Planning For Price Elasticity-Based Revenue Optimization

Hotel companies are working out ways to quantify price elasticity as part of plans to sort out complex pricing issues.

The objective is to forecast how customers will respond to price changes, their willingness to pay and accordingly work out optimal prices.

Today there are price optimization tools that incorporate real-time competitive rates with a hotel’s demand and booking patterns to recommend the best price. Revenue management (RM) specialists have developed processes that continuously balance rates, occupancy and guest pricing preferences in a way that increases revenue opportunities regardless of demand. They also have the capability to address destructive price wars. In some markets it may be deemed unnecessary to match a competitor that is slashing prices, based on estimates of customer price elasticity relative to that competitor.

Overall, the industry is focusing more on price elasticity and price optimization as part of its overall revenue management strategy.

Measurement – far from being easy

Elasticity has been a subject of much discussion – and a heavy component of “gut-instinct” pricing for years, says Bonnie Spalding, vice president of APAC operations, The Rainmaker Group.

“The environments that are best suited to measuring elasticity are not common in a real-world business environment, so integration of these measures into more science-based approaches has been limited,” says Spalding.

Also elasticity is relative – it will vary by customer, by channel, relative to the comp set (a competitive set consists of a group of hotels by which a property can compare itself to the group’s aggregate performance), relative to certain price points etc, she says.

The first part of the challenge can be deciding which element of elasticity to measure.

“With fixed inventories I believe that operators will gain the most benefit from applying knowledge of price elasticity to fixed-capacity assets such as the hotel vs. ancillary revenue streams with higher supply and variable costs,” says Spalding.

However, application to ancillary revenue streams may be easier and faster to implement.

“We are very excited to integrate elasticity measures into our hospitality product,” she says. Spalding says she has experienced results and how it can significantly contribute to the revenue performance of a property. The plan is to further build upon this functionality to benefit the industry.

Ancillary Revenue

Price optimisation applies equally well in the area of ancillary offerings.

Elasticity-based systems can generate optimal price recommendations for everything including hotel rooms, meeting space etc. Revenue management tools can most certainly be applied to any ancillary revenue streams which have the same features of limited inventory, variable demand and pricing. However, the key challenge in other revenue streams lies in the capture and organisation of data that is revenue management-friendly. For example, in restaurant revenue management one needs to look at `Revenue Per Available Seat Hour’ as a key performance indicator.

Inventory systems have limited uses, but everything a hotel sells has an optimal price. Many times, hotels need to take a step back and think about how they are choosing prices for everything they sell. Are they taking a cost-based approach or competitor-rate-based approach? Or, are they using a more sophisticated technology that can measure how much their guests are willing to pay for their ancillary products.

Opportunity

Hotel executives say that room revenue management is still operating with competitive pricing and not price elasticity. This is primarily due to the fact that airlines have more opportunity to use price elasticity to influence the size of demand/market, while hotels typically are not able to change the market size, and are more preoccupied with market share.

The challenge with managing non-rooms revenue is data. For the vast majority of revenue streams, RM specialists say they do not have the data to do complex revenue management, so the tools used in room revenue management for the most part cannot be used.

Measuring price elasticity around specific product variables is possible within the science that exists to today. In practice though, most hotels are not capturing data about specific product elements along with the pricing that was in effect and revenue that was generated. Indeed it is an untapped opportunity—but there is a data requirement and infrastructure that needs to be in place first.