Amin Deroui - Profitable Hotel Rate Management
Although we have seen some great results from hotel groups such as Intercontinental
Hotels Group (helped by property disposal), the average return on capital deployed and net
profit margins in the industry are simply dire. Most large hotels are focused on Occupancy
Rate, which pushes the rates down for the sake of higher occupancy. The more enlightened
hotels look at RevPAR (Revenue Per Available Room), which takes into account occupancy
and revenue achieved from available inventory (rooms). Take it whichever you will, these
are very crude measurements and drive the wrong behaviours in frontline management, all
of which drive down the return on capital deployed (the real measure of profitability in any
Hotel industry is its own worst enemy having conditioned the travelling public to think "Buy
late and get a bargain", and then complain about return on investment and lack of
profitability. Portals such as lastminute.com have become a byword for cheap travel and
have actually entered into our everyday language. You can now get last-minute-deal on
Hotel industry needs to take a leaf out of the airline industry and their pricing and rate
management practices. There are number of similarities between the two business models:
Seasonality - Hotels and Airliners have parallel seasonal highs and lows, with famine-to-
feast cash flow that makes the bravest of entrepreneurs run for cover. This seasonality is the
key in behaviour and price setting in both industries but strangely manifest itself differently.
Capital Intensive - Airlines and hotels are extremely capital hungry with high levels of capital
invested in their infrastructure and inventories (aircrafts/ seats & bedrooms). This makes it
even more imperative that the assets and inventories should be deployed aggressively and
as the old saying goes "make your capital sweat hard". For airlines keeping the ground time
per aircraft to minimum is the key to profitable deployment of capital and hotels attempt to
chase the same targets by focus on occupancy.
High Fixed Cost Ratio - In both cases the operating cost is made up of mostly fixed cost and
small variable costs. Think about it, an aircraft taking off from an airport has a loaded cost of
fuel, crew, landing/take off slot, and lease/finance cost of the plane regardless how many
passengers are on the plane. The same applies to a hotel, as regardless of how many rooms
are sold, the cost of building, staffing, marketing, etc. is the greatest part of the overall cost
all of which are fixed.
External Exposure - The fiasco of Icelandic volcano in April 2010 was a great reminder of the
vulnerability of both industries to external events that are entirely out of their control. Same
applies to the harsh winter of 2010, strikes by air-traffic controllers, ground crews, etc. all of
which impact both airliners and hotels.
Airline Pricing Model
Airlines have steadfastly retained their basic principle of "Early Discount, Late Premium"
pricing model. As consumers we have all accepted this basic premise and know that cheap
flights are only available if we book early and we hesitate at our peril.
However, this simple principle is not a one dimensional and asynchronous pricing model.
Airline price management tools take into account availability of seats. Seats are divided into
groups (Price Bands/Buckets) which have a set number of seats at a specific price and are
made available for sale at preset intervals prior to departure dates. Simple you may say, but
this is not the end of the story. Pricing algorithm takes into account 'Sell Rate' (number of
bookings per given period, e.g. per hour/per day/ per week), 'Search Rate' (number of
enquiries made for specific flight per day/per week), and available capacity (number of seats
left for sale).
This decides whether a specific bucket of seats is opened, closed, or enlarged hence the
variation you may find in prices when checking for a flight over a period of days. Some have
gone further by storing 30-day cookies on visitor's browsers so that they can identify a
returning browser and then make a decision as to whether to offer the same price as before
or increase the price (the "You should have booked earlier" lesson!).
Hotel Pricing Model
This could have been a simple one-liner that says 'Hotels do not have a pricing policy or
logical model', but I would then be inundated with emails full of RevPAR, Occupancy,
Average Rates, etc.
Well this is nonsense. Just because an industry has acronyms and measurable benchmarks,
it doesn't follow that they have a system, understanding, or strategy nor does it mean they
are measuring the right things. Let me illustrate.
Hands up all those who have seen "Early Booking" offers in January, then 'Sale' prices before
Easter and "last-minute" bargains the week before you go on holiday. Then go to
TripAdvisor and see all those portals advertising 'Up to 70% discount'. Does this sound like
strategy or sell-as-much-as-you-can at any price culture? So what happened to the Rack
Add to this my very favourite phenomena, namely the portals that are supposed to sweep
up excess capacity and increase the occupancy rate. They are provided with a huge
commission (up to 25%) and then get a lower price than the Rack Rate (normally the same
offers available on the hotel's website). So where is the value add of the Portal? If they offer
the same price as the hotel's website (90% do) and take a large chunk of commission, then
what happens to the hotels RevPAR? Anyway, if this was supposed to be the clearing house
for excess capacity, why do they have rooms for sale in January or February for holidays in
July or August? Hotels cannot possibly know their excess capacity 6 months prior to the
start of the high season.
Just as Airlines measure Plane Utilisation, we can talk about Occupancy but no matter how
high this figure is, it does not mean we are generating any profit. Benchmarks are useful for
comparative analysis between two similar businesses, but they should not be mistaken for
sound business practices and be treated as the Holly Grail. Business analysis is not dogma,
but a rational analysis of the performance that should show us the right direction to take
What is the solution?
The solution is simple, just follow the airline industry.
Have a clear understanding of you Break-even point. Without this you cannot make a
rational decision and all the benchmarks in the world will not help you make a profit.
Offer your best available prices 6-months prior to arrival dates and as the dates get closer
ratchet up the price towards the Rack Rate.
Do not create randomly selected discount packages. You should not discount just to get
your occupancy up or meet these arbitrary and meaningless benchmarks.
You should always consider other objectives such as increasing your average stay, improving
traditionally poor period, etc. Occupancy increase will come through as a secondary
objective if your packages are well targeted.