Finding ways to come up with revenue-optimising rates for hotels

IN-DEPTH: Frederic Deschamps, vice president, Global Revenue Optimization, Carlson Hotels says rate optimisation is the new standard for the hotel industry. He says he wouldn’t be surprised if functionality that optimises based on elasticity and publicly available rates becomes a standard feature of any revenue management system. He also talks about new opportunities in RM

Published: 23 May 2011

IN-DEPTH: Frederic Deschamps, vice president, Global Revenue Optimization, Carlson Hotels says rate optimisation is the new standard for the hotel industry. He says he wouldn’t be surprised if functionality that optimises based on elasticity and publicly available rates becomes a standard feature of any revenue management system. He also talks about new opportunities in RM

By Ritesh Gupta

Hotel companies have been working on initiatives to push revenue management from a centralised function out to the operational levels of their properties where one can now empower hotel employees that are busy providing guest services to also make data-driven revenue optimisation decisions with ease.

A group like Carlson Hotels Worldwide has been proactive in looking at ways to combine current competitive and market data with historical insights.

Recently, Carlson shared that its rate optimisation tool, Stay-Night Automated Pricing (SNAP), is having a measurable impact on its RevPAR index performance when it is used consistently.

SNAP continuously updates a number of historical variables as well as an inventory of all publicly available competitive prices to recommend revenue-optimising rates for hotels.

“Carlson hotels that diligently follow SNAP rate recommendations are seeing a sustainable lift in RevPAR and are reducing their pricing workload. Rate optimisation is a good answer to a transparent marketplace, so to the extent transparency in distribution is here to stay; rate optimisation is the new standard for the hotel industry,” Frederic Deschamps, vice president, Global Revenue Optimization, Carlson Hotels told EyeforTravel’s Ritesh Gupta in an interview.

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.

“That is essentially the capability that Carlson Hotels has developed the ability to set prices dynamically based on publicly available competitive rates and levels of demand at each rate level. What this does is that it allows the hotel to balance the “pull” that its property has with the competition it faces for a given level of demand and maximise its revenue,” Deschamps said.

On how has SNAP helped Carlson in shifting pricing from being based on the product only to being based on the product and demand for it, he said, “We’re seeing hotels being more aggressive with using rates to compete for demand, both in increasing and decreasing rate.”

SNAP allows the hotel to react more quickly to a shift in demand or competitive rates and with a booking curve that is getting ever shorter even a day or two gained in reaction time can give the hotel a RevPAR index advantage.

“For example, in one case, we saw a hotel drop rate a week earlier than they would have otherwise and capture a 24 pts RevPAR index advantage for that stay-night,” shared Deschamps.

Rate Optimisation

Last year, in an interview with EyeforTravel, Bill Kotrba, senior director of Industry Strategy for JDA’s Pricing and Revenue Management Group, mentioned that traditional RM systems have focused on the question, “How much demand am I expecting at my current prices and how much inventory should I protect for my highest price points?”

This approach works very well for hotels or flights that run consistently full, as a means of “yielding out” the low value demand, Kotrba said. He added, “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, according to Kotrba. 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.

Assessing the same, Deschamps said, “Traditional spill-based systems that estimate excess demand based on the hotel’s occupancy struggle when occupancy is low. A rate optimisation system does not depend on the hotel’s occupancy and is therefore more robust for situations where occupancy is low or highly variable.”

It’s important to note though that a rate optimiser does not automatically raise rates, but will also recommend lowering rate when it’s in the hotel’s best interest to do so.

“The key benefit is that a rate optimiser will typically recognise an opportunity to raise or drop rate ahead of when the hotel might otherwise have, which provides the hotel a critical head start on the competition. I wouldn’t be surprised if functionality that optimises based on elasticity and publicly available rates becomes a standard feature of any revenue management system,” said Deschamps.

Transparency

As per the findings of an industry survey undertaken by RevPar Guru last year, just over 30 percent of hoteliers indicated most of their business came from direct/phone reservations and just over 27 percent reported most of their business came from OTAs and online channels. This shows how the Internet is becoming an increasingly important channel when it comes to hotel bookings, which was not the case several decades ago. Because of this, using a combination of traditional hotel revenue strategies combined with practices that involve sophisticated automated software, allows hoteliers to strategically use up-to-the-minute information to give their property a competitive edge among other hotels and resorts.

Strategic pricing, rate discipline, automation and smart computing are also integral parts of a successful hotel revenue management strategy.

Deschamps said that the search engines and “star and rate” sites such as TripAdvisor provide transparency for the consumer.

“More than ever, having a competitive rate is critical to make the sale. Carlson Hotels has developed technology to continuously optimise rates in function of the competition and the publicly available competitive rate-scape,” he added.

Coming up with the most favourable rate to offer a potential customer is termed as the most important aspect of revenue management. Considering this transparency, it is said that Rate Integrity is the current mantra and the proliferation of channels of distribution from xml links to various extranets has made today's revenue managers task that much more challenging.

“I think that this is basically correct,” said Deschamps.

He continued, “The fact that hotels can no longer count on channels to divide demand into discrete groups that the hotel can price to individually poses a new paradigm for hotels. A viable approach is to embrace this situation and optimise the market-clearing rate across all channels that maximises revenue to the hotel.”

Trends

Commenting on some of the critical issues which RM has had to face in the recent past, Deschamps said one of the critical developments for RM is that the customer is armed with better information.

“The customer can compare prices quickly across the consideration set. RM has responded with the “rate of the day” approach, but that only partially captures the revenue opportunity. Some kind of rate optimisation is also needed to prevent that rates gradually slide towards the lowest rate in the set,” said Deschamps.

And on the next big thing, he said, “One as-yet untapped areas is to introduce a notion of value for the underlying hotel product. Rate optimisation, as good as it is, still depends on the formed opinion of consumers (expressed through his/her price elasticity) to maximise revenue. There is an opportunity to influence that formed opinion by balancing price with product variables in the optimisation algorithms. Collecting that data reliably and processing it consistently across the consumer's choice set remains challenging, as well as picking the relevant product dimensions to set rates.”

 

 
 
 

 

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