Can A 5 Year Old Go In A Bike Seat 6 Steps to Profitable Hotel Rate Management.

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6 Steps to Profitable Hotel Rate Management.

The OFT (Office of Fair Trading) has announced an investigation into hotel portals for alleged price fixing. The complaint was initiated by the Skoosh portal as it accused hotels and portals of price fixing – I’d honestly never heard of them until now, so I guess it wasn’t a bad publicity stunt! Without weighing the pros or cons of this case, hotel pricing defies logic and is not good business practice.

Let me put my cards on the table. My experience with hotel pricing comes from being involved in a hotel that I partially own and other hotels that we provide marketing consulting services to, so you might argue that I have limited experience in this. However, I spend many years involved in pricing complex products for global markets with thousands of components, multiple currencies, local prices, etc. Never in my life have I seen so much nonsense presented as science as in the hotel industry.

Although we have seen some great results from hotel groups like Intercontinental Hotels Group (helped by property disposals), the average return on capital and net profit margins in the industry are simply terrible. Most large hotels focus on Occupancy Rate, which lowers prices for the sake of higher occupancy. More enlightened hotels look at RevPAR (Revenue per Available Room), which takes into account occupancy and revenue generated from available inventory (rooms). Take it as you will, these are very crude metrics and lead to wrong behaviors in frontline management that reduce the return on capital deployed (the true measure of profitability in any business).

The hotel industry is its own worst enemy, having conditioned the traveling public to think “Buy late and grab a bargain” and then complain about ROI and lack of profitability. Portals like lastminute.com have become a byword for cheap travel and have entered our everyday language. Now you can get a last minute deal on almost anything.

The hotel industry needs to take a leaf out of the airline industry and its rate and price management practices. There are many similarities between the two business models:

  1. seasonality – Hotels and planes alike have seasonal highs and lows, with cash flows from famine to feasts sending the bravest entrepreneurs running for cover. This seasonality is key to behavior and pricing in both industries, but curiously manifests itself differently.
  2. Capital Intensity – Airlines and hotels are extremely capital hungry with high levels of capital invested in their infrastructure and inventory (aircraft/seats & bedrooms). This makes it all the more imperative to aggressively grow assets and stocks and, as the old saying goes, “make your capital sweat hard.” For airlines keeping ground time per aircraft to a minimum is key to profitable capital growth and hotels are trying to pursue the same goals by focusing on occupancy.
  3. High fixed cost ratio – In both cases, operating costs consist mainly of fixed costs and small variable costs. Think about it, an aircraft taking off from an airport has a loaded cost of fuel, crew, landing/takeoff position and cost of leasing/financing the plane regardless of how many passengers are on the plane. The same applies to a hotel, as regardless of the number of rooms sold, the cost of construction, staff, marketing, etc. it is the largest part of the total cost all things being constant.
  4. External exposure – The Iceland volcano fiasco in April 2010 was a great reminder of the vulnerability of both industries to external events completely out of their control. The same goes for the harsh winter of 2010, strikes by air traffic controllers, ground crews, etc. all of which affect both airplanes and hotels.

Airline pricing model

Airlines have steadfastly maintained their basic principle of the “Early Discount, Late Premium” pricing model. As consumers, we have all accepted this basic premise and know that cheap flights are only available if we book early and hesitate at risk.

However, this simple principle is not a one-dimensional and asynchronous pricing model. Airline price management tools take seat availability into account. Seats are divided into groups (Price Bands/Buckets) that have a specified number of seats at a specific price and are available for sale at predetermined intervals prior to departure dates. Simple you may say, but that’s not the end of the story. The pricing algorithm takes into account ‘Sales Rate’ (number of bookings per given period, eg per hour/per day/per week), ‘Search Rate’ (number of inquiries made for a specific flight per day/per week) and the available capacity (number of seats left for sale). This decides whether a particular seat bin is opened, closed or enlarged, hence the variation you may find in prices when checking a flight over a period of days. Some have gone further by storing 30-day cookies on visitors’ browsers so they can recognize a returning browser and then decide whether to offer the same price as before or whether to increase the price (the course “Should you had booked earlier” !).

Hotel pricing model

This could have been a simple one-liner saying “Hotels don’t have a pricing policy or logic model”, but then I’d be inundated with emails full of RevPAR, occupancy, average rates, etc. Well, that’s nonsense. Just because an industry has acronyms and measurable benchmarks doesn’t mean it has a system, understanding or strategy, nor does it mean it’s measuring the right things. Let me explain it.

Hi all who have seen ‘Early Booking’ deals in January, then ‘Sale’ prices before Easter and ‘Last Minute’ deals in the week before you go on holiday. Then go to TripAdvisor and see all these portals advertising “Up to 70% off”. Does this sound like a sell-as-much-at-any-price strategy or culture? So what happened to Rack Rate?

Add to this my very favorite phenomena, namely the gates which are supposed to sweep up excess capacity and increase the occupancy rate. They are given a huge commission (up to 25%) and then get a lower price than the Rack Rate (usually the same offers are available on the hotel website). So where is the added value of the Portal? If they offer the same price as the hotel website (90% do) and get a big chunk of the commission, then what happens to the hotels RevPAR? Anyway, if this was supposed to be the clearinghouse for overcapacity, why do they have rooms for sale in January or February for vacations in July or August? Hotels cannot know their excess capacity 6 months before the start of the high season.

Just like airlines measure the use of planes, we can talk about occupancy, but no matter how high that is, it doesn’t mean we’re making a profit. Benchmarks are useful for comparative analysis between two similar businesses, but they should not be taken as good business practices and treated as the Holly Grail. Business analysis is not a dogma, but a rational analysis of performance that should show us the right direction to take our business.

What is the solution?

The solution is simple, just follow the airline industry.

  1. You have a clear understanding of the break-even point. Without it you cannot make a rational decision and all the benchmarks in the world will not help you make a profit.
  2. Offer your best available rates 6 months before your arrival dates and as the dates get closer you increase the price towards the Rack Rate.
  3. Don’t create randomly selected discount packages. You shouldn’t be discounting just to increase your stay or meet these arbitrary and meaningless benchmarks.
  4. You should always consider other goals, such as increasing your average stay, improving your traditionally poor season, etc. Increasing occupancy will be a secondary goal if your packages are well targeted.
  5. Check your bookings, availability and targets on a daily basis, which will give you an indication of whether you should keep the price low or raise it (airline sale price concept).
  6. Never offer a late booking discount unless it exceeds your average stay (bet you didn’t notice that). In any case, you should not offer your best prices to last-minute hunters. You are simply confirming habits that the hotel industry would love to start.

Finally, stick to your guns with Portals. 10% commission or nothing and use it to create an attraction for your hotel from market segments that you can’t do, but you don’t make them more competitive than your own prices. Remember you agreed on parity, not the “lowest possible rate!”

This strategy has worked and we can show that hotels using this strategy have increased their occupancy, RevPAR, and believe it or not Average Occupancy. Most importantly, the hotels we work with are all profitable operations. You should be right to think. “If that’s all there is, why are you publishing it for free?” You’d be right, because it’s not just that!! Contact us and see what we can do for your business.

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