IN-DEPTH: Price optimisation can be the ultimate guide or recommendation provided by a central RM solution--to properties who are unsure how to price in their market, says Bill Kotrba, Vice President of Industry Strategy for Leisure, Travel and Hospitality at JDA Software

Published: 02 Aug 2011

IN-DEPTH: Price optimisation can be the ultimate guide or recommendation provided by a central RM solution--to properties who are unsure how to price in their market, says Bill Kotrba, Vice President of Industry Strategy for Leisure, Travel and Hospitality at JDA Software

By Ritesh Gupta

As highlighted in one of our recent articles, hotel companies have been working on initiatives to push revenue management (RM) from a centralised function out to the operational levels of their properties where one can now empower hotel employees that are busy providing guest services to also make data-driven revenue optimisation decisions with ease.

Agreeing upon the same, Bill Kotrba, Vice President of Industry Strategy for Leisure, Travel and Hospitality at JDA Software, says the hotel companies are focusing on how to centralise revenue management and still satisfy franchisees who ultimately want final authority in how they price.

“It is encouraging to see the industry focusing more on price elasticity and price optimisation as part of their overall revenue management strategy—especially as they consider centralised solutions,” Kotrba told EyeforTravel’s Ritesh Gupta in an interview. “Price optimisation can be the ultimate guide or recommendation provided by a central RM solution--to properties who are unsure how to price in their market,” says Kotrba, who is scheduled to speak at the forthcoming Travel Distribution Summit North America 2011, to be held in Las Vegas (19-20 September) this year.

Kotrba added, “At JDA, we have seen this evolution take place over the past 10 years as it became clear that traditional inventory controls were leaving money on the table on nights when hotels had empty rooms. Inventory controls rely on bid prices, which can be very low if a hotel is not full – even as low as $1 (assuming variable costs are covered). However, the optimal price of a room is never $1, even when there are empty rooms.”

Kotrba spoke about maximising profits, predicting consumer lifecycles, forecasting, up-selling or cross-selling ancillary offerings and other relevant issues. Excerpts:

Can you provide an insight into initiatives being taken by the industry to maximise profits by accurately forecasting demand by segment, and setting price and availability restrictions to ensure access for the most valuable customers?

Bill Kotrba:

Many questions abound such as how do they set the price, what tools do I use other than just looking at competitors and matching competitors’ prices? Given the amount of innovation with RM systems, companies can do a lot more than just simply look at their competitors’ prices and match them for the sake of being competitive.

As far as how segmentation plays into maximising profits and setting the right price, it’s still a hit and miss with a lot of companies. Case in point: while hotels have invested in automated demand forecasting, good segmentation still requires restrictions and enforcement. Offering a discount in exchange for booking well in advance is good, but early booking discounts that allow late cancellation don’t accomplish much. Too many hotels still allow deeply discounted rates to be canceled up until 6pm on arrival day. On the other hand, requiring full non-refundable payment at time of booking is true fence that will separate business and leisure demand. But that is relatively uncommon—except to the extent that OTA’s do this and capture upside that hoteliers really should be getting.

How has the sector gone about predicting consumer lifecycles? What do you recommend when it comes to segmenting customers according to their value, preferences and purchase behaviour?

Bill Kotrba:

The convergence of RM and Customer Relationship Management (CRM) tools has always been viewed as a big payoff looming on the technology horizon. Unfortunately, most RM systems are still transactional and cannot provide the level of information one customer from another in terms of lifecycle and lifetime value. Hotel chains with sophisticated loyalty programs are very good at differentiating the lifetime value of individual customers, but the information might not be shared with the RM department. JDA’s recommendation is for RM organisations to be placed high on the corporate food chain so that marketing activities and loyalty program data can be leveraged in the total RM approach. Here, alignment and communication given the right processes is key.

The modern RM is no longer the record keeper of the past and instead is far more reactive to market conditions, in tune with sales plans and the RM professionals are being described as decisive forward thinkers who are innovative and creative. How do you think this all is reflecting the approach of RM professionals today as far as forecasting is concerned?

Bill Kotrba:

The key word is definitely “forecasting”. We now see all manner of sophisticated business intelligence tools that provide a dizzying array of reports and diagnostic output showing what is happening in a business—now and in the past. However, data alone does not tell you what is going to happen in the future and how to best position your hotel to maximise your future results. Intelligent data combined with a good demand forecasting solution, one that can automatically apply multiple algorithms and constantly self-correct, is an absolute necessity to maximise revenue. The best RM professionals combine top-notch experience and intuition, great reports and diagnostic tools, and advanced predictive technology that allows them to place an informed bet on what will happen in the future.

How can one optimise initiatives focused on up-selling or cross-selling ancillary offerings?

Bill Kotrba:

There is a great opportunity here for discipline and an analytical approach. This is where the art and science of pricing and revenue management need to intersect. There is a lot of art to up-selling and cross-selling that involves good training and getting the right people in the right role to do an effective job. This approach can incorporate automated and data-driven demand forecasting and pricing, but it’s the people who are trained to execute effectively at the customer end who can also deliver the revenue lift through cross-selling and up-selling. This requires a clear connection point from what sophisticated RM systems generate and providing visibility company-wide – all the way to the person managing the front desk. If you’ve got the right data with respect to market segments and purchasing behavior, a business can improve its odds that it will offer the right up-sell to the right person at the right time.

It is being highlighted that price elasticity measurement is something relatively new in RM and will likely find an application in the ancillary revenues. What’s your viewpoint regarding the same?

Bill Kotrba:

We absolutely agree. The great thing about the new focus on price optimisation tools that are out there is that price optimisation applies equally well in the area of ancillary offerings. Elasticity-based systems can generate optimal price recommendations for everything from hotel rooms to meeting space to ice cream bars. Inventory systems have limited uses, but everything a hotel sells has an optimal price. Many times, hotels need to take a step back and think about how they are choosing prices for everything they sell. Are they taking a cost-based approach or competitor-rate-based approach? Or, are they using a more sophisticated technology that can measure how much their guests are willing to pay for their ancillary products.

Earlier this year, an executive told me: One as-yet untapped areas is to introduce a notion of value for the underlying hotel product. Rate optimisation, as good as it is, still depends on the formed opinion of consumers (expressed through his/her price elasticity) to maximise revenue. There is an opportunity to influence that formed opinion by balancing price with product variables in the optimisation algorithms. What do you think are the main challenges in capitalising on the same?

Bill Kotrba:

It is clear that hotel customers have strong preferences and value product elements very differently from one hotel to the next. Measuring price elasticity around specific product variables is possible within the science that exists to today. In practice though, most hotels are not capturing data about specific product elements along with the pricing that was in effect and revenue that was generated. Indeed it is an untapped opportunity—but there is a data requirement and infrastructure that needs to be in place first.

Airlines have started down this path by unbundling many service elements from the basic ticket price. The world was a nicer place when you got to check your bags for free--but the carriers are indeed generating substantial revenues with fees and add-ons. Airlines are at the point where they could start measuring elasticity and optimising some of these ancillary prices, although I’m not sure any of them are doing that.

For hotels, it’ll be a balancing act of managing customer perception and maintaining customer loyalty. An ala carte model like airlines would represent a substantial change to the way most hotels price. As such it would seem that the industry would be wise to be cautious when considering if this model fits into their business model and goals.

Today, with so many ways to gauge customer perception using social media tools, hotels can leverage these tools to get their customers’ thoughts before they make major changes to their price structure or business model.