The impact of flexible pricing on forecast accuracy
Published: 27 Nov 2008
Flexible pricing, flat rate, dynamic pricing ,and floating rates, all Revenue Management (RM) must begin with a scientific approach to developing a pricing strategy or all yielding will be done to inferior rates and less than optimum RM will be the result.
But before we go any further, let’s clarify the difference between a rate strategy and rates. A rate strategy is how a property positions its rates verses its competition and is most often expressed as a range of rates. Rates are within the rate strategy and are manipulated on a short term basis as demand dictates.
Let's examine what drives a hotel’s room rate strategies today. If we ask hoteliers, “How did you arrive at your current rate strategy?” we receive the following or similar answers:
“Our competition increased or decreased their rate by 5% so we did also.” So it is based on Competitive Pricing to raise the market share.
“Our costs increased by 5 % which might be renovation cost so we needed to increase our rates.”
So how scientific are the above answers? In the first case, a hotel would be following a competitor’s rate strategy regardless of how good or bad it may be. In the second case, the hotel is really doing nothing more than maintaining their profit margin or allowing cost to drive their pricing strategy. Another answer we sometimes receive is "demand determines our rates". If this is your answer, consider this. Demand really determines what rate you are quoting within your rate structure or strategy. The demand for your hotel will be determined by the attributes or features of your hotel and the appeal they have for a particular market segment traveler. If this is not true, then why does one hotel out-perform another in REVPAR? The answer is attributes, features or service. All of them create the demand for a hotel which in turn drives the rate which is quoted within the rate strategy.
Flexible pricing in the rapidly evolving Middle East hotel sector, will be a challenge for everyone especially for the next period where we have to know to whom we should apply this strategy. Flexible pricing might mean one price for all or flat rates, but are we over-Revenue Managing in our hotels? Are we making our rate strategies so complex, so they become impossible to manage effectively and efficiently, in another meaning should our price structures be simplified? In the end simplicity will increase conversion.
Flexible pricing will depending on which market and segment we are serving and before all of this we should know our hotel much better. Are we purely a corporate and business hotel, or purely leisure hotel, or in most cases are we mixed between both segments?
Some markets will do just fine by having two seasons, high and low, changing once or twice a year. Other markets and segments, like high transit, corporate, groups definitely will need another pricing strategy to get their share.
In flexible pricing could we eliminate the contracted corporate rate and just give 5%, 10% and 15% off based on yield (not just volume, but also taking in consideration stay pattern). Couldn't we simplify the public rate (racks and best available rates) structure? Flexible rates may be an interesting analysis to simulate a possible scenario but consumer choices are always changing, always looking for something different and human nature means that consumers are rarely satisfied!
Why are we so stuck in the way we are used to setting our prices? Can we think outside the box? Or are we controlled by something bigger than us or afraid of change? I am not advocating flat seasonal rates or dynamic or others. But why do we tend to have over 50 different rates in a hotel?Still it is not about how many prices you have or how you move then up and down, but how you get your prices to "attack" the right customer. RM is more than having 50 prices and moving them, this is the beauty of this fascinating discipline.
What we have to understand that we live in a permanent changing world especially in the current economic situation. Change is the only constant and permanent thing! Therefore RM & Distribution philosophy should go along with it and reflect diversity. RM is like a "mirror" that tells us to pay permanent attention on market, competition, trends, communication and technology changes.
Remember to have your action plan ready as back up for any sudden changes which happened. Be ready with added values in certain low seasons, great early booking discounts, 7 nights for 6 with prepayment. Combine this with added values and special offers, for tour operators, travel agents. An incentive plan might also help, as well as different commissions on accommodation, F&B, Spa, etc depending if there is prepayment or credit (30, 60 days), release & cancelation period, rappel discounts based on production in room nights on accommodation and on revenue in F&B, etc.
In general, in a big part of the world there is a slowdown and in the other part including Middle East there will be more pick up and demand, especially in the resort areas. While all hotels are subject to the same broad economic influences, each market and property is most directly affected by the supply and demand factors in their own back yards. Markets facing significant supply increases will likely experience a greater degree of stress than previously anticipated. Conversely, those with little to no supply increases underway can expect to weather the storm with less difficulty.
Facing the dilemma of short lead time which has an impact on your forecasting accuracy, I think having good historical data about your hotel, markets, area, and your competitors should help you a lot to solve this issue. Keep a record of daily data in terms of occupancy rates, ADR, and revPAR, keep notes for each day, to remember in the next month and years why you were have high or low figures. When you have a group, special event in the city, is it going to happen again? The same opportunity is also there for your competitors. Analysis of your daily pick up as well with a range of 1-3 month, will give you clear picture to position your hotel and your pricing strategy.
Be aware of each single movement in the market.
Having this in mind will divert you to your rate structure and pricing for next year, think what you will do for your accounts: increase XYZ of % for the rates for all, increase fix amount to all, or you could play with changing there position according to their category .
Think how this will impact in your occupancy and your potential accounts and think more about the below: -
The right price for the right market segment, with the right positioning strategy at the right channel. This definition differs a little from the pivot RM theory. If I depend 90% from corporate transient business from Monday to Thursday, I will make sure not to cannibalize this business by selling cheaper (with the same booking patterns).
Use of rate restrictions to build rate fences that protects one segment moving from one rate level to the other.
Price is not all. How can you differentiate and give more value then your competition? Would someone be willing to pay 5 $ extra because you offer more value? Some revenue managers need to learn the concept of "value".
The price you sell at is not what your clients will buy, if you have the right pricing strategy you may position your hotel $5 cheaper then your main competitor but sell $5 in the end more expensive (Up-selling, Merchandising techniques, etc... this is called "Surrounding pricing strategy")
Develop a pricing & positioning strategy first and then use tactical techniques
Just keep in mind, the right product price is the price the consumer is willing to pay, whilst providing a profit to the retailer. And this will take you back to the RM pivot, selling the right product to the right customer at the right time to the right customer through the right channels
This article has been written by Ahmed Mahmoud, Revenue Management at Starwood Hotels and Resorts and owner of www.revenueyourhotel.com in conjunction with EyeforTravel. The article summaries the topics and issues that will be explored at EyeforTravel’s Hotel Revenue Management and Pricing Middle East conference which takes place on 15-16th December in Abu Dhabi.
For complete information please go to www.eyefortravel.com/rmme or email tom@eyefortravel.com and make sure you request information about the special rates we are offering for hotel delegates.
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