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6 Steps to Profitable Hotel Rate Management.
The OFT (Office of Fair Trading) has announced an investigation into hotel portals for alleged price fixing. The complaint was initiated by Skoosh portal as it accused hotels and portals of price fixing – honestly never heard of them until now so I guess it’s not bad publicity! Despite the merits or demerits of this case, hotel prices defy logic and there is an absence of good business practice.
Let me put my cards on the table. My experience in hotel pricing comes from involvement with a hotel that I partially own and other hotels that we provide a marketing consulting service to, so you can argue that I have limited experience in this. However, I spend many years involved in pricing complex products for the global markets with thousands of components, multiple currencies, local price points, etc. Never in my life have I seen so much nonsense presented as science as in the hotel industry. .
Although we have seen some excellent results from hotel groups such as Intercontinental Hotels Group (helped by property disposal), the average return on capital deployed and net profit margins in the industry are simply terrible. Most large hotels are focused on Occupancy Rate, which pushes the rates down due to higher occupancy. The more enlightened hotels look at RevPAR (Revenue Per Available Room), which takes into account occupancy and revenue achieved from available inventory (rooms). Take it any way you want, these are very crude measurements and drive the wrong behaviors in frontline management, all of which decrease the return on capital deployed (the true measure of profit in any business).
Hotel industry is its own worst enemy, conditioning the traveling public to think “Buy late and get a bargain”, and then complain about return on investment and lack of profit. Portals like lastminute.com have become a byword for cheap travel and have actually entered our everyday language. You can now get a last minute deal on almost anything.
Hotel industry needs to take a leaf from the airline industry and their pricing and fare management practices. There are a number of similarities between the two business models:
- Seasonality – Hotels and Airlines have parallel seasonal highs and lows, with a famine-to-feast cash flow that makes the bravest entrepreneurs run for cover. This seasonality is the key in behavior and price in both industries but strangely manifests itself differently.
- Capital Intensive – Airlines and hotels are extremely capital hungry with high levels of capital invested in their infrastructure and inventories (aircraft/seats & bedrooms). This makes it even more imperative that the assets and inventories be deployed aggressively and as the old saying goes “make your capital sweat hard”. For airlines keeping ground time by plane to a minimum is the key to profitable deployment of capital and hotels try to chase the same goals by focusing on occupancy.
- High Fixed Cost Ratio – In both cases the operating cost consists of mostly fixed cost and small variable costs. Think about it, an airplane taking off from an airport has a loaded cost of fuel, crew, landing/takeoff, and rental/finance cost of the airplane regardless of how many passengers are on the plane. The same applies to a hotel, because regardless of how many rooms are sold, the cost of building, personnel, marketing, etc. are the largest part of the total cost, all of which are fixed.
- External Exhibition – The Icelandic volcano meltdown in April 2010 was a great reminder of the vulnerability of both industries to external events that are completely out of their control. The same applies to the severe winter of 2010, strikes by air traffic controllers, ground crews, etc. all of which affect both airliners and hotels.
Airline Pricing Model
Airlines have steadfastly maintained their basic principle of “Early Discount, Late Premium” pricing model. As consumers we have all accepted this basic premise and know that cheap flights are only available if we book early and we hesitate at our peril.
However, this simple principle is not a one-dimensional and asynchronous pricing model. Airline management prices take seat availability into account. Seats are divided into groups (Price Groups/Buckets) that have a fixed number of seats at a specific price and are made available for sale at predetermined intervals before departure dates. Simple you may say, but this is not the end of the story. Pricing algorithm takes into account “Sales rate” (number of reservations for a given period, e.g. per hour/day/week), “Search rate” (number of inquiries made for a specific flight per day/week), and available capacity. (number of seats left for sale). This decides whether a specific bucket of seats is open, closed or expanded, hence the variation you can find in prices when you check a flight over a period of days. Some have gone further by storing 30-day cookies in a visitor’s browsers so they can identify a returning browser and then make a decision whether to offer the same price as before or increase the price (the “You should have booked sooner” lesson!).
Hotel Pricing Model
This could be a simple one-liner that says ‘Hotels don’t have a pricing policy or logic model’, but I would then be inundated with emails full of RevPAR, Occupancy, Average Rates, etc. Well this is nonsense. Just because an industry has acronyms and measurable benchmarks, it does not follow that they have a system, insight or strategy nor does it mean that they are measuring the right things. Let me illustrate.
Hands up everyone who saw ‘Early Bird’ deals in January, then ‘Sale’ prices before Easter and ‘last minute’ bargains the week before you go on holiday. Then go to TripAdvisor and see all those portals advertising ‘Up to 70% off’. Does this sound like a strategy or a sell-as-much-as-you-can-at-any-price culture? So what happened to the Rack Rate?
Add to that my very favorite phenomena, namely the portals, which are supposed to sweep up excess capacity and increase occupancy. They are provided with a huge commission (up to 25%) and then receive a lower price than the Rack Rate (normally the same offers available on the hotel’s website). So where is the added value of the Portal? If they offer the same price as the hotel’s website (90% do) and take a large part of the commission, then what happens to the hotels RevPAR? Anyway, if this was supposed to be the explanation for excess capacity, why do they have rooms for sale in January or February for holidays in July or August? Hotels cannot possibly know their excess capacity 6 months before the start of the high season.
Just like Airlines measure Aircraft Utilization, we can talk about Occupancy, but no matter how high this figure is, it does not mean that we are generating any profit. Trademarks are useful for comparative analysis between two similar businesses, but they should not be confused with sound business practices and be treated as the Holly Grail. Business analysis is not a dogma, but a rational analysis of the activity that should show us the right direction to take our business.
What is the solution?
The solution is simple, just follow the airline industry.
- Have a clear understanding of you Flat point. Without this you cannot make a rational decision and all the benchmarks in the world will not help you make a profit.
- Offer your best available prices 6 months before arrival dates and as the dates get closer, raise the price to the Rack Entry.
- Do not create randomly selected discount packages. You shouldn’t discount just to increase your occupancy or meet these arbitrary and meaningless benchmarks.
- You should always consider other goals such as increasing your average stay, improving a traditionally poor period, etc. Increasing occupancy will appear as a secondary goal if your packages are well targeted.
- Review your bookings, availability and targets daily, which should then give you an indication of whether you should keep the low price or crank it up (airline Sell Rate concept).
- Under no circumstances offer a late booking discount unless it’s above your average stay (bet you didn’t pay attention to that one). Either way, you don’t have to offer your best prices to last-minute bargain hunters; you are only reaffirming habits that hotel industry would like to start.
Lastly, stick to your guns with Portals. 10% commission or nothing and use them to create traction for your hotel from market segments that are out of your reach, but do not make them more competitive than your own rates. Remember you agreed to equity not “the lowest ever possible rate!”
This strategy has worked and we can prove that hotels that use this strategy have increased their occupancy, RevPAR, and believe it or not Average Stay. Most importantly, the hotels we work with are all for-profit operations. You should think right; “If this is all, why are you publishing this for free?” You would be right as this is not all there is to it!! Contact us and see what we can do for your business.
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