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We Know Why You Stay (we think)

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June 01, 2012
Value Pricing
Mark Hoare - www.theprismpartnership.com

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One of the most successful and award-winning travel industry advertising campaigns of recent years belongs to American Airlines which claims, “We Know Why You Fly!”  The premise of the campaign is to instill a sense of kinsmanship and recognition. Not only recognition of the individual, but also of his or her differing travel motivations and the needs driving why a particular trip is being taken.


Given that the majority of trips by air involve a hotel stay it’s reasonable to suggest that hotels too should stand behind their own “We Know Why You Stay!” claim. It is also reasonable to suggest that the purpose of the traveler’s trip is the same, whether thinking in terms of the hotel or air component of that same trip.

What the American Airlines campaign does not highlight, at least openly, is that each of these reasons for traveling correlates to a very different value proposition for the seat (or a room in this case) in the minds of the travelers, whether they be business or leisure travelers.  Accordingly, it is extremely important not to treat every hotel guest as a clone of the other, and not to commoditize the product and the experience based on a misapprehension that all travelers are fixated on the lowest published room rate, and that they can always be swayed to one brand or another simply on the availability of the lowest price. 

Some years ago our group looked at how one hotel brand discovered that it had wrongly assumed its branded Web-direct channel had a particular type of guest sitting at the other end and made pricing decisions for that Web-direct channel accordingly. The brand discovered, albeit accidentally, that there were actually several customer types with differing value perceptions and very different reasons for booking.  Effectively, it was offering discounts to people who weren’t looking for them. This is important because our industry has fixated on low price for a decade at least, and in turn has caused widespread commoditization of the hotel product. To be slightly lenient to hotel owners and hotel companies, they have been inextricably drawn into this state by the advent of: ubiquitous rate transparency, STAR reporting, rate parity mandates from OTAs, competitive set pricing reactivity, meta-search engines, harsh economic downturns, among other things.

Some might support the view that the fundamentals of strategic and tactical product pricing have been all but abandoned in the sharp elbowed jostle for lowest price placement based on promoting the least desirable quality, located and configured room. In effect hotels are expending the majority of their time and effort attracting and servicing their least profitable guests. In fact, some hotels implement pricing strategies and booking policies that plainly alienate their best guests. Hypothetically, consider a Ford pricing and selling strategy that is based on advertising and promoting only its entry-level Ford Focus in all its channels of distribution, hoping that that was enough to get the shopper to page down a few times and buy a fully-loaded $43,000 Ford Explorer. How do we correctly value-position other types of rooms and stay experiences to align with the numerous reasons why our guests stay with us? 

Focus toward the fundamentals of product pricing and align that with a rejuvenated understanding of your guests, why they stay, and how that affects their perceived value proposition at the time of purchase.

Contrary to myth, there is no single magic bullet that one can use to repair a poor pricing strategy, rather there’s a compelling need to take a step back and acknowledge that the many years of driving gains via diligent cutting of costs and increasing revenues (somewhat successfully) by the investment and deployment of expensive revenue management technologies are pretty much exhausted.

In support of evolving to value optimized pricing as the cornerstone of a profitable business model, the top areas to focus are described below.

Hotels must define a pricing strategy based on value perception, not cost/+ pricing.
Hotels should understand the underlying cost of an occupied room/suite, but should not use a cost/+ pricing model in today’s highly fragmented market. Using this method implies the hotel doesn’t know, or does not see the benefit in knowing, the value propositions that cause a guest to buy its product or inversely abandon and look elsewhere. 
Hotels must resist reacting to marketplace pricing.
Nothing has promoted the commoditization of a hotel more than chasing the pricing tail of its competition. It presumes that one or more of the competitive-set cluster actually has a pricing strategy worthy of following. What if you could increase local market share and be at a higher price-point than your competitive-set, simply by offering a unique and tailored value proposition? This ability to promote a more intimate knowledge and established positioning within the locality can support higher price points than the box brands in the same area.
Hotels must accept variable-margin pricing by (room/suite) product.
This issue is typically, but not uniquely, a symptom of finance being involved in product pricing strategies. It also stems from cost/+ pricing whereby a hotel may have five room types. Again, the value perception the traveler attaches to a particular room type will vary according to his needs and reason for traveling. Maintaining a uniform margin target across all your products will likely drive away those buyers whose value perception doesn’t align with the resulting price-point, or inversely will leave money on the table for those who would have paid more. 
Hotels must incentivize sales and front office staff on profit margin.
One of the most prevalent issues Prism comes across when evaluating a hotel company’s current rate and selling strategy is the practice of incentivizing sales and the front office based on maximizing; occupancy, average daily rate (ADR), or in more forward thinking properties, revenue per available room(RevPAR). While all of these are key performance indicators they all ignore profit and fixate on heads-in-beds or top line revenue. RevPAR is simply a blended performance measurement of the two. Profit management, measured by GOPPAR (gross operating profit per available room), will supplant revenue management as the practice of choice over the next decade.  Those hotel companies that are already making the move to value optimized pricing strategies will be the best positioned to capitalize on this inevitable shift from revenue focus to profit focus.    
Hotels must accurately profile and segment their customers.
Hoteliers must think differently about how define their hotel’s segmentation. Put yourself in the traveler’s shoes and identify his characteristics and tailor your product, bundling, pricing, and channels of distribution to align with the most important aspects of each segment’s travel needs. The very same guest may belong to two or more segments.

In a recent assessment our group found that environmentally conscientious travelers, whether traveling on business or leisure, will actually pay a premium to enjoy a room that features green amenities such as biodegradable toiletries, hypo-allergenic beds and bedding,  energy efficient lighting, recycled stationery and chlorine free bathroom tissue. The whole hotel hasn’t gone green but a product has been created to align with this growing travel segment.

Another example is the provision of a business-oriented floor product that tightly aligns to the needs and desired stay experience of the business traveler, featuring a smaller bathroom space in favor of a larger bedroom with an ergonomically designed, and technologically efficient work zone.  

Hotels must focus on their most profitable guests/segments.
It would be reasonable to expect that hotels are fully aware of who their most profitable customers are, but this is not the case. As already discussed, the maniacal focus on lowest and best available rate, price parity and other constraining factors such as agreeing to last room availability on mega-OTA sites and backfilling excess capacity with lower rated group and tour business has distracted hotels from developing a deep and actionable understanding of who their most profitable customers are, and are spending most of their time and effort distributing to and attracting their least profitable guests.

Many hotels depend too heavily on the merchant and opaque OTAs to drive heads-into-beds, thus driving occupancy and the delivery of the inherent spin-off of incremental spend. This is wrong on a number of counts. The guests booking through these channels are 99 percent price sensitive and far more likely to patronize the local eatery than the hotel restaurant or bar. Added to that, the booking’s cost of acquisition erodes between 20 percent and 40 percent off what was already the hotel’s best available rate.

Hotels must avoid pricing policies that drive away high-value guests.
We have spoken a great deal about the selling price and profitability, but of equal importance in value optimized pricing  is avoiding pricing and selling conditions that alienate high-value client segments. 

The above focus areas are just a bulleted listing that need to be integrated into a planned approach aimed at transitioning from current-state to a price optimized operation. Before identifying the relevance of each focus area for a particular hotel or hotel brand, and before prioritizing the sequence in which addressing them will drive the best incremental benefit, our group recommends a thorough benchmarking of current state indexed against best practice, and leading practice in those cases where an hotel has already made a move toward being pricing centric.

Making this move will not be easy. Following a decade of focusing on cost containment, occupancy, ADR and RevPAR, it is perhaps apposite to use the analogy of entering into rehab: that is to say, a tough journey ahead with a high likelihood of slipping right back into old habits.  However, when developed over a strong understanding of what facilities and experience guests want out of a hotel stay, hotel companies that are ready to embrace and hold fast to value optimized pricing will lead the charge back to controlling price and become the industry’s leading practitioners of profit management. For those of you who read the book, “Blue Ocean Strategy”1 you will readily identify the similarity between fighting in the Red Ocean of commoditized competitive BAR pricing, and moving out into the Blue Ocean of value optimized pricing.

In part two  of this article, we’ll take a much closer look at one of the most useful of all tools that enables us to fine tune our product and service pricing to the value perceptions of the growing number of different guests/segments that use our hotels, namely conjoint analysis.

Mark B. Hoare, is a partner with The Prism Partnership LLC, a Boston-based consultancy servicing the global hospitality industry. For more information, please call (404) 424-9258 or visit www.theprismpartnership.com.

1 Kim & Mauborgne, Harvard Business School Press, 2005

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