The Issue of Tactical and Strategic Revenue Management
By Cheryl Hawksworth Regional Sales Manager, IDeaS, a SAS Company | March 13, 2011
The global hospitality market is in the period of slow recovery after the recession of 2008/2009, but the status of room pricing recovery is uneven across regions. Despite rebounding occupancies, the U.S and Mexico are not yet seeing improved average daily rates (ADR), while hotels in Asia are leading the world in ADR recovery. Hotels in Europe and the Middle East, despite showing no early signs of recovery, are now seeing slowly improving ADR.
It is becoming apparent that, in most geographical regions, recovery is hindered by the tactics hotels employed to deal with the soft demand created by the recession; namely, the tactic of rate discounting in an attempt to raise occupancy, and the subsequent loss of rate integrity. Room prices were driven even lower by the outbreak of regional price wars, the unfortunate result of an intense cycle of pushing for rate parity with competitors that are pricing lower, and lower, in an effort to win market share.
The recent recession was particularly deep, and it is important to consider that in the past it has taken the industry between 5 to 6 years for room prices to fully recover from previous downturns. This lends rise to the question - is the tactic of lowering room rates actually complimentary to long-term revenue optimization?
The tactic of lowering rates can maximize revenue in the short-term, by either holding or boosting occupancy, stealing market share from competitors and attracting leisure travelers or brand-neutral, price sensitive customers. But the unknown variable is how price elastic the market is, how much more occupancy will be gained at the reduced rate, and whether the effect on RevPAR will be positive or negative.
In effect, tactical discounting, especially when it descends into a price war, often has disastrous long-term consequences. Regional hospitality industries are now finding that attempts to increase prices back to pre-recession levels are being met with strong resistance from customers. What is an even more damaging consequence for hotels is the commoditization effect - when a hotel makes a choice to compete on price, this soon becomes the only thing customers see about the property, especially in the era of long-distance travel and third-party or internet bookings.
As a result, it becomes very difficult to differentiate a property from its competitors - ultimately hurting, or completely destroying, any brand that has been built up in association with that property.