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Will there be "dynamic pricing" war?

With the renewed hotel cycle and improved hotel occupancy, Revenue managers have more room for implementing a rate policy that is more precisely adapted to the change in demand.While the interest of this for hotel groups is obvious, it needs to be communicated to major hotel consumers and key corporate accounts.

Does “dynamic pricing” mark the entry into a new era of rate policies? For some time now hotel groups have been perfecting their flexible pricing strategy. They would like to put an end to negotiated rates, seasonal variations and sprawling segmentations! Now’s the time for free pricing, reflecting the real state of demand... in real time! “On some of our markets, hotels change their rates several times in a single day,” explains Eric Viale, Revenue Management director Europe for the InterContinental group. By using this end form of yield management, hoteliers use the rate argument to get the most out of peak periods and smooth out occupancy rates by directing price-sensitive clientele towards slower periods.The brand’s management sets a framework, but the hotel’s manager is the master of the situation. “The managers of our hotels are the key players. They have the power to make proposals within a standard framework. We listen to our operators and work within a logic of consensus. We have a direct relationship with the hotel,” explains the distribution manager of Louvre Hotels. “We are able to encourage a director to raise his prices. It is a question of argumentation”. In fact, this freedom does not exclude supervision by the operational hierarchy. “Our regional Revenue managers are responsible for ensuring the grounds for this or that positioning. Their regular exchanges with hotel directors and revenue managers are intended to ensure strategies and pricing are optimized.”Times when there were as many rates as there are clients and periods are slipping farther and farther away from us. "Dynamic pricing" goes hand in hand with a more simplified rate base. With a clear rate base structure, prices may evolve within a defined framework . "It is necessary to be careful to preserve homogeneity for the networks of each brand. No client is willing to pay whatever rate is presented and accept unjustified increases of 20%," warns Olivier Derycke, distribution and Revenue Management director at Louvre Hotels. “Before anything else, rates must be comprehensible. 350 different prices across 365 days is many too many,” he insists.Dynamic pricing effects not only Revenue management, but also the marketing of properties. These rate fluctuations can make marketing the product more difficult. But, according to Eric Viale, "prices are losing ground as the major communication element. With very similar products in terms of hardware, we have now shifted from the era of the product:price ratio to an era where dream, experience, and destination all come together". "The implementation of dynamic pricing had positive effects on our marketing and distribution, particularly on the simplification of our inventory and related advertising," confirms Joël Gronau, Marketing Director at Mercure hotels.With the rise in power of online distribution, it has become easy to compare prices of hotels. Well aware of yield management, customers adapt their needs to these significant price variations. “Airlines blazed the way for us,” admits Olivier Derycke. In exchange for higher rates when the hotel is operating full throttle, customers are aware that they may also take advantage of slower periods to get better rates or even find what they’re looking for in high seasons by booking in advance and accepting some restrictions. “We have not met with any particular resistance from our clients with regard to rates that are not fixed by contracts," confirms Eric Viale.Individual clientele accepted this rate flexibility all the more easily as they do not have very much power to negotiate rates. Nonetheless, it is not as easy to implement flexible rates with regard to Key Accounts. Today, this particular clientele benefits from rates that are negotiated in function of the volume generated in the year. The new goal of hoteliers is thus to convince this clientele to accept the principle of pricing flexibility. It is no longer a matter of giving them a guaranteed rate year round, but rather a percentage discount on a fluctuating price. In addition to achieving a higher profit from business growth, the rapid development of "dynamic pricing" should give hoteliers more strength in negotiations. Purchasing management divisions at companies have placed this major budget heading under close supervision. They entrust it to hardened professionals, buyers who know how to best decipher the pricing strategies at hotel groups thanks to Internet. And to avoid being caught out by this benchmarking tool, it is in hotel managers’ interest to generalize "dynamic pricing" strategies.This is still far from being the case, particularly with regard to clients with negotiated rates. The vast majority of contracts have not yet entered the era of "dynamic pricing", although it is beginning on the other side of the Atlantic. Corporate clientele shy away when they can’t see any positive side for themselves. To them, dynamic pricing presents multiple handicaps. The first: Key accounts fear they must accept major price hikes wherein hoteliers are in the stronger position, with growth in turnover to support them. The second: the buyer must justify negotiated prices with the management. Yet, with price variables and no precise framework, this can be difficult.A great deal of effort is necessary to convince them. Even if, as Eric Viale observes, "some clients understand and accept the goal of hoteliers by playing the game". "It is necessary to prove the harmlessness of this tool," advises Joël Gronau. This could be done by showing them the financial advantage to organize a seminar during a slow period; by giving them a quantifiable framework of spending easy to budget. It is clear that the "dynamic pricing" strategy also requires some internal persuasion. "The challenge lies in educating our salespeople who in turn educate our clients. With such a perishable inventory as hotel rooms, it is imperative that we reflect the levels of supply and demand," encourages Eric Viale.In this increasingly competitive environment reactivity is a must. The revolution of distribution via Internet opened the way to "dynamic pricing". Today, two other factors allow it to become widespread: the increased skill of Revenue managers and the efficiency of analysis tools. In fact, within this evolving framework, the role of the Revenue manager, one of the major players in the pricing strategy, continues to gain importance. Originally in charge of pure Yield management, his role evolves at the same rate as the instruments for analysis he has available are perfected. It is up to him to optimize the occupancy rate of the property and its rate policy as well as to perfect his analysis and keep an eye on several parameters, such as the global revenue generated by clients and the management of distribution channels. His job is a combination of sales, marketing and Revenue management.Meanwhile, the analysis tools available to him are being perfected. The best selling specialized management software such as Amadeus Hospitality and Micros Fidelio propose new functions. And hotel groups are also developing their own tools, such as RevTool/RevMix that will be implemented in 2007 at hotels belonging to the Accor group for managing dynamic pricing, as well as Perform, an RMS especially designed by InterContinental for its small capacity properties. In addition to forecasts, the timely analysis of competitors is gaining strategic importance.Pricing benchmark tools are becoming more widespread. The accelerated development of the daily format of the Hotelcompset observatory over the past three years by MKG Consulting meets a demand of the profession. By presenting the rates practiced in an identified geographic area – almost in real time – it becomes possible to see if there is room to maneuver. "These products are easy to use, dynamic and offer an overall view of the standard rate policy of our competitors," explains Eric Viale. The sophistication goes hand in hand with the regular observation of rates available on the Internet.At a time when the recovery is well on its way, everything is falling into place to avoid missing out on opportunities to optimize room revenues.The opinion of Sébastien Condès, Research manager MKG ConsultingLooking for optimal reactivity“While a hotel’s historic performance is fundamental, its competitive environment is even more so. Knowing this information, with as little delay as possible, is a fundamental element that the Revenue Manager must integrate into his strategy. Previously, the Hotelcompset tool allowed him to make comparisons on a monthly basis – in terms of occupancy rates, average daily rate and RevPAR – with a selection of direct competitors. But this observation made a posteriori is not sufficient, so we developed a daily program, enabling operational reactivity. The simple fact that nearly 1,500 hotels already participate in this program launched just two years ago proves that it answers a vital need. It covers all categories, including hard-budget and is used by all categories of players. Just 10 years ago, only the major American or European groups used this type of tool. Today, smaller groups and even the most dynamic independent hotels also keep a careful eye on their competitive universe.”Pricing policy: who does what?Always in search of greater flexibility. Who could resist the strong trend of the moment? Only two hotel categories are a bit less concerned at this time and for different reasons. The luxury segment is taking advantage of a return of clientele with high buying power that is more concerned about the quality of services than prices. But hoteliers have not always had such a privileged situation. At the other end of the spectrum, the hard-budget category has a very small maneuvering margin since pricing is its major sales pitch. In the other categories, however, the higher the range the greater the flexibility.Nonetheless, introducing flexibility requires some framework. In order to define a variable pricing policy, groups do not leave their troops without any structure. Each brand has its own pricing grid. It defines the number of different offers (rack rate, weekend price, special prices on Internet, discounts for different clientele categories such as seniors or people in the service...). This structure also defines the differences between these different rates and the barriers necessary so that the global rate policy remains both pertinent and understandable for the client. Below a certain level, the guest begins to question the product’s quality and services in light of its (too) low cost. Too high and the client thinks its disproportionate.This work is the job of marketing and Revenue management specialists. “The choice of rate structure is done on the level of Global Revenue Management in a close collaboration with Global Marketing. It is important to align the brand’s wishes in terms of positioning with the imperatives of Revenue management with regard to optimizing sales,” describes Eric Viale, director of Revenue Management Europe for the group InterContinental. This pricing structure also evolves in function of the growth objectives for the group overall: “Within the framework of our budgeting process, we define goals for turnover in function of consumer indexes and opportunities for negotiating annual contracts. This sets the framework for some of our ambitions,” explains Olivier Derycke, director of Distribution and Revenue Management for Louvre Hotels.This prescriptive framework is not rigid, however. Hotel groups leave general managers and hotel teams a great deal of latitude for elaborating their own rate strategy within it. Each hotel sets its price level according to its market while taking set orientations into consideration as well as several parameters specific to their local market: the hotel’s positioning, its clientele mix and seasonality. And, of course, the competition. Dynamic pricing on a day-to-day basis comes into play at the level of the hotel – provided its capacity is sufficient– or its market place. “The implementation of dynamic pricing reinforces the hotelier’s need for a certain amount of autonomy. I cannot imagine a process in which the hotel should have to answer to a higher authority each time it wants to modify a price position. It would not be viable to implement procedures that are too demanding and could cause hotels to miss out on some opportunities,” explains Eric Viale.The brand’s management sets a framework, but the hotel’s manager is the master of the situation. “The managers of our hotels are the key players. They have the power to make proposals within a standard framework. We listen to our operators and work within a logic of consensus. We have a direct relationship with the hotel,” explains the distribution manager of Louvre Hotels. “We are able to encourage a director to raise his prices. It is a question of argumentation”. In fact, this freedom does not exclude supervision by the operational hierarchy. “Our regional Revenue managers are responsible for ensuring the grounds for this or that positioning. Their regular exchanges with hotel directors and revenue managers are intended to ensure strategies and pricing are optimized.”

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