IN-DEPTH: Understanding customers’ needs, behaviour, location, and individual price sensitivity are key to any pricing strategy and related tactics

By Ritesh Gupta

The hotel industry has witnessed the emergence of price optimisation tools that incorporate real-time competitive rates with a hotel’s demand and booking patterns to recommend the best price.

Overall, the industry is focusing more on price elasticity and price optimisation as part of its overall revenue management strategy.

Commenting on how hoteliers need to look beyond the tricks and quick fixes and instead focus on dynamic rate optimisation for pricing strategy, Jean Francois Mourier, RevPar Guru says one aspect of the same is dynamic pricing, which is essential.

“Dynamic pricing is an umbrella term that encompasses others, and is an effective way for revenue managers to evaluate multiple pricing metrics in real time. This includes real-time price comparisons to competitor hotels, as well as monitoring instant changes that affect those rates. Another component is a hotel’s historical prices. But it’s important to note that this metric is increasingly less of a factor when figuring a current or future rate. Historical prices are very good at faithfully reporting back to the revenue manager a past room rate, but is a very poor predictor of what the new rate should be, i.e., the future,” says Mourier.

He added that other pricing systems partially determine rates based on room rate elasticity, or the flexibility of price based on consumer demand. For instance, travellers regularly expect room rate hikes during peak seasons like the upcoming holidays. Travellers accept and pay those rates and rather than diminishing demand over higher prices, demand actually peaks. Thus, holiday hotel room rate prices are said to be relatively inelastic, or inflexible.

“Another component to modern software-driven hotel room pricing is rate optimisation. And part of that fair rate is based on your hotel’s clout relative to the competition. Increasingly that clout is based on where your hotel lands in basic Google searches as well as online travel agent (OTA) rankings. Other factors that are part of the pricing mix include: booking patterns by day of the week, time of day booking patterns, special events, room size, guest reviews, and booking pace. Seven days a week, 24-hours days, all of these factors, and others, are re-evaluated in real-time in order to establish the perfect rate at the very moment a room is booked,” added Mourier.

He also says automated pricing programmes and their intelligence-gathering abilities will grow increasingly complex – and importantly, extremely helpful to the revenue manager, pulling in and analysing greater and greater amounts of data to make more informed decisions.

Recently, Amadeus highlighted that price management thrives in an environment where revenue management does not. It is possible to realise a vision of a market tied to customer personalisation in place of more limited customer segmentation. It is possible to move effectively from just inventory management to channel management. By discarding the traditional capacity allocation models inherited from the airline industry it is now possible to address, at a macro-scale, the pricing issues that hoteliers are facing, and at a micro-scale provide pricing solutions, including dynamic pricing, real-time group quotations, with more granular competitive intelligence. And this enables systems to reveal many more opportunities for increasing revenue for hotel companies.

With dynamic price management techniques hotel rooms can be filled at the most profitable price according to learned demand patterns. By looking ahead using future booking data, and back with detailed historical records, advanced forecasting models can make intelligent rate and inventory recommendations. This can be done in real-time, adjusted dynamically to changes in the hotel environment, ensuring accurate and reliable ‘always on’ business intelligence.

Redefining RM

Out of the many recent developments, the ones related to price-sensitivity modelling are probably the most significant in re-defining RM, says Pieter Dorhout , founder, Pieter Dorhout Consulting, who is scheduled to speak at the forthcoming Revenue, Yield & Pricing for Travel Europe 2011 Conference, to be held in Prague (29-30 November) this year.

“Rather than accepting demand as it materialises, RM now aims to influence demand to materialise in a profitable way. Or in sports terms: RM is evolving from being a neutral, passive referee to becoming an active player in the market,” says Dorhout.

This, according to Dorhout, has profound implications for the RM algorithms, processes and people.

“There are great examples of companies who have taken on the related challenges and reaped rich rewards. However, as with most investments, a higher return is usually accompanied by a higher risk. In this case, the appetite for sophistication needs to be balanced against the ability to deal with complexity, and getting this balance wrong can be extremely painful,” says Dorhout.

Dorhout mentioned that it’s a shame that the phrase ‘change is the only constant factor’ has become such a cliché, because it has actually never been more true than today.

“In this context, revenue management can help travel operators adapt very quickly to changing market conditions. In fact, sophisticated players will automatically adapt their presence in the market: when demand is falling short, incremental cost become the relevant benchmark for pricing, but when (or where) demand is soaring, opportunity costs become the price threshold. In other words, especially in these uncertain times, RM is crucial to the core business of every travel company: making profit,” said Dorhout.

It is important to distinguish between market segmentation and channel management. Distribution has effectively become a commodity, and the low barrier to entry has resulted in a wealth of economically viable channels. For the operator, it is now neither effective nor efficient to put significant effort into managing individual channels, and rate parity is a generally sensible outcome. However, as Dorhout points out, that does not mean that market segmentation has lost its profit-generating power.

“For example, it would be tempting to say that network airlines will soon adopt the low-cost airlines’ one-way pricing practice. And some already have. But I know for a fact that the ability to distinguish between leisure and business demand by means of duration is still extremely valuable for other airlines. For hotels, I think the message is: don’t throw the baby out with the bath water; rate parity across channels is fine, but commoditisation of your product probably isn’t,” concluded Dorhout.

Ideally different product options with differential pricing based on customer’s characteristic should be offered to capture the real amount that consumers are willing to pay. However this is only possible as long as the overall market does not offer new products/innovations “for free”. Unless the customer feels being “ripped off” by the marketplace there is a clear win-win opportunity. Key for any seller’s success is a value statement that clearly articulates why customers should make this purchase.