Hotel Pricing in a Social World

Driving Value in the Digital Economy

Kelly A. McGuire

• Editorial: Wiley
• Año: 2015
• ISBN:
  9781119192404
• Edición: 1
• Categoría: Business
• Categoría: Hospitality, Travel & Tourism Industry

Take control of revenue management in the new hotel economy

Hotel Pricing in a Social World: How to Drive Value in the New Hotel Economy is an insightful resource that provides guidance on improving organizational decision making to keep your hotel relevant, from a pricing standpoint, in the often chaotic hotel landscape. This groundbreaking book clearly showcases the current environment of the hotel industry, and describes new and emerging trends that can impact your revenue management tactics. This essential text prepares you to survive and thrive in today's highly competitive market, and outlines the best approach to building profitable pricing strategies that follow both tactical and strategic best practices.

Revenue management has become a key activity in the highly social environment of today's hotel industry, thanks to mobile technology and social media. Though relatively new, revenue management is a quickly-evolving discipline that requires precision if you want to maintain your hotel's relevance in the market.

• Leverage original research, case studies, and industry examples to understand the practical application of key concepts
• Explore current market conditions that have an impact on revenue management
• Consider how advances in data management, analytics, and data visualization can impact revenue management practices
• Identify how revenue management can help you take advantage of market opportunities and overcome challenges

Hotel Pricing in a Social World: How to Drive Value in the New Hotel Economy is an essential text for hotel CFOs, CMOs, revenue managers, and operations managers who want to leverage revenue management techniques to keep their hotel competitive.

PART ONE
New Analytics for a New Environment: The Evolution of Hotel Revenue Management Analytics, Technology, and Data

CHAPTER 1
The Social World Has Changed Revenue Management Forever

Revenue management has a lot less control today than we like to think we do. It used to be that we could influence guest behavior by putting a particular pricing strategy in the market. With price transparency, rate parity, user generated content, mobile and all of the other myriad of influences on guest behavior, we can’t change behavior with just a price. Our guests are in control, and we need to understand them better to be effective. Price alone won’t do the trick anymore.

—Nicole Young, Vice President, Revenue Management and Sales, SBE Hotels

The chapter opening quote perfectly illustrates the challenges revenue management faces today. In today’s interconnected social world, getting it right is harder than it used to be. Pricing and competitive positioning are becoming more complicated by the day, as service triumphs and mistakes are laid out for the world to see. Revenue managers are asked to build profitable pricing strategies in the face of price transparency, distribution complexity, increased competition, changing market conditions, hyperconnected consumers, and evolving technology. The market has changed, the technology has changed, and the revenue manager has changed as well. Hoteliers are left wondering how to evolve to manage through these changes.

Any statistics I provide about the evolution of the social web and its impact on the search and booking process will likely be outdated before the book is out of copyediting, but the trend will be directionally correct. It is clear that social media has gone mainstream, and it has changed the way consumers engage with one another and the vendors they do business with. Pew Research Center, in a 2014 study, estimated that 52 percent of American online adults use two or more social media sites, with Facebook being the most popular at 71 percent. Seventy percent of Facebook users engage with the site daily and 45 percent interact several times per day (Duggan et al. 2015: www.pewinternet.org/files/2015/01/PI_SocialMediaUpdate20144.pdf). To illustrate how this has changed behavior, the 2014 Pew study reports that nearly half of web-using adults get their news about politics and government from Facebook. A Harris poll found that half of Americans get recommendations about something good to try from social media (www.mediapost.com/publications/article/241179/half-of-americans-get-product-recommendations-from.html). My own research has shown that 55 percent of leisure travelers (Noone and McGuire 2013b) and 80 percent of business travelers (Noone and McGuire forthcoming) read reviews some or all of the time when researching a hotel purchase.

This evolution of the social web came close on the heels of the revolution of ecommerce, which completely transformed the way that consumers research and buy products. Online travel agencies (OTAs), like Expedia (founded in 1996) and Orbitz (founded in 2001), took advantage of the Internet as a buying platform to build online storefronts that display multiple hotel options in a market, so that consumers have easy access to price, location, and feature comparisons across the market. TripAdvisor (founded in 2000) provides a platform for user-generated content describing the travel experience. Today, TripAdvisor has more than 225 million reviews and opinions about more than 4.9 million accommodations, restaurants, and attractions worldwide (www.tripadvisor.com). Review sites are now integrated with Facebook so that consumers can identify reviews generated by friends, or friends of friends. Metasearch sites like Trivago and Kayak aggregate prices and information from booking sites across the web, helping consumers identify the “best” deals (even though with rate parity, they should be finding the same rates for the same hotel offered everywhere).

Facilitated by this robust and complex digital ecosystem, consumers today look at dozens of websites during the search process, making it challenging for hotels to understand where demand is sourced, and which partners are generating bookings. A 2013 report from Expedia Media Solutions and Millward Brown Digital found that leisure travelers visited up to 38 sites before booking a vacation package, an average of 15.5 of them in the week before booking (http://info.advertising.expedia.com/path-to-purchase). The OTAs had a 47.2 percent share of site visits in this study. Let’s not forget that all of this digital activity is rapidly shifting from computers to smart phones, tablets and other mobile devices.

Before I describe how this book will help hotel revenue management survive and thrive in the new social world, it is important to briefly describe where hotel revenue management started, and why the changing marketplace I discussed earlier has put pressure on traditional revenue management systems and practices.

The Changing Marketplace

Based on the success of revenue management in the airlines after deregulation (Smith, Leimkuhler, and Darrow 1992), major hotel companies saw an opportunity to adapt this model to their business, which shares similar characteristics. Yield management, or revenue management as it came to be known, is a pricing methodology that is well suited for industries that have a limited capacity (only 300 rooms in the hotel), perishable inventory (if the room goes empty one night, you lose the opportunity to sell it for that night), segmentable demand (business travelers and leisure travelers value the product differently), time-variable demand (at a business hotel, weekdays are busy, weekends are slow), and a low cost of sale (compared to the cost of operating the hotel, the variable cost associated with booking one more room is relatively low) (Kimes 1989).

Hotels followed the airline model of forecasting demand and preserving inventory for higher paying guests. Overbooking policies protected against no-shows and length of stay controls helped to fill the days around busy periods (“shoulder days”) (Vinod 2004). These measures were very successful, even when implemented in a relatively manual environment. However, this methodology originated at a time before the Internet existed, so it was difficult for consumers to “price shop” in the market. Demand was relatively stable, and assumptions about the independence of rates held for the most part. After realizing substantial value from manually applied overbooking and length of stay controls, rudimentary forecasting techniques, and pricing strategies like threshold models to shut off lower rates as demand started to build, hotels were only just starting to implement automated revenue management systems based on airline models in the late 1990s.

Suddenly, the Internet went mainstream, ecommerce became widespread, and consumer behavior started to change dramatically. Distribution opportunities expanded, and third parties started to sell hotel rooms online on behalf of their hotel customers. Just a few years later, the social web connected consumers to one another and to their preferred vendors across distances and networks. Consumers were suddenly empowered to take control over how they researched, how they made a decision of where to book, and what channels they used.

Today, online travel agents (OTAs), price transparency, social media, mobile, search, review sites, last-minute booking apps, and flash sales have created a market that is more dynamic and generates more data than ever before. Consumers have easy access to price and value information about all the hotels in a market, which means more pressure on hotels to understand and account for competitive dynamics. Disruptive events like economic downturns, political disruptions, and catastrophic weather events have shaken consumer confidence. Booking windows are shortening, driven by the shift to mobile devices and new last-minute booking apps that promise the very best deal on hotel stays. All of this activity means the past is no longer the best predictor of the future.

Traditional revenue management systems have been unable to cope with these changing market conditions primarily because the airline model they were based on assumes that prices are relatively stable, so availability for different prices could be controlled without impacting demand. The models assume that predetermined rates could be open and closed based on independent demand levels. With rate parity agreements, price transparency and the disintegration of traditional rate fences, simply opening and closing rates according to demand forecasts no longer provides optimal price recommendations. Pricing for the mass market must account for price sensitivity of demand and also be balanced against the traditional agreements with groups, wholesalers, and corporate accounts.

The Evolution of the Revenue Management Function

Cross, Higbie, and Cross (2009) provide an overview of the evolution of revenue management in the lodging industry, from the inventory-focused role it played in the late 1980s and 1990s, to the post-9/11 shift toward a more expansive role within the organization. Historically, as described previously, revenue managers were tasked with opening and closing predefined room rates based on predicted demand such that the best combination of occupancy and rate was achieved for any given night. More recently, with the emergence of the digital economy as described earlier, revenue management has begun to evolve from this tactical orientation to a more strategic role that encompasses marketing, sales and channel strategy. With this evolution has come a broader set of responsibilities across a number of domains including pricing, management of the entire revenue stream (total hotel revenue management), and a customer-centric approach to developing demand (Figure 1.1). Consequently, the background and skill set of an “ideal” revenue manager have evolved. I will address all of these topics, and their implications on the practice of revenue man...