Hotel price wars and the race to the bottom: How to avoid driving down prices in 4 easy steps

By Ira Vouk, November 12, 2019

Let me dive right in: STR and Tourism Economics have recently downgraded their RevPAR outlook to 1.6% for 2019 and 1.1% for 2020.  

str.tourism economics

Softening demand is naturally followed by a desire to lower rates in order to offset the loss in occupancy. At least that’s what we experienced during the last recession. Are we in danger of starting another race to the bottom? 

While it doesn’t really take only one or two hotels discounting their rates to set off the chain reaction, there’s definitely some danger of a domino effect. In this article, I’ll go over how hoteliers can be prepared and avoid dragging the whole industry down the rabbit hole. I also talked about this topic in the Lodging Leaders podcast with other industry leaders. Feel free to tune in for an in-depth discussion.

Today, as there are more and more rate shopping providers entering the market, more hotel properties use automated tools to compare their rates to the competitor’s (market) prices. They now follow the competition much closer than they did a decade ago, especially in dynamic markets. While there’s certainly a benefit to that, there’s also a downside: it increases the risk of a chain reaction that causes a price race to the bottom. 

Here are four things to keep in mind when making your pricing decisions that will help save the industry and recover much faster should we find ourselves in another recession.  

 

Step #1: Don’t just follow the competition – look at all relevant data points to make a more objective decision. 

It is very important to understand that competitor pricing is not the only factor that should affect your pricing strategy. It’s just one little piece of the puzzle. 

There are two types of data that are used to make pricing decisions at a hotel property:

  • internal (generated by the PMS): occupancy, booking pace, speed of sales, group business, channel mix, average LOS, average booking window, etc.
  • and external (market data): compset rates, reputation scores, events data, etc. 

macro.micro

As you can see, competitors’ rates are really only one element to consider when making your pricing decisions. It would be inaccurate to use that element alone to make your ultimate pricing decision. This practice can lead to great revenue losses. Following any competitor (or a competitive set) is a flawed tactic. 

For example, if the Best Western next door dropped it’s prices but your booking pace (speed of sales) hasn’t slowed down at all – that’s a good indicator that there’s no need to drop your rates. Maybe that Best Western had a large group cancellation that resulted in many empty rooms that they need to fill last minute. 

 

Step #2: Adopt a Revenue Management System before you get sucked into the black hole of discounting.

As I mentioned above, it’s important to look at various data points when setting your pricing. This is where revenue management technology comes in handy. There’s a great benefit in adopting a revenue management tech solution that gathers all necessary data (not just one aspect of it) and presents a complete 360 view to the user. These tools can help you make more objective pricing decisions, or will even make the decisions for you. There’s even more benefit when “all-in-one” solution is used, where PMS/CRS/RMS are one whole organism and there’s a seamless data flow between them. 

According to a recent study by Skift, “Only 16.5% of hotels in the world use revenue management technology that goes beyond Excel spreadsheet, heuristics and gut feeling.” This is sad but true. Chances are, very few of your competitors are using adequate revenue management systems. So why follow their rates? Unless you want to find yourself in a “blind leading the blind” situation… and off the cliff you’ll go, dragging the whole industry along with you. 

hotelpricewars

The sooner you sign up for an RMS – the better you’ll be prepared for the “soft market conditions” that will eventually be upon us, sooner or later. 

 

Step #3: Concentrate more on improving your bottom line, rather than discounting.

If the demand indeed dies out and booking pace drops – try to concentrate more on how to improve the bottom line and how to lower your expenses instead of immediately dropping the rate. Note that 50% occupancy at a rate of $100 yields a better Net result than 100% occupancy at $50, due to lower overhead. So discounting doesn’t always help the bottom line. 

Improving your bottom line involves many things, including:

  • Embracing total revenue management (i.e. taking into account ancillary revenue departments if you have any, and not just Room Revenue)
  • Channel management (navigating production towards direct, less expensive channels)
  • Expense management (taking into account cost per occupied room, such as labor costs, use of amenities, etc.)
  • Working closely with general managers to cut production costs
  • Working closely with the sales and marketing team when building budget, etc. 

 

Step #4: Be proactive, plan ahead.

Many of the fears that result in hotel price wars are reactionary. You need to build your strategy at least 365 days ahead and be prepared. Some larger properties try to forecast further out, but there are more uncertainties past one year predictions. As a general rule, you should have at least 365 days covered with forecast data.

For example, don’t set all your rates at $500 a night and then drop 30 days before arrival. Build your “rate seasons” in advance, by analyzing as much data as possible, including:

  • Holiday calendar
  • Local events data
  • Convention data
  • Historic booking pace, etc.

You build your “seasons” a year out, but then constantly adjust them based on the demand fluctuations. This “adjustment” and flexibility is what yields the best results. And remember, a season doesn’t mean “spring, summer, fall and winter.” In the current dynamic market conditions, a rate season may be one-day long, as each day of the year needs to be treated individually and optimized separately (and sometimes in a chain with other shoulder dates) in order to maximize yield for the whole year. 

So, learn how to accurately forecast, but also always keep an eye on your booking pace and other data (daily, or even multiple times a day). This way you’ll avoid ending up in a situation where a week out you realize that you’re only 20% full and you panic and drop your rates to the bottom, causing other properties to follow you. Don’t be that person! You don’t want to be personally responsible for decreasing the whole industry’s performance numbers.

Also, be sure to set up notifications to be alerted about unusual booking patterns outside of your standard booking window, or large cancellations, or increased demand. As mentioned above, revenue management solutions can help you handle all of that. 

If you’re still using pen and paper or excel to figure out how to price your hotel – it’s really time to consider shifting towards some better technology if you want to remain competitive at all. Seriously, the times have changed and the longer you wait to upgrade, the further behind you’ll fall.

 

Conclusion

To conclude, I’ll say that the industry is currently in much better shape than it was during the last recession. To clarify: we are not in a recession, and probably won’t be for a while, but it’s hard not to notice that demand has indeed softened a bit.

The more hotels start following the steps above, the better prepared we’ll be for the next economic downturn. More and more hotel companies are adopting revenue management technologies of some kind, which will allow them to make data-driven pricing decisions rather than make reactionary decisions based on fear. 

If more hotels follow the steps above, I feel optimistic that the industry will be better off when the market conditions soften in the future compared to the last decade’s recession. 

 

Are you ready to take your pricing strategy to the next level? Check out Cloudbeds’ Pricing Intelligence Engine (PIE)

About Ira Vouk

Ira is Pricing Intelligence Product Manager for Cloudbeds. Ira is also the co-founder of iRates. She was selected as Top 5 Revenue Managers in the country in 2013 by HSMAI. With a background in sociology and marketing research, she has been able to apply her knowledge and experience to the hotel industry and develop many innovative ideas.

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