Hotel revenue managers feel pressure to reduce price

March 27, 2009 | Hospitality Industry

Cornell's revenue management expert Sherri Kimes conducted an online survey of hotel RM professionals throughout the world to gauge how revenue management has changed during these times of economic uncertainty.

With the recent economic downturn, many hotel revenue managers have been struggling with how best to manage declining demand and the pressures to reduce rate.

In order to gauge how revenue management has changed during these times of economic uncertainty, Sherri Kimes, STB Distinguished Professor of Asian Hospitality Management, Cornell-Nanyang Institute of Hospitality Management, conducted an online survey of hotel RM professionals throughout the world. The survey, conducted in partnership with EyeforTravel, was completed by the end of March.

Survey respondents were asked to evaluate eight different issues and assess how the importance of those issues had changed from the previous year. In addition, respondents were asked several questions on how occupancy, ADR and RevPAR performance had changed at their hotels during the previous year.

In addition, the survey posed three open-ended questions on major issues, changes and the future of RM. Finally, the survey recorded various demographic statistics including each respondent’s job position, amount of RM experience, level of education, and geographic location.

Demographic Profile

About a third of the respondents (34%) served in an executive position in RM while more than half (55 percent) worked as a revenue manager. About 10 percent of respondents worked as analysts or consultants. About a third (32 percent) of the respondents worked in Europe, 37% worked in Asia and the Middle East and

29% were from the Americas. Only 5% worked in Africa or Australia. The respondents had considerable revenue management experience, with 58 percent having more than five years of experience (and 20% having more than ten years).

How has performance changed?

Respondents were asked to compare current hotel performance to the previous year’s on a 7-point scale (1 = much lower, 7 = much higher).

Not surprisingly, performance was down significantly from the previous year. Occupancy received an average rating of 2.49; ADR, 2.73 and RevPAR, 2.68. Occupancy ratings did not vary by region of the world, position level, education or amount of experience, but North American and Asian respondents rated ADR and RevPAR as significantly lower than did respondents from other parts of the world.

Guest length of stay was down significantly (2.95) and respondents reported that customers were booking their reservation much closer to their arrival date (average rating of 2.28). Length of stay and booking patterns did not vary by region or education, but respondents with 3 – 10 years of RM experience rated current customer length of stay as significantly shorter than the previous year, and more experienced revenue managers considered the booking window to be significantly shorter.

Change in importance of issues

Respondents were asked to assess how the importance of eight different issues had changed since the previous year on a 7-point scale: 1 = much less important, 7 = much more important.

Issues considered were competition, contract renegotiations, customer rate resistance, price wars, rate integrity, RM hiring, systems integration and training budget.

The top four issues were customer rate resistance (5.86), contract renegotiations (5.84), competition (5.83) and price wars (5.80). Issues that had not changed much in importance during the previous year included training budgets (3.91) and RM hiring.

Open-ended questions

Respondents were also asked three open-ended questions on the most important issues facing RM, the changes in RM practice that they had observed over the previous year, and their vision of the future of RM. The responses were sorted into 8-10 categories for each question.

The majority (77.5 percent) of respondents answered the open-ended question regarding the issues that they viewed as the most important facing them as revenue managers. By far the most frequent comments had to do with pricing. A number of the respondents also commented on marketing issues (11.6 percent) and on the increased uncertainty facing them (10.7 percent).

Price wars (21.9 percent of comments) was the most frequently mentioned issue. Respondents commented on price wars and about the pressure they felt to reduce price to maintain market share and stay competitive. Many also talked about how price wars can ultimately affect the grand image of a hotel.

Pricing (17.4 percent of comments) was also commonly mentioned. Respondents talked about the increased price sensitivity of their guests and how price negotiations with certain market segments had increased.

Rate integrity (16.9 percent of comments) was another area of concern. Respondents were concerned about the impact of discounts on the long-term rate integrity of the hotel and the difficulty that the hotel might face with increasing rates again after a prolonged period of offering discounted rates.

Marketing concerns (14.5 percent of comments) were also mentioned along with the need for hotels to identify new market segments and new distribution channels to help maintain volume and market share.

Future of RM

Respondents were also asked to identify future trends in RM; over 60 percent (62.6 percent) provided comments. The most frequent comments had to do with pricing (20.3 percent), followed by distribution (17.1 percent), total hotel RM (13.4 percent) and marketing (13.4 percent).

A number of respondents also commented on the increased role of RM systems (9.1 percent) and how they believed that RM would be integrated with other departments within the hotel (8.6 percent).

What should hotels do?

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.

Research has shown that hotels with an ADR significantly lower than that of their competitive set have an inferior Rev-PAR performance (Canina and Enz 2008; Enz and Canina 2004). This relationship has been shown to hold true across all hotel market levels.

When developing a response to a price war, you should assess three factors:

(1) Your customers. Customer issues that need to be assessed are the price sensitivity of certain market segments and the possible emergence of new segments if new rates are offered. Discounted rates should be targeted at price sensitive market segments and rate fences should be built to prevent less price-sensitive customers from availing themselves of the discounts. In addition, the hotel should identify other potential market segments which might be attracted by a selected discount and determine whether it is a market segment that fits in with the hotel image.

(2) Your hotel and your competition. Discounts are affected by the cost structure of the hotel, the capabilities of the hotel and the strategic positioning of the hotel. Hotels with a lower cost structure than their competition can more profitably offer discounts since they may be able to withstand the reduced margins. In addition, the type of hotel matters. 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. Their lower prices may appear to offer better value.

The same analysis should be conducted for your competition so as to gauge their potential response to a price war and to determine their strengths and vulnerabilities.

(3) Your distribution channels. In addition, the hotel’s distribution channels should be assessed to determine which ones are most effective at delivering business and also if the volume sold would increase if the commission or percent.

The study also recommends approaches for competing in a price war without suffering long-term damage. These comprise both non-price and price methods.

The full version of the study, Hotel Revenue Management in an Economic Downturn, is scheduled to be released through EyeforTravel shortly.