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The Effect of Yield Management on Hotel Brands - a Discussion.
By Laurence Bernstein
Thursday, 19th January 2006
 
Electronic distribution channels and their inherent tendency to commoditize products are - in fact  not the major issue affecting hotel branding in the marketplace today.

Rather this distribution channel appears to be an enabler and accelerator for a more serious and intrinsic danger, namely variable demand based pricing systems – in other words, yield management systems. The very nature of these systems is to transfer one of the most powerful determinants of brand position (price) to the control of a mathematical model. This surely cannot be good for the brand![1]

Yield management systems pose potential issues for hotel brands for three reasons: the first, as mentioned above, is their insidious role as engine of commoditization of the industry (i.e. all hotels are the same); the second is the commoditization of the internal product (specifically, customers coming to believe that for all practical purposes, all rooms within any property are the same) and hence the gradual erosion of margin, leading ultimately, to a single (or at most double) tier pricing structure within the asset. The third is the elimination of pricing as one of the most salient cues of brand value and status.

In this article we will address these three issues using as a base information collected in our recent study of variable demand pricing systems.

Section 1: The Study and findings

Background

In a study we conducted which included looking at the variable pricing structure in the hotel industry we were amazed at the overall confusion and inconsistency faced by customers on a daily basis when purchasing rooms in hotels.

The study was conducted on behalf of a client in a non-hospitality category that was interested in adapting a demand based variable pricing system. In order to describe the process from the consumer point of view, we tracked prices in two Canadian hotel properties over a six week period in May/June of 2003[2].

The findings were surprising for several reasons:

We had expected to see a great deal of movement in prices and price categories over the time period. This was not the case, as can be seen in Charts 1 and 2.

Nor was there any effective change in the number of rooms available in each price category (the on-line information represented "available" rooms in each category – and, with only a few exceptions, we did not see any price category fall out of the listings)

The complexity of room offerings delivered to consumers (on the web sites) and travel agents (through Sabre) made the task of tracking the prices over time all but impossible

Rates displayed on the internet site at any given time were beyond confusing – for instance, a room in a specific category showed the following options consistently over the tracking period

While an argument could be made that this is harmless as long as it is invisible, the fact is that it is anything but invisible.

Not only is it likely that traveling colleagues will compare rates, the on-line reservation sites of the hotels make these anomalies starkly evident:

For any given room type, there were a variety of different prices, some differentiated by minor service offerings (e.g. breakfast) and some with no differentiation at all.

In other words, a customer can buy the exact same room in the same hotel on the same night, booked at the same time, via the same distribution channel at a variety of different rates.

While we did not collect this data for our study, the examples shown in Charts 3 and 4 illustrate the point.[3]

Viewing such discrepancies can't help but persuade buyers that hotel rate assignments do not reflect any of the attributes normally associated with price variance within a given brand:

  • Degree of quality
  • Degree of scarceness
  • Degree of added value
In the absence of this logic, it is likely that the buyer will see rates as, from a practical perspective, arbitrary. Consumers who believe they are faced with arbitrary pricing become defensive, driven by a concern they will be the recipients of the negative side of the scale.

As a result, they are likely to insist on the rate they believe is the best "deal", or they are likely to walk away. This behavior is most apparent in the retail automotive industry resulting from an engrained belief that the dealer is trying to take advantage of them. However, given the perceived behavior of hotel brands it is not out of the question that this industry will similarly evaluated.

This complexity is compounded by the fact that these rates do not necessarily change in the same proportion at each given point in time in all channels – the "discount", therefore, at any given rate point, is different, depending not only on when you book, but also on which of the different rates for the room you select (see chart Vancouver on-line rate variances…)

1. Rates quoted by travel agents for the same room choices over the period did not vary at all. Thus the difference between on-line and travel agent rates varies over time, increasing the confusion and leading to situations where, travel agent rates can be lower than internet rates. Recent actions by hotels to highlight (and guarantee) lowest internet rates clearly help this situation, but would be difficult, if not impossible, to manage under this structure.

2. The relationship of rates between the three channels were consistent for each property, but not between properties

Rates ranged as much as $20 in Vancouver and $36 in Montreal

In Vancouver Travel agent pricing was consistently midway between on-line and call-centre

In Montreal Travel agents consistently quoted a lower rate than on-line or call centre rates, both of which were always equal

If there is any doubt that there is a systemic level of confusion that consumers must find hard to avoid, the following charts should put it to rest. Travel agents are likely to be as confused as their clients. Furthermore, given the ever increasing pressure applied by hotels on agent commissions, it is unlikely that travel agents are will act in the interests of the brand to clarify this confusion.
  • The range of prices available through travel agents in the snapshot survey varied as much as $115 from the highest to the lowest for the same room in the same hotel on the same date
  • In the case of one of the hotels, there was a roughly even dispersion of quotations between the lowest ($229) and highest ($344). Noticeably, however, this pattern was completely different for the second hotel, where agents were divided into two camps, one camp quoting $229 and the other $269.
While this tracking is by no means an exhaustive study of the industry, it is indicative of the real world out there. Subsequent to this project, we periodically came across similarly confusing situations that clearly support the findings – the examples in the box show the 28 rate categories for a hotel in Boston that travel agents are required to navigate before reserving a room for their client. In addition, we have spot checked a number of major hotel chains and find little difference in the complexity and confusion created by their on-line reservation sites.

Section 2: Observations

The core of the study involved two hotels and one point in time. In addition we looked at several other properties and chains on different dates to clarify specific points and add a level of greater confidence. Nevertheless, we cannot, and do not, suggest that the results are necessarily indicative of anything other than these specific properties and dates. That said, it is worth pointing out, using these two examples, a few of the issues identified that should be of interest to brand development managers.

In all cases other than travel agent quotes, buyers are penalized for booking early; in other words, rates achieved are lower than the initial rates put on the market. If the system is working, we assume this indicates that demand is low at the beginning of the period[4], resulting in a lowering of prices to increase demand later on. If this is the case, it suggests one (or more) of the following things are happening in the marketplace:

  • The expected price is too high, reflecting an unrealistic rate structure. This notion is further supported by the fact that rack rates bear no resemblance to quoted rates
  • The marketplace has become wise to the system and customers simply wait until the last moment before booking
  • The object of the pricing system is to replicate the "last minute" travel discount model used by travel wholesalers and consolidators. This probably makes the most sense for leisure travel, and would need to be more sensitive to demand in order to be successful.
Airlines (who do not necessarily represent best practice players in this arena) use the opposite approach – fares increase as you get closer to the departure date. This is designed to capitalize on the low demand elasticity among high-margin business travelers. Increasingly business travelers are demonstrating that this assumption is flawed, and that they can and will plan in advance if there is a savings. The declining rate pattern detected in these hotels works directly against this trend.

Section 3: Effect on the brand

For purposes of this discussion, we understand "brand" to mean the net understanding of the franchise resulting from all impressions of the trustmark and products – the brand is the words, pictures and emotional impressions that come to mind when a person hears or sees the name, logo or trustmark of the company.

In order to crystallize this "brand image" consumers combine personal experience (functional and emotional) with a variety of accepted cues, such as advertising and promotion, price, recommendations, published information, etc. As the purchase process moves further from the product (such as the process of booking a hotel migrating from the hotel and brand reservation service or travel agent to on-line) these external cues play an increasingly important role in building the ultimate brand image.

For all practical purposes (using an extremely simplified model), the brand serves two purposes for the consumer: It clarifies the competitive landscape and it defines the value proposition and hence determines how much more or less the product is worth relative to other choices.

The value proposition is an individual calculation in which each individual takes into account how much he or she will pay for value received from both functional (amenities, convenience, room size, loyalty programs, etc) and abstract (badge-value, emotional preferences, personal validation, etc) attributes

What makes all this particularly complicated for hotel companies is the fact that, while the consumer may have a particularly strong image of the brand, when he or she is booking the hotel, they are thinking about an individual product that, for purposes of the specific stay in question, is quite far removed from the brand. In each case, based on the location, the competitive set changes as does the absolute cost (a hotel room in San Francisco is more expensive than in Sacramento). Therefore, consumers must build a unique value proposition for each property. This is why a clear, uncompromised brand promise from the master brand is essential – this is the only constant that the buyer can rely on when making the purchase decision. Failing the existence of a strong brand, or if the brand is called in question on the hotel site, the buyer will necessarily default to a non-brand environment – i.e. they will see the products in the category as commodities to be evaluated on price alone.

With this in mind, we will look at potential effects of the yield management system as experienced in the two hotels in the study.

I. Commoditization of the industry

Changing the rate for the same room on the same date for no apparent reason questions the inherent value of the room. This is amplified by the confusion of rates presented as options to the on-line customer (as well as the travel agent customer). Finally, the disparity between the actual rates offered and the "rack rate" lends a tone of absurdity to the process and leads consumers to question the sincerity of the product. In that this is seen as not being isolated to one particular brand, it is becoming the accepted norm in the category.

In addition, the vast number of corporate programs delivering discounted rates to many (if not most) of the business travelers in the franchise, further reinforces the notion of arbitrary pricing.

Any value system is predicated on a transparent relationship between price paid and product/service quality received. In the current situation, this is clearly not the case – in any given booking situation there are a myriad of inconsistent pricing relationships regardless of which channel the buyer chooses.

II. Commoditization of the property itself

As long as the overall pricing structure is arbitrary, guests will become more and more immune to any form of differentiation. Thus, after realizing that they can pay less for a superior room than a standard room depending on when they book or how well they read the rate quotes on the internet, they are likely to start believing that while the rooms might be different, there is limited real value in that difference.

The result would be that in the absence of a lower quote for a better room, they will default to the lowest quoted rate (and hope they will receive a better room anyway). Ultimately this suppresses margins and deflates the brand.

III. Collapsing the value proposition – eliminating pricing as a brand value cue

Given that price is the most important value "cue", changing prices must impact value propositions. This it does in two important ways:

  • Different prices for the same room at the same time
The way in which rates are presented on the web-sites and through travel agents confuses the consumer, resulting in what we might call "value-proposition stasis". How can a customer be expected to develop a clear sense of the value that the experience will deliver when there are several prices available at the same time for the same room. Without having done any consumer investigation on the point, we can only assume that the smart consumer will default to the lowest price and build a value proposition on that rate.

This effect can be managed quite easily – showing only the lowest current rate, adding booking or payment restrictions or other terms or in some way differentiating and explaining each different rate. This serves the purposes of evening out the effective value and allows the customer to understand the value of the experience at a higher rate, discounted for some inconveniences. At the same time the full rate option[5]h must be provided (if, for instance, the "justification" for a lower rate is a 24hour cancellation penalty, a rate must be available that does not have the penalty condition attached)

  • Rates changing over time

    If a guest builds a value proposition based on a $100 rate on day-one, what conclusions can he or she draw about the value when they see the rate has moved to $120 on day-two:

    Case 1: the reservation is confirmed:

    If the reservation was confirmed, there would be a feeling that I "got a deal", which makes the guest feel good, but might build a brand impression that it is only of value when it is discounted. Following this, the guest will be loath to pay full price under any circumstances. If the purchase is deemed a good value at $100 it will be considered a lesser value at $120 (unless the guest understands this lower price to be a specific deal offered for specific reasons for a specified length of time) In this case, by moving the price up the value perception has decreased among those who did buy at the lower rate.

    Case 2: the buyer does not make the reservation

    In this case, the buyer is likely to try to ensure that there are no equivalent products available at the initial good value rate ($100) before returning reluctantly to make the reservation, and he or she is likely to conclude that this is not the fairest price for the room (hence not a fulfilling value proposition

    If the price goes down to $80, the same conclusions apply in reverse.
Section 5: The role of the internet

Our hypothesis is that this situation would remain true even if the internet had not entered the marketplace. However, as in any marketplace, access to timely information plays an important role – in this case it serves to spot light the pricing aberrations and hence speeds up the process. Consumers are ever more concerned about their own savvy as consumers and will work hard to ensure their dollar delivers the best value. On-line

Section 6: Solutions

Is this a train that has left the station, never to return, or are there actions hotel brands can take to minimize the effect and turn around the process? It is true many (if not most) hotel brands are on the train and it has left the station. Those, such as Four Seasons who never hopped on the train, seem to be building solid brands that support higher margins based on attributes and experience, rather than the shaky territory that other brands are being forced into – price/value differentiation. That said, there may be some immediate remedies that can be applied to minimize (or turn around) these effects of revenue management:

Option 1:

Jettison the yield management system and sell rooms on a constant inventory basis, offering consistent rate structures based on room type and seasonality, and offering negotiated volume rates to bulk purchasers, wholesalers and, when necessary, consolidators.

In this model an internet discount would be applicable, and it would be up to the hotel and timeframe if lower prices would be available on travel sites – if they are, however, they would need to be built into a value added package of some description or accompanied by real restrictions that qualify the discount.

Option 2:

Revise the execution of yield management systems. Starting with the core rate structure, developing a rack rate that is somehow believable vis a vis actual rates paid by guests. Rates quoted at the outset should be low in order to reward advance booking, gradually increasing over time so that late bookers (in fact business travelers who can and will pay the higher prices) pay the full freight.

Finally, whenever there are rate variances on the same page (i.e. multiple rates quoted on the web) clear, logical reasons must be presented for the different rates.

Option 3

While not directly an alternative remedy, it is a prevention as well as cure: focus on building a strong, differentiated brand that is experienced at every touchpoint – at the very least, experienced consistently in every property.

These are only a few of what must be many remedies available. Which is best can be the subject of many debates; however, that there is a need among many hotel brands to find a remedy is not open to debate.

[1] Some might argue that without these systems the brand could not survive, and therefore the benefit to the brand of yield management systems is absolute and overriding.

[2] One hotel in Vancouver and one in Montreal were selected by our client. We arbitrarily chose a date – Thursday June 26, 2003 – as the target date and checked rates on a weekly basis through each of three channels: Independent travel agent who accessed the hotel via Sabre; the hotels' websites and via the hotels' toll free reservation number. On the preceding Monday, we called 50 travels agents randomly selected in the US and Canada gain a snapshot of "short term" pricing.

[3] This discussion does not take into account the myriad negotiated rates that hotels offer corporate or other large accounts: corporate, convention, wholesale travel, association discounts, affiliation cards, etc.

[4] In drawing these conclusions we assume that the starting rates are based on what the rate planners consider a realistic expectation of achievement. If they are simply "place holders" waiting for a measurement of demand to find the correct price level we suggest that starting at a lower "place holder" and allowing for increased pricing based on demand might make more sense

[5] The current "rack rate" does not adequately serve this purpose as it is too high

Laurence Bernstein is the founder and managing partner of The Bay Charles Consulting Company. He has been a leading proponent of the "new order of differentiation" and has written and lectured on the subject of experiential branding and intrinsic/extrinsic research methodologies in Canada, the US and China.

www.baycharles.com
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