The curious mismatch between hotel pricing and economic recoveryNewsBy Viewpoints | April 5, 2011Share This article was originally published on NB: This is a guest article by Klaus Kohlmayr, senior director of consulting at IDeaS.Despite the tough times the global hospitality industry has been navigating through, analysts agree on the good news that recovery is near, if not already here.Demand has been rebounding faster than expected. Figures show that 2010 saw international tourism arrivals increase 6.7% year on year. This represents a growth of 22 million arrivals over the former peak year of 2008.Leisure demand is at a historic peak, many markets are above their previous peaks in occupancy, and in the case of London and Berlin, even above previous peaks in rate as well.Yet apart from a few specific markets, average rates have been very slow to recover, especially in the US. The recent recession saw hotels across all markets drop their rates close to historical lows.There are a number of reasons why average rate is recovering slower than expected. It could simply because recovery is uneven.Challenges to full economic recovery, such as consumer confidence, housing prices and unemployment still remain, and as a result, secondary and tertiary hospitality markets largely still have yet to experience a bounce back in demand.However, we understand from our clients that even in the secondary and tertiary sectors, although full recovery has not been achieved, business is getting substantially stronger each month.The obvious conclusion is that, aside from uneven recovery, there must be other factors at work that can better explain the stagnant recovery of average rates.In times of high occupancy, or low, room pricing remain the most effective lever hotels have at their disposal, provided it is used well.And yet, there are three significant factors that mean hoteliers have not yet managed to be proactive with their pricing in this recovery: Hotels have given a large amount of their inventory to OTAs and have not yet managed to rebalance their approach. As a recent article on Tnooz reports, the main OTAs, such as Expedia, have been increasing their margins on the back of hoteliers struggling to fill their rooms.Despite the fact that hotels were quick to lower their rates in the recession, especially when their competitors lowered their rates, in the recovery many hoteliers remain afraid to raise rates for fear of damaging the fragile recovery. There is a fear and lack of understanding of just how price elastic their market segments are.Long term contracts in the corporate, group and wholesale segments, at lower rates, are contributing to the diminished pricing power of hotels. This factor is especially evident in the US, where corporate hotel rates actually decreased in 2010, by 2% year on year vs an overall average daily rate (ADR) increase of 0.4% for North America (Corporate Travel Index). We have already mentioned that pricing is the most important lever in a hotelier’s toolkit, so with the present situation in mind, what can be done to regain pricing power, and implement pricing changes that optimally position hoteliers to keep control of their recovery?Here are the four main areas where hoteliers must focus their energies:1. For markets where demand has rebounded, hoteliers must start to increase rates more proactivelyYes, price sensitivity is high in some segments and channels, however, it is important to understand the business in sufficient detail to determine which segments and channels are more price inelastic to allow for increases in average rate.Even in a price sensitive market, certain segments are less sensitive than others and hoteliers who understand these differences will be able to increase rates more aggressively.It is important to note that average rate increases do not necessarily mean an increase in the rates, in many cases a re-balancing of the business mix towards the higher-rates segments will suffice to improve the business.2. Consider rebalancing inventory allocations towards direct channels.A 30-70% balance between OTA and hotel direct (including the hotel’s website and GDS) is the minimum, while 80-20% is ideal.3. Increase your focus on forecasting.Get your forecast right, and price for the future, not the past. The more granular and accurate the daily demand forecast is, the better the position your hotel will be in to be proactive with pricing decisions. Increasing rates when the hotel is already 70% full is too late!4. There is nothing that can be done to change long-term contracts for 2011 now.Hopefully, some hoteliers have negotiated strategically on last room availability and may have even negotiated dynamic contracted rates, which would allow them to react rising demand by increasing rates proportionally.Others might have started to gradually remove value adds (like free breakfast, upgrades or drinks.For everyone else – if you are regretting the contracting decisions made at the end of last year – mentally register your current situation and any regrets, and keep them in mind when next years contract negotiations come around!NB: This is a guest article by Klaus Kohlmayr, senior director of consulting at IDeaS.