Hotel operators need to diligently look at their existing pricing and segmentation practices in order to gain optimal results.

By Ritesh Gupta

RM specialists believe that the spread between various segments needs to be reduced. Too often one sees 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. This dynamic changes constantly. Therefore, so should the price.

Assessing the situation, Puneet Mahindroo, Corporate Director of RM & Global Distribution, Taj Hotels & Resorts, says most of the industry looks at segmentation in a classic/traditional manner i.e. Corporate, Leisure, etc. From a Revenue Management perspective this level of granularity is perhaps not enough.

“In a competitive environment as we have today, further dissection is required. For instance, there is virtue and opportunity in understanding the behaviour of Corporate Segment broken down by price point range, kind of product opted, Typical Length of stay, etc. To illustrate - a group/segment of guests traveling for the purpose of conducting business, booking INR 8,000-10,000 price point and booking the base category room for 2 nights with an average-spend of INR 2,500 on ancillary revenue areas could be an example of one such RM Segments,” explained Mahindroo, one of the speakers at EyeforTravel’s Travel Distribution Summit India 2011, being held in Mumbai.

“As for pricing; we have observed in the past and continue to see in the future – “price obscure strategies” will continue to play a pivotal role in the industry,” Mahindroo said.

Mahindroo spoke to EyeforTravel’s Ritesh Gupta about the latest issues and trends. 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?

The biggest challenge that Revenue Management continues to face is availability of trained human resources. Going forward from an India perspective where supply is expected to expand further, this will continue to pose an issue. The industry will need to think of creative ways of ensuring availability of talent which in one way can be achieved by partnering with relevant educational institutions or adoption of technology to minimise human dependency.

The other aspect is forecast accuracy. With growing volatility in demand cycles, we need to refine and review our approach towards forecasting since this forms the crux of Revenue Management. The key to competitive advantage is going to rely as much on our ability to forecast accurately as much on product and service innovations.

What do you think are going to the key issues which RM managers need to focus upon going forward?

It will be a combination but I think driven by a common theme “Competitive Advantage”. Innovation and creativity will determine how best the RMs of the future deal with this. It is always easy to follow the band wagon but we all know that successful organisations either do the same things differently in a smarter manner or just simply do different things. In doing so, the foremost challenge from a RM Stand-point will be in managing an optimal market mix and ability to dynamically manipulate the same to support RevPAR growth strategies.

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?

Be it short or long term – “Across the Board Discounting” is the worst possible strategy to pursue. As mentioned earlier the answer lies in Price Obscure Tactics/ Strategies and Optimal Management of Market Mix. We must not fall into the trap of assuming that all the customers are looking for the cheapest rate; they are not. Several consumer research materials indicate that the customers are looking for the best value and the value perception may vary substantially from one customer group to another i.e. micro market segments.

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

I agree. There is no denying; most matured business managers will resist discounting and if they do; they will ensure that there is no long-term damage and that the impact leads to incremental revenue gains. Also one must understand that the demand exists at several price points (Ref: law of demand) – it’s just that it is in varying degrees at different times of the year or demand cycles. Hence, most matured RM practices will not only find ways of attracting lower relevant price points but also ensuring that those capable of paying a higher price point don’t buy down.

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?

Special Deals, Discounts and Special Offers are often considered smart ways to lure customer interest in this fight for electronic shelf space and mindshare. But the customer today is more aware and conscious of the value they derive. We must be relevant and targeted in our communication – be it via electronic or off-line media/channels. A mass market approach is certainly not that will yield most optimum results and hence, we must be micro segment / multi-channel focused. Hence, choice, timing and selection of the most relevant channel is a key. The measure of result must always be not the total revenue generated but total “Incremental” revenue generated.

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?

Many of us have been grappling with the concept and the main challenge has been in operationalising this in an easy to “use” and “comprehend” manner. This is a big focus area for us at the moment and I am confident will add a different level of awareness and understanding to pricing tactics and strategies. We are very excited on the prospects of this long standing challenge being overcome in the near future.

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?

I think pricing is one dimension to the future of Revenue Management. Firstly, I would hope that Revenue Management innovation drives system development and not the other way out. If that be the case then the big question for me for the future is how can I serve the best customised value proposition to each customer when we serve the interest of a million customers who either stay with us or have the potential to spend in our hotels? Revenue Management must lead to greater convergence in bringing together the objectives of marketing, sales, yield optimisation, CRM and operational excellence; thereby addressing the objectives of all key constituents of the overall Revenue Cycle. The company that gets this alignment right will enjoy a long-term and substantial competitive advantage.