Ms. Buckhiester

Revenue Management

Best Practices for Dealing with Price Wars

By Bonnie Buckhiester, President, Buckhiester Management Limited

Recently I was driving to a client’s and had occasion to listen to NPR (National Public Radio). The program featured a speech by Robert Gates, Secretary of Defense. He commented that he’d worked for 8 different presidents, and when a situation elevated to the President’s office there were no good solutions. If there had been, someone would have thought of it already and taken credit for it. No, if a problem reaches the President, all that can be done is choose the least damaging of an array of difficult solutions.

So you ask, what does this have to do with price wars in the hospitality industry? Simply put, when you’re in the heat of battle in a difficult market, there are no perfect, silver bullet solutions…but there are options far less damaging than fighting the battle with price alone.

Dealing with price wars is clearly the nemesis of many hoteliers during a recession - with aggressive and often predatory pricing being deployed in many markets. The truth is that when demand wanes, 5-star hotels steal from 4-star, 4 from 3, 3 from 2 and so on. So what is a General Manager to do when price becomes the weapon of choice?

Of course the very first move is to manipulate business mix, not price. But managing mix is foremost a strategic maneuver, and decisions must be made over longer horizons. If you’re already embroiled in battle you need to start by asking 2 questions: “Are you selling your product for less than the customer is willing to pay?” and “Are you creating products that don’t sell?”. If the answer is “yes” to both, it’s likely you have a pricing problem which offers price points that are too high in some circumstances and too low in others, leaving money on the table either way.

This is a curious dilemma considering the hotel industry is a high fixed cost, low variable cost sector. Every incremental dollar impacts profitability exponentially, and every lost dollar erodes profit in the same, magnified manner. So playing with price is deadly. General Managers and Controllers know this all too well, but do other staff members who make decisions about price understand this unique flow-through relationship? If not, they should. They should also know that reliable studies from respected sources like Cornell University confirm that discounting in the hotel business does not create volume as much as it decreases revenue.

Step 1 – Restate your value proposition

For any hotelier, the ability to fight price wars begins with a value proposition. The “ingredients” that establish value involve quality and price. The “ingredients” that make up quality involve product and service. Every customer has some notion of this value proposition. I was working recently with several hotels that decided to try to leverage the value of their smoking rooms. They asked a group of smokers if they would pay $10 more to smoke in their rooms? The answer was ”Are you kidding? Do you know how cold the winters are here? Of course I’d pay $10 more.” So they asked the same group of smokers if they’d pay $50 more to smoke in their rooms, dead silence.

So what does this mean? Simply, that the value proposition for a smoking room in that market was somewhere between $10 and $50. And the price probably shifted inversely in concert with the outside temperature. Determining the value proposition is an important part of dealing effectively with price wars. Yet, even though most hoteliers can tell you their composite Tripadvisor score, few know their “value score”. The moral of the story - if your value score is high, above 4.5 (on a scale of 5), you may have room to move your rate. If it’s below 4.0 you may have a value proposition problem, especially if your competitors’ value scores are better.

But if a hotel is satisfied they have identified their value proposition and feel confident about their price levels, then what steps can they take to minimize the impact of price wars? In my view there are 6 best practices that help. The very first is to restate your value proposition any time prices are challenged. This may seem like a “no-brainer”, but you’d be surprised how often hoteliers give in to price resistance. The key is to state your value proposition online and offline in a clear, confident, and concise manner, this is why we’re worth it. Often this is enough to satisfy a guest’s concerns. If Step 1 doesn’t work, move on to...

Step 2: Ask the right questions.

Too often when a hotel detects price resistance the customer’s premise is erroneous, comparing apples to oranges, standard room prices to deluxe rooms and/or inferior hotels to yours. Sometimes the customer’s pricing expectations are absurd. Ask the question, is this my customer? Ask if you’re competing with hoteliers whose revenue management skills are pathetic. Find out whether denials and turn-downs are being tracked. In other words, do you really know why a reservation wasn’t converted? Was it room type availability, a stay control, or price?

Step 3 – Add value first

The next logical step is to add value before you drop price. Most hotels do this regularly in their packages and promotions, but not automatically when confronted with price resistance. Whether its breakfast, or parking, or free WIFI, or a complimentary upgrade, always add value first, Add whatever is least expensive to you but most treasured by the guest. I recently heard a hotel boast about an added value offering for a late checkout at 2PM on Sundays. Whoop-di-doo. If you want to provide real value, extend that weekend getaway by offering a 5 or 6PM checkout. Now that adds value with no cost, especially for those hotels that do not fill on Sunday nights. What’s the worst that could happen? Housekeeping carries over a few rooms.

Step 4 – Be a master at fencing rates.

Fences in this context are simply tactics that are applied to prices to prevent once segment of demand from buying down into the next. Whether you choose to create a package to obscure the room rate, or offer a free night promotion to protect rate integrity, or provide a limited time complimentary add-on to create value, all of these are various types of fences. The hotel that becomes an expert in fencing their prices (online and offline) will find price war behavior much less damaging.

All right, we’ve covered Steps 1, 2, 3 & 4 – you’re restating your value proposition, you’re asking the right questions, you’re adding value and you have become an expert “fencer”. But this isn’t enough. You feel your back is against the wall, with no choice but to drop prices. If this is the case then at least follow Steps 5 & 6.

Step 5 - “Do the math”

It’s vital you know just how much incremental business your hotel will have to generate to reach the same revenues and profit. In other words, does the revised sales volume appear achievable when compared to the current sales volume? If you expect the sales volume to fall by more than the % breakeven sales change as a result of the competitor's price decrease, it would be less damaging to your property's profitability to match the price than to lose sales. On the other hand, if you expect that sales volumes will fall by less than the % break-even sales change it would be less damaging to your profitability to let your competitor take the sales than it would be to cut price to meet this challenge. You have a choice, but at least do the math first so that you make an informed, fact-based decision. Finally, there’s...

Step 6 – Have the best up-sell program on the face of the planet.

Whether it’s a traditional Front Desk/Reservations up-sell program, or an online solution like Nor1’s patented e-Standby Upgrade up-sell process, don’t miss the opportunity to capture highly profitable up-sell revenue. With so many customers booking online and often paying in advance, what better prospect than a guest who’s already paid and might see a $10 or $20 upgrade charge as great value? Travelers today are quite accustomed to upgrade options, but your hotel will never gain the revenue if you don’t ask the question.

In summary, these six key steps are considered “best practices” when dealing with price wars. Deploy these tactics and your “war wounds” will be far less severe:

Step 1 – Restate your value proposition
Step 2 – Ask the right questions
Step 3 – Add value first
Step 4 – Be a master at fencing prices
Step 5 – Do the math
Step 6 – Have the best upsell program on the planet.

At the end of the day there‘s a big difference between dropping price and lowering average rate. Good pricing practices and smart business mix strategies (ones that match the demand in the marketplace) may produce a lower ADR, but do not use transparent pricing as a primary strategy.

Industrial psychologists say it takes at least a 30% discount to influence a buy. You may increase sales quickly but at a much higher risk. A risk of higher costs, but less revenue. A risk of charging lower prices than the customer is willing to pay. And the risk of eliciting a competitor’s response. They say elephants never forget, well guess what, guests don’t either. They will ALWAYS remember the last rate they paid. Count on it. Deploy these best practices now and ease the pain of battle weary revenue warriors.

Bonnie Buckhiester is the principal of Buckhiester Management Limited, the leading Revenue Management consulting and developmental training firm in North America for the hospitality industry. Founded in 1995, now with offices in Vancouver, Seattle and Washington, DC, Ms. Buckhiester’s career in travel, tourism and hospitality is extensive and multi-dimensional including positions as Senior Vice President, Operations for a major North American hotel REIT; General Manager for two 4½-diamond hotels, and General Manager Operations for a major tour operator. Her diverse product knowledge of hotel, tour, cruise, air, rail and car rental inventories offers a unique cross-fertilization of industry strategies. Ms. Buckhiester can be contacted at 703-858-7304 or bonnie@buckhiester.com Extended Bio...

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