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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 the Skoosh portal because it accused hotels and portals of price fixing – honestly, I’ve never heard of them before, so I guess it’s not a bad advertising trick! Regardless of the merits or demerits of this case, hotel pricing defies logic and lacks good business practice.
Let me put my cards on the table. My hotel pricing experience comes from working with a hotel that I partially own and other hotels that we provide marketing consulting services to, so you could argue that I have limited experience in this. However, I have spent many years involved in pricing complex products for global markets with thousands of components, multiple currencies, local price points, etc. I have never seen so much nonsense presented as science in my life as in the hotel industry.
While we have seen some great results from hotel groups such as Intercontinental Hotels Group (helped by asset sales), the average return on invested capital and net profit margins in the industry are simply terrible. Most large hotels are focused on Occupancy Rate, which pushes rates down for higher occupancy. More developed hotels look at RevPAR (revenue per available room), which takes into account occupancy and revenue generated from available inventory (rooms). Take it however you will, these are very rough measurements and encourage the wrong behavior at the forefront of management, all of which reduce the return on invested capital (the true measure of profitability in any business).
The hotel industry is its own worst enemy because it has conditioned travelers to think “Buy late and get a bargain” and then complain about ROI and lack of profitability. Portals such as lastminute.com have become synonymous with cheap travel and have actually entered our everyday language. Now you can get a last minute deal on almost anything.
The hotel industry needs to look at the airline industry and their pricing and fare management practices. There are numerous similarities between these two business models:
- Seasonality – Hotels and airlines have parallel seasonal ups and downs, with the flow of cash from famine to feast forcing the bravest entrepreneurs to seek cover. This seasonality is central to behavior and pricing in both industries, but it manifests itself strangely differently.
- Capital intensive – Airlines and hotels are extremely capital hungry with high levels of capital invested in their infrastructure and inventory (aircraft/seats and bedrooms). This makes it even more imperative that assets and stocks should be aggressively deployed and, as the old saying goes, “let your capital sweat.” For airlines, minimum ground time per aircraft is critical to cost-effective deployment of capital, and hotels are trying to achieve the same goals by focusing on occupancy.
- High fixed cost ratio – In both cases, the operating cost consists mainly of fixed costs and small variable costs. Think about it, an airplane taking off from an airport has huge costs of fuel, crew, landing/takeoff slots and the cost of leasing/financing the aircraft regardless of how many passengers are on board. The same is true for a hotel, because regardless of how many rooms are sold, the costs of construction, staff, marketing, etc. make up the largest part of the total costs, which are all fixed.
- External exposure – The Iceland volcano fiasco in April 2010 was a great reminder of the vulnerability of both industries to external events completely beyond their control. The same applies to the harsh winter of 2010, strikes by air traffic controllers, ground crews, etc., which all affect both planes and hotels.
Airline Pricing Model
The airlines have firmly maintained their basic tenet of the “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 hesitate at our own peril.
However, this simple principle is not a one-dimensional and asynchronous pricing model. Airline fare management tools take seat availability into account. Seats are divided into groups (price classes/groups) that have a certain number of seats at a certain price and are available for sale at predetermined intervals before the departure date. Simple, you may say, but this is not the end of the story. The pricing algorithm takes into account ‘Sell Rate’ (number of bookings per given period, eg per hour/per day/week), ‘Search Rate’ (number of inquiries for a specific flight per day/week) and available capacity (number of remaining places for sale). This decides whether a particular group of seats will open, close or increase, so you may find price variations when checking a flight over a period of several days. Some have gone further by storing 30-day cookies in visitors’ browsers so that they can identify a returning browser and then make a decision whether to offer the same price as before or increase the price (“You should have booked earlier” lesson !).
Hotel price model
This could have been a simple one-line text saying ‘Hotels don’t have a pricing policy or logic model’, but then I’d be inundated with emails full of RevPARs, occupancy, average rates, etc. Well, this is nonsense. Just because an industry has acronyms and measurable benchmarks, doesn’t mean they have a system, understanding, or strategy, nor does it mean they’re measuring the right things. Let me illustrate.
Hands up all those who saw the “Early Booking” offers in January, then the “Special” prices before Easter and the “last minute” specials a week before going on vacation. Then go to TripAdvisor and look at all those portals that advertise ‘Up to 70% off’. Does this sound like a sell-as-much-at-any-cost strategy or culture? So what happened to Rack Rate?
Add to this my favorite phenomenon, namely the portals, which should clean up the excess capacity and increase the occupancy rate. They get a huge commission (up to 25%) and then get a lower rate than the Rack Rate (usually the same deals are available on the hotel website). So, where is the added value of the Portal? If they offer the same price as the hotel website (90% do) and take a large portion of the commission, then what happens to the hotel’s RevPAR? Anyway, if this was supposed to be an overcapacity house, 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 main season.
Just like airlines measure aircraft utilization, we can talk about occupancy, but no matter how high that number is, it doesn’t mean we’re making any profit. Benchmarks are useful for comparative analysis between two similar companies, but they should not be confused with good business practice and treated as the Holy Grail. Business analysis is not a dogma, but a rational performance analysis that should show us in which direction we can take our business.
What is the solution?
The solution is simple, just follow the airline industry.
- Have a clear understanding of your break-even point. Without it, you cannot make a rational decision and all the world’s benchmarks will not help you make a profit.
- Offer your best available rates 6 months before your arrival date and as the dates get closer increase the price according to the Rack Rate.
- Do not create random discount packages. You shouldn’t compromise just to increase your occupancy or meet these arbitrary and meaningless benchmarks.
- You should always consider other goals such as increasing the average stay, improving a traditionally poor period, etc. Increasing occupancy will be a secondary goal if your packages are well targeted.
- Review your bookings, availability and targets on a daily basis, which should then give you an indication of whether you should keep the price low or raise it (airline sale price concept).
- Under no circumstances do you offer a late booking discount unless it exceeds your average stay (I bet you didn’t look into that). In any case, you shouldn’t offer your best prices to bargain hunters at the last minute; you are only confirming habits that the hotel industry would love to start.
Lastly, stick to your guns with portals. 10% commission or nothing and use them to attract your hotel from market segments that are out of your reach, but don’t make them more competitive than your own rates. Remember you agreed to parity, not the “lowest possible rate!”
This strategy has worked and we can show that hotels using this strategy have increased their occupancy, RevPAR and believe it or not average length of stay. Most importantly, all the hotels we work with are profitable operations. You should think right; “If this is all there is to it why are you posting this for free?” You would be right, because this is not all!! Contact us and see what we can do for your business.
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