Does your pricing strategy measure up?

Online Bookings: Does Your Pricing Strategy Measure Up?
By Jean Francois Mourier, Founder & CEO, RevPar Guru Inc.
It seems like yesterday that a hotel's overall pricing strategy had to take into account two (or, at the most, three) relatively straightforward sales channels: direct, travel agents, and, in the case of larger chains, a global distribution system (GDS). With limited options for inventory distribution, pricing and forecasting were also limited. Travel agents needed published rates many months in advance, as did the advertisements that drove direct sales. GDSs had (and have) a bit more latitude- by aggregating room inventory across an entire chain or franchise network, occupancy-based pricing is more feasible- but GDS rate changes are still made in days, not hours or minutes.
Then, of course, the internet showed up. And just as it changed all of our lives, the rise of the online marketplace marked a fundamental shift in the way hotels sold their rooms.
Hotels are now faced with a myriad of sales channels. Add online travel agencies (OTAs) to flesh-and-blood agents, an individual hotel website to the direct channel (which was dominated by phone bookings, pre-internet) and third-party room aggregators to global distribution systems, and you have a daunting range of available avenues for room sales.
Today, the unquestioned growth leader among these channels is online. More than 44% of all room sales are completed online, a figure which is expected to grow to 57% next year. The online market for hotels is projected to exceed $65 billion in the US by 2010. Clearly, the current size and future potential of this channel demands an innovative pricing strategy to match it. Yet many hotels, while embracing certain aspects of the online revolution, nonetheless maintain a traditional pricing structure.
Why is this? The short answer is, because traditional pricing has always worked. Hotels have always employed smart men and women to determine the equilibrium between what a guest is willing to pay and what a room is worth, and to achieve the fine balance of occupancy, rate and operating margin that results in positive revenue per available room (revPAR). Complex formulas have been conceptualized and implemented to govern these variables, and courses at hotel schools from Ithaca to Las Vegas are dedicated to developing sound strategies for hotel profitability.
But the game has changed. The online marketplace moves at the speed of electrons and revenue managers need a sophisticated and fully automated system that will help keep up with the pace and update the rates continuously, in real-time. The most elegant calculus can't predict the permutations of occupancy from three months out. And as the current market has (painfully) reminded us, the only constant is change.
The only solution for optimizing both revPAR and occupancy is a comprehensive revenue management system that features automation and real-time updates, and leverages the tremendous information transparency currently available in the internet age. Considering all of that, how does your pricing strategy measure up?
Reactive vs Proactive
Traditional pricing is, at its core, only reactive. It's a reaction to historical norms, to forecasted occupancy rates, to seasonal changes and to perceived changes in the marketplace. Of course, all pricing methodologies share these characteristics; they are inarguably useful, and integral to any pricing process. But traditional pricing does not use all of the information available. At the end of the day, it cannot marry the proactive and reactive characteristics necessary to optimize both revPAR and occupancy.
Room rates determine, in large part, the very top line of a hotel's p&l. Maintaining the appropriate rate is paramount to sustainable financial success. Too often, particularly in a challenging environment such as the one we're in right now, a traditional pricing strategy will react to soft demand with deep discounting in an effort to increase occupancy rates... but this is a purely reactive action. Instead, hotels should build the right kind of reactionary action into a proactive plan. This may sound like doublespeak, but a system that reacts to moment-by-moment changes in demand and occupancy levels, as a dynamic pricing system does, is, in fact, more proactive than a 'manual' system that reacts after the fact.
Historical pricing is history
Basing rates on occupancy levels from last year (or last quarter, or last season) is a time honored technique, but one that in inherently limited in its scope. If the current economic situation has taught us anything, it's that year-to-year projections can easily be undercut by unforeseen events. To use an extreme example from a particularly hard-hit market, the Baltimore Convention Center Hilton had initially projected a revPAR of $112.57 in 2008; the actual figure came in at $68.46. This shortcoming is not limited to large-scale crises either. In boom times, hotels that relied exclusively on data from the year prior probably sold their rooms slightly short, missing out on a crucial revenue bump their competitors might have capitalized on.
Historical or seasonal rate setting- by itself- is dangerously myopic. Instead, these techniques should be integrated into a comprehensive pricing strategy, one that leverages the strengths of the online channel rather than functioning despite the rapid changes facilitated by online sales. The place for historical and seasonal rate setting is in establishing a baseline, not governing the pricing strategy altogether.
What is dynamic pricing?
Dynamic pricing provides the answer to the occupancy vs profit margin dilemma by allocating price points to the demand in real time; in other words, balancing what the market wants with what it's willing to pay. It's a tool by which hoteliers can reach a natural equilibrium point in their given market and also within each individual booking transaction.
In terms of hotel rooms, which are inherently perishable, achieving this equilibrium is critical for hotels to remain profitable (or even surviving) in a demand-depressed economy. Good revenue management systems use information transparency- the relative ease with which pricing data is obtained from hotels in a client's competitive set along with demand data from multiple sales channels- to optimize pricing on a moment-by-moment basis.
Dynamic pricing isn't new, but it's been updated to reflect the speed of consumer's purchasing decisions. Automated pricing programs and revenue management systems allow hotels to manage multiple sales channels more efficiently. This allows consumers a wider array of pricing options, effectively passing the savings onto the consumer.
Managing multiple sales channels
With an intense focus on the online channel, which, as trends suggest, is absolutely necessary, other sales channels can fall by the wayside. This is not acceptable. A good revenue management system must be integrated into all sales channels, and, ideally, into all major systems in a hotel. What good is an RMS that cannot take into account room sales made by live travel agents, or reservations taken via phone through an in-house department? (On another note, how useful is an RMS that can't communicate with a property operation and management (POM) system? But that's for another story.) A solid pricing strategy or RMS must be able to consider all of the applicable sale channels, and translate the information gleaned from them into real-time pricing updates.
Pricing strategies in an online-dominated, demand-depressed operating environment must be innovative, up-to-date, and extraordinarily effective. They cannot be based on antiquated practices- though they can, and should, incorporate the best aspects of traditional pricing tactics- and they cannot be limited by lack of automation. The best way to achieve a strong pricing strategy in today's market is to utilize a robust, comprehensive revenue management system.
Jean Francois Mourier arrived in South Florida in 2003 after a career in Europe as a trader, financial analyst and director for a number of firms including Merrill Lynch and ING Barings. He joined a small Miami Beach hotel management firm as a financial analyst. he revamped the company’s revenue management methods, with dramatic results. In 2007, along with his colleague Bruno Perez, Mourier founded RevPar Guru to provide the Yield Dynamic Price Engine, an integrated revenue management and pricing solution, to others in the hospitality industry. Mr. Mourier can be contacted at 786-478-3500 or clientservices@revparguru.com