The OFT (Office of Fair Trading) has announced investigation into hotel portals for alleged price fixing. The complaint was initiated by Skoosh portal as it accused hotels and portals of price fixing - frankly never heard of them until now so I guess not a bad publicity stunt! Not withstanding the merits or demerits of this case, hotel pricing defies logic and there is absence of good business practice.
Let me put my cards on the table. My experience of hotel pricing comes from involvement with a hotel I partly own and other hotels that we provide marketing consulting service, so you may argue I have a limited experience in this. However, I spend many years being involved in setting pricing of complex products for the global markets with thousands of components, multiple currencies, local price points, etc. Never in my life have I seen so much nonsense presented as science as in the hotel industry.
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Although we have seen some great results from hotel groups such as Intercontinental Hotels Group (helped by property disposal), the average return on capital deployed and net profit margins in the industry are simply dire. Most large hotels are focused on Occupancy Rate, which pushes the rates down for the sake of higher occupancy. The more enlightened hotels look at RevPAR (Revenue Per Available Room), which takes into account occupancy and revenue achieved from available inventory (rooms). Take it whichever you will, these are very crude measurements and drive the wrong behaviours in frontline management, all of which drive down the return on capital deployed (the real measure of profitability in any business).
Hotel industry is its own worst enemy having conditioned the travelling public to think "Buy late and get a bargain", and then complain about return on investment and lack of profitability. Portals such as lastminute.com have become a byword for cheap travel and have actually entered into our everyday language. You can now get last-minute-deal on almost anything.
Hotel industry needs to take a leaf out of the airline industry and their pricing and rate management practices. There are number of similarities between the two business models:
Seasonality - Hotels and Airliners have parallel seasonal highs and lows, with famine-to-feast cash flow that makes the bravest of entrepreneurs run for cover. This seasonality is the key in behaviour and price setting in both industries but strangely manifest itself differently. Capital Intensive - Airlines and hotels are extremely capital hungry with high levels of capital invested in their infrastructure and inventories (aircrafts/ seats & bedrooms). This makes it even more imperative that the assets and inventories should be deployed aggressively and as the old saying goes "make your capital sweat hard". For airlines keeping the ground time per aircraft to minimum is the key to profitable deployment of capital and hotels attempt to chase the same targets by focus on occupancy. High Fixed Cost Ratio - In both cases the operating cost is made up of mostly fixed cost and small variable costs. Think about it, an aircraft taking off from an airport has a loaded cost of fuel, crew, landing/take off slot, and lease/finance cost of the plane regardless how many passengers are on the plane. The same applies to a hotel, as regardless of how many rooms are sold, the cost of building, staffing, marketing, etc. is the greatest part of the overall cost all of which are fixed. External Exposure - The fiasco of Icelandic volcano in April 2010 was a great reminder of the vulnerability of both industries to external events that are entirely out of their control. Same applies to the harsh winter of 2010, strikes by air-traffic controllers, ground crews, etc. all of which impact both airliners and hotels.
Airline Pricing Model
Airlines have steadfastly retained their basic principle of "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 we hesitate at our peril.
However, this simple principle is not a one dimensional and asynchronous pricing model. Airline price management tools take into account availability of seats. Seats are divided into groups (Price Bands/Buckets) which have a set number of seats at a specific price and are made available for sale at preset intervals prior to departure dates. Simple you may say, but this is not the end of the story. Pricing algorithm takes into account 'Sell Rate' (number of bookings per given period, e.g. per hour/per day/ per week), 'Search Rate' (number of enquiries made for specific flight per day/per week), and available capacity (number of seats left for sale). This decides whether a specific bucket of seats is opened, closed, or enlarged hence the variation you may find in prices when checking for a flight over a period of days. Some have gone further by storing 30-day cookies on visitor's browsers so that they can identify a returning browser and then make a decision as to whether to offer the same price as before or increase the price (the "You should have booked earlier" lesson!).
Hotel Pricing Model
This could have been a simple one-liner that says 'Hotels do not have a pricing policy or logical model', but I would then be inundated with emails full of RevPAR, Occupancy, Average Rates, etc. Well this is nonsense. Just because an industry has acronyms and measurable benchmarks, it doesn't follow that they have a system, understanding, or strategy nor does it mean they are measuring the right things. Let me illustrate.
Hands up all those who have seen "Early Booking" offers in January, then 'Sale' prices before Easter and "last-minute" bargains the week before you go on holiday. Then go to TripAdvisor and see all those portals advertising 'Up to 70% discount'. Does this sound like strategy or sell-as-much-as-you-can at any price culture? So what happened to the Rack Rate?
Add to this my very favourite phenomena, namely the portals that are supposed to sweep up excess capacity and increase the occupancy rate. They are provided with a huge commission (up to 25%) and then get a lower price than the Rack Rate (normally the same offers available on the hotel's website). So where is the value add of the Portal? If they offer the same price as the hotel's website (90% do) and take a large chunk of commission, then what happens to the hotels RevPAR? Anyway, if this was supposed to be the clearing house for excess capacity, why do they have rooms for sale in January or February for holidays in July or August? Hotels cannot possibly know their excess capacity 6 months prior to the start of the high season.
Just as Airlines measure Plane Utilisation, we can talk about Occupancy but no matter how high this figure is, it does not mean we are generating any profit. Benchmarks are useful for comparative analysis between two similar businesses, but they should not be mistaken for sound business practices and be treated as the Holly Grail. Business analysis is not dogma, but a rational analysis of the 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.
Have a clear understanding of you Break-even point. Without this you cannot make a rational decision and all the benchmarks in the world will not help you make a profit. Offer your best available prices 6-months prior to arrival dates and as the dates get closer ratchet up the price towards the Rack Rate. Do not create randomly selected discount packages. You should not discount just to get your occupancy up or meet these arbitrary and meaningless benchmarks. You should always consider other objectives such as increasing your average stay, improving traditionally poor period, etc. Occupancy increase will come through as a secondary objective if your packages are well targeted. Review your bookings, availability and targets on daily basis, which then should give you an indication of whether you should retain the low price or ratchet it up (airliners Sell Rate concept). Under no circumstances offer late booking discount unless it is over your average stay (bet you were not keeping an eye on that one). In any event, you should not offer your best prices to last-minute bargain hunters; you are just reaffirming habits that hotel industry would love to kick off.
Lastly, stick to your guns with Portals. 10% commission or nothing and use them to create a pull for your hotel from market segments that are out of your reach but don't make them more competitive than your own rates. Remember you agreed to parity not "lowest ever rate possible!"
This strategy has worked and we can demonstrate hotels that use this strategy have increased their occupancy, RevPAR, and believe it or not Average Stay. Most importantly, hotels that we work with are all profitable operations. You should rightly be thinking; "If this is all there is to it why are you publishing this for free?" You would be right, because this is not all that there is to it!! Contact us and see what we can do for your business.
6 Steps to Profitable Hotel Rate Management.
Ali Zartash-Lloyd is Managing Partner at Cognisant Associates ( http://www.cognisantassociates.co.uk ) a business consulting partnership. He is a management graduate from the University of Leicester and was European Director for major US and Korean multi-nationals for over a decade.
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