Hotel pricing mechanisms need a direct approach

Hoteliers have been telling us for years that the public needs to be better educated about what rates really stand for.

NB: This is an analysis by Pamela Whitby, editor at EyeForTravel.

That’s especially true today with the plethora of sites offering a bewildering array of hotels and apparent deals.

But while consumers may enjoy greater choice about where to stay and how to book, hoteliers are pinning their hopes on the fact that trends in the hotel space often follow the airline sector, where many consumers now choose to book direct.

Brian Hicks, InterContinental Hotel Group’s (IHG) VP Revenue Management for Europe & AMEA, for one, thinks the case for booking direct is getting stronger.

Reading the papers suggests that he may be right. The Guardian recently published an article which argued that the "best rate guarantees" of the likes of Booking.com, Expedia and Rentalcars.com, as well as TripAdvisor’s "just for you" offers, "are barely worth the pixels they are written on".

The Mail Online followed up only last weekend saying, "Hotel guests are being fleeced by online agents".

Another plus for hoteliers is that EyeforTravel’s latest The Future of Metasearch report finds that while brand loyalty is less common, hotels have a much stronger link to the consumer than airlines do.

Trust and transparency

To date there has been little transparency around hotel pricing structures, despite some in the industry trying to convince consumers otherwise.

But with the recent furore around price parity in the energy sector and antitrust legislators in Europe pushing major OTAs such as Booking.com to amend rate parity agreements and innovations in technology, the chance to clarify price parity has never been clearer.

Furthermore the consolidation of major OTAs and metasearch, which has confused the picture about who drives business where, is likely to be closely examined.

For Hicks, and many other hoteliers, it’s clear that still more needs to be done to educate consumers. For this reason a strong focus at IHG in Europe today is about how to educate the customer.

“We working hard so that they can be sure that the price they find on our own direct channel is going to be better, or at least the same, than the price they might find on any comparison site or OTA,” says Hicks.

Pricing and segmentation

The cost of sale in three different channels can range from between five and 35% - and hit profitability hard. Traditional RM tools, which were only focused on top line revenues, just don’t cut it.

A cost of sale of 35% is probably not a sustainable model, says Hicks.

For this reason, a major focus at IHG today is pricing. “We are looking at what is out there, what is missing, where the holes are – and we’re educating our revenue managers on the total cost of sale,” he says.

Fernando Vives, Senior Vice President Commercial Strategy & Pricing, NH Hotel Group agrees: “We need to think total revenue, not just room revenue.”

That means understanding acquisition costs, looking beyond the last click and establishing a concrete pricing strategy per segment.

“That’s key to boosting revenues and optimising RevPAR, avoiding cannibalism while reaching out to a different type of consumer,” Vives says.

He strongly advocates a one-to-one strategy that applies specific pricing based on customer behaviour.

One area where hotels can do better is in yielding group rates versus individual rates online, says Tim Hentschel, chief executive of HotelPlanner.

He points to a “major flaw” in the practice of some revenue managers, “in particular, those hotels that don’t offer a 20% or more discount to promote group bookings six to eight months in advance of check in”.

Driving direct bookings, loyalty and the Google effect

The rise of metasearch, and not least developments in Google Hotel Price Ads (HPA), is making this channel a major battleground for hotel’s media spend.

Some chains like NH Hotels are adopting a wait-and-see strategy; Vives, for one, sees the potential of HPA but says it will “depend on how Google plans on evolving it as we have heard different versions of future next steps”.

Google sees tens of millions of searches for hotels daily translating to “tens of millions of potential bookings,” argues Megan Danielson, Google head of industry, travel.

But it’s also highly unlikely that it will want a set to with its other biggest advertisers, aka the OTAs, which can and do still offer consumers the choice that no one chain can fulfill.

Having said that, hotel firms such as Hilton Worldwide are, according to Dustin Bomar, Vice President, Digital Acquisition, finding Google to to be a valuable partner.

HPA, which Hilton began testing three years ago, is, he says, a cost effective and efficient way to secure more direct bookings and also reach an array of new customers across all devices a customer make be searching on.

Since using Google HPA, Hilton Worldwide has seen:

Conversion rates increase by 45%
A 12% increase in overall ROI compared to traditional search campaigns

Where all hotels are working much harder is on driving loyalty. Simplifying the booking process (eg. Google HPA), giving guests more options when searching and richly rewarding those who book through a proprietary channel are among the tactics.

Hotels are treating loyalty programmes as closed user groups but this remains a contested regulatory issue.

Technology and training

With the boundaries between metasearch and the OTAs blurring, hotels must understand the contribution and attribution of every channel and there are plenty of travel tech firms that can help.

For example, technologies from firms such as ForNova utilise automated online data extraction and simulate human shoppers from multiple point-of-sale systems worldwide.

However, while having the right business intelligence and information architecture should be a primary focus, whether to outsource or develop in-house needs careful thought.

Vives points to several considerations including: strategic value, investment/resources needed and time to market.

When it comes to training and education, strategically there needs to be a much stronger focus today on bringing distribution strategies into line with revenue management, a trend that Hicks has seen accelerate in the past few months and become a major focus for IHG.

Reputation and ancillary revenue

The fast-growing interdependency between reputation and revenue management is recognised by hotel management companies. By feeding data from social listing tools, review sites and online guest surveys back to individual hotels, revenue management decisions are becoming smarter.

“If consumers are seeing the value, and are telling us about it, then that’s a great sign for us to rethink pricing, value add and so on because demand sits squarely with RM,” says Hicks.

Quality and consistency of the brand experience is one thing that hotels can control and an ancillary product strategy, executed well, can help to improve both margins and customer experience.

"All the OTAs are selling travel products on trip but hotels with their local knowledge are perfectly placed to do this,” says EyeforTravel managing director, Tim Gunstone.

Again it’s about knowing your customer. So if you’ve got groups coming through the door then, says Hentschel, you should know that they will spend more on F&B than individuals. So price it right and market accordingly!

Indeed, getting your pricing strategy right is one of the most pressing issues facing hoteliers today.