Private vs. Public Rates: How to Discount Without Starting a Price War
By Kelly McGuire Vice President, Advanced Analytics, Wyndham Destination Network | March 20, 2011
Broadcasting deeply discounted rates through widely visible channels is the best way to start a price war. Competitors have faster access to price information than ever before, and with improvements in technology allowing more rapid price changes throughout all channels, no sooner have you made a change, then you could find your market responding. As soon as that happens, you've lost your opportunity to steal market share and reap the volume benefits that were supposed to offset your discount.
Discounting to stimulate demand helps to ensure that you are generating sufficient revenue to meet short term financial obligations, but it has long term implications on your price position in the market. The only way to balance the opportunity with the challenge is to be surgical in the way that you offer discounts. Basic revenue management theory combined with some behavioral economics will help you stay out of a price war, while still driving enough volume to meet your financial obligations. First we'll define public versus private channels, and then we'll talk about the revenue management and behavioral economic theory underlying this pricing strategy.
Public channels are those that are available to any customer who "walks up". These include the hotel website, OTAs, call centers or even the sign outside the hotel. The impact of public channels should not be taken lightly. They do more than just facilitate a booking. Rate shoppers like Rubicon scrape these channels and make the rates available to your competition practically immediately. The general public uses these channels to understand your price position, make value determinations and compare their willingness to pay to the rates you are offering.
Private channels have restricted access. You have to "be somebody" or "do something" to get access to the rates. These are channels like meeting planners, travel agencies, loyalty member email lists, social media fan pages, or Twitter followers. Any channel protected by a password or by an "opt in" list. While these channels may have different degrees of price sensitivity or reach, they are not where the general consumer or your competitors typically go to find out what you are charging.
Offering discounts through private channels will impact your ADR, but not the public perception of your price position. As with any pricing decision, however, you need to do some careful analysis to determine whether the pricing discount will generate significant enough volume to make up the loss in revenue. If you simply grant a discount to the same demand that would have materialized anyway, then you're leaving money on the table.
At the core of utilizing public channels versus private channels is the concept of rate fences, one of the principles upon which revenue management was founded. Rate fences are any qualifications or conditions placed around a particular rate that limits access. For example, a senior citizen discount requires you to be of a certain age to take advantage. A pre-paid, non-refundable rate is not attractive to business travelers who might have a last minute change. The point of a rate fence is to allow you to sell a discounted rate to fill excess inventory without diluting revenue from guests who would have been willing to pay more. Rate fences can either be physical, such as room location, room type or included amenities, or non-physical, like advanced purchase conditions or association memberships (AAA)*(i)*.