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Dynamic Pricing: make it or break it…

In light of the increase observed in average daily rates over the last few years, hoteliers are increasingly inclined to be in favour of flexible rates to stay in line with the market’s fluctuating needs. But while “dynamic pricing” is commonly accepted within a yield management strategy, it makes business clientele, who are accustomed to negotiated fixed rates that vary in function of the volume of nights, cringe.

A few years ago the Coca- Cola Company triggered much criticism when it experimented with vending machines that could adjust their prices as the mercury rose or dropped. And yet, the idea actually aimed more at dropping the price in a slow period to stimulate sales than at increasing them during hot spells! The method earned itself a bad image in public opinion, whereas strictly speaking it is hardly new. The travel industry, in particular, has long adjusted its prices depending on the dates of the service rendered and the reservation. The earlier tickets are purchased, the better their price. Inversely, last minute bookings, at sell-off prices, have existed for twenty years on airlines, and were introduced to the hotel industry after 2001.Hoteliers that decide to take this route will have to convince their clients that they too have everything to win… or at least nothing to lose. Much instruction, transparency and more precise measuring tools will be essential for a successful transition.Each time, the rate is adjusted to optimise revenues in function of market conditions. The hotel chain Marriott was one of the first to implement such modulation widescale, like Hertz for car rentals.The development of e-commerce stimulated dynamic pricing in all sectors to such an extent that some observers see it as the future model for transactions on the Web, which will be adjusted in real time depending on demand. But the model is a double-edged sword that is able to generate new revenue for hotel groups while aggravating relations with important clientele looking for recognition. While the world of airline transportation succeeded fairly well at allowing significant variations in fares depending on the season, including for Business clientele, the hotel industry has more difficulty in receiving widespread acceptation of the concept "in vivo". The development of sales via Internet, which is by far the favoured vector for dynamic pricing, could facilitate its implementation. But its transparency allows clients to compare the fares they are offered more easily with those being applied at the destination during the same period. The frustration easily becomes perceived as unjust, generating infidelity. It is the result of all the ambiguity of a procedure whose adepts nonetheless continue to multiply.Accor Asia Pacific, the biggest operator in the region, expects the months to come to bring dynamic pricing, with, for example, a 10% increase in room rates for popular destinations where the supply is still limited. Generally speaking, the consensus on the sector is that the fixed rates no longer fit the reality of the changes in occupancy rates depending on the time of year. Thus, the practice may be expected to become more widespread in the short to mid-term. The system is not totally free of constraints, it works within a safety net. This comes in the form of an RAP, or Range of Acceptable Prices, within which the rate may fluctuate.If the price drops below a certain level, the client begins to wonder about the quality of the product and of the service provided with respect to its (too) low price. When it rises above the upper lmimit the price seems disproportionate. The hoteliers’ search for the optimal price is naturally perceived by professional buyers as an increase. This is where the strategy clashes with the test of reality and negotiation.Business clientele are often sceptical about dynamic pricing and are sometimes quite hostile about it. Companies that spend large volumes on business travel have a bad opinion of the phenomenon and don’t see any advantage in it for them… especially when it casts any doubt upon the programmes they use and risks pulling the hotel-spending budget up in overall. Flexible rates often run up against a concept that is of capital importance for this Corporate clientele: rewards for their fidelity in the form of a preferential rate in function of the volume of nights consumed rather than the calendar. And then there is the exacerbated problem of anticipating and calculating budgets for business travel...The majority of business clientele have become very reticent about this system. Negotiations are often difficult - even more so in Europe than in the United States. Mind sets are not ready and hoteliers are not always ripe for convincing. Since last fall, Hilton, Hyatt and Starwood have been trying to come to a mutual agreement. They are proposing a different model within which brand loyalty is rewarded by a constant percentage of reduction, which may be applied to the variable rates depending on the market’s dynamism. Hotel groups do not all take the same approach. Between those that prophesy the generalisation of dynamic pricing and call for the need to prepare clientele and those that cry catastrophe while coming to a halt, the artistic blur rules. In fact, some brands, under pressure from their sales manager, are pretty reserved in their approach. Sales people particularly fear that a permanent system that makes a product cost much less from one day to the next, or a week or a month later, might lead to a widespread wait-and-see policy. According to one group of clientele, the spontaneity of the purchase, which is a powerful motor, could be hurt by this. Moreover, clients run away from restrictions as much as they do bad deals. Adapting rates to closely follow real consumption could thus also generate stress and be counter- productive in the end.Thus for a group such as Hilton, 2006 will be a test year with the implementation of the system for certain clients: the first results would appear satisfactory for the brand. The client already appears to be much more inclined to accept the new rules if he knows the RAP that he is subject to. In fact, it is the lack of any more precise information that the principle itself rejects. Nonetheless, a mixed strategy is conceivable and even desirable, at least for an initial period: it is not absolutely necessary to choose between a fixed rate schedule and a fluctuating model, the two are able to cohabit within a single supply. Marriott International, a pioneer with four years of experience in the field thus implements dynamic pricing for 20% of its supply – those properties that have difficulty filling their rooms during certain periods – and maintains a fixed schedule for the other 80%. In practice, the theorization of dynamic pricing is turning more into case-by-case situations where the client’s power of negotiation makes all the difference.Hoteliers that decide to take this route will have to convince their clients that they too have everything to win… or at least nothing to lose. Much instruction, transparency and more precise measuring tools will be essential for a successful transition.

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