 the Rate Integrity issue for hotels "Pin It")
NB: This is a guest article by Dorian Harris, founder of hotel booking site Skoosh.
With no formal training in marketing, I’m often quite baffled by the industry’s terms and expressions. Perhaps cynically, I often feel they’re put in place to distract the consumer.
Sometimes I think we even confuse ourselves with them, and never more so than with the pervasive “Rate Integrity”.
Like so much in marketing speak it looks and sounds right at first glance, but these things often don’t hold up against closer scrutiny.
“Integrity” itself is a no-brainer – we all want to have integrity in business and any suggestion to the contrary isn’t going to be well received.
I certainly don’t like mine being challenged, though, on many occasions, I’ve been told by hoteliers that my actions are “in violation” of their rate integrity, which makes it sound like a huge, perhaps criminal offence.
So what is this thing that I am violating? Rate integrity to me simply means that you can justify the price you’re selling your rooms at.
That’s reasonable enough – but what is the price of a room?
I’m not sure what else hoteliers factor into their pricing, but a major component appears to be the price of nearby competitor hotels. That’s a reasonably standard business practise.
I’ve no doubt that supermarket chains keep a close tab on each other’s prices, as do all direct competitors.
However, there is a big difference in the travel industry, which we’re all aware of, in that the price goes up and down depending on availability on any particular date.
That’s not the case with most household products. You may see the iPhone vary by 10% or so depending on the outlet, but never by 100%, and nor does it fluctuate much in relation to the price of other phones.
To me, that’s integrity.
What we see in the travel industry is much more like a stock market. The same room can be bought for £100 or £300, depending on date of travel.
I think the customer understands that, to some extent, hotels are assisted here by the nature of the airline industry and the ever changing flight prices.
So what you appear to be telling customers as a hotelier is that the rate at your hotel is subject to demand and supply more than, say, quality.
The room you’re selling at £300 on October 17 is the same standard as the one you’re selling for £100 on the October 19 – the difference is down to availability.
Integrity in this sense, if that’s the right terminology at all, is being able to explain that to the consumer.
So, are we doing that?
NB: This is a guest article by Dorian Harris, founder of hotel booking site Skoosh.
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The comparison to the iPhone is really not relative. The iPhone is not a “perishable” item. I hotel room is. When a new model comes out, the old model may be of less value, but that is not the case with a hotel room 90+% of the time. So rate integrity is not relevant to perceived brand value in any item that has no value once the room goes unsold that night. It’s lost revenue forever.
one could tell who this post is written from without even checking first…
clever boy
I have to agree with Peggy. And the reverse happens when the “perishable” item is in a saturated market and you are able to procure four and five star properties at below market value. I know this aspect from being in hospitality in the Washington DC market. A four star property rate can range from $89 to $469 based upon whether Congress is in session, IMF, a convention, or some march on Washington. Yes, tough being on the receiving end, but the hotels are figuring this game out and being competitive in the process. As a hotel, you still need to provide value in the red ocean they live in.
The comparison to IPhone doesn’t work in this example, I agree with Terence & Peggy. The Hotel Industry is based on demand and supply of a product that is limited in number. The hotels can’t produce more rooms if the demand is there. If the demand is high the rates move up to capture the maximum revenue. The customers are trained for this too. They don’t go looking for a hotel and think that it should only be $199 as that is what they paid last time. They shop the dates to check what the current rates are and if it is within their budget they book or they look for something within their budget.
Peggy, Terrence and Raj, I agree with all of you. Indeed, I only made the comparison to indicate that there is no comparison. The hotel industry is clearly mediated by supply and demand.
That being the case, there is no rate integrity in our industry. Depending on availability, a 5 star hotel can fluctuate by 100% and, at times, that will mean it’s priced lower than a 3 star.
However, rate integrity is the prime reason that hoteliers offer in favour (or defence) of rate parity. They tell me that the consumer will be confused if they see the same hotel offered at different prices at different times. My feeling is, they don’t only understand that but they expect it.
Dorian, let’s eliminate the confusion. Hotel rate integrity is not a synonym for variable pricing.
Instead, it relates to the hotel applying a pricing strategy consistently across distribution channels. This does not mean that all the rates must be the same for each channel; it means that the retail pricing structure and various channel pricing strategies are not undermined by anomalies.
Keeping various prices identical across various distribution channels is actually referred to as price parity.
Price parity is undoubtedly the issue that is getting Skoosh into trouble. Organizations that have access to net rates that are marked up as a wholesale distribution partner (popularly termed “the merchant model”) are prohibited from undercutting the hotel’s retail pricing structure (or in many cases, exceeding it as well.) This keeps the hotel’s retail pricing under the direct control of the hotel.
The best example of hotel rate integrity coming into play is when cross-channel conflict arises. Due to changing market conditions, group/convention rates that were negotiated 18+ months in advance can potentially be significantly higher than the hotel’s best available rate as the date of the event nears. The hotel may even be offering distressed rooms through package, opaque and flash sale channels at dramatic discounts to fill low occupancy periods that overlap the convention dates.
The hotel’s rate integrity has more to do with the terms and conditions related to eligibility for specific rate tiers and the distribution of those rates as opposed to the fact that the rates fluctuate based on supply and demand.
The issue you are raising is better termed “rational pricing,” where retail pricing is more related to the asset’s underlying cost of goods and offered at consistent levels to consumers.
Hotels are not alone. For years, the case has been made for airlines to adopt rational pricing based on the cost per seat mile. The rationale being that a connecting flight from Chicago to Los Angeles with a stop in Houston should not logically be priced lower than the Houston – Los Angeles non-stop leg of the trip as two airplanes are being flown as opposed to one.
The stark reality is that if travelers in Houston are willing to pay a premium for a non-stop flight and that connecting passengers from Chicago require a lower fare to compensate for the reduced convenience. The same goes for high demand departure times, seat capacity flying between city pairs, types of equipment, and yes, the baggage fee policies of the carrier.
It all comes down to multi-variate estimations of consumer demand by market segment and the price elasticity of that demand that keeps travel revenue management teams employed.
You are correct, from a consumer perspective, it would be logical for a hotel to charge the same price every day of the year for a room and the same level of service, regardless of demand.
Unfortunately, except in rare instances, rational pricing is highly susceptible to tactical competitive reaction. With non-inventoriable products such as hotel stays, air seats and car rentals, variable pricing in alignment with market (and channel) demand winds up maximizing revenues and increases flexibility to combat competitive pricing tactics.
In the late 80′s I successfully established static everyday low pricing for a Canadian economy hotel chain that efficiently buried the competition while providing exceptional returns to our investors. It was awesome – we provided complete price transparency, eliminated unnecessary overheads and exceeded our brand promise of “Quality Accommodation at Affordable Prices.”
We were able to accomplish this by 1) running the most efficient and lowest cost operations in the industry, 2) having a unique capital structure that demanded guaranteed returns to limited partners and aggressive management fee levels, 3) operating in an environment where local competition had limited access to national distribution and where national brands had little visibility into local market performance.
Times have changed – hotel pricing may not be rational, but the smarter hotels are fighting to maintain pricing integrity – then they can at least look their guests in the eye and provide a valid explanation for the rate being offered.
Don’t get me started on “equitable pricing” that one is still a theory for most hoteliers…
Wow. Great response Robert. I just wanted to add to the fact that the “integrity” issue DOES impact conventions and meetings rates. I work for one of the larget meeting management companies in North America. We struggle with this a lot and it’s one of the most contentious discussions. As a former hotel executive, I understand their side. However, the hotel wants to sell rooms. Our company has motivated buyers who are committed to a convention (whether transient demand is there or not) and to a certain number of night stay. We’re seeing more hotel companies working with convention groups to maintain “integrity.” Even to the point that if demand decreases, they will lower the rate for the group – including reservations already made at the higher rate.
Terence,
Absolutely agree – I should have included a comment about how the hotels that have a solid rate integrity strategy work through the example I raised.
During market downturns, it is the hotels that have effective rate integrity strategies that wind up retaining business due to loyalty from those groups where they made fair pricing adjustments instead of profiteering.
As Robert suggested, I think revenue management practices (yielding) and price parity (channel management) are being confused. Hotel chains have been training the end consumer to believe that the best deal is found on the hotel’s own site. Sites like Skoosh make their lives more difficult, because sometimes the best deal is actually found elsewhere.
Bob, if you want to confidently tell the consumer that the best price is available on your site all you need to do is stop working with distributors. The problem is solved immediately.
Robert, thank you for your considered response. As you say, it would be easiest for the consumer if the price for each hotel was the same all year round but we know that’s not possible. You need to moderate them up and down in line with demand and supply.
The way that the hotel industry is trying to manage that reality and to stop consumer confusion is by simplifying the rate structure and ensuring that at the least the visible price to the public is the same across the board.
That’s an extraordinary step commercially. The consumer, myself included, wants to know that they can shop around for a better deal. That’s what keeps commerce buoyant.
And frankly, it doesn’t work. Hotels still can’t sell enough rooms with rate parity in place so they open up other channels such as opaque, and distribute rooms that way. For my part, that shows a real lack of integrity – not in the marketing sense but in the ethical sense. The message to the consumer is: we guarantee you we offer the best rate on our site – as far as you’re aware.
For my part, if you have to hide something from the consumer to achieve your ends then your strategy needs looking at again.