Revenue management and the vicious circle of guerrilla pricing

March 10, 2010 | Hospitality Industry

Revenue management professionals have had to combat several critical issues over the last year or so. Be it for customer rate resistance, contract renegotiations, competition or price wars, the going hasn’t been easy.

From a professional’s perspective, Preferred Hotel Group’s Director, Revenue Account Management – India, Middle East & Africa, Brij Bhushan Chachra believes for revenue professionals, issues such as these are all part of a continuous battle in good and bad times.
However, Chachra acknowledges that going definitely gets tougher during an economic downturn.
“In this recent economy, there is no “one size fits all” approach. The successful revenue manager is one who understands the new environment; understands his/her business on a micro scale; and will then customise an approach that best fits his/her needs,” says Chachra.
He added, “Last year most of the RM professionals gave in to the customer demands and fought a hard price war. However, they have tried to minimise the effect by rationalising price cuts by market segments, exploring emergence of new segments if new rates are offered and effectively using distribution channels.”
Negotiations
Hotels have been focusing on Group and Corporate contract negotiations and price wars. Hotels are often negotiating for group and contract business multiple years in advance. While RM professionals may have been willing to accept significantly reduced group rates during the downturn in exchange for occupancy, they also needed to be very careful regarding not lowering the rate expectations for dates beyond the foreseeable future.
Professionals realise that when the economy turns up again, multi-year contracts and a lower base ADR could artificially deflate achievable pricing for longer than is acceptable.
Chachra says this is true.
He says last year the group rates offered were significantly low, however this is a direct correlation to the demand.
“The group segment is the hardest hit in an economic downturn. Therefore we have to fight harder to retain or even steal market shares. Most RM professionals have been smart by cutting short term deals and protecting the rates in the long term window. I still feel that 2010 will be a challenging year especially for the group segment as the business on books is low from the segment,” said Chachra.
He added, “However, lead time of the segment has shortened considerably therefore it will depend on how the other segments come back which will influence the rates for the group segment. At this point, I would be positive as the shorter booking lead time will boost figures nearer to arrival.”
Price wars
When key competitors resort to guerrilla pricing for unqualified business, revenue managers are sometimes forced to do the same to retain a respectable market share.
This does not generate any additional market demand, and simply drives down the revenues for all. So to what extent has been the market adversely impacted through such tactics? Answering the same, Chachra said this has been a big concern in the past year.
“In guerrilla pricing, hotels try and do price cuts in short window to pick up additional market share however if done too often this can lead to a dilution of revenues,” said Chachra.
“Unfortunately, revenue managers do get into this vicious circle and effect of the same can be seen in our average rates and revenues. Although the year got off to a positive start, with January booking volumes showing growth, the effect of these tactics is seen in the in the depressed average daily rate, which in all cases is lower than that achieved in January 2009, 2008 and 2007,” explained Chachra.
The affect of these strategies, according to him, also affected the strategic positioning of the hotel.
“Luxury or upscale properties should exercise great care before discounting because of the potential impact that this could have on the hotel’s long-term image. Conversely, budget or economy hotels may not be as affected by a price war because they may benefit from customers ‘trading down’ from more upscale hotels,” said Chachra.
Focus
In down economies RM does everything to stimulate incremental demand, ensure all channels are maximised, all segments are priced effectively, and all systems are set up appropriately to capture whatever demand there is to capture.
Chachra says in the last year RM has handled price sensitivity of certain market segments, tackled pricing wars with the competition and effectively managed the distribution channels.
“I feel the biggest challenge for the revenue management professional has been competing in a price war without suffering long-term damage. These comprise both non-price and price methods. The RM has to assess and determine which ones are most effective at delivering business. This economic downturn pushed us to evaluate our operations, create efficiencies where needed and implement changes that have both short- and long-term impact,” shared Chachra.
Given the concern that revenue managers have about pricing-related issues, it is imperative to assess how hotels can manage price during an economic downturn.
One of the keys to success in a down market is to not offer across the board price cuts, but to instead focus on particular market segments and distribution channels.
“When the economy bounces back, we will come out stronger and ready to take on new challenges,” concluded Chachra.

Preferred Hotel Group’s Brij Bhushan Chachra is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2010 (to be held in Singapore, April 28-29.