Human element deters dynamic pricing at hotels
 
Human element deters dynamic pricing at hotels
13 JANUARY 2016 11:23 AM
Dynamic pricing is a good theory and a practice used by the airline industry, but can it translate to the hotel industry?
GLOBAL REPORT—Dynamic pricing is becoming more important, according to sources, although any rapid rise will be stymied by hoteliers who wish to retain the human element of their businesses.
 
Dynamic pricing is defined as the practice of pricing items in response to market demands to levels determined by customers’ perceived ability to pay. Revenue management is defined as an analytical approach that allows consumer behavior to be predicted at a micro-market level so as to optimize room/product availability and price to maximize revenue growth.
 
Dynamic pricing is viewed by the industry, sources said, as a subset of revenue management, and it is wholly appropriate that airlines are a long way ahead due to the scale that allows them to afford systems to best analyze optimal pricing.
 
The hotel industry is playing catch-up and has to consider the people aspect of selling roomnights, sources added.
 
“A major problem for hotels is that hotel bookings remain an emotional buy as well as a price one,” said David Turnbull, a member of the HSMAI Europe revenue management advisory board and founder and COO of SnapShot GmbH. “That is, a strictly dynamic pricing environment could run the risk of alienating guests.”
 
“Hoteliers did not really consider all the impact of dynamic pricing when introducing it to the industry,” said Nicolas Alsterdal, director of European revenue management for Choice Hotels International. 
 
Alsterdal said the proposition behind the practice is a win-win model for hoteliers and clients, “as it should theoretically result in always offering the best rate possible to clients and the highest possible average rate at the same time.”
 
However, the reality of how the practice has played out has been different, he said. “The traditional global corporate segment did not want to play the game at first, and neither did the international wholesalers.”
 
Alsterdal said dynamic pricing could soon reach its limitation, even though the revenue-management discipline spent the past 15 years implementing the pricing model and still is working in most regions with fixed and dynamic models.
 
“We might have used our revenue-management resources on shaping, implementing and analyzing a pricing model, instead of focusing on profitability and alternative ways to reach it,” Alsterdal said.
 
Sources said dynamic pricing and revenue management should not be confused as being identical.
 
Alsterdal said the industry did not do itself any favors when it began implementing revenue management. He said no one was convinced by the model’s viability, as the industry traditionally shied away from confrontation and toward people skills.
 
“Did our sales teams adopt the model in the first place?” Alsterdal said. “Were our front-desk and reservation agents trained to demonstrate for the guests that they actually did the best deal they could by purchasing our best available rates? Did we give enough knowledge, analysis and tools to our people to understand length of stay, booking windows and willingness to pay? I was there, and I didn’t.”
 
“We do not like conflicts, and we prefer exceptions,” Alsterdal continued. “If you compare the business of selling hotel rooms to the business of selling a flight seat, you will see that there is always a reason for exception and special treatment when you sell a room, but a flight seat is a flight seat. We could, of course, have been as consequent and aggressive as the airlines on implementing dynamic pricing, but we did not have the possibility to do it.”
 
Another issue for many hoteliers, sources said, is there simply is not the time and ability to push new pricing strategies through their systems.
 
Changing the approach
Alexander Manz, a partner at hospitality consultancy Swiss Hospitality & Partners, said hoteliers need to change their approach toward distribution, pricing and marketing.
 
“Many hoteliers have still not understood the five stages of travel and the impact on how to differentiate in order not to become a commodity, since the transparency in the market and the availability over the (online-travel-agency) channels strongly pushes comparability anytime, anywhere,” Manz said.
 
For dynamic pricing to work best, revenue-management teams need to stay focused because bad math can result in losing control of the hotel’s inventory, according Turnbull.
 
But sources cautioned that working in silos won’t get the job done.
 
“We need future commercial strategists who aren’t siloed between sales, marketing, revenue and digital,” Turnbull said.
 
Alsterdal agreed that the industry needs to move away from working in silos with dedicated revenue fields and departments.
 
He said that digitalization can offer a more holistic environment where all of the disciplines can affect each other, including: pricing; yielding; content; search engine optimization; search engine marketing; sales contracting; membership rewarding; on-site offerings; service; and reviews.
 
Alsterdal said the entire revenue-management discipline has taken baby steps toward a more holistic approach of demand management, taking whole demand as the starting point of its strategies.
 
He said many in the industry still cling to the notion that roomnights are perishable rather than analyzing the makeup of full demand.
 
“Is it enough to adjust our pricing point (best available rate) levels to the expected demand, which is basically what dynamic pricing will entitle us to do, or do we have to go further?” Alsterdal said. “How many BAR levels and/or discount levels on BAR rates will we need the day we can address the correlations between review scores, social mentions and pricing?”
 
One possibility, sources said, is hotel chains will soon start leapfrogging the technology systems likely to be prevalent in the next three years. Revenue managers and senior management must constantly consider new technology that will give them an edge over other companies and act as new levers pushing profitability, transparency and sophistication, sources said.
 
Sources said revenue managers need to adopt, if they have not already, three rules of thumb: 
  • Manage parity on a daily basis. See if the OTAs are sticking to parity agreements and that your prices are the same everywhere.
  • Give consumers a reason to believe your prices are not being beaten.
  • Be smarter about the dynamic pricing you predict in upcoming months based on demand, competition, etc.
 

2 Comments

  • Chris Cheney January 20, 2016 4:39 AM

    There are some good points here about the refinement of dynamic pricing and the laggards holding back full implementation. However, there is no mention of the drastic change in consumer behavior, booking method and booking window as technology has migrated to digital/web. The 10 years ago revenue strategy was all about foresight and positioning. Now, these two strategy elements are only half the battle. The fact is, in this short-term, highly transparent and fluid channel landscape, the market itself has become dynamic, and therefore strategy must be dynamic in order to constantly search for equilibrium pricing. The market sets the pricing strategy, not vice versa--that is, if you're really looking to maximize revenue per available room and profitability. I will grant that in the luxury and resort segments, emotional purchasing decisions are still a much larger part of the strategy matrix, and in those segments the price should be much less elastic.

  • Kris Seeboo January 20, 2016 9:43 PM

    The article is a well written one and adresses many issues which have to be honed as per the specific reality of each segment of the market . Chris Cheney" s comments are very pertinent and can be integrated in the above article The theoretical approach is only a tool that has to be mastered and fine-tuned by all the metrics of the prevailing conditions of the market at a definite period

Comments that include blatant advertisements or links to products or company websites will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff.