The OFT (Office of Fair Trading) has announced that it is investigating hotel portals for alleged price fixing. The complaint was initiated by the Skoosh portal, since it accused the hotels and portals of fixing prices; Frankly, I’ve never heard of them before, so I guess it’s not a bad publicity stunt! Regardless of the merits or demerits of this case, hotel pricing defies logic and good business practices are absent.
Let me put my cards on the table. My hotel pricing experience comes from my involvement with a hotel that I part own and other hotels that we provide marketing consulting services to, so you can argue that I have limited experience with this. However, I have spent many years involved in complex product pricing for global markets with thousands of components, multiple currencies, local prices, etc. Never in my life have I seen so much nonsense presented as science as in the hotel industry.
While we’ve seen some great results from hotel groups like Intercontinental Hotels Group (aided by property sales), the industry’s average return on invested capital and net profit margins are simply dismal. Most of the big hotels focus on the occupancy rate, which drives down rates for the sake of higher occupancy. The most informed hotels look at RevPAR (Revenue per Available Room), which takes into account occupancy and revenue earned from available inventory (rooms). Take it however you like, these are very crude measures and lead to wrong behaviors in front-line management, all of which reduce the return on deployed capital (the true measure of profitability in any business).
The hotel industry is your worst enemy, as it has conditioned the traveling public to think “Buy late and get a bargain”, and then complain about the return on investment and lack of profitability. Portals like lastminute.com have become synonymous with cheap travel and have indeed entered our everyday language. Now you can get last minute deals on just about anything.
The hospitality industry needs to take a leaf out of the airline industry and its price and rate management practices. There are several similarities between the two business models:
- seasonality – Hotels and airliners have parallel seasonal ups and downs, with a famine-to-feast cash flow causing the bravest entrepreneurs to seek shelter. This seasonality is the key to behavior and pricing in both industries, but curiously it manifests itself differently.
- capital intensive – Airlines and hotels are extremely capital hungry with high levels of capital invested in their infrastructure and inventories (aircraft/seats and rooms). This makes it even more imperative that assets and inventories be aggressively deployed and, as the old saying goes, “make your capital sweat a lot.” For airlines, keeping per-plane ground time to a minimum is the key to cost-effective deployment of capital, and hotels try to pursue the same goals by focusing on occupancy.
- High fixed cost ratio – In both cases, the operating cost is composed mainly of fixed costs and small variable costs. Think about it, a plane taking off from an airport has a loaded cost for fuel, crew, landing/takeoff location, and aircraft leasing/financing cost, regardless of how many passengers are on the plane. The same applies to a hotel, as regardless of how many rooms are sold, the cost of construction, staff, marketing, etc. is the largest part of the total cost, all of which are fixed.
- external exposure – The Icelandic volcano fiasco in April 2010 was a great reminder of the vulnerability of both industries to external events that are completely out of their control. The same applies to the harsh winter of 2010, strikes by air traffic controllers, ground staff, etc. all of which affect both airlines and hotels.
Airline Pricing Model
The airlines have firmly upheld 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 hesitate at our own risk.
However, this simple principle is not a one-dimensional, asynchronous pricing model. Airline pricing tools take seat availability into account. Seats are divided into groups (Price Bands/Cubes) which have a fixed number of seats at a specific price and are available for sale at pre-set intervals before departure dates. Simple it can be said, but this is not the end of the story. The pricing algorithm takes into account the ‘Selling Rate’ (number of bookings per given period, for example, per hour/per day/per week), the ‘Search Rate’ (number of queries made for a specific flight per day/week) and available capacity (number of seats left for sale). This decides whether a specific bucket of seats is opened, closed or extended, thus the variation you may find in prices when checking a flight over a period of days. Some have gone further by storing 30-day cookies in visitors’ browsers so they can identify a returning browser and then make a decision to offer the same price as before or increase the price (the “Should have booked earlier” lesson). !).
Hotel pricing model
This could have been a simple sentence saying “Hotels don’t have a pricing policy or logic model”, but then I would be inundated with emails full of RevPAR, Occupancy, Average Rates, etc. Well, this is nonsense. Just because an industry has measurable acronyms and benchmarks doesn’t mean it has a system, understanding, or strategy, nor does it mean it’s measuring the right things. Let me illustrate.
Hands up all those who have seen “Early Booking” offers in January, then “Rebate” prices before Easter and “last minute” bargains the week before going on vacation. Then go to TripAdvisor and look at all those portals that advertise ‘Up to 70% off’. Does this sound like a strategy or a culture of selling everything you can at any price? So what happened to the Rack Rate?
Add to this my favorite phenomenon, namely portals that are supposed to eliminate excess capacity and increase occupancy rates. They are given a huge commission (up to 25%) and then get a price lower than the Rack Rate (usually the same offers available on the hotel website). So, where is the added value of the Portal? If they offer the same price as the hotel’s website (90%) and take a large portion of the commission, what happens to the hotel’s RevPAR? Anyway, if this was supposed to be the overcapacity clearinghouse, why do they have rooms for sale in January or February for vacations in July or August? Hotels cannot know their excess capacity 6 months before the start of the high season.
Just as the Airlines measure Airplane Usage, we can talk about Occupancy but no matter how high this figure is, it does not mean that we are generating any profit. Benchmarks are useful for benchmarking between two similar businesses, but should not be confused with sound business practices and should be treated as the Holy Grail. Business analysis is not a dogma, but a rational analysis of performance that should show us the right direction to run our business.
What is the solution?
The solution is simple, just follow the airline industry.
- Have a clear understanding of your 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 before your arrival dates, and as the dates get closer, increase the price towards the regular rate.
- Don’t create randomly selected discount packages. You should not discount just to increase your occupancy or meet these pointless and arbitrary benchmarks.
- You should always consider other objectives such as increasing your average stay, improving traditionally poor periods, etc. Occupancy increase will appear as a secondary goal if your packs are well targeted.
- Review your reservations, availability and targets on a daily basis, which will give you an indication of whether to keep the price low or increase it (aircraft sales rate concept).
- Do not under any circumstances offer a late booking discount unless it is above your average stay (I bet you weren’t aware of that). In any case, you shouldn’t offer your best prices to last-minute bargain hunters; you’re just reaffirming habits that the hospitality industry would love to start.
Lastly, stick to your guns with Portals. 10% commission or nothing and use it to attract your hotel from market segments that are out of your reach but that don’t make you more competitive than your own rates. Remember that you agreed to parity, not “lowest possible rate.”
This strategy has worked and we can show that hotels using this strategy have increased their occupancy, RevPAR and, believe it or not, the average stay. Most importantly, the hotels we work with are profitable operations. You should be thinking straight; “If this is it, why are you posting this for free?” You are right, because this is not all there is! Contact us and see what we can do for your business.