Surviving the distribution price wars

It has been a tough past year for revenue management professionals to get the financial flow moving in the right direction. Many important issues have been waging war on the bottom line, from guerrilla pricing to customers slamming on the brakes over rate changes.

From a professional’s perspective, Preferred Hotel Group’s director of revenue account management – India, Middle East & Africa, Brij Bhushan Chachra, believes for revenue professionals, issues such as these are all part of a continuous battle in good and bad times.

However, Chachra acknowledged that going definitely gets tougher during an economic downturn.

“In this recent economy, there is no ‘one size fits all’ approach. The successful revenue manager is one who understands the new environment; understands his/her business on a micro scale; and will then customize an approach that best fits his/her needs,” said Chachra, who is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2010 (to be held in Singapore, April 28-29).

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He added, “Last year most of the RM professionals gave in to the customer demands and fought a hard price war. However, they have tried to minimize the effect by rationalizing price cuts by market segments, exploring emergence of new segments if new rates are offered, and effectively using distribution channels.”

NEGOTIATIONS

Hotels have been focusing on group and corporate contract negotiations and price wars. Hotels are often negotiating for group and contract business multiple years in advance. While RM professionals may have been willing to accept significantly-reduced group rates during the downturn in exchange for occupancy, they also needed to be very careful regarding not lowering the rate expectations for dates beyond the foreseeable future.

Professionals realize that when the economy turns up again, multi-year contracts and a lower base ADR could artificially deflate achievable pricing for longer than is acceptable.

Chachra said this is true.

He said last year the group rates offered were significantly low, however, this is a direct correlation to the demand.

“The group segment is the hardest hit in an economic downturn. Therefore, we have to fight harder to retain or even steal market shares. Most RM professionals have been smart by cutting short-term deals and protecting the rates in the long-term window. I still feel that 2010 will be a challenging year especially for the group segment as the business on books is low from the segment,” said Chachra.

He added: “However, lead time of the segment has shortened considerably, therefore, it will depend on how the other segments come back, which will influence the rates for the group segment. At this point, I would be positive as the shorter booking lead time will boost figures nearer to arrival.”

PRICE WARS

When key competitors resort to guerrilla pricing for unqualified business, revenue managers are sometimes forced to do the same to retain a respectable market share.

This does not generate any additional market demand, and simply drives down the revenues for all.

So to what extent has been the market adversely impacted through such tactics?

Answering the same, Chachra said this has been a big concern in the past year.

“In guerrilla pricing, hotels try and do price cuts in short window to pick up additional market share, however, if done too often this can lead to a dilution of revenues,” said Chachra.

“Unfortunately, revenue managers do get into this vicious circle and effect of the same can be seen in our average rates and revenues. Although the year got off to a positive start, with January booking volumes showing growth, the effect of these tactics is seen in the depressed average daily rate, which in all cases is lower than that achieved in January 2009, 2008, and 2007,” explained Chachra.

The affect of these strategies, according to him, also affected the strategic positioning of the hotel.

“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,” said Chachra.

FOCUS

In down economies, RM does everything to stimulate incremental demand, ensure all channels are maximized, all segments are priced effectively, and all systems are set up appropriately to capture whatever demand there is to capture.

Chachra said in the last year, RM has handled price sensitivity of certain market segments, tackled pricing wars with the competition and effectively managed the distribution channels.

“I feel the biggest challenge for the revenue management professional has been competing in a price war without suffering long-term damage. These comprise both non-price and price methods. The RM has to assess and determine which ones are most effective at delivering business. This economic downturn pushed us to evaluate our operations, create efficiencies where needed, and implement changes that have both short- and long-term impact,” shared Chachra.

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.

“When the economy bounces back, we will come out stronger and ready to take on new challenges,” concluded Chachra.