Hotels and airlines have traditionally optimized revenues by forecasting demand against a pre-set rate structure, and offering rates (or opening and closing fare classes) based on predicted demand levels. While inventory allocation, along with overbooking and length of stay controls, has resulted in revenue increases, executives have not always stopped to question whether the rate plans or fare structures were optimal to begin with.
Even if customers would have paid only a few dollars more than the rate they were offered, money is still being left on the table. The success of inventory-based revenue management has lead some forward-thinking revenue management professionals to question the basic assumption of the “rate plan.”
When developing rate plans, managers may take a quick survey of competition, look at seasonality and evaluate some demand patterns, but in general, they rarely leverage advanced analytics to gain a true picture of customer willingness to pay. Too often, rate plans are developed based on gut instinct or adjustments to previous year’s rate plans. Then these pre-established rate plans become the basis for every pricing decision the hotel makes, including best available rate, OTA pricing, promotional discounting, group rates and contracted rates.
Rate optimization is the crucial next step in moving from inventory optimization to price optimization. Advanced bookings (and legacy reservation systems which can only accept pricing in certain formats) require hotels to pre-set rate schedules and offer these rates (or not) as demand dictates. Wholesalers, tour operators, meeting planners and leisure travelers all want you to commit to some schedule of rates so they can evaluate your hotel against others in making booking decisions. Rate optimization helps the hotel to develop these pre-set rate plans by taking into account demand patterns at your hotel, competitor pricing, seasonality, market mix and shopping behavior. You can truly understand how much more customers would pay for an upgraded room compared to a standard room, and put a value on the differences in location, service level and amenities between your property and your competitors. Your published rate plans are now more intelligent because they are based on analytics rather than gut feel or rules of thumb.
Rate optimization would probably not have saved hotels from the price wars that are happening during this current economic crisis. Major economic or social events change market behavior, change the conditions under which rates were optimized to begin with. However, as the economy stabilizes and business travel and groups return to prior levels, I believe that rate optimization will keep intelligent hotels from being dragged into constant price wars with their less analytically-savvy competitors.
Starting with the right set of rate plans, based on market characteristics and willingness to pay will give hotels a leg up on the competition. It represents the next big advance in revenue management, meaning the next opportunity for incremental revenue growth.
3 Comments
It's good thought, but I am afraid any system that takes "..competitor pricing, seasonality, market mix and shopping behavior" into account when setting prices will make prices wars worse, not better. Once discounting starts in a true downturn it has a snowballing effect and the more information about negative pricing trends will be fed into a system, the more that information would lead that system to price downwards as well, no?
Markus,
Thanks for the comment. Keep in mind that this rate rationalization exersize happens once a year, not on a systematic basis like pricing through a revenue management system. Rate rationalization happens first, then those rates are configured in the RMS and PMS. You need to take competitor rates, seasonality, market mix and shopping behavior into account when setting the rate plans because these elements help to determine how customers value the elements of your property. As I state in the article, and as you suggest, rate rationalization would not have saved companies during the current downturn because the rate plans were set under different market conditions.
I like the "apples to apples" comparison theory. Up until recently I was a Director of Operations and support for an economy brand and it scared me to see how much ADR, as a result of the "knee jerk reaction" rate management, had dwindled from mid 08 until now. All brands (economy through luxury tier) alike have significantly decrease rates to optimize occupancy index. Truth of the matter is, and you bring it up in your article, that you have to know what your guests want and are willing to pay, what the market will bear and more importantly if your rates are in line with your comp set. You can be price sensitive but if you're an apple you need to compare yourself to other apples.
Great article Kelly.