IN-DEPTH: IHG's Matt Busch view on pricing optimisation -

Revenue Management practices place a lot of emphasis on capacity constraints, time cycles, and price variables.

If one were to go by this view alone, any reference to the "right consumer" is limited only to their ability to pay the optimal price. In some ways, this approach may be deemed to be short term, transactional biased and product orientated.

From a hotelier's perspective, InterContinental Hotels Group's director of pricing Matt Busch says at the centre of all successful businesses are their customers. But revenue management is not immune to this immutable ‘truth'.

He says new advanced pricing optimisation models are now able to estimate customer responsiveness to price and adapt in real time to ensure prices and revenue management decisions are in tune with their customers and guests.

"I expect further advances will be made in the future to better estimate the lifetime value of a customer to ensure we recognise the unique value of guests who are looking for a relationship with our brands," says Busch.

Busch, in an interview with EyeforTravel.com's Ritesh Gupta, spoke about price integrity, retaining customers that travel during off peak demand periods and other issues. Excerpts:

If it is not acceptable to compromise on price integrity at any level of unqualified business, could you provide an insight into other ways to discount and to attract additional customers that do not compromise your core pricing?

Busch: Price integrity is critical in this age of transparency. Customers are confounded by options. Complicating the issue with questionable pricing practices will harbor customer distrust. This can impact and fragment the industry, not just your flag or hotel.

It is however important to acknowledge that there are groups of customers that are sensitive not only to price, but also the concept of ‘getting a deal'. When necessary, it's important to target closed offers to these customers in ways that ensure ‘existing' revenue is not diluted, and the overall outcome is truly incremental.

Delivering targeted and closed offers to these customers via interactive marketing (email, search, and the like) is perhaps the most exciting and interesting method to test the waters. The immediacy in communication and results allows you to test offers and measure various metrics efficiently. More traditional offline methods should also be considered across all transient and group segments.

RM is the key to manage peak and off peak pricing. Managing segments which will help tide over off peak periods has to be looked at from a perspective of overall hotel strategy. What do you recommend when it comes to preparing for this strategy?

Busch: In theory, you want to focus on retaining customers who travel during off peak demand periods. With the exclusion of air crews, very few customers can promise when they will deliver until close to 14 days advance notice and frankly, they don't typically have a gauge if it's peak or off peak in the market. Moreover, most contracted clients are unable to commit to annual volumes that they base the negotiations on.

Therefore, this is one of the most difficult elements of pricing and revenue management. The key to managing this uncertainty is to carefully track historical behaviour (as a predictor for the future) and negotiate on a flexible platform that mitigates your risks, such a dynamic pricing or non-last room availability. As a safety measure, it is best practice to measure performance at least quarterly, and adjust pricing and terms of agreement if targets are not met.

How do you segment customers by price sensitivity and gauge the likely effect discounting will have on their current and future purchases?

Busch: There are quantitative disciplines that attempt to do just this. Measuring a customer segment's actual response to price requires a well designed market based experiment. Conjoint analysis has become an increasingly popular research method in the realm of revenue management.

This type of research measures stated customer choices based on trade offs among various product attributes, including varying levels of price. The challenge is in its application and determining customer attributes that will best predict their behaviour. This is where CRM and revenue management will need to evolve in parallel.

On the local level, hotels can renegotiate contracts to offer flexible discounting rather than fixed rates, or contract business that may not have been considered in the past. They can focus promotional efforts on their immediate locality, instead of reaching for far-off markets. How do you assess the situation?

Busch: This needs to be addressed at an individual hotel level and will be the result of a strategic review of market positioning across market segments. Changing a hotel's market mix does not happen overnight, to react to changing market conditions in bad times and good.

Therefore, like any business decision it is important to understand the risks and rewards of taking such actions both now and in the future. In doing so, a hotel team should not underestimate the value of a brand and customer relationships that exist at the regional and global levels that drive their market performance.

Undermining these values and relationships would be revenue dilutive. Pursuing new local markets or enhancing your local presence however can lead to incremental revenue opportunities. In challenging times like these local innovations can make a difference.

What do you think are going to the key issues which RM managers need to focus upon going forward – would it be customer rate resistance, contract renegotiations, competition or price wars?

Busch: All of them are inherently related when it comes to price decisions. When you make a decision on pricing your non-qualified rates there is often a domino effect to other segments and decisions. Underlying all of this is a deep understanding of pricing and advanced analytics.

Simulating the impact of your decisions, and evaluating competitor and customer reaction should be the goal. So we generally need to elevate the level of revenue management talent and raise the bar of our discipline. The old adage that "you're only as smart as your dumbest competitor" holds true too often. We must raise our collective ‘game' in all facets of pricing.

Last year, an industry professional told me: price elasticity is not immune to the demand structure. In fact one of the paradigm shifts that's needed is the fact that most of the corporate business in the world does not purchase a hotel room. They purchase a convenience and you need to price for the convenience. Do you believe that generalisation for segments isn't possible? In fact, can this be more so an elasticity based on the demand scenario prevailing at that point in time which can be spread across different segments?

Busch: In the context of hotels, I would contend that customers are purchasing more than just a convenience. Customer decision making is influenced by a mix of tangible and intangible benefits represented by the brand or the physical asset. However, price targeting has become increasingly difficult in this time of transparency.

Some level of generalisation is necessary, combined with careful and discreet targeting of offers. Assuming a single estimate of elasticity across all levels of demand would lead to missed revenue opportunities.

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