The beautiful evolution of hotel room pricing over the last 15 years
NB: This is an article by Titus Hanke
What’s an online travel agent, please?
Let’s be honest. We in hospitality all played our part in creating and growing them: the online travel agencies such as Expedia, Booking.com, Orbitz, Kayak, Trivago, Tripadvisor, etc. Our hospitality industry is a slow-moving Goliath and little online travel agent Davids have been dancing around us for the last decade, eventually turning into Goliaths themselves. How did it come to these travel intermediaries playing such a key role in our lives today, whether we are hotel guests or operators? Couldn’t hotel chains have created their own powerful online travel agency (and not only 10 years later with mixed results)? When I started in hospitality nearly 15 years ago, we used to smile at these so called online agencies, who were not even producing a tenth of the business we were getting through the GDS (Global Distribution Systems) or what we referred to as “hotel direct”. Transparency of pricing was a term that didn’t even exist. If you wanted to book a hotel, you would call it or simply use a travel agency to book it. We didn’t even have the ability to book a room on our website back then.
A lot has changed since, and that’s great. Innovation replaces inefficiencies with smart solutions, it makes life easier and information more accessible. Online travel agencies have undoubtedly found their justification in the travel landscape, offering a wide catalog of choice featuring ratings, reviews, real-time pricing, secure payment, pictures and videos, all easily accessible. So that’s a good thing. As another positive side effect, they’ve triggered something that is rather beautiful and that I wanted to spend a moment to write about.
How has pricing of hotel rooms changed in that time?
In the old days, in many cases, we would price our hotel once or twice a week, for the next 15-30 days. Mostly done manually, experience, market insight and a lot of assumptions (also known as “educated guessing”) were what drove the pricing decision. Thankfully, this has nowadays been replaced by systems that are by far more accurate and diligent than humans could ever be. Where we used to define rates based on experience, we are now evaluating what the competitors are doing much more than we ever have. Algorithms in expensive revenue management systems calculate every possible pricing opportunity for us based on this competitive insight and ensure prices are changed across all channels in real-time. So, where we were debating with ourselves what rate to sell for a 3 night stay back in the old days, systems help us now. Revenue Management systems take care of pricing and while we can intervene and usually approve these recommendations, the systems are getting better and better as they learn from historic data and recent trends that humans wouldn’t even notice.
This indirectly means that the job of pricing has also changed. Today, thanks to the technological evolution and sophisticated Revenue Management systems, we have more time at hand to determine and review the pricing strategies around rate products that are not dependent on publicly available rates. Take corporate, wholesale, group and air crew rates for example. Revenue Management has increasingly become involved in the pricing decisions of these rate products, which can account for 60-70% of the hotel room revenue, previously often “un-managed” – at least from a Revenue Management perspective.
Pricing for these contracted rates has historically been a decision of the Director of Sales & Marketing. The same Director of Sales & Marketing who was attending the Virtuoso or FH&R trade shows, conducting famtrips, dealing with customer complaints, meeting clients and doing show-arounds of the property for that great car launch next year. That sounds like a kitchen chef who is serving the guests food and sitting with them to create a relationship which triggers the question: who is cooking (and what is it going to taste like!)?
Aside from increased responsibilities, I believe it is a good thing that Revenue Directors have been able to free up some time thanks to the (substantial) automation of public rate management. It often goes unnoticed, however many corporate hotel owners have realized that the pricing of rooms should sit with the individual who has been trained to do this all day long. In fact, while there is a spirit of close collaboration between sales, marketing & revenue management to achieve the common objective of RevPAR growth, the most simple way to summarize the collaboration is, everybody should do what they do best: sales sell and try to identify new business opportunities, marketing market to create awareness of the property and promote its unique selling points and revenue directors direct and optimize revenues.
Many hotel chains have been handling pricing this way for quite some time now. In fact, some chains are expanding the pricing responsibility to Food & Beverage, and even Banqueting & Catering. Why on Earth would you not want the pricing strategy of the ball room you proudly charge a daily room rental of 12.000 EUR for, be managed by the Revenue Leader of your hotel? When I speak to some of my esteemed “old-school” General Managers on occasion, some always tell me that you need operational experience in F&B and Events to sell ball rooms and event space. Hence, the events team should decide the prices. I am sorry to say they are wrong and stuck in the 90s. After all, I don’t need to know how to clean a bedroom in order to price and sell it. I don’t believe the car salesman who can negotiate the price of a car can explain to me how it works in detail, nor is the real estate guy pricing my new house a plumber who can explain all the pipes. What is true though is that you need to learn and gain pricing experience (and operational experience doesn’t do harm of course). Experience can be acquired, taught and learned. And let’s face it: while it is indeed more complex to sell banqueting space than guest rooms, it’s not rocket science either!
So back to the topic of this article. How has pricing changed? Well, I strongly believe that it has become more diversified because of technology enhancements. Many of these enhancements only became possible because the industry was faced with new online travel intermediaries mentioned in the opening paragraph of this article. Change is good and in this case, the change of the hotel distribution landscape has created technology innovations which resulted in an opportunity for Revenue Leaders to focus on additional revenue streams. Hotels that still work with manual solutions will inevitably be left behind, undoubtedly.
A brief outlook on the future of pricing
I don’t want to drift of into a philosophical excursion about the future, no worries. However there are certain trends that we simply cannot ignore. Some of these will determine the future of revenue management and more specifically, pricing.
Big data. Not a surprise, we’ve all heard about the power of big data. However, today we’re still dreaming of what we could do with it in most cases, especially in hospitality. Reality is, we’re still stuck with our Micros Opera screen which looks exactly like 15 years ago. The future will allow big data to be put to use more than today. This leads to the next point.
Application of big data. Think big (literally). Think about passenger loads on flights that determine hotel pricing because the system anticipates the volume coming into market, think about train and highway traffic. Movement of individuals can be very helpful to predict demand for overnight stays! Geo-based pricing will allow different rates based on the country you’re located in. OTAs have been doing this for a long time (hotel chains mostly haven’t). What about the three day weather forecast? A sunny weekend coming up and the rates should move up for those weekend destinations, for potential guests in the 2 hour flight radius! How will we deal with fluctuation of exchange rates? Incentivizing currency markets (not necessarily the same as countries) with a temporarily unfavorable exchange rate but good willingness to spend and travel could be an opportunity?
Symbiotic Consolidation. Mergers & Joint Ventures between tech companies and traditional hotel chains will drive more and more technology into our hotels. Just observe what is happening in the car industry right now, with tech companies starting to work with traditional car manufacturers. Tech companies realized it’s more complex to build a car than they thought, car manufacturers aren’t as good with computers as tech companies (with a few exceptions). Together, they are building cars that do things we wouldn’t have imagined only 10 years ago! For hotels, this means that the level of automation, the increase in comfort or personalization and the enhancement of the service experience will be a big game changer in the coming years. For sure, this will create competitive advantages for the early adopters.
In closing, I would like to assure that the future of pricing in the hospitality industry is exciting, and it will only get better! It’s a journey of constant change, technology enhancements, new systems, constant learning and adaptation. The good thing? These are all competences that our Revenue Leaders have learned to embrace over the last decade.
Titus Hanke is Director of Revenue Management Operations EMEA for Starwood Hotels and Resorts Worldwide. He is an industry veteran with over 13 years of leadership experience in the field of Hospitality and Revenue Management in particular. His ability to lead constant change management initiatives within an organization and provide guidance to best in class Revenue Management Operations has made him a highly respected revenue management professional.