IN-DEPTH: Not all customers are equal. So revenue management systems should not be purely product-centric but also address the customer needs. If this is achieved, appropriate pricing decisions can be made for high-value customers.

EyeforTravel.com’s Ritesh Gupta evaluates how hotel companies can capitalise on data related to various segments and arrive at viable value-based pricing for core offerings.

It is essential for hotel companies to recognise that they do not serve a homogenous group of customers with the same set of preferences for their products and services. Different customer groups value different aspects of a hotel’s offerings; it depends on their requirements and budget.   

Understanding this value and pricing accordingly for each of these groups is the essence of the challenges facing modern revenue management.

The value a business strives to deliver is best defined based on the market segment it would like to target, says Brij Bhushan Chachra, director, revenue account management – India, Middle East & Africa, Preferred Hotel Group.

Chachra defines value as the benefit a consumer derives from a product in correlation to price paid to satisfy their individual requirements.

So how do you even start to optimise this process of segmentation and price accordingly?

•   The first step, and one that is often overlooked or done incorrectly, is to determine an appropriate way to segment the market into customer groups whose value is relatively common, and whose purchasing patterns are also relatively common. 

•   Once this is done, we must track the purchasing behaviour of each of these customer groups, determining the patterns in their behaviour: how it varies over time, and how it is impacted by factors such as price, competition, and so on.

•   Once we understand behaviour patterns behind customer groups, the final step is to compare demand to available capacity, and price appropriately – managing price on a day-to-day basis for each group to optimise overall margins for the enterprise. This last step is extremely challenging, as so many factors can influence the correct pricing for a given customer group and product for any particular date.

Data drive

Today revenue management executives are equipped with data relating to various segments which can help them to forecast and measure results. Some tend to get involved in the marketing activities of RM and recommend specific decisions based on the demand that they see for different segments. This enables RM executives to be well integrated with other business functions and hence be a key strategic partner in sales and marketing activities.

But overall collecting 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.

The single biggest issue that the industry deals with is pulling information from multiple systems in which customer transactions and choices are captured – web, reservations systems, loyalty programmes, retail systems, food and beverage systems and so on. 

The data in these systems can be very difficult to access, and attempts to integrate information regarding any single customer are often impeded by the poor data quality in these systems. 

One sees customers represented multiple times in these systems under slightly different names, misspellings, and so on.

“We at SAS see this area as a core issue that the industry needs to address – not only from the perspective of understanding customer value, but also from the perspective of ensuring quality service,” says Alex Dietz, principal product manager, SAS.

As a frequent traveller, Dietz says he is consistently astounded that he is still asked the question “is this your first time staying with us?” when checking into hotels that he has stayed at 20 or 30 times. 

“They may recognise my brand loyalty status, but their inability to recognise my loyalty to their specific property – and properly recognise it in a face-to-face interaction – is deeply disappointing.  And from a pricing perspective, how can these properties possibly be pricing correctly if they do not see this level of loyalty in their data?” he asks.

He has a point. Indeed hotel companies can work on customer-value based pricing by planning an enterprise view of their customers. For this they need to extract the information that they have in their existing systems. 

To begin with, it is essential that a data quality review is undertaken. The next step is developing a complete view of each customer, so that you can assess the full, enterprise value of the customer. The final step is operationalising the delivery of pricing based on each customer’s value. 

Lessons from the airlines

One as-yet untapped area is to introduce a notion of value for the underlying hotel product. To maximise revenues, rate optimisation, as good as it is, still depends on the formed opinion of consumers (which is expressed through his/ her price elasticity). There is an opportunity to influence that formed opinion by balancing price with product variables in the optimisation algorithms. 

The airlines, for example, took a close look at how their service was viewed by the customer, and subsequently have claimed significant revenue benefits from unbundling their baggage and meal services. 

There is no question that other segments of hospitality and travel should be looking at the airlines example, and considering if this sort of strategic change to their offerings should be considered.  In doing so, from a hotel company’s perspective, there are some basic questions that need to be answered to determine the correct path forward. These include:

1.    At what level do our customers view our product as commodity?  In other words what variables truly impact a customer’s willingness to pay versus which do not. And just how aware of these differences can we reasonably expect a customer to be at time of purchase?

2.    What are the operational impacts of unbundling?  So how much do we benefit from ‘varying’ product on the revenue side versus how much does it cost us to provide this level of flexibility in our service?

“I do not see this sort of decision as one that can be easily written into a revenue management optimisation routine, and processed to change on a daily manner,” says Dietz. “Rather, I see this as a strategic pricing and positioning decision that firms within our industry will need to consider.” This will affect not only their day to day revenue stream, but also how their service is provided, and their brand is viewed by their customers.  

Changing times

New trends are emerging all the time. One that has already arrived is the is the mass move towards loyalty programmes that encourage customers to identify themselves so that one can treat them individually. There is going to be a natural evolution to support for these programmes through selling systems, because it benefits the customer – and they expect it. 

Says Dietz: “As this proliferates, we’re going to see the opportunity and value to the industry from value-based pricing increase.”

Behind all of this, though, the science behind revenue management must be applied at a more individual level.  “This means we’re going to need to continue to develop methods for predicting consumer demand, and understanding price elasticity at a more and more detailed level,” he adds. 

One thing seems certain: ‘willingness-to-pay’ based revenue management isn’t going away – it’s just evolving.