An overwhelming theme in 2018 is that hotel pricing power seems to be a thing of the past. More people are traveling and staying in hotels than ever before, but hotel operators are facing shrinking profitability margins because rates and revenue are not growing at the same clip as costs, such as labor, marketing and distribution.
Ask why hotels can’t drive ADR, and you’ll get blame pointed in several directions, from online price transparency, increased hotel supply and new competition from home-sharing services like Airbnb. But in hallways and breakout rooms this year, I heard a new challenge: technology systems that rely too heavily on competitor rate-shopping and thus recommend severe discounting as day-of-arrival approaches.
After some candid conversations, it’s evident that some revenue managers and revenue management systems are relying too heavily on competitor prices and rate-shopping tools to make pricing decisions.
Honestly, this caught me off guard. How could systems meant to aggregate and analyze data, build an accurate forecast and make profit-driven pricing decisions be in fact suppressing ADR growth?
So, I came back with honest questions for Duetto’s product team. And it turns out the answer is two-fold: mistakes are being made on both the strategy and the technology fronts.
Here’s what I already knew: rate shops and competitor pricing data is meant to be a guide and a measurement, not a “demand signal” or the sole data set off which hotels are making pricing decisions. Below, I’ll highlight some new strategies and data sets to help hotels make better pricing decisions and ways revenue teams can break themselves from the competitor-driven pricing mold.
I also knew that discounting rate to boost occupancy as day-of-arrival approaches is a bad strategy because it sends your competitors into a tailspin and more-importantly trains your customers to either wait to book or cancel and rebook when price inevitably drops.
What I was more curious about though, was the accusations that revenue management systems are recommending heavy discounts, and it turns out that is partially true. Some hotels with a one-way integration to a lightweight RMS are in fact weighing rate-shops too heavily and thus overreacting to competitor price drops. Other revenue management systems use a legacy theory called “zero-bid” to shape their algorithms, meaning when demand is not there, the value of the next room to sell is zero. More on that after the strategy discussion.
New Strategies to Move Beyond Competitor Pricing
On a panel at the Hotel Data Conference, Ash Kapur, SVP of hotel asset management and CRO for Starwood Capital Group, said even with a revenue management system, the biggest challenge for any hotel is dealing with a foolish revenue manager in the comp set. We’ve all heard similar refrains from hoteliers about only being as good as their dumbest competitor on the street corner.
Kapur said a core issue is that hoteliers are looking at market trends and competitor rates before simply evaluating how many rooms they have left to sell.
“People are starting to price based on these rate shopping tools. No!” he said. “We set the rate. Then we will push it to all channels: hotel website, call center, OTAs. If managed correctly, if you understand the demand channels and your customer needs, then you are able to push higher rates even through the OTAs.”
Competitive rates are one piece of the pricing puzzle, but many hotels are paying too much attention to their competitors. Whether it is done manually or with an automated system, any strategy relying on competitive rates and competitor data as the primary mechanisms for pricing is flawed, argues Michael McCartan, Managing Director of Duetto.
“Each hotel has unique demand every day based on its geography, branding, amenities, group business, corporate contracts, online reviews and more. A good forecast considers competitive data, but also other local factors like events, flight arrival information and even web shopping data to more accurately understand overall demand,” McCartan writes here. “If you or your revenue management system are primarily focusing on competitor pricing and someone across the street cuts rate for little or no reason, and others follow, it could and probably will lead to a race to the bottom for everyone.”
It seems as if the No. 1 thing hotel revenue teams can do to drive rate is to stop pricing based on their competitors. Instead, look to the market as an indicator, not a decision-driver, and consider new metrics like GOPPAR and GOPPOR as key performance measurements.
What Does Rate-Shopping Technology Actually Tell You?
Until recently, it was common practice for hotel revenue teams to call neighboring hotels daily and ask their current rate. Understanding the importance of this data, new technologies were developed to help hotels move beyond manual, static rate shops and provide them with live visibility into competitor rate changes and updates.
This insight can be key for hoteliers to ensure rate parity across channels, including brand.com, OTA, wholesalers, etc.
But even rate-shop providers understand that room rates should not be set on competitor data alone, and thus provide their data to larger platforms that ingest and analyze additional data sets. Pricing driven by competitor rates as the main indicator sets hotels up for failure. For this reason, lightweight pricing tools without a two-way connection to the hotel PMS for availability and other in-house data sets are fading out of fashion.
It’s one reason Booking.com shut down its in-house revenue management solution; the necessary integrations were just too complex and costly to build.
At Duetto, the pricing application was built to put a much greater focus on finding a price that will make hotels the most money rather than on estimating demand as a means to that end. Rate shops do not influence the pricing algorithm unless a user wants to set up rules where they always sit at a certain position above or below a competitor, and even this strategy is vetted through a complex conversation before implemented.
Instead, Duetto prices more holistically by using multiple Demand Signals, relying on price, web shopping data, and other third-party data as the cornerstones. Merging real-time signals with a hotel’s historical data provides a better guide.
In fact, Chief Marketing and Strategy Officer Marco Benvenuti told me that when he co-founded Duetto and was working with engineers to develop the algorithm, he made sure to buck legacy revenue management trends that were suppressing pricing power.
“The very first thing that I wanted to do was not to rely on what we call the bid-price approach to pricing. The bid price basically tells you: If I had an extra room in my hotel, what would be the value of that extra room, and traditional legacy revenue management systems base their algorithm on this,” he said. “The weakness of that approach, in the modern world with complex distribution, is that [hotel rates] can go very low very quickly if you’re not forecasting a sellout. So, if for whatever reason your forecast 90 days out was to approach a sellout, but something derailed that forecast, the bid price reverts to zero.”
Obviously starting the value of the next available room at $0 is not going to help hotels push pricing power.
So, while there are plenty of events and trends that hold back hotel revenue teams from pushing rates, your RMS should not be one of them. If you’re dropping rate as day of arrival approaches or relying too much on last-minute discount channels like Hotwire and HotelTonight, challenge your team to identify the causes and revise a strategy to break out of this mold. Proper pricing strategies will help the hospitality industry as a whole fend off disruptors and ensure profitability and longevity.