Pricing as a Strategic Tool: How Revenue Management Can Support Business Strategy
By Kelly McGuire Vice President, Advanced Analytics, Wyndham Destination Network | October 06, 2013
As revenue management has demonstrated success and gained visibility in the organization, the discipline has begun to evolve from a tactical, day-to-day inventory management function to a more strategic function within a hotel company. This has been enabled in no small part by the widespread adoption of automated revenue management systems. Once the systems began to make analytic-based pricing recommendations, revenue managers were freed from the manual tasks of data extraction, analysis, and selling system updates. With revenue management systems bearing the burden of determining pricing, revenue managers are now tasked with performing more ad hoc or longer term analysis (managing other revenue generating assets, coordinating with marketing counterparts or monitoring competitive movements). The temptation is to simply let the revenue management system do its job – deliver revenue maximizing, daily pricing decisions.
However, by blindly following system recommendations, hoteliers might be missing out on some important opportunities to leverage price as a strategic tool to support longer-term business strategy, rather than simply using price for short-term revenue generation.
Price as a Strategic Tool
Price has strong advantages as a business lever. By now, most are familiar with the McKinsey report from 1992(1), which showed that a 1% increase in price (overall), resulted in 11% improvement in profits (for the target companies in the study). This is because price increases alone do not increase costs – in other words, it's a very easy way to drive profits. The results of this study apply specifically in hospitality. Several studies sponsored by the Cornell Center for Hospitality Research(2)showed that in the hospitality industry, those companies that established a price position at the top of their competitive set consistently over time had better RevPAR performance than those who focused on occupancy (by setting a lower price to theoretically drive demand). While the GOP numbers for the hotels in the study were not available, those hotels that focused on price should have driven better profits than the comp set, because that price advantage (born out by the RevPAR performance) dropped to the bottom line.
Pricing in the Hotel Industry
The hotel industry in particular has some advantages because they have the flexibility to adjust price frequently. In fact, research has shown that consumers have become accustomed to fluctuations in hotel room pricing, so firms have the ability to be very nimble with price(3). Consider how much simpler it is to change a price than to change a service offering or find a cheaper supplier. This makes pricing very attractive as a business strategy lever. The examples I've given above establish the strong relationship between price and profitability, but there may be situations where you chose to forgo short-term profits in favor of longer term business strategy.