Revenue Management is in many occasion confused with strategic pricing. It is a part of the revenue management practices but you cannot rely only on your strategic pricing plan. You need constantly update yourself with relevant information, if possible daily. Besides this information stream you need to apply rate discipline in your drive to maximize revenue. (not to be confused with maximize occupancy) Your goals as you have set in your strategic pricing plan, the forecasted rates, are very important indicator to evaluate your strategies success.
As little as ten years ago, the best, most recent information available about competitors’ rates came out in quarterly Smith Travel Research reports, or we discovered through call-around rates, GDS and rack brochure rates. Now, that data is constantly available and readily accessible – and I don’t mean in call-arounds. Likewise, price and rate prediction could only be achieved by consulting historical tables; rate discipline and its effects on brand identity and future room sales was barely considered two decades ago. Today however, the best revenue management systems employ sophisticated algorithms to generate optimal prices.
Rate Discipline
Rate discipline often comes up in reference to discounting. The theory holds that deep discounts implemented to boost occupancy or stimulate demand will negatively effect the hotel’s brand image. As mentioned, sometimes this practice can run contrary to other important aims, and sacrificing occupancy to maintain strict rate discipline can be as financially irresponsible as knee-jerk discounting. The best practice, then, is to dynamically adjust rates based on demand, without going too far in either direction.
The primary effect of rate discipline is felt on the hotel’s brand. Associations between price and quality are natural for consumers to make, and perceived quality is a central component to any hotel’s brand image. Therefore, a rate discount negatively affects a hotel’s brand.
This effect is real, and cannot be dismissed. Brands have immense value. According to a 2002 Interbrand study, brand value accounts for approximately 38% of the value of the companies that own them. If discounting is damaging to a hotel’s brand, and maintaining one static rate is equally detrimental to RevPAR and occupancy, then the solution lies in variable rate, modified in real-time to best match demand conditions. This eliminates the either-or quandary of whether or not to engage in across-the board discounting. Instead, the highest rate likely to generate a sale is presented to the right customer at the right time. This is achievable through the use of advanced revenue management systems, the best of which will also optimize page position on OTAs, manage multiple sales channels, and manage room inventory. To maximize occupancy and rate, however, automation is key. Rates must be modified subtly, in real-time, to avoid the pitfalls of wide-scale discounting.
In the end, just because a hotel offers a particular rate doesn’t necessarily mean a consumer will take that rate. Rate discipline through dynamic pricing provides a workable solution to this truism.
Using real-time information
The hotel industry, like everything else, has entered its information age. Compared to years ago, when information about everything from competitors’ rates to booking pace to demand levels was tightly held by a select few gatekeepers, all of the information necessary to set the perfect rate is available to hoteliers at all times. Unfortunately, most hotels fail to adequately access this information, or if they do, fail to leverage it effectively. The best practice in information usage is exemplified by the advanced revenue management systems in place at some hotels, which constantly consults demand levels and monitors competing hotels’ rates and make adjustments to the rate being offered based on this real-time information.
The reason this valuable information is now widely available is, of course, the advent of internet sales. Because every hotel posts rates online through various sales portals, those rates can be monitored. Because an increasingly high percentage of room sales are made through the online sales channel, demand levels can be assessed minute to minute. And because hotels have unfettered access to this information through the web, they can act on it in a quick and decisive manner. To do this effectively, however, hotels need the right tools; most often, these tools are found in a comprehensive, automated revenue management system that can, among other things, accurately predict movements in hotel room price.
Price Prediction
Since revenue management involves a certain measure of prediction, it stands to reason that revenue management systems will draw from other industries where prediction is at the core of their business. Some revenue management systems incorporate option pricing principles to help generate optimal room rates. Other systems may also use primarily financial instruments to make predictions, or leverage emerging techniques like crowdsourcing or artificial markets. At any rate, the backwards-looking techniques currently in place at many hotels is fast becoming obsolete.
Predicting the direction of future prices may be a bit foreign to hotels, which often take a supply-side approach to rate setting. But the best practice in price prediction borrows from basic concepts in commodity and option pricing, which focuses almost exclusively on predicting what price the market will bear for a particular good in the near future. The hotel room, as a (relatively) uniform product with high perishability is as much a commodity as a bushel of corn. But as financial markets have mechanisms to determine the optimal price of a particular issue (futures markets, etc.), hotels often arbitrarily assign a rack rate, and (if they do) modify the rate presented to potential customers from there. A comprehensive revenue management system for hotels can set prices based on both historical considerations and current market conditions, giving it twice the range of more traditional pricing strategies.
Each of these best practices of revenue management- rate discipline, information usage, and price prediction- are integral to a comprehensive revenue management strategy. Like strategic pricing and the proper approach to revenue management in general, a hotel cannot operate to its fullest potential without engaging in the best practices outlined here. And while they may not be a magic bullet of lodging success, they can go a long way toward optimizing rates, generating positive and sustainable RevPAR, and gauging where rates ought to be in the near future – a key component of ongoing financial success.