While hotel industry revenues continue to rise, commissions paid to third parties are growing twice as fast.
Furthermore, companies like Priceline are worth many times more than the largest hotel brands. The hotel industry is nearing a tipping point.
NB: This is an analysis by Marco Benvenuti, chief analytics and product officer and co-founder at Duetto.
Systems and strategies based on a time when most customers booked directly with hotels are no longer profitable, if even viable, in today’s world of online travel agents and emerging intermediaries.
Revenue management must transition to a more holistic revenue strategy that employs new technologies and techniques to combat the growing complexity of the hotel distribution landscape.
Dynamic pricing, the core strategy used by most hotels today, is at the root of the problem. With it, a hotel can theoretically price its inventory based on supply and demand to capture the most revenue.
In reality, it has become dynamically pricing one or two rates that become benchmarks for all other rates. It’s not static pricing, but it’s not really dynamic, either.
It’s a fixed-tier approach based on best available rate (BAR), or what is commonly known as BAR pricing.
The reason this fixed-tier approach has become commonplace is because of its simplicity. It’s easy for hotels to implement and manage, but that simplicity is the exact reason it’s not the best choice.
Advances in technology and data science now allow for a new revenue strategy that goes beyond what dynamic pricing has become.
Open pricing gives hotels the ability to price all room types, channels and dates independently of each other to maximize revenues without having to close any off.
Hotels can price each room across all channels based not on BAR, but on the demand for those specific products and segments.
Unravelling it for a modern hotel sector
Let’s take an a real-world approach to it:
With the fixed-tier pricing approach most hotels use today, a best available rate is established based on price elasticity and other rates are based off that.
For example, a promotional rate may be 10% less than BAR and an OTA package net rate might be 35% less.
So if BAR was $200, the promotional rate would be $180 and the package net rate would be $140.
In this case, the hotel misses the opportunity to maximize revenue by using differentiated pricing based on the different behaviors shown by customers booking from other channels.
A shopper booking the promotional rate may sometimes be willing to pay more than the standard 10% discount from BAR, but most hotels would never know that.
If BAR jumps to $400 on a compressed date, other rates would move in lockstep and the promotional rate would become $360 and the package net rate $280.
This example reveals a serious flaw:
on a day with more business than beds, a hotel will often close out those discount channels, instead targeting the higher-dollar business at BAR.
But if the compressed date falls between two shoulder dates with limited demand, the hotel risks losing customers who wouldn’t see the hotel listed on those discount channels.
The choice is either leave those discount sites open and take low-value business or close them out and risk losing much needed bookings on shoulder dates.
Length-of-stay restrictions can help hoteliers retain some of that lost revenue by keeping discount channels open to customers and forcing them to book for three or more days.
But why not instead price the discount channels dynamically based on elasticity and not shut them out or mandate complicated restrictions?
Instead of closing channels, open pricing enables hotels to always keep the doors open across all channels by pricing rooms based on forecasted demand and pace specific to those channels.
The promotional rate could be two percent less than BAR on a compressed date and the more typical 10% on softer dates. The OTA package net rate may not even be discounted on a highly compressed date, but at least it would remain open to customers only shopping those OTAs.
Open pricing can also give hotels the ability to price different room types independent of each other, based on demand rather than a predetermined amount.
Like with BAR pricing and promotional rates, hotels typically set a modifier between basic room types like a standard and a suite.
The modifier might be a suite always selling for $50 more, but why not price room types independently to always have a suite available for the high-worth last-minute traveler willing to pay for that luxurious experience or for the family in need of a kitchen?
New technology and the integration of property management, central reservation and revenue strategy systems are making this complex matrix of pricing a reality.
Even if systems aren’t yet fully aligned, hotels can manually take steps to maximize revenue through open pricing. They should set up several yieldable segments and manually make rate changes on highly compressed dates when the revenue potential is greater than the cost of that data entry.
Open pricing means never closing the door on a guest who wants to book a hotel.
It’s also what revenue management should be about: maximizing revenue by selling the right room to the right customer at the right time for the right price.
NB: This is an analysis by Marco Benvenuti, chief analytics and product officer and co-founder at Duetto. It appears here as part of Tnooz’s sponsored content initiative.
NB2: Tune in for a FREE webinar with Duetto, Cutting edge revenue strategies for hotels on Thursday 9 October 2014.
NB3: Transparent money image via Shutterstock.