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Revenue Management Rate Parity
Revenue Management Rate Parity
| Forget Rate Parity and Rate Integrity, let’s go to War! |
| Wednesday, 22 July 2009 08:41 |
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Just about every industry expert and professional has been preaching for the last 6 months that dumping rates is not the solution to offset low demand during these challenging economic times. But to unload distressed inventory even Starwood Hotels & Resorts is cutting its prices up to 50% at approximately 600 properties worldwide.
We have been always in favor of a more long term coherent strategy and have always encouraged our clients to do the same thing. And when on the brink of giving up, we always send them the classic song, ‘Hold the Line’, by Toto to motivate them.
But does this still hold up, if a strong worldwide brand like Starwood is stepping away from what many of us have seemed to agree of being the best long term strategy. What if the large chains all start slashing their rates? What if 5 star hotels price themselves at a level where they compete with 3 and 4 star hotels? Can we throw Rate Integrity out of the window?
Rate Integrity, yes that’s a concept consumer’s value, knowing that they are buying a product of a certain value. Of course they are open to pay more or less for a room depending on the time, place and situation of acquisition. Yielding and fences are well accepted by consumers. But there is an acceptable bandwidth or psychological range.
The question many hoteliers ask us, will people accept to be paying €150 for their room, knowing or the room next door pays €75. The truth is they will never know. You will … Many hoteliers also ask us if the profile of the ‘cheaper’ guest will not disturb the more ‘expensive’ guest. We tend to see this as old school thinking, as in this day and age, you cannot tell the difference. Let’s face it, today I am wearing a suit for the first time since my wedding last year. I have been staying in and consulting for 4 and 5 star hotels going around in my ripped jeans. The world is changing …
So how does this game of Price Integrity and Rate Parity Work? From our experience we have found that hotels who have applied a more dynamic and flexible strategy are the ones achieving the best results. One cannot just work in a sense of ‘black and white’ and maintain rate strategies of another era. Nor can you throw all strategies and positioning out of the window. But realistically we are competing in a world that goes in all directions, so we have to be smart about it, not just radically discount across the board.
Ok great, well said… But what is a smart strategy? How could it work? Because in the end you still have to fill rooms. It is too easy to stand on the sidelines and say, discounting is not the solution. I hate those kinds of comments. A theory is not enough. It won’t get you there. You need to get creative, and be flexible. A Guerilla Warfare approach works best, as your competition will not be able to understand or follow …
Here an idea of a strategy that has worked very well for some of the hotels we manage;
The above examples of price segmentation and price discrimination and guerilla tactics are very effective. You have to get creative and outsmart your competition. And if you segment, communicate and promote your offers and price strategy clearly well, you will not lose ‘price integrity’.
To avoid having to discount to deep to achieve occupancy, the name of the game is driving demand. The role of the revenue manager therefore has changed. Collaboration and working in sync with the marketing manager has become indispensible.
Rate Parity and Rate Integrity are not an objective. They are merely yield tools of your strategies. We must not lose sight of the real goal of any business, the bottom line. RevPAR is not something you can really rely on nowadays. Hoteliers should be really managing their property by GopPAR.
If you really want to win in these times, you should take it to the next level. Kill your competition. Invest in online marketing. And I mean invest. Let’s take an average scenario to define budget. A hotel of 100 rooms running at 75% occupancy at an ADR of €80, which gets 30% of its business through third party travel agencies and 15% FIT wholesaler production. Conservatively calculating the commission and net rate discounts we are talking of €180.000, at the least. Converting 10% of this business into direct sales would be acceptable at a price of €18.000 no?
We applied this approach with some hotels we manage last year. And surprise, this year their occupancy is outperforming last years. One of them generated with their website in 4 months time the same revenues as entire 2009 and another double his direct online sales. We are ignoring the direct sales through the reservation office, which is trending at a 20% spin off currently.
To win, you need to take risks, be different. Outsmart your market. Don’t just do what the rest does. Do it in stealth mode. Be a rebel, and outmaneuver your competition. And if it means going against some industry standards here and there, so be it …
Cheers!
Patrick Landman – Xotels
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