If You’re Going To Panic, At Least Panic Constructively: Raising Rates in a Turbulent Market

Cathy Enz, I could kiss you! During the Cornell Hospitality Research Summit last month, Cathy, a Cornell professor, delivered results from her seven-year study of the hotel slump in the U.S. She found that hotels that held rate or priced above their comp set had predictably lower occupancies. But the real kicker: their bigger RevPAR gain more than made up the revenue loss. Bottom line: “Deep discounting doesn’t do much.”

Even the Wall Street Journal is weighing in. An article in October’s Money Hunt, “Raising Prices Pays Off for Some,” Emily Maltby highlights the conundrum facing everyone with a product to sell: Raise prices? Lower prices? Let them ride? In this article, only 12% of the small business owners surveyed were raising prices.  A whopping 88% were either lowering prices or holding firm. Research published in the McKinsey Quarterly reveals that rushing to lower prices, even if it attracts more buyers, generally doesn’t put a company ahead. And here I was thinking that the hotel industry was the only one with prices dropping faster than a cliff diver in Acapulco (though not nearly as gracefully).

Remember when you first heard the term “yield management”? Later, along with a little tweaking, yield management became “revenue management” and, lately, I’ve heard the term “revenue optimization” thrown around. Bottom line, isn’t it all about selling rooms at the right time, in the right place, to the right people, with the right length of stay, at the right price?    

I understand that this sounds all well and good in theory. But let’s face it—with staff cut-backs and everyone expected to do more with less, research, analysis and strategic planning may be taking a back seat to answering the phone and checking people in. It seems as if each market has a hotel who thinks they can steal business by lowering rate. When everyone else follows suit, they drop their rates once more. They continue with this strategy until the entire market finally fits Einstein’s definition of insanity: doing the same thing over and over again expecting different results. 

Some markets have been seeing recovery both in rate and occupancy though in the last couple of weeks, economic research firm e-forecating.com, in conjunction with STR, announced that the Hotel Industry Pulse Index dropped in September. Evangelos Simos, chief economist of e-forecasting.com is concerned. “September’s report gives us pause and provides questions to the sustainability of the U.S. hotel industry recover.” In other words, it ain’t over yet. 

So, if you’re going to panic, at least panic constructively. Step back, take a deep breath and consider these suggestions:      

Avoid thinking like Jimmy Neutron.  Jimmy: “But dad, all my friends are gonna be there!” Hugh:  “I know, son, but if all your friends were named Cliff, would you jump off them? I don’t think you would.”  In other words, just because hotels in our comp set are lowering their rates, it doesn’t mean we should lower ours, too. We have access to rate-shopping tools designed to monitor comp set pricing tactics.  Though handy, sometimes we become too reliant on the data alone, resulting in pricing decisions based on what the competition is doing, not necessarily what is best for us. Stop allowing the competition to control your strategies. Use Revenue Management 101 to move rates higher when it’s right for you.    

Value Rules!  Let’s take a look at a study recently conducted by Epsilon, a leading marketing services firm. Only a third of the people they surveyed were sure of where they wanted to stay when making a hotel reservation. The number one buying point for all of the customers they surveyed was price. Not that four-letter word RATE. PRICE. Providing value through creative packaging doesn’t mean you have to compromise on rate. The dictionary defines value as “the worth, importance or usefulness of something to somebody.” Create unique meeting packages, value-driven IBT packages and dynamic leisure packages comprised of items that are of significance to the market segment being targeted. When describing them, use benefit statements to reinforce their value.

Channel Management has never been more important. And you won’t hear me go on about dumping the OTA’s. Goodness knows we’ve heard enough about that lately. It’s all about where you distribute your inventory, its value on that channel and, think like an operator here, the profit represented by each booking. It’s the mix that matters. Keep in mind that the only part of revenue that you can take to the bank is the profit.  

We’re not in Kansas anymore. There’s no “waiting until we get back to normal.” This is it, Dorothy.  Refrain from depending on strategies that were working two years ago. Rate management has become a game of who blinks first. Make adjustments for shorter lead times, different arrival/departure days and more diverse booking channels. Booking windows are much shorter now with last minute deals as common as knockoffs in Chinatown. When making decisions, remember Wethern’s law: Assumption is the mother of all screw-ups.

Reports of rate and occupancy improvement are welcome news but a sustained recovery is dependent on the decisions we make now. It’s time to stop cannibalizing the market and work together to recapture the pricing power that we abandoned in alarm over declining demand. Continuing to participate in mindless price wars is not helping your business which means it’s not really helping the economy either.

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