IN-DEPTH: There is a need to make efforts to get rid of “static” rates for all segments and move to dynamic pricing across the board, says Maunik Thacker, Vice President - Revenue Optimization, Marina Bay Sands

Published: 13 Sep 2011

IN-DEPTH: There is a need to make efforts to get rid of “static” rates for all segments and move to dynamic pricing across the board, says Maunik Thacker, Vice President - Revenue Optimization, Marina Bay Sands

By Ritesh Gupta

Hotel operators are advised to adopt a pricing and revenue management approach that can help predict how customers will respond to changes in price. By leveraging advanced technology such as price sensitive revenue management, hotels can efficiently adapt to demand, current capacity and other market factors.

Also, the convergence of traditional distribution channels and online channels has resulted in extensive price transparency, leading to the collapse of channel-based segmentation.

As far as customers are concerned, it is imperative to recognise that all customers are not created equal. “Transactional” RM does not always maximise results when certain customers have a high long-term value to your company. Hotels need to leverage all available data about an individual customer’s lifetime value based on previous purchases and other information supplied voluntarily. One can also deliver customised prices and products across a broad range of distribution channels and points-of-contact.

Commenting on how hotel operators need to look at their existing pricing and segmentation practices in order to gain optimal results, Maunik Thacker, Vice President - Revenue Optimization, Marina Bay Sands, says one has to make sure that all segments are priced based on the current demand-supply situation which will yield optimal results from all segments.

“And we also need to ensure that pricing for each segment and each customer in each segment, reflects 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,” said Thacker, who is scheduled to speak at the forthcoming EyeforTravel’s Travel Distribution Summit India 2011, to be held in Mumbai (12-13 October) this year.

Thacker spoke to EyeforTravel’s Ritesh Gupta in detail about the critical RM issues, working on the best mix of distribution channels, price discounting and lot more. Excerpts:

Can you elaborate on some of the critical issues which RM has had to face in the recent past and how do you think the industry needs to gear up for the same in the time to come?

Maunik Thacker:

The obvious RM issues relate to the downturn during the financial crisis and the subsequent upswing. Recently, uncertainty in the financial markets has increased again following the downgrading of the US debt. During such times, it seems we still have not learnt the dangers of price cuts. Numerous studies have demonstrated that this is the least profitable strategy for the long term. Yes, it may yield short term gains, but certainly does more damage in the long term. This seems to be a challenge for revenue managers who have to manage the short term pressures from owners, etc… Finding the right balance still remains a challenge and one needs to be smart in how they drive tactical promotions. Hopefully, the recent past has taught us well. Another issue is the distribution problem. Finding the best mix of distribution channels... It is very easy to give inventory away to 3rd parties, but that only reduces your yield per room night. Hence, not only is it important to set up the right balance, but it is even more important to constantly tweak the mix.

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

Maunik Thacker:

I think the spread between various segments needs to be reduced. Too often we see prices for some segments being much lower than other segments. This results in shifting business from one segment to another. Moreover, some segments still benefit from a “fixed” year round price. This is against the basic principle of pricing… Rates need to reflect the current demand-supply relationship as we all know. And we also know that this dynamic changes constantly. Therefore, so should the price! Unfortunately, that is not always the case and hence, I believe we need to make efforts to get rid of “static” rates for all segments and move to dynamic pricing across the board. This will ensure that all segments are priced based on the current demand-supply situation which will yield optimal results from all segments. And we also need to ensure that pricing for each segment and each customer in each segment, reflects 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.

What do you think are going to be the key issues which RM managers need to focus on going forward – would it be customer rate resistance, contract renegotiations, competition or price wars?

Maunik Thacker:

The most important issue is going to be choosing the right customers that will drive maximum profitability for the organisation, both short term as well as long term. This means having a very well thought out strategy covering all segments of the business and then being able to execute this effectively. So if I look at the options you mentioned, I think it is all of them. The underlying principle is always and will always be a strong strategy based on the highest customer value.

Across-the-board discounting and deep rate cuts may be appropriate for the very short term, but keeping rates artificially low for a protracted period of time simply robs ADR in the service of occupancy. How should one approach discounting at this juncture?

Maunik Thacker:

This is one of the challenges our industry faces and hopefully we have learnt from the recent past. Clearly, across the board discounting is not the right approach. Instead, it should be tactical in nature, over short periods of time and must be targeted, i.e. very well fenced and to closed user groups rather than being open to all. And as much as possible, mask the real room rate… Add value, create packages, etc. However, I would much rather play with distribution channels first before discounting.

Experts believe that the way hotel companies deal with price discounting is an evidence of how mature their RM strategies are and probably also a fair indication of whether or not RM is part of their organisational culture. How do you assess the situation from RM perspective today?

Maunik Thacker:

I do see some companies having realised that price discounting does not necessarily work. Hence, they are now staying away from it as much as possible. That in itself is a maturation of the RM culture in that organisation.

It seems there is an appetite from consumers to always lap up special deals, discounts and special offers. But do you think hotels are in danger of falling into a trap of working with everybody and having discounts all over the place? What do you recommend to hotels considering that so many options for flash sale initiatives are now available?

Maunik Thacker:

Yes it is very easy to fall into that trap. It is very easy to give up your inventory to a 3rd party to sell for you. Flash sale sites are similar… But they all come at a cost. And flash sale sites come at a very large cost! I do not necessarily think they should all be taboo, but hotels must consider these options very carefully. Use it as a last resort when all else has failed and you truly believe will sink if you do not go this route. And keep an eye on whether this will damage your long term objectives. Very often we say “Only this once…” and the very high impact short term results get us all excited to do it again. It’s like a drug, so I would be very careful to not get addicted. Personally, I do not think this is a route that hotels should take for selling hotel rooms. It may be better to use sites like Groupon for restaurants instead. But not the high end restaurants for sure.

It is being highlighted that the big innovation that is on the horizon is the capability to quantify price elasticity and use that output to generate optimal prices directly. Bringing publicly available competitor pricing data into the heart of the RM system and forecasting how customers will respond to changes in price—it’s a totally different approach. What’s your take on the same?

Maunik Thacker:

Isn’t that what we are supposed to be doing already? I do not think this is a great innovation. Measuring price elasticity, using publicly available competitor pricing data and then pricing your own product, is something good RM systems already do. In fact, what is new to us is the ability to capture customer reaction to pricing in general through various social media platforms. This is something we did not have in the past and hence, this additional variable will help us to react quicker in adjusting our prices to better reflect market conditions.

An industry professional recently pointed out: Future systems will focus on the question, “At what price will I generate the most revenue or profit?” This approach is attractive because it offers upside even for hotels and flights that are not expected to be full. It also addresses destructive price wars amid increasing price transparency. In some markets it may be deemed unnecessary to match a competitor that is slashing prices, based on estimates of customer price elasticity relative to that competitor. What’s your opinion about future systems?

Maunik Thacker:

A system that does not address “At what price will I generate the most revenue or profit” is, to me, a system that is fundamentally flawed!

The job of a Revenue Manager and a Revenue Management System is to figure out just that, at all times. What the future systems will do better though is to optimize the price based on total customer value and not just room rates. And those that cannot deliver this functionality will have a very short shelf life.