Simplifying Pricing: From Tactics to Strategy
By Kelly McGuire Vice President, Advanced Analytics, Wyndham Destination Network | May 18, 2014
Revenue managers squeeze every last dollar of revenue opportunity from each product – frequently managing dozens of rates over hundreds of days in detail. Automated revenue management systems have taken some of the burden from revenue managers, by producing analytically-derived rate recommendations and automatically updating selling systems. However, revenue managers still need to review recommendations and manually intervene when necessary. This detailed analysis is not only time-consuming, but it keeps revenue managers in the weeds, taking time away from strategic thinking. For hotels to survive and thrive, there must be a balance between driving short-term revenue and building sustainable long term profits.
As revenue management practices become more widely used, both within the hotel industry and outside of it, the number and type of personas who interact with pricing recommendations are growing. Couple this with a shortage of revenue management talent, and there's more work with fewer people to do it. Companies are beginning to think creatively about how to leverage advanced analytics to apply revenue management discipline broadly, but with fewer people; or, they are looking to expand their revenue management reach with the same number of people. This cannot be accomplished if systems and processes still require revenue managers to manage prices and technology at a detailed level. However, over-simplifying or incorrectly simplifying can negatively affect profitability. Hotels need to first consider how pricing fits within their business strategy, then evaluate any operating constraints (selling systems, people, organizational structure and culture) that may have implications for pricing processes and practices; finally, they should seriously consider whether a technology investment could streamline or automate the process further, thereby freeing up strategic resources.
Aligning Pricing with Business Strategy
There is no doubt that revenue management has begun to take on a more strategic role within most hotel organizations. The focus has shifted from purely short-term revenue generation to building a sustainable, long-term revenue stream. Last year I wrote an article about pricing as a strategic tool, describing the advantages of aligning pricing policies with an organization's business strategy. Simplification will not work properly unless it is approached within the context of an organization's business strategy. You certainly do not want to minimize the value you get from optimal pricing recommendations by oversimplifying your process'
Price can be a useful lever for manipulating demand, attracting certain market segments, driving bookings, or stealing share. It can also signal a value proposition to the market, based on how you are priced relative to the competition or how the prices are presented (whole dollar pricing, rounding or taking price to pennies, for example). For companies with multiple brands or classes of service, pricing can be established to support a differentiation strategy . For example, if the organization is entering an aggressive growth phase by moving into new markets, a pricing strategy that builds market share is warranted.
Recently, I worked with a multi-brand company in the travel space that was investing in new pricing and revenue management analytics. They had a strong desire to improve forecasting and price optimization, but wanted their pricing efforts to align with their brand strategy – keeping the brands, and their brands' customers, distinct. To them, this translated to maintaining a specified price alignment between the brands, across locations, even if their revenue management system would have recommended that one brand should be higher than another in one market, and the reverse in another. While the "optimal" recommendation would have resulted in short term, incremental revenue, they were focused on the long term goal of strong brands as a method of sustaining revenue and profits. The company wanted to know the tradeoffs they were making in short-term revenue to achieve this longer term goal, so the pricing analytics provided detailed and optimal recommendations, which were then interpreted and adjusted according to their business strategy for the selling systems. The revenue analysts could use the detailed analytic results to continue to refine the pricing strategy.