IN-DEPTH: Among all the developments from the recent past, the ones related to price-sensitivity modelling are probably the most significant in re-defining revenue management (RM), says Pieter Dorhout, Founder, Pieter Dorhout Consulting

Published: 22 Sep 2011

IN-DEPTH: Among all the developments from the recent past, the ones related to price-sensitivity modelling are probably the most significant in re-defining revenue management (RM), says Pieter Dorhout, Founder, Pieter Dorhout Consulting

By Ritesh Gupta

The hotel industry has witnessed the emergence of price optimisation tools that incorporate real-time competitive rates with a hotel’s demand and booking patterns to recommend the best price.

Overall, the industry is focusing more on price elasticity and price optimisation as part of its overall revenue management strategy.

Referring to developments pertaining to price-sensitivity modelling, Pieter Dorhout, Founder, Pieter Dorhout Consulting says rather than accepting demand as it materialises, RM now aims to influence demand to materialise in a profitable way.

“Or in sports terms: RM is evolving from being a neutral, passive referee to becoming an active player in the market,” Dorhout told EyeforTravel’s Ritesh Gupta in an interview.

“This has profound implications for the RM algorithms, processes and people. There are great examples of companies who have taken on the related challenges and reaped rich rewards. However, as with most investments, a higher return is usually accompanied by a higher risk. In this case, the appetite for sophistication needs to be balanced against the ability to deal with complexity, and getting this balance wrong can be extremely painful,” shared Dorhout, who is scheduled to speak at the forthcoming Revenue, Yield & Pricing for Travel Europe 2011 Conference, to be held in Prague (29-30 November) this year.

Dorhout spoke about the significance of RM in the travel sector, pricing and segmentation practices, deals/ discounting, and other relevant issues. Excerpts:

How do you assess the significance of revenue management in the travel sector in today’s business environment?

Pieter Dorhout:

It’s a shame that the phrase ‘change is the only constant factor’ has become such a cliché, because it has actually never been more true than today. In this context, revenue management can help travel operators adapt very quickly to changing market conditions. In fact, sophisticated players will automatically adapt their presence in the market: when demand is falling short, incremental cost become the relevant benchmark for pricing, but when (or where) demand is soaring, opportunity costs become the price threshold. In other words, especially in these uncertain times, RM is crucial to the core business of every travel company: making profit.

What do you think travel professionals can learn from RM specialists in the other sectors?

Pieter Dorhout:

Lots! Although universities now offer modules in RM, and lots of mathematical research is carried out, it is still fair to say that most RM practitioners have followed the learning-by-doing path. As a result, RM practice is very much defined at the industry level, and there is relatively little cross-pollination across industries. I now offer a RM Concepts training course, which takes a step back from day-to-day practice, in order to explore the underlying conceptual principles. This will not only deepen the revenue manager’s understanding of his own job, but will also make it easier to learn from RM application and RM trends in other environments.

Revenue management in hotels is constantly evaluating several issues at this juncture - dynamically measuring the responsiveness of guests to price changes, RM tools and ancillary revenue streams, and automated systems. How do you assess the future of RM in this industry?

Pieter Dorhout:

You are right: RM is evolving into many directions at the same time. In the past, it was mainly recommending which products (especially length-of-stay) should be closed, and to do that, a reliable demand forecast was required. Now, lots of developments – some of which you name – aim to extend the RM footprint as well as increase its sophistication. I think this will have two main implications:

• RM will become less clearly defined, and RM practitioners will have to invest more time and effort in liaising with other disciplines, especially marketing;

• It will be harder to keep an eye on the big picture: the more ambitious the RM department and RM system become, the harder it will be to know that every single commercial decision contributes to overall profitability, i.e. to carry out RM’s main task. Keeping profitability as the guiding principle for all these new initiatives will require vision and discipline.

How do hotel operators need to look at their existing pricing and segmentation practices in order to gain optimal results?

Pieter Dorhout:

It is important to distinguish between market segmentation and channel management. Distribution has effectively become a commodity, and the low barrier to entry has resulted in a wealth of economically viable channels. For the operator, it is now neither effective nor efficient to put significant effort into managing individual channels, and rate parity is a generally sensible outcome. However, that does not mean that market segmentation has lost its profit-generating power. For example, it would be tempting to say that network airlines will soon adopt the low-cost airlines’ one-way pricing practice. And some already have. But I know for a fact that the ability to distinguish between leisure and business demand by means of duration is still extremely valuable for other airlines. For hotels, I think the message is: don’t throw the baby out with the bath water; rate parity across channels is fine, but commoditisation of your product probably isn’t.

It seems there is an appetite from consumers to always lap up special deals, discounts and special offers. What do you recommend to hotels considering that so many options for flash sale initiatives are now available?

Pieter Dorhout:

Make sure you keep an eye on the big picture: if you can’t see the wood for the trees then you can rest assured you’ve lost the plot! Secondly, bear in mind that treating distribution channels differently is costly, and if you believe that distribution is now more or less a commodity – as I do – it is probably more beneficial to focus on decision variables that you do fully control. Just as an example, rather than working out which channel is best suited for an exclusive, limited-distribution deep discount, you could use the same energy to talk to local restaurants, theatres, parking garages, museums and/or shops to create an attractive package for general distribution.

Hoteliers are looking at the total worth of the customer and not just the amount they spend on the room. This is where CRM and Revenue Management will merge. How do you see the maturity level of the same?

Pieter Dorhout:

I will present my views on this at the Prague conference.

In short, I think there is still a long way to go, and – perhaps more worryingly – the road to go is not necessarily the road we’re going… I’m not a great fan of unnecessary complexity. In merging CRM and RM, it seems logical to treat every (loyal) customer as a micro-market segment and/or to try and optimise life-time value. Doing this will certainly keep the theorists ahead of the real world for many conferences to come…But again, I’m concerned about our ability to ensure that all the related decisions do indeed contribute to overall profits. Personally, I’d recommend to develop a joint, coherent vision for CRM and RM, but to give up some detail and algorithmic ambition, so that it can actually be implemented without too much risk. I’m looking forward to discussing this with people with a different view!

Can you provide an insight into initiatives being taken by the industry to maximise profits by accurately forecasting demand by segment, and setting price and availability restrictions to ensure access for the most valuable customers?

Pieter Dorhout:

The question contains an accurate definition of what RM has always been about. In fact, in times of economic turmoil, the trend can go in the opposite direction: as high-value business demand becomes more erratic and also more likely to materialise as bookings for lower-value products, holding out for the big bucks may look like a risky strategy. Similarly, new industries wishing to adopt RM should consider very carefully if they serve any late-booking high-value demand at all. For example, tour operating doesn’t really have that kind of demand, and that changes fundamentally the context for applying RM (practices or systems). The airline industry is often the pinnacle of RM sophistication, but following them too slavishly is not a good idea.