Published by Kris Glabinski
OK, three weeks in lockdown, following social media, I have a comment about all of the analysis of the hospitality market.
In a nutshell, demand is one key element. Demand brings occupancy, occupancy increases revenue, revenue decreases losses.Even if we will see the light in the tunnel (like in Wuhan), we need to acknowledge GOPPAR is slashed or is going to be slashed very soon. For all properties and in all regions.
And this is the key information.
Talking about a downturn, the virus, predicting how long the downturn will last, or how quickly hotels and tourism will recover is irrelevant.
Those were the factors that we looked at in the past. But in the past, we did not have a situation, where GOPPAR was slashed for everyone.
So GOPPAR is the main factor of how hotels will be recovering. Not the outlooks, the GOPPAR.
This means we will need to reinvent the industry. Especially reinvent revenue management. #reinventRM
Revenue Management will no longer be a comfortable solution, it will be a critical one.
The comfortable solution was when RM was driving hotel profits. A very comfortable situation. So comfortable, that hoteliers exercised RM in steady ways at their own pace. In fact, 80% of hotels had such a relaxed approach to RM, they used Excel as the main tool to manage hotel data, analysis, forecasting and price optimisation.
But then again, it was so easy, excel wasn’t anything bad or wrong. Historical data was firm, trends were steady, periods of high, low, mid, business or leisure looped in time. A Revenue Manager would work with data for about 40% of the process and then apply 60% of intuition to make price decisions. It worked.
But those times are now gone.
What we anticipated at Lybra.Tech, while creating our Intelligent Revenue Assistant, was a change over many years, actually became a reality in the last 3 weeks. Boom. Here it is.
We need to realise, that historical data is no longer valid. There is a break in demand data for several weeks now already. The trends from before the Covid19 crisis will no longer be applicable in the next years or months. Many traditional Revenue Management System algorithms will require 6 to 12 months to figure out new trends.
While customer behaviour will change. This means that excel based Revenue Management has lost the major source of data, which affected the algorithms and as a result lost its effectiveness.
We need to realise that forecasting based on trends, when trends got broken, is not going to be effective either. Again this will affect any Excel-based Revenue Manager. The formulas will have a probability factor close to the odds in a lottery. In fact, it will not be effective for many traditional revenue management systems that rely on historical data too.
Furthermore, historical data and trend-based forecasting is the core basis of many global hotel chain revenue management systems. I’m afraid it will not be effective anymore.
And the difference to previous times is, there is no more risk that hotels can take. It’s not a comfortable situation it is critical. So a Revenue Manager’s intuition will no longer be safe to accept, forcing innovative technology to come in as a backup.
Other than PMS data, we will follow a demand-centric approach to include customer behaviour in real-time into RM. Something that we started to work on 2-3 years ago, thinking we have several years to make it perfect. But guess what… situation has hit the fan.
We just don’t realise it yet, as we are all under lockdown. Trust me, once the lockdowns are lifted and hotels reopen, we will face a new reality.
And this new reality of Revenue Management today is critical. Because it is not about hotels making 10-15% more or less profit. Covering debt comes first so any, I repeat any revenue will help. It is all about minimising losses now. Adapting to demand so quickly, that the benefit is seen immediately.
There is a great saying from Mr Peter Drucker, which is right on time and right for this situation:
“The greatest danger in times of turbulence is not the turbulence, it is to continue to act with yesterday’s logic.”
We need to start thinking with tomorrows logic #tomorrowslogic when it comes to Revenue Management.
There have been many suggestions from various RM experts given. We need to consider which of them is yesterday’s way of thinking and focus on tomorrow’s mindset.
A few of the most common suggestions appear below:
“Have a clear revenue management direction”
Trust me, there will be no clear revenue management direction. The suggestion comes from times when a hotel could make a decision based on traditional strategic positioning.
“ I am not going to go down with prices, we are a quality hotel”, “ we will never be that expensive”, “let the competition bleed, we will maintain our profits”.
The only RM direction you will get is by following your customer’s behaviour and the market. Not your aspirations. Profit is no longer key. Minimising losses is the new key. That is tomorrow’s thinking.
“Avoid discount actions to reduced demand”, or “do not slash rates”, or “protect your public rates”, or “Hold rates”
Trust me, any expected logic in pricing, no matter how much hoteliers are in solidarity now, will not be applicable. Countries will reopen at different times. International travel will lift gradually. Domestic travel will probably lift faster. Customers will likely be much more value-conscious, but with more preserved disposable income, which will create new habits.
Reacting with price and value to those habits will need to be real-time quick, or hotels will miss it. Maintaining internal price policies will be risky. And for many, there will be no more room for more risk.
“hotels that are the fastest to drop their rates and who drop their rates the deepest can be the last ones to recover”
For sure this statement is true, but, it is based on yesterday’s observations. Tomorrow’s version of it is that if hotels don’t focus on the short term, they may not reach any longterm business.
So be careful with suggestions for applying internal price policies. It may be better to recover longer than die too fast.
One of the other comments I read was explaining why dropping rates may be harmful:
“reason is that the pricing structure of many hotels is based on a ‘best available retail rate,’ meaning that all the other rates, such as for business, group, and so on, are tied to it”
This answer is a great example of how Revenue Management will need to be reinvented. Traditional rules-based Revenue Management will lose any sense of rules. This will affect all rules-based Excel revenue managers and revenue systems. Traditional price derivations suggest that BAR dynamics can drive corporate demand or leisure, groups or other segments. The application of such an approach will be riskier than ever before, for the reasons above. Once you drop the BAR price, you drop all the other prices, which shouldn’t necessarily drop. The other reason is already mentioned. Traditional segments of customers have changed and so should our thinking about the change. Price adaptation should happen in real-time and independently for every type of customer.
“discounts are useless if people aren’t travelling for safety concerns”
A great statement but may that lead to a wrong conclusion. The conclusion should be: add safety as a value in your product. What this statement may suggest, based on yesterday’s logic, is don’t drop prices because people are afraid to travel. Once again, think with tomorrow’s logic.
“Use non-restrictive cancellation policies”, or “cancellation policies to be more flexible”, or “Highlight Free Cancellation”, “Reduce Cancellation Risks”, “When circumstances permit, offer flexible policies to cancellations”
In fact, flexibility rules are becoming more valuable than ever before. Let’s not give it away for free, please. Understandably is humane support for all stranded tourists. But tomorrow’s thinking is about value. And flexibility will be the core of it. Use low prices when you need or must, but price value where and when you can. Understand what value is. To do so, you need to understand your new customer. Don’t think about yesterday’s segments.
Be aware of price opportunism: if all hotels will go for flexibility at low prices (as many have suggested doing so), as this may encourage customers to irrationally make reservations and cancel them to rebook at lower rates.
“Know your segments and when they are likely to return”
Just remember that segments from the past may not be the same anymore. Remember that any traditional expectations from customer segments will have no background for justification. So as much as understanding your customer is the key advice, a traditional approach to segments may spoil that understanding. We assume the obvious: domestic demand will lift up first and international later. Many businesses have learned to work online and from home. Leisure will recover as many airline and hotel vouchers are in the air to be materialised. Many countries reliant on tourism will support tourism promotions. And more importantly, make sure you know where your customer is. Your customer is on the internet.
OTAs and metasearch sites are hit now as well, but not dead. They are reinforcing their strategies. But not to sell hotels. Strategies to reach customers. This is the tomorrow thinking mindset that hotels should apply as well.
“Events will be back, they are suspended and not cancelled”
Possibly yes. After all, humans are social. But humans are also afraid. Often the fear comes from a lack of knowledge or understanding. Communication about safety, new ways of gathering options, assurance of professional hygiene-focused service will be the kind of triggers that will stimulate the return of events. You need to convince customers it is safe to organise events. You need to convince people that it is safe to participate in events. In order to do that, you must be sure it is safe to do both. So think about how to make it safe. Safety will be another value worth more than ever before.
– Low Occupancy Offers (package)
– Low Occupancy Upsell
– Develop Localised Offers
These are examples of tomorrow thinking. Value and price will have a very wide but strong relationship. Now is the time to seize this as an opportunity. But don’t use yesterday’s approach. Don’t include all the obvious products in a package, just for the sake of the package. Think about values to the customer, then create components of the package, upsell or cross-sell offers. Think customer, don’t get stuck to traditional segments. Remember the values already mentioned: flexibility and safety. Think about communicating your values. The customer is on the internet: browses for reviews on Google, watches videos on YouTube to get deeper insights into the value of the product, surfs social media for knowledge (unfortunately) and recommendations.
“who you think your competition is may not be who any given consumer might consider it to be”
I think this is an example of great tomorrow’s thinking. Yesterday’s logic was about the hotel, selecting its competitive hotels as a set to benchmark with and compete with. But now the customer habits have changed. Customers may prefer apart-hotels over traditional hotels. Where there is a kitchenette to avoid crowds in restaurants. Customers may prefer apartments than hotels, to avoid crowds and elevators. Customers may prefer longer stays than shorter and more frequent trips, to avoid flights, airports and congestions. Customers may prefer camping sites than resorts, to be closer to nature rather than crowds at sunbeds at the swimming pool of a resort.
So we cannot really imagine how the approach to competition definition has changed. And the demand-centric approach in Revenue Management is tomorrow’s logic.
This type of understanding will be the key for many hoteliers.
We need to start thinking ‘tomorrows logic’ #tomorrowslogic
We need to reinvent revenue management #reinventRM
Because Revenue Management will no longer be a comfortable approach, it will be a critical approach. A must for every hotel concept.