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Revenue Management and Pricing in a Slow Economy

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October 01, 2001
Revenue Management
Kim Lindemann

© 2001 Hospitality Upgrade. No reproduction or transmission without written permission.

Today’s strategies are carefully employing tactics to ensure that everything is done to protect revenues and build sales... everything, that is, except price under-cutting.

Many readers who were around during the dismal late 1980s know only too well what lengths hotel companies will go to in order to save a buck. There was nothing wrong with that, right? In the name of business, it’s all about money, profit and the bottom line. And there were two ugly words in particular that seemed to capture the essence of the drastic measures hotels would take to increase sales: rate war. Because of those hard times and the mostly negative impact rate games had on hotel revenues, today’s yield strategies are carefully employing tactics to ensure that everything is done to protect revenues and build sales… everything, that is, except price under-cutting.

When profits are down, a hotel can do one of two things to increase RevPAR over last year: cut expenses or increase sales. Expenses can be cut rather simplistically—make a list of all unnecessary expenses and put a freeze on spending. Unfortunately, the subject of sales will be more challenging for most, as revenues have peaked in the last few years, making achieving those same levels of growth difficult. Dissecting the two components that make up RevPAR, rate and occupancy, both seem unshakable at the surface in terms of increasing. Demand has plateaued in most markets already, and the rate growth which was a phenomenon for so long (1997-2000), has since slowed considerably. But can our experiences in the late 1980s serve to protect the potential for future rate erosion? With rate protected from significant decrease, hotels may be able to salvage any unnecessary dramatic decrease in RevPAR.

Keeping up with the Jones
If revenues are going to be down, then let’s make sure your revenues are down just as much as your competitors. Keeping up with the pace of your competitor was important when RevPAR growth was in the double-digits, so why shouldn’t it be just as important when RevPAR growth is tepid? You were right to want to grow rate and RevPAR as aggressively as everyone else when times were good, so should you be now, when times are less than desirable: All negative growth is not the same. Let’s say your competitor shows a 2.8 percent RevPAR decrease over the same month last year. It would be wrong to assume you’re doing just as poorly if you show an 8 percent decrease. The latter suggests some money left on the table, for your sales pace worsened significantly more than your competitor.

Pay special attention to the pace of rate growth. On the STAR or HRM (HotelRevMax) Report, note the comparison in percent change period-over-period of your hotel’s average rate vs. your competitive set. While RevPAR might be down, it’s important to acknowledge how your competitors are adjusting prices in response to a slowing economy. You might be surprised to notice more of a decrease in occupancy than in rate growth driving any RevPAR decrease. Many markets still continue to show a positive rate growth, albeit in smaller increments than we were previously accustomed.

Rate Flexibility vs. Price-Cutting
If softening up on rates seems to be how your market of hotels is reacting to a slowing economy, be sure you identify the pricing strategy being employed by most. There’s a fine line between lowering rates across the board and merely allocating additional inventory or rate types available that otherwise would not have been available during those same time periods. An example would be traditionally lower weekend rates being allocated through the midweek, or perhaps a discounted rate attached to a several night stay. The yield management systems used by large hotel companies today make these combined possibilities materialize into camouflaged length-of-stay packages, which on the surface might seem impossible to detect of your competitors without some deeper investigating.

Keep Your Insurance Policies in Force
When RevPAR growth is in jeopardy, one of the first inclinations of a hotelier might well be to slow or even stop spending altogether. This is the first mistake. While it is normally prudent to maintain a frugal disposition during slow times, be careful that any revenue management tool which allows you to maintain an ultra competitive position in your market is coveted for the protection it allows—specifically, in monitoring competitor pricing and inventory controls so that you can implement yield strategies accordingly. Industry reports, such as STAR and HotelRevMax, offer general strategy direction and are indispensable during all demand periods. Industry pricing and GDS reports allow for real-time rate maneuvering and fluctuation. Examples of these valuable pricing and GDS reports would include the long-standing PHASER, Hotelligence and newcomer Internet pricing report, CHECK-RATE. Increased participation on Priceline and Expedia are also suggested, with careful thought going into the rate, time period and product offerings made available.

While making an extra $100,000 might seem challenging at the moment, imagine how easy it would be to lose that same amount. It’s simple… just stop paying attention to your competitors.

Kim Lindemann is president of Yield Management Research & Development, a firm specializing in fair share forecasting and revenue management. She can be reached at yieldmgt@msn.com or (425) 775-7570.

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