Name your own price – is this hotel revenue management?

For months, a small hotel here in Connecticut featured a sign that read “Name your own price – up to 50% off.” The General Manager must either be desperate or a big William Shatner fan. I can understand the consumer’s interest in finding the lowest price, that’s rational economics; but when hoteliers get on board and try to give away rooms, its not revenue management it’s just race-to-the-bottom pricing.

The hotel industry got the proverbial wind knocked out of it by the economic downturn and is still struggling to get back in the game. But the dirty little secret is that the hotel sector was preparing for a down cycle anyway. The recession just gave it a strong push off the cliff. As analysts discussed the impending doom it was clear that the impact of the fall would be determined by hoteliers’ ability and willingness to hold their rates steady in the face of dropping demand.

Some analysts were optimistic and some were realistic. As it turns out, rates plummeted. The ‘gas station on every street corner effect’ led (Sales) Managers to offer huge discounts while (Revenue) Managers shuddered.

The laws of RevPAR (revenue per available room) make it pretty clear that trading rate for occupancy is not a good plan. A lower rate just doesn’t draw enough new customers to make up for the revenue you threw away. Not to mention the fact that competing hotels will quickly match your strategy. A strong Revenue Management function in a hotel (I have heard revenue managers note that sales managers should be reporting to them, not the other way around) can isolate specific opportunities to increase RevPAR. In certain cases that could mean charging less, in others it may mean charging more. If each channel is not being properly managed, money is being left on the table.

We can’t turn back the clock and we can’t stop other hotels from dropping rates. What we can do is invest in revenue management personnel and tools. STR projects that in 2011, U.S. hotel rates will be almost $14 below where they would have been if 2007 peak levels had continued growing, even just at the rate of inflation. It is going to take many years for rates to catch up. Make sure that your hotel doesn’t permanently destroy its pricing power – be nice to your Revenue Managers and help them find the correct price level for each room, each date, each channel and each customer.

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In survival mode over the last 12 months, hotels have been managing costs, curtailing capital expenditures, and pruning staffs as occupancy and average daily rates (ADRs) fall. Learn more about the recession and impending recovery in PhoCusWright’s U.S. Online Travel Overview Ninth Edition: Hotels & Lodging.

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Date: April 14th, 2010 @ 13:55

Author: Charles Snyder

Categories: Blog, PhoCusWrightPosts

Tags: hotel research, hotel revenue management, hotel revenue management theory, increasing ADR, increasing hotel room rate, smith travel research, str, travel research

Guest

As an Asset Manager at a private hotel firm, I agree with this article. We have struggled in this economy and have seen many (specifically brand-owned) hotels drop rates creating this 'monopoly' which results in neighboring hotels being forced to follow suit to stay competitive. Yes, this is a capitalistic market, but dropping rates while occupancy is also dropping is diminishing the value of our hotels. It is easy for a Revenue Manager to state that you must drop rates to keep your business but that Revenue Manager, working at the hotel, is managing to their own goals at the property level (fill the rooms no matter what). As a hotel owner it is very difficult to maintain the value to the building when rates are dropping rapidly - revenue streams are lower, flow through is more difficult to maintain every day, and the bottom line is greatly diminished. The real question to answer here (which this article implies) is as follows: do you fill a room at any cost, or do you analyze the cost of maintaining and cleaning that room and balance it with the diminished value at the end of the day? Just food for thought here as it's easy to criticize but there are greater implications here when you consider the larger ramifications.

revenuemanager

Well I totally agree with Anti Charles, I have been working in revenue management for many years and have been extremely succesful in good times and bad. I think you missed the most important point, "perishable inventory". Most experiece hotels will use the opaque sites to sell inventory that otherwise would have not sold at our Best Available rates... There is a customer who only buys through these channels and i will take them if I am not forecasting to be full. " Selling the right room, at the right price, at the right time,to the right customer... In closing.. Heads in Beds.