In-Depth: The handling of price discounting in the recent past gave a fair indication of whether or not RM was part of an organisation, according to Nayan Peshkar, regional director - Revenue Management Europe, Millennium Hotels and Resorts.

Published: 24 Aug 2010

In-Depth: The handling of price discounting in the recent past gave a fair indication of whether or not RM was part of an organisation, according to Nayan Peshkar, regional director - Revenue Management Europe, Millennium Hotels and Resorts.

By Ritesh Gupta

For revenue management professionals, issues such as customer rate resistance, contract re-negotiations and price wars is a continuous battle in good and bad times.

During an economic downturn, the whole game becomes more challenging.

The last couple of years have proved to be quite a testing period for the hotel industry as it created pressure to maintain market share, and many hotels reduced rates in an attempt to attract additional customers.

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.

In order to gain an insight into how the RM department in an established group went about certain tasks in a challenging environment, EyeforTravel’s Ritesh Gupta spoke to London-based Nayan Peshkar, regional director - Revenue Management Europe, Millennium Hotels and Resorts. Excerpts:

How do you think RM professionals have handled critical issues - customer rate resistance, contract renegotiations, competition or price wars – over the past year or so?

Nayan Peshkar:

The field has been spread in terms of how RM professionals handled these issues. Different hotel companies took different approaches to the economic situations seen in the recent past. Rate resistance and contract re-negotiations were the unfortunate hallmarks of the corporate transient business segments in the previous year. Rate re-negotiations in key cities were rife in the airline crew market too.

Generally, I believe that competitive benchmarking has finally gotten its fair share of focus from hoteliers – external pricing pressures were just as important as internal demand levels when it came to setting business strategy.

Price wars were bound to occur, though here we can see a clear division in the approach RM professionals took – One line of thought was that rate stability provided a better opportunity for a healthy GOP and this relied on the premise that the downturn would be short lived. Another line of thought was simply that short term gains in terms of occupancies were good for the top line – these will eventually flow through reasonably to the bottom line. The premise here was that the downturn would drag on. The jury is still out on the impact of these two strategies on hotels in the current situation, where the markets seem to be bouncing back. How the 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.

When key competitors resort to guerrilla pricing for unqualified business, revenue managers are sometimes forced to do the same to retain a respectable market share. This does not generate any additional market demand, and simply drives down the revenues for all. To what extent has been the market adversely impacted through such tactics?

Nayan Peshkar:

Price discounting is not always a bad thing – it should not be the taboo within our profession that it fast seems to be becoming. Price discounting in my view, serves market correction needs too – the bad side of the same comes across only when we see excesses in discounting. We should clearly distinguish between these two separate elements of discounting before labelling the effort as conducive or disruptive. A particular hotel’s revenue situation (whether in the red or black) is only one side of the story – equally important is its position within its market and its market share. A hotel which is teetering on the edge of profitability or otherwise, may still have done a good job if it has achieved more than its fair share of revenues – clearly, the management seems to be making good of a very bad situation. Of course, this is a difficult message to sell to stakeholders. Excessive discounting may well have taken some years off the rate growth in key markets – the key to bouncing back profitably, in the short term, would be to carefully manage the costs of sale. The biggest lesson from the recent downturn for RM professionals will probably be that “Precision Cuts” in pricing are more equitable to rate integrity than an approach that may require price cuts across the board or none at all.

In down economies RM does everything to stimulate incremental demand, ensure all channels are maximised, all segments are priced effectively, and all systems are set up appropriately to capture whatever demand there is to capture. Looking back, what do you think has been the most critical aspect of some the decisions RM professionals have taken?

Nayan Peshkar:

Systems integration has been the key to keeping our heads above the water. Mature RM strategies do not discriminate between channel retailers – for example, one OTA should not get a better price than another. Decision automation and robust systems integration have definitely helped RM professionals to maintain a level playing field – after all the gains from intra channel discounting have historically proven to be detrimental to overall revenue growth in the long term. Also, RM professionals who had adopted a “linked” pricing strategy across business segments would have fared better than those who saw their silo pricing strategies exposed by revenue dilution due to inter segment movements. There is some merit to the statement that “the consumer set is a finite one” – pricing strategies that overlook this fundamental argument tend to suffer in tough demand situations. The question of price wars is not one just limited to the open market (between hotels), it is equally relevant to the price relationship that exists (or not) between an individual hotels operating market segments. Very early on, some RM professionals decided to utilise the Opaque sales channels available to them – such a strategy helped them to protect brand and rate integrity. Some other good choices were related to how rate fences were applied. We saw a lot more discounted products – but asking for guest commitment. Discounting became about a “Give and Take” relationship – discounts were given, but commitments through pre-payments, strict amendment and cancellation policies were taken. I think this kind of product structure is now here to stay.

Prices slumped for five years or so post 9/11. What strategies will ensure a lengthy slump doesn’t repeat itself?

Nayan Peshkar:

One thing in the favour of hotels is that RM is better entrenched in hospitality now than it was in 2001 –no more is it just the large hotel companies that practice the discipline. Even though, 2010 is still seeing residual effects of the rate pressures of last year, RM is better placed to help hotels recover more rapidly. Revenue Managers all over the world will need to focus on the basics –market segmentation must be re-evaluated for relevance, analysis needs to now include behavioural aspects as against just transactional ones, competitive benchmarking is crucial to riding the upswing in the markets, clearly defining the way forward in terms of hotel positioning is now more important than ever – decide, state and act upon what gives you success, invest in the right BI and MI and if possible also in upgrading your RM and distribution technology. Revenue Management has had to adapt to the increased cost focus seen in 2009 – Revenue Managers today need to be able to assign “value” to their sales channels based upon profitability, not just top line numbers.

There is also the need for RMs to become more risk management focussed – commercial value of contracts now need to be assigned risk grades. Forecasting activity needs to account for these risk grades as does long term business strategy.

Customer issues that need to be assessed are the price sensitivity of certain market segments and the possible emergence of new segments if new rates are offered. How should one go about tracking the consumer behaviour changes and accordingly, adjusting price –related initiatives?

Nayan Peshkar:

There is no doubt that consumer behaviour changed last year – partly due to their new found confidence in rate shopping and partly due to our inability as an industry to have a long term approach to rate integrity. I am not so sure that new segments were created – we did see aberrations of behaviour prompted by the two issues mentioned above. Is this likely to create new consumer segments? Not in my opinion. I do believe that 2009 merely escalated the evolutionary changes that were coming the way of the corporate transient segments - Most bookings of the future will be from one electronic means or the other and will have some measure of rate shopping and comparison attached. Hence, RM professionals need to stick to the basics while qualifying if indeed there is a new breed of customers, whose behaviour is significantly different from the old ones thus requiring them to re-position the sell strategy for a hotel.

We need to do the simple things right – start with the re-qualification of the current consumer / market segmentation. Such a review would justify keeping them as is or show the direction for the changes that need to be made. Those RM professionals who have access to up to date technology in the form of Data collation systems (PMS, CRS etc) and Data analytics and decision management systems (Automated RM systems) will take the lead in identifying these new behaviours and being able to market to them. “Spray and Pray” marketing doesn’t work if you want to keep rate integrity and brand integrity. So, if you have access to these technologies – no reason for you not to benefit from them. If you don’t have good technology, probably a good case now to invest in some. There is a risk of micro segmenting consumers – finding trends where either none exist or they exist, but have no critical mass to support a unique strategy. Common sense should take precedence over the need to find something new!! Revenue Management as a discipline has an evolutionary cycle when it comes to its integration into the cultural psyche of the organisation. For a vast majority of RM professionals, 2010 will see them getting back to the basics, doing the simple things right and making the profession’s position within their companies sustainable and credible.

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.

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