Has the hotel industry managed to keep rate drop in check?

IN-DEPTH: One of the keys to success in a down market is to not offer across the board price cuts, but to instead focus on particular market segments and distribution channels.

Published: 11 May 2010

IN-DEPTH: One of the keys to success in a down market is to not offer across the board price cuts, but to instead focus on particular market segments and distribution channels.

Drop in occupancies, ADR and RevPAR have been widespread in the hotel industry over the last year or so.

In its 2010 survey, released in association with EyeforTravel, Cornell Nanyang Institute of Hospitality Management says the effectiveness of tactics that revenue management professionals used to survive the economic downturn showed that while discounting was the most frequent strategy used, marketing approaches were considered to be the most effective.



During the economic downturn, as indicated by the respondents who participated in the survey, for nearly three-fourths of respondents, the most popular tactics were value-added packages (73 percent) and lower rates (72 percent), followed by new market segments (52 percent) and a free extra night (50 percent). The least popular tactics were air-car packages (13 percent), prepaid food and beverage (16 percent), and two-for-one packages (22 percent).

The tactics were divided into four basic categories: cost cutting, discounts, marketing, and obscuring the room rate. Discounting was the most common strategy (72 percent of all respondents), followed by marketing measures (41 percent), obscuring the room rate (38 percent), and cost cutting (27 percent). Usage varied by world region and by hotel star level. Respondents from Europe (29 percent) and the Americas (36 percent) were significantly more likely to use cost-cutting measures, and respondents from the Americas (42 percent) and Asia-Pacific (40 percent )were more likely to have used rate-obscuring tactics. There were no statistically significant regional differences for discounting or marketing measures.

For this year, marketing tactics were by far the most likely to be used (94 percent), followed by rate-obscuring (84 percent) tactics. Cost cutting (68 percent) and discounting (66 percent) tactics were less likely to be used. Respondents from the Americas were more likely to continue to use cost-cutting approaches in 2010.

Conversion rates

From a hotelier’s perspective, Chinmai Sharma, VP, revenue management, Wyndham Hotels and Resorts, feels the RM community on the whole has performed rather well in the current downturn.

Sharma pointed out that unlike previous downturns when most of the RevPAR decline came from rate drop, this time the industry as a whole managed to keep the rate drop in check.

“The rates still did decline although I feel that this time the industry had a better handle on the fact that below a certain price threshold you don’t create new demand, but in fact dilute existing demand,” said Sharma, who is scheduled to speak at EyeforTravel’s Revenue Management & Pricing Strategies Conference, to be held as a part of Travel Distribution Summit North America 2010 in Chicago (13-14 October) this year.

“Given the economic scenario, the customers searched more extensively for better deals and we saw a reduction in conversion rates across the industry (as customers shopped multiple channels before booking) as well as a steep increase in the opaque business model (like Priceline and Hotwire). Some customers’ segment increasingly became more brand agnostic and price sensitive,” said Sharma.

He added that RM and Sales personnel were flexible during contract negotiations in the past 12-18 months and worked with the corporate accounts to develop win-win relationships for the current year by either holding the rates or by providing some value added benefits while being very open to offer last room availability status.

“Overall, we didn’t see any major price wars happening in the industry this time around although some markets like New York, Miami and Chicago felt the pressure more as existing development projects led to increased supply in a contracting demand situation,” observed Sharma.

Short term deals

The group segment is the hardest hit in an economic downturn therefore RM professionals have to fight harder to retain or even steal market shares. Most RM professionals have been smart by cutting short term deals and protecting the rates in the long term window. It is largely felt that 2010 will be a challenging year especially for the group segment as the business on books is low from the segment. However, lead time of the segment has shortened considerably therefore it will depend on how the other segments come back which will influence the rates for the group segment.

Sharma says it is always hard to foresee more than 12-18 months as the markets can turn volatile at a relatively short notice.

“I think the RM community has always been careful not to over-commit on low rates too far out even though the last many months were challenging due to the unprecedented decline in demand. One thing that has improved is that the industry has got better in using intelligence, both internal and external, to understand high level forward looking trends. Internal data like pace, mix and spend by segment (as well as channel), day of week trends and hotel performance over city events is always key data in assisting future group quotes,” he said, adding that there are several solutions that also make it very easy to gauge market trends and assist the hotels in making good business decisions to avoid leaving money on the table.

Incremental demand

In the last year, RM handled price sensitivity of certain market segments, tackled pricing wars with the competition and effectively manage the distribution channels. The biggest challenge for the revenue management professional has been competing in a price war without suffering long-term damage. These comprise both non-price and price methods.

The RM has to assess and determine which ones are most effective at delivering business. This economic downturn pushed the industry to evaluate their operations, create efficiencies where needed and implement changes that have both short- and long-term impact. Given the concern that revenue managers have about pricing-related issues, it is imperative to assess how hotels can manage price during an economic downturn. One of the keys to success in a down market is to not offer across the board price cuts, but to instead focus on particular market segments and distribution channels.

Sharma said that the hotels who did relatively well in the last downturn were the ones who saw the declining signs early and were able to realign their pricing strategy in time to gain market share over competing hotels.

“This also meant being more flexible towards corporate accounts and groups. The RM professionals have also become more sophisticated in distribution channel management which has resulted in optimising production from all channels, especially the Internet, as they have worked closely with their counterparts in distribution, ecommerce and marketing to maximise OTA and brand.com revenues,” said Sharma.

Guerrilla pricing

In guerrilla pricing, hotels try and do price cuts in a short window to pick up additional market share. However, if done too often, this can lead to a dilution of revenues. Unfortunately, revenue managers do get into this vicious circle and effect of the same can be seen in the average rates and revenues.

“A common phrase in the industry is that you are only as smart as your dumbest competitor,” Sharma said. “Sometimes the tactics of a few big players in the market can have a significant impact on the whole market. It has been well documented that indiscriminate discounting doesn’t create new demand but dilutes existing business.”

He added, “The industry overall did a better job in this area in the current downturn with the RevPAR declines coming in from both rate and occupancy drops (instead of only a rate drop). Still, some markets were hit harder especially due to addition of new hotel rooms. As an example, 2009 room demand in both New York and Miami markets stayed flat over the previous year but their rates dropped in double digits as they also had to deal with significant new supply (per STR data).

It is important to understand that the pricing strategy does impact demand at an individual hotel level as well as on its market share but it’s also important to fence discounts appropriately and to avoid unnecessary downward rate spirals as that’s when markets get adversely impacted.

Ritesh Gupta



Travel Distribution Summit North America 2010

EyeforTravel’s Revenue Management & Pricing Strategies Conference will be held as a part of Travel Distribution Summit North America 2010 in Chicago (13-14 October) this year.

For more information, click here or Contact:

Rosie Akenhead
Global Events Director
Eye For Travel
Email: rosie@eyefortravel.com
Telephone: +44 (0) 207 375 7229

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