white paper Are your customers buying your shopping experience or someone else’s merchandise? 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! 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.
Section 1: The Study and findings ♌
Background
In a study we conducted which included looking at the variable pricing structure
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able 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.
in the hotel industry we were amazed at
The findings were surprising for several
the overall confusion and inconsistency
reasons:
faced by customers on a daily basis when
We had expected to see a great deal of
purchasing rooms in hotels. The study
movement in prices and price categories
was conducted on behalf of a client in a
over the time period. This was not the
non-hospitality category that was inter-
case, as can be seen in Charts 1 and 2.
ested in adapting a demand based vari-
Nor was there any effective change in the
♦
While an argument could be made
number of rooms available in each price
that this is harmless as long as it is
category (the on-line information repre-
invisible, the fact is that it is anything
sented “available” rooms in each category – and, with only a few exceptions, we did not see any price category fall out
May 20
Room Description Web
of the listings) Club room, king size bed, includes breakfast
Rate Quotes, Regular Room, Montreal Hotel 350
300
Traditional, king size bed,
Rates
250 Toll Free 200
$375
June 30
Travel Agent $299
Web
Travel Agent
$339
$339 $409
$229 $409
$630
$630
$630
$630
$216
$229
$189
$189
$289
$269
$246
$246
$319
$269
$269
$450
$450
$450
Online Agent
150
but invisible. Not only is it likely that traveling colleagues will compare
100 20-May 26-May 2-Jun June,9 16-Jun 23-Jun 30-Jun
rates, the on-line reservation sites of
♦
The complexity of room offerings de-
350
For any given room type, there were a variety of different prices, some differen-
300
tiated by minor service offerings (e.g.
Rates
250 b Toll Free
200
Online Agent
150
breakfast) and some with no differentiation at all. In other words, a customer can buy the exact same room in the same
100 20-May 26-May
2-Jun
June,9 16-Jun 23-Jun 30-Jun
livered to consumers (on the web sites) and travel agents (through Sabre) made the task of tracking the prices over time all but impossible
♦
the hotels make these anomalies starkly evident:
Rate Quotes, Regular Room, Vancouver Hotel
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
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. 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:
Page 2
♦
Degree of quality
♦
Degree of scarceness
♦
Degree of added value
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
In the absence of this logic, it is likely
under this structure.
that the buyer will see rates as, from a
♦
The relationship of rates between the
practical perspective, arbitrary. Consum-
three channels were consistent for
ers who believe they are faced with arbi-
each property, but not between prop-
trary pricing become defensive, driven by
erties
a concern they will be the recipients of the negative side of the scale. As a re-
♦
Rates ranged as much as $20 in Vancouver and $36 in Montreal
sult, they are likely to insist on the rate they believe is the best “deal”, or they
♦
In Vancouver Travel agent pricing
are likely to walk away. This behavior is
was consistently midway between on-
most apparent in the retail automotive
line and call-centre
industry resulting from an engrained belief that the dealer is trying to take ad-
♦
In Montreal Travel agents consistently quoted a lower rate than on-line or
vantage of them. However, given the
call centre rates, both of which were
perceived behavior of hotel brands it is
always equal
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 vari-
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.
ances, next page) Rates quoted by travel agents for the
Travel Agent Rate Quote Variance Montreal Hotel Monday June 30, 2003
same room choices over the period did not vary at all. Thus the difference beies over time, increasing the confusion and leading to situations where, travel agent rates can be lower than internet
$400 Rates $(Cdn)
tween on-line and travel agent rates var-
$300 $200 $100 $0 12
2
5
3
Number of travel agents
7
11
Vancouver Hotel On-line Rate Variances, Traditional King Bed Room $500
$450
Rate $ (Cdn)
$400 Rate A
$350
Rate B Rate C
$300
Rack Rate
$250
$200
$150 May 20/03 May 26/03 June 2/03
♦
♦
June 9/03 June 16/03 June 23/03 June 30/03
The range of prices available through
categories for a hotel in Boston that
travel agents in the snapshot survey
travel agents are required to navigate be-
varied as much as $115 from the
fore reserving a room for their client. In
highest to the lowest for the same
addition, we have spot checked a number
room in the same hotel on the same
of major hotel chains and find little differ-
date
ence in the complexity and confusion cre-
In the case of one of the hotels, there was a roughly even dispersion of quotations between the lowest ($229) and highest ($344) [Chart xx]. 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
ated by their on-line reservation sites.
Section 2: Observations
ers and consolidators. This probably
The core of the study involved two hotels
makes the most sense for leisure
and one point in time. In addition we
travel, and would need to be more
looked at several other properties and
sensitive to demand in order to be
chains on different dates to clarify spe-
successful.
cific points and add a level of greater
Airlines (who do not necessarily represent
confidence. Nevertheless, we cannot, and
best practice players in this arena) use
do not, suggest that the results are nec-
the opposite approach – fares increase as
essarily indicative of anything other than
you get closer to the departure date. This
these specific properties and dates. That
is designed to capitalize on the low de-
said, it is worth pointing out, using these
mand elasticity among high-margin busi-
two examples, a few of the issues identi-
ness travelers. Increasingly business
fied that should be of interest to brand
travelers are demonstrating that this as-
development managers.
sumption is flawed, and that they can and
In all cases other than travel agent
will plan in advance if there is a savings.
quotes, buyers are penalized for booking
The declining rate pattern detected in
early; in other words, rates achieved are
these hotels works directly against this
lower than the initial rates put on the
trend.
market. If the system is working, we assume this indicates that demand is low at the beginning of the period, 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 wholesal-
Section 3: Effect on the brand
value, emotional preferences, personal
For purposes of this discussion, we un-
What makes all this particularly compli-
derstand “brand” to mean the net under-
cated for hotel companies is the fact that,
standing of the franchise resulting from
while the consumer may have a particu-
all impressions of the trustmark and
larly strong image of the brand, when he
products – the brand is the words, pic-
or she is booking the hotel, they are
tures and emotional impressions that
thinking about an individual product that,
come to mind when a person hears or
for purposes of the specific stay in ques-
sees the name, logo or trustmark of the
tion, is quite far removed from the brand.
company.
In each case, based on the location, the
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 online) 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.
validation, etc) attributes
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.
The value proposition is an individual cal-
1.
culation in which each individual takes
Changing the rate for the same room on
into account how much he or she will pay
the same date for no apparent reason
for value received from both functional
questions the inherent value of the room.
(amenities, convenience, room size, loy-
This is amplified by the confusion of rates
alty programs, etc) and abstract (badge-
presented as options to the on-line cus-
Commoditization of the industry
tomer (as well as the travel agent cus-
will default to the lowest quoted rate (and
tomer). Finally, the disparity between the
hope they will receive a better room any-
actual rates offered and the “rack rate”
way). Ultimately this suppresses margins
lends a tone of absurdity to the process
and deflates the brand.
and leads consumers to question the sincerity of the product. In that this is seen
♦ 3. Collapsing the value proposition – eliminating pricing as a brand
as not being isolated to one particular brand, it is becoming the accepted norm in the category.
value cue Given that price is the most important value “cue”, changing prices must impact
In addition, the vast number of corporate
value propositions. This it does in two im-
programs delivering discounted rates to
portant ways:
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. 2. Commoditization of the property itself
♦
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 con-
As long as the overall pricing structure is
sumer will default to the lowest price and
arbitrary, guests will become more and
build a value proposition on that rate.
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.
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
The result would be that in the absence
some inconveniences. At the same time
of a lower quote for a better room, they
the full rate optionh must be provided (if,
for instance, the “justification” for a lower
clude that this is not the fairest price
rate is a 24hour cancellation penalty, a
for the room (hence not a fulfilling
rate must be available that does not have
value proposition
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 con-
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
essary, 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.
up the process. Consumers are ever
♦
more concerned about their own savvy
Revise the execution of yield manage-
as consumers and will work hard to en-
ment systems. Starting with the core rate
sure their dollar delivers the best value.
structure, developing a rack rate that is
Section 6: Solutions
somehow believable vis a vis actual rates
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,
Option 2:
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.
rather than the shaky territory that other
♦
brands are being forced into – price/
While not directly an alternative remedy,
value differentiation. That said, there
it is a prevention as well as cure: focus
may be some immediate remedies that
on building a strong, differentiated brand
can be applied to minimize (or turn
that is experienced at every touchpoint –
around) these effects of revenue man-
at the very least, experienced consis-
agement:
tently in every property.
♦
These are only a few of what must be
Option 1:
Option 3
Jettison the yield management system
many remedies available. Which is best
and sell rooms on a constant inventory
can be the subject of many debates;
basis, offering consistent rate structures
however, that there is a need among
based on room type and seasonality, and
many hotel brands to find a remedy is not
offering negotiated volume rates to bulk
open to debate.
purchasers, wholesalers and, when nec-
Protean Strategies is a Toronto based management consulting firm specializing in developing brand strategies and providing a full range of consumer research services. Since its inception in 1997, the firm has provided breakthrough strategies for leading Canadian and US brands, including General Motors, Fairmont Hotels, Canadian Tourism Commission, American Express, Dell Canada, Energizer Batteries, Unilever , Procter and Gamble, Allstate Insurance and advertising agency partners in Toronto, Calgary, New York City, Chicago , London, Amsterdam, Frankfurt and Shanghai. Www.proteanstrategies.com * 416.967.3337 Page 10