Jason Freed always writes stimulating articles and this is no exception. What do you think of the five practices within revenue management
I’ll admit—I’ve struggled with understanding the rate debate. Considering industry-wide average daily rate is down $10 from last year as experts preach about holding rate, I don’t think I’m alone.
I’ve come to terms with how falling ADR hurts the industry as a whole. And I get how long it will take rate to recover from any slashing that’s going on currently. And I completely buy the evidence that discounting does not create demand.
But when I step into the shoes of a consumer—and I do every day—I’m stunned by expert advice to continue raising hotel room rates while the economy sputters, jobs are lost, businesses cut travel budgets and everyday people simply cannot afford to take a vacation.
It’s like this: Say a restaurant has chocolate cake on the menu as a dessert item. In 1998 the slice of cake was priced at $4.50; in 2000 the price was raised to $4.75; in 2004 it was $5.50 and in 2009 the same slice of cake cost $6.50. Eventually, guests at the restaurant just stop ordering dessert. They realize $6.50 is too much to pay for a slice of cake and they go without, especially in a down economy when most of the guests are already penny pinching.
Compare the cake to an overnight stay in a hotel room, except instead of $6.50 it’s $650 for a one-night stay in the new Mandarin Oriental in Las Vegas. At some point, consumers are going to forgo their vacations, trade down or look for a hotel that is offering a discounted rate. Now, does it really make sense for the Mandarin Oriental to hold that rate if occupancy dips to atrocious levels?
To the experts’ credit, evidence clearly shows that dropping the price of the chocolate cake back down to $4.50 isn’t going to get anyone to purchase it. At least not enough people to make up the difference in price. Similarly, dropping your room rate $20 may get you one or two more guests per night, but you’re going to lose overall revenue in the long run.
The solution heading into 2010 is revenue management. The industry has adopted revenue management well, and the organizations that maximize revenue managers and yield management software are the most successful. Those that haven’t are left with rate slashing as their only option.
On a recent webinar, Klaus Kohlmayr, director of Ideas Advantage revenue management consulting division, said hotel companies who have the right tools in place and the right outlook on business and strategies moving forward will be much better off in terms of performance.
Kohlmayr said there are five practices within revenue management—strategic pricing, total asset maximization, win-win distribution, benchmarking performance and back to basics philosophies—that need to be 100 percent in place for a hotel to succeed.
Kohlmayr illustrated strategic pricing—which he said is “recognized as the biggest threat to the industry”—not with chocolate cake, but with cheeseburgers.
At McDonalds, he explained, the pricing philosophy previously called for raising the price of sandwiches by 10 cents and fries by 5 cents across the board.
Then McDonalds implemented revenue management concepts and their philosophy changed. Now, corporate looks more closely at each menu item and each individual restaurant. Executives might suggest one restaurant increase the price of fries by 3 cents, and another restaurant increase beverages by 3 cents and fries by 1 cent.
“Rather than across the board, they look within each restaurant, within each product they sell and they understand pricing sensitivity,” he said. “In some instances they can increase prices and in some they need to decrease. It’s a better and more micro-approach to pricing.”
Kohlmayr outlined some do’s and don’ts for hoteliers.
Do:
— Think about positioning within market
— Ask yourself if customer segments have changed
— Ask yourself if competitors have changed
— Make it easier to roll back discounts
Don’t:
— Follow every competitor movement
— Have competing promotions in place
— Simply discount without exploring options, such as reducing value adds
“There is myriad ways of how you get around reducing your rate,” Kohlmayr said. “Historically we know once you discount it takes three to four years to get rate back to where it used to be. So think about where you want to be in three to four years and if you can afford to suffer.”
Without efficient revenue management processes, the chocolate cake might be discounted, sales remain flat, dessert revenues dwindle and the restaurant struggles. With a successful approach, chocolate cake is offered free with the purchase of two entrees. Demand increases, guest-spend is up and no one walks away hungry.
November 3, 2009
By Jason Q. Freed
http://www.hotelworldnetwork.com/improving-sales/-chocolate-cake-theory-pricing-0
