LONDON—The problem with data is that a certain way of looking at it can become very comforting, but ultimately misleading, for the end user. As market conditions change, the realisation that the tools and performance indicators that have been used successfully for a period of time are no longer as helpful can be difficult to digest, lead to uncertainty and, ultimately, to poor decisions. The preponderance of technology and the overwhelming amount of data available that only gives a part of the picture has contributed to a culture of decisions made without recourse to what effect they have had on the business.
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James Chappell
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Let’s use the current market conditions as an example. The hotel industry runs in cycles. Predicting the length of any cycle isn’t an exact science, but they generally run between seven to 10 years, which means four to five years of growth and four to five years of contraction. The severity of the contraction period will be affected by the classic drivers of supply and demand, in turn influenced by the wider economy as a whole.
To illustrate, the European market, which was already dropping partly as a result of the IT bubble bursting in early 2001, was pushed deeper into recession by 9/11 and was in negative growth territory until 2004, the year after the invasion of Iraq. There followed almost three years of continuous growth until the rate and level of growth peaked and started to slow down in the third quarter of 2007. This means that between the end of 2003 to August of 2008, demand for hotel bedrooms year on year was greater than the previous year, which meant higher occupancy levels, greater revenues and more profits.
In the growth period of the cycle, using price as a means to manipulate demand is an effective tool. Revenue managers can change the behaviour of customers with a variety of methods and ‘push’ or funnel bookings to their advantage. High demand periods will mean length-of-stay restrictions to get the best deal, with discounting on weaker days a good way of stimulating demand that perhaps is not necessarily there—at that particular price point. These so-called pink days are the days where the hotel effectively creates its own demand by marketing the rooms, often at a discount, either directly through the Global Distribution Systems or the hotel’s own Web site. Too often, however, the hotel’s own internal budget or growth targets are the focus, not what its share of the market was at any one time. Certainly since 2004, where growth between 6 percent and 12 percent and the market was normal, there has been little incentive to actively manage the market share data when targets were being surpassed year on year.
This has coincided with a reliance on rate scraping, or price comparison, Web sites. It’s certainly seductive to look at competitors’ rates online and believe that you can actively tweak consumer behaviour in real time, but the truth is far less clear cut. Online rate-scraping tools look at publically available rates, i.e. GDS and Internet, which in most cases account for perhaps 20 percent of the business. This means that many hotels are basing short-term pricing decisions with no visibility on 80 percent of the business—unthinkable in any other industry.
These tools have their place, but only as part of a wider strategy that has market share as its core, providing all of the necessary information to have an active check and balance. The fundamental questions hoteliers need always to be asking themselves is this: Did that decision cause me to increase or decrease my market share? Market share in average rate and occupancy can be exploited, as long as the share in revenue per available room ultimately increases. This is where many hoteliers fall down. Without visibility on RevPAR market share, how can you possibly know if that new strategy you have spent many hours designing and implementing has worked?
This brings us back to the underlying theme of the article: adapting your ways of working when the market changes. The ability to effectively manipulate through price is possible only in a growing market. Please note the use of the word effective, because I am sure that a hotel with an average rate of £100 selling rooms for £10 would stimulate interest, but at what cost to the long-term health of the business?
With the current market circumstances as they are, the idea that there is mythical pent-up, ‘latent’ demand waiting to book only if the correct discount is available is false. Hotels that have conditioned themselves to behave in this way are in effect doubling up on the drop, losing both occupancy and average rate. This vicious cycle is accelerated by the rate-scraping tools, which show competitors dropping rates; the temptation to follow suit is often too strong, and the result is a much lower RevPAR.
The solution lies in market share. The name of the game in this market is not making more money than your competitors, it’s making sure you lose less. Hotels first must establish what their market share is on a daily basis, and then closely monitor what effect each price decision has on their RevPAR penetration. That is the only responsible way to manage the business in the current climate and make sure that the hotel is in the best possible shape when the recovery starts.
