A Revenue Management mistake that needs avoiding


NB: This is an article by RateGain

As a revenue manager, taking a decision on the right price is the most important part of your role.

However, for your pricing decision to be as accurate as possible, there is another preceding decision that you need to take correctly.

Most revenue managers spend a lot of time calculating optimum prices without dedicating sufficient time to this step. The trouble is, not paying enough attention to this step will invariably lead to incorrect pricing and missed revenue opportunities.

What am I talking about?

Competitive sets.

Every hotelier in the world has a comp set. But here’s the important question… Is your comp set the correct one? In other words, does your comp set an accurate reflection of your true competition?

Very often – no. Let’s examine the data.

STR helps hoteliers to determine better comp sets by analyzing and grading them. The organization has more than 30,000 comp sets in its US database. Here’s how their grading percentages look…

A grade – 21% of hotels

B grade – 46%

C grade – 33%

Therefore, according to this grading system 79% (46+33) of US hotels have the potential of improving their comp sets. That’s a big number!

Nameback percentage

The fact that most comp sets have a huge scope for improvement is supported by another indicator – the nameback percentage. Nameback percentage depicts the percentage of hotels that add a competitor back in turn.

For instance, Hotel A adds Hotel B as a competitor, but Hotel B does not add Hotel A as a competitor too.

Very often, this has two implications…

  • A is incorrectly naming B as a competitor when it really should not count as competition, or
  • B incorrectly ignoring A as a competitor.

The national nameback percentage in the US is only 48%! This is another indicator that most hotels need to have better comp sets.

What are hoteliers doing incorrectly?

There are three fundamental mistakes that hoteliers or revenue managers often make when thinking about competitive sets.

  1. Some hoteliers believe that it’s enough to determine their competitive sets through intuition or a cursory analysis. However, to arrive at a comp set which accurately reflects the nature of the competition, it’s important to follow a scientific approach. Take various factors into consideration, assign appropriate weights to those factors and arrive at the comp set through a logical calculation.
  2. Often, after arriving at a comp set, hoteliers do not feel the need to reexamine their comp sets again for long periods of time – often years. This is a crucial mistake in a world which is continually changing. An important competitor might not even have existed a year back! According to STR data, only 58% of hotels have modified their primary comp set within the past five years.
  3. Many hoteliers believe that it’s sufficient to have a single comp set. However, for reasons that I will talk about soon, a single set premise is often a flawed one.

Your competitive set lies at the very foundation of your pricing research. You need to know exactly who you are going to compare your prices against. In addition, comp sets are also very important for deciding what inclusions you should offer to your customers – breakfast, in-room wi-fi, airport transfers, etc. Finally, comp sets are also important for marketing campaigns – you need to deliver the right message to travelers so that they choose you over your competition.

So how do you determine a comp set that is more accurate? Here are a few points to keep in mind for creating better comp sets…

1. Listen

Question: What makes a hotel your competitor?

Answer: When a potential guest considers your hotel, as well as that hotel for the purpose of a specific stay, then that hotel becomes a competitor.

The point is that each of your prospects is creating his/her own comp set while picking a hotel. Therefore, your search for a better comp set has to begin with the customer.

If you listen to your guests, you will be able to see recurring patterns and trends about who they are comparing your hotel to. Try to gather information about your guests’ preferences from various sources especially social media and review sites. These platforms are a gold mine of information about what your guests are thinking about your hotel, who they are comparing you against, and what factors they are taking into consideration when making their choices.

This brings us to the second point – factors.

2. Consider the right factors

In most cases the following factors should be taken into consideration:

Room rates
Room rates is possibly the first thing that your guests will take into account while beginning their search.

Location and Proximity
For busy business travelers location is often the most important criteria.

Star rating
Hotels belonging to the same star rating. Sometimes, hotels a star above and below might also be considered, if their price points are not too far apart and they are located close by.

Brand positioning
In terms of the experience it offers and the clientele it caters to. A resort would have a different brand positioning than a business hotel.

There are also other factors like size of the hotel, chains vs boutique hotels, etc.

Which factors are the most important – star rating? Location?

Maybe, or perhaps not! After all, your factors should depend on what your guests and prospects consider to be the most important factors. Listening to your customers will give you a better idea of the weightage of each factor in your calculations.

3. Have multiple comp sets

Usually, upper-tier hotels have more than a single comp set. Taking luxury and upper-upscale hotels in the U.S. into account, 16% have three or more sets while 36% have two sets. Of all hotels in the U.S., 91% have a single comp set.

However, even if your hotel does not fall into the upper-tier categories, you might want to explore having more than one comp set.

You hotel probably caters to different customer segments. A customer who belongs to Segment A would consider and choose your hotel from reasons that are different to a Segment B customer. Having different comp sets allows you to maximize your revenues from different segments – such as group vs transient or business vs leisure.

Similarly there are other purposes for having multiple comp sets. Here are a few types of comp sets you can consider:

You might compete with a very different group of hotels in a different season, hotels which might be quite far off from where you are located. Rather than try to take on the difficult task of incorporate that seasonal divergence in a single comp set, why not have a different set altogether?

You can have a comp set which focuses primarily on location.

This set is based on the similarity of the offering and ignores geography. Comp sets for ski resorts is an example.

If you are working towards rebranding your hotel’s image, renovating it or gearing up for any kind of change, you would need to consider a comp set which reflects that new offering.

4. Continuous Improvement

A year back, the sharing economy was not considered to be a serious competition to hotels as it is now. The world is changing at an extremely rapid pace, driven by technology and changing customer tastes and perceptions.

If the pace of change is so rapid, why should comp sets remain static?

The comp set which was looking perfect yesterday might be completely skewed in a few months time. Besides, no comp set is perfect and Revenue Managers need to revisit them every now and then to have a better representation of who their competitors are.

A crucial step in pricing

Comp sets are one of the first steps in arriving at the right price for your hotel rooms. The data clearly indicates that most hotels have a scope to create better sets. Revenue Managers need to try to make the most of this opportunity to arrive at more optimal pricing – pricing that will help them make more revenue every day.

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