|Demystifying the Magical Pricing Potion.|
By Jean Francois Mourier, REVPAR GURU
Tuesday, 29th November 2011
You may not know it, but the grandfather that is today’s hotel industry room rate optimization technology just celebrated an anniversary – and a big one at that.
Fifty-nine years ago this month, UNIVAC (Universal Automatic Computer), the 16,000 lb, 500 vacuum tube-equipped behemoth performed the unthinkable: it correctly predicted in an early call the 1952 president election of republican Dwight Eisenhower with a less than one percent margin of error in the electoral vote count and an equally slim three percent error in the popular vote. CBS News at the time, fearing the computer’s error, refused to announce the results. It preferred to rely on its experts’ gut instinct.
The “Electronic Brain’s” Hotel Career Shift
If UNIVAC could have, it would have checked itself into a luxury hotel and then laughed itself off to the proverbial bank. The stunning prediction marked the first time a computer accurately predicted an election. By 1956, a host of so-called “electronic brains” were putting their thinking caps on to again make that early call. As the saying goes, in terms of computerized election prediction, the rest was history.
So of course, this little story begs the question, “What does all this have to do with hotels, revenue managers, and pricing systems?”
The answer is simple – and comes without vacuum tubes. Just like the technology, software and algorithms that went into UNIVAC, so too does a carefully attuned calculus comprised of today’s modern rate optimization systems. In other words, pricing a hotel room rate fairly, one that is both reasonable for the customer and for a revenue manager’s bottom line shouldn’t be rocket science, nor should it require a magic wand or an apothecary’s potion. Like successful election predictions, various intelligence-specific factors are taken into account.
The REAL Abracadabra Behind Pricing
Above all, dynamic pricing is essential. Dynamic pricing is an umbrella term that encompasses others, and is an effective way for revenue managers to evaluate multiple pricing metrics in real time. This includes real-time price comparisons to competitor hotels, as well as monitoring instant changes that affect those rates. Another component is a hotel’s historical prices. But it’s important to note that this metric is increasingly less of a factor when figuring a current or future rate. Historical prices are very good at faithfully reporting back to the revenue manager a past room rate, but is a very poor predictor of what the new rate should be, i.e., the future.
Other pricing systems partially determine rates based on room rate elasticity, or the flexibility of price based on consumer demand. For instance, travelers regularly expect room rate hikes during peak seasons like the upcoming holidays. Travelers accept and pay those rates and rather than diminishing demand over higher prices, demand actually peaks. Thus, holiday hotel room rate prices are said to be relatively inelastic, or inflexible.
Another component to modern software-driven hotel room pricing is rate optimization. And part of that fair rate is based on your hotel’s clout relative to the competition. Increasingly that clout is based on where your hotel lands in basic Google searches as well as online travel agent (OTA) rankings. Other factors that are part of the pricing mix include: booking patterns by day of the week, time of day booking patterns, special events, room size, guest reviews, and booking pace. Seven days a week, 24-hours days, all of these factors, and others, are re-evaluated in real-time in order to establish the perfect rate at the very moment a room is booked.
Breaking the Spell: Poof!
In the end, today’s modern hotel room pricing software, unlike its UNIVAC grandfather, is more a forecaster of appropriate (and best) pricing than a predictor of room rate outcomes. Hoteliers and revenue managers have come a far way since the time of Eisenhower’s shattering win in 1952: no longer are their internal room rate calculations performed, pardon the pun, in a vacuum, or guessed at peering through a crystal ball, but rather in an open, transparent and real-time interactive environment. Finding the right price is not about lowering rates or relying on what’s worked in the past, it's about reaching the perfect "sweet spot" - that ideal rate that will convert a looker into a booker, be it a business or leisure guest.
Without gazing into any crystal ball, I can tell you that automated pricing programs and their intelligence-gathering abilities will grow increasingly complex – and importantly, extremely helpful to the revenue manager, pulling in and analyzing greater and greater amounts of data to make more informed decisions. While in some ways, thanks in part to meta-search engines and OTAs, customers have as much or even more access to current room rates data than revenue managers, that imbalance is likely to even out.
Hopefully, my commentary has demystified some of the magic that we seek out when it comes to pricing rooms. In any case, it’s time to put away the magic wand and rely on science and technology, and intelligent software to make those on-target and critical pricing decisions that hotels’ profitability rely on.
About REVPAR GURU
Jean Francois Mourier is CEO and Founder of REVPAR GURU, a company that provides automated revenue and rate optimization solutions. REVPAR GURU’s real-time pricing solution combined with automated online distribution helps hotels maximize occupancy and increase their profits. The company’s Dynamic Pricing Engine, an integrated revenue optimization and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving revenue managers more time to run their hotels, make better decisions and do what they do more efficiently. You can reach Jean Francois through www.revparguru.com or by calling +1.786.478.3500.