, I wrote about why today’s revenue management systems just aren’t working anymore.  I detailed three areas which have caused the problem: changing market conditions, outdated analytics, and a user experience that no longer meets the needs of the evolving revenue management function. In this post, I’ll go into more details about the conditions in the market today that have fundamentally changed the pricing problem, and talk about why today’s revenue management systems can no longer cope.  

Market Changes

Most would agree, the market has fundamentally changed since revenue management was introduced to hospitality.  Online Travel Agents (OTAs), price transparency, social media and flash sales have created a market that is more complex, more dynamic and creates more data than ever before.  Consumers have easy access to price and value information, which means more pressure to understand and factor in competitive dynamics.  The growth in mobile bookings, although still a very small portion of demand at this point, is shortening booking windows.  Disruptive events like economic conditions and catastrophic weather events have shaken consumer confidence.  All of this activity means the past is no longer the best predictor of the future.   

Today’s revenue management systems have been unable to cope with these changing market conditions primarily because the airline model they were largely based on assumes that prices are relatively stable, so availability for different prices could be controlled without impacting demand.  These systems were built on the premise that pre-determined rates could be open and closed based on expected demand levels (Alex talked about this in his blog a couple of weeks ago, and he’ll talk more about it next week – stay tuned for the outdated analytics blog).  Clearly, this is no longer the case.  With the advent of OTAs, social media and search, consumers have easy access to price and value information, which means more pressure on hotels to understand competitive dynamics. 

Competitive Pricing

In fact, a huge weakness in today’s revenue management systems is that they were never designed to handle competitive pricing pressures.  The advent of the OTAs in the late 90s transformed the booking process.  Consumers suddenly had full access to all of the rates in the market in one place.  This access to competitive price information fundamentally changed how revenue managers priced.  Or it least it should have.  Since revenue management systems were not built originally to account for competitive price pressures, this functionality had to be built onto the systems after the fact.  Therefore, today’s revenue management systems, if they consider competitor rates at all, typically rely on business rules or provide an adjustment to the recommended rate post-optimization to account for relative competitive positioning.  All of these methods are primarily user driven, rather than analytically driven, so they result in sub-optimal competitive strategies (and a good deal of stress on the part of revenue managers who must manually account for the complex pricing actions of their competitors). “Follow the leader” may be fun on the playground, but it isn’t a sustainable pricing strategy.

Mobile + the Economy = Shorter booking windows

While mobile bookings do not yet represent a significant percentage of demand, the number of bookings made on a mobile device has been growing steadily over the past few years.  The vast majority of mobile bookings are short term – even as close as the day of arrival. When booking windows are this short, there is much less room to adjust pricing strategies based on the flow of demand. 

Even setting aside the growth of mobile bookings, booking windows have been getting shorter over the last few years, particularly since the recent recession.  The economic conditions put more pressure on hotels to offer deals to drive business.  Flash and social sales came on the scene.  As a result of this activity designed to drive bookings, consumers were trained to wait, expecting hotels to offer better deals closer to bookings.  Recent demand increases are beginning to demonstrate to consumers that the room won’t always be there when they want it.  We may be able to “re-train” consumers away from this behavior.  However, the lasting effect of all of this is that consumers are waiting longer to book. 

The forecasting algorithms in today’s revenue management systems were not designed to handle these conditions, since they were developed in a more stable market.  These systems typically use one forecasting method to suit all forecasts, and can take time to learn and react to changing market conditions.  In a highly competitive and quickly changing market, revenue managers cannot afford to wait for the system to keep up.

All of these factors have caused shifts in consumer behavior that have “broken” the assumptions that today’s revenue management systems were built on.  The algorithms needed to cope with current market conditions are very different than the ones that most revenue management systems rely on. Next week Alex will talk about how the analytics in today’s revenue management systems have become outdated and the impact that is having on pricing recommendations.

tags: Hospitality Analytics, Revenue Management and Price Optimization

One Trackback

  1. By Why Revenue Management needs big analytics on October 17, 2012 at 4:15 pm

    [...] forecasting is often a major weakness in traditional revenue management approaches.  Dealing with all of the market changes we’ve been discussing requires more detailed forecasting, incorporating all relevant factors such as room type, market [...]

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