Mr. Sharma

Revenue Management

Top 5 Things to Consider in Order to Maintain Rates and Avoid Price Wars

By Chinmai Sharma, Vice President Revenue Management, Wyndham Hotel Group

I think everybody agrees that we have been through a roller coaster ride in the past twelve to eighteen months. While the industry has become much more profitable over the years we still see a lot of knee jerk reactions at the hotel level especially in terms of pricing. While we understand that pricing can create demand and move share within a competitive set of hotels, it is well documented that indiscriminate discounting will not create additional demand but dilute existing revenue streams. RevPAR variance at a hotel – both positive and negative - has a multiplier effect on its profitability and thus it’s important to understand how much increased demand will you really need to offset the impact of an ADR drop. Here are five steps you should consider and questions you should ask yourselves before jumping down the rate spiral in hope of capturing that elusive incremental demand:

1. Start with taking a closer look at your latest monthly Smith Travel Report

Check your Occupancy, ADR and RevPAR index (penetration) vs. your competitive set and tract scale for the running 3 months and YTD. In particular look at the spread between your ADR and occupancy indices vs. comp set and market to gauge if you are close to your fair share on these two metrics. If the spread is too large it might indicate that your RM strategy might be out of balance and in need of some adjustment. As an example if your Occupancy and ADR index vs. your comp set is 120% and 70% respectively there is a good chance that you are underpriced and that you might be able to achieve a better RevPAR index and profitability by improving your ADR index even at the cost of losing some occupancy. The vice versa is also true although one needs to remember that the improvement in occupancy usually has to more than compensate for the drop in rate to maintain the same profitability. If STR segmentation is available for the competitive set then examine your transient, group and contract RevPAR index performance. In particular look at your Transient ADR and RevPAR index to understand if your transient rates (which include your retail / non-qualified segment rates) are comparable to your competitive set over a period of time. If you subscribe to STR’s bandwidth report then understand the width of the ADR bandwidth for your comp set including the ADR of the comp set leader. This will help you understand your potential ADR gap and assist with your retail pricing strategy.

2. Look at your Segment Mix

Understand your business by the ‘purpose of visit' of your largest segments. Track their production over time and develop a ‘What If’ type scenario worksheet to develop possible iterations of the mix. Even while maintaining the same pricing strategy but changing to an optimal segment mix will give you a higher RevPAR and index. Examples could be to leave more rooms for retail and higher rated business in high demand markets and periods instead of filling up too early with lower rated / discount business. Remember to consider the displacement factor for high demand periods especially when considering changing the mix between transient and group rooms. Some other questions to ask include - How are your volume accounts priced in comparison to your other segments like wholesale and OTAs? How much are they spending at your hotel in ancillary revenue?

What days of week are the accounts utilizing and do you need help on those days of week? Do you have a rate-volume logic in most of your negotiated corporate accounts?

3. Understand your Channel Mix

Analyze the channel mix at your hotel and see if there are any opportunities to leverage the typically high ADR, low cost proprietary channels like your hotel or brand’s website. Optimizing the business mix from other channels into a channel like the hotel or brand website can give you both a higher Gross ADR and a higher Net ADR (post reservation transaction costs). Look at your opaque segment rates and volume compared to your retail business to understand if the rate spread is too large or if you are selling too much on opaque segments at a low rate too far out. Compare your channel mix with the industry / leading hotel brands using benchmark reports like Rubicon Demand Analysis (Destination Insights) or TravelClick’s eTRAK report to see if you are underperforming in any channel. To develop an optimal channel mix start tracking metrics likevolume per channel, channel costs, booking characteristics (lead time and day of arrival) and ancillary spend. Develop your forward looking Revenue Management strategy based on your data and lead time. Price by dominant channel depending on where you are in the booking window and fence appropriately.

4. Evaluate your Room Type Mix

Track room type production through your PM system and check the actual occupancy and ADR by room / suite type. Analyze your actual ADR by room type vs. the published rate ‘modifiers’ or rate differential between room types to make sure you are priced correctly. Is your deluxe or executive room really worth the $30 premium you have set? Are you really getting the higher rate you were planning on or do you oversell your base/cheapest room types and then end up upgrading for free? Do you have an effective up-sell program at the front desk level? Would it make sense to charge $ 15 extra instead of $30 for the higher room type to improve their capacity utilization and achieve a higher overall rate? Can you charge a premium for your double beds since you have limited inventory and they are the first to sell out in summer months? Are your suites really that nice that you don’t sell them on most channels but let your front desk staff sell them to walk-ins at a ‘manager’s special rate’?

5. Shop Intelligently

Do you have a good competitive set for your rate shop reports? Are all the hotels in your set comparable to your hotel from a product quality standpoint? Do you compete with your comp set hotels in at least one major market segment? Now that you have a good comparable competitive set, you need to make sure you are shopping them correctly. Do you just shop for one night length of stay or can you shop multiple nights length of stay to get the real picture for LOS based discounts in the comp set? It’s always a good idea to shop for some qualified rates like government or AAA as well to see what discounts are being offered by the comp set hotels. Also calculate your retail rate index (average lowest weekday and weekend retail rates for your hotel compared to your competitive set) and compare it to the STR ADR index against the same competitive set to see the variance. If your retail rates are in line with your comp set but you are under-penetrated on the STR ADR index then you probably have a segment/channel mix opportunity.

The points mentioned above are not meant to be an exhaustive list but just some good food for thought for hotel operators to incorporate in the development of their pricing strategy. The market place today is very dynamic with the advent of new distribution channels and the quantity of information available to the customer. There are many factors that can impact demand at a hotel and market level bit it is still a good idea for a hotel to try and develop a controlled test criteria while trying out new pricing strategies. Based on the inputs above if a hotel does decide to test some new higher or lower price points then they should make sure they do it in a controlled manner and for a specific time frame. Once the period is over, they should test their effectiveness using metrics like STR indices, YOY change, rate efficiency and impact on the profit line. Hotels should also think through the impact of a significant change in retail rate structure on their floating qualified discounts (AAA, consortia etc) as well as on their bread & butter negotiated accounts and fixed rate / allocation type wholesale partners.

Chinmai Sharma is a successful revenue management leader with more than fourteen years of progressive hospitality experience in the fields of Market Analysis, Revenue Management and Electronic Distribution with companies like Taj Group of Hotels, Hyatt International, Expedia Inc and Wyndham Worldwide. Mr. Sharma joined the Wyndham Hotel Group in 2007 and is responsible for the overall Revenue Management process for Wyndham Hotels and Resorts, Wingate by Wyndham and Hawthorn Suites by Wyndham brands which includes setting strategic direction and alignment for the brands and specific hotels. Mr. Sharma can be contacted at 973-753-6848 or chinmai.sharma@wyn.com Extended Bio...

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