Article for Wednesday, 2nd 2011

The article I chose to deal with today is "10 Tips to Better Pricing for the Travel Industry".

According to the author, using the pricing strategy could grow substantially your operating profit: a 1% increase of your prices, while demand level remains constant, would increase your average operating profit by 11%. For some businesses, the margin could even be higher. Price is a key element for both the seller and the buyer. The problem is that very often, the seller does not try to understand the buyer's point of view, which results in bad pricing and thus, potential losses and  a lower revenue... The aim of the article is to demonstrate that with 10 simple rules, you can follow a successful pricing startegy that will help you to grow your business.

 
Rule n° 1: "Don't make up cost" by calculating the return you expect on such or such product (for instance, a 30% margin requirement) . It will only give you a number disconnected from the reality of the buyer and the value he attaches to the product. By forgetting your customer psychology and purchasing power, you risk never reaching your goals.
 
Rule n°2: "Set prices that capture value", which means put yourself in the shoes of the customers and try to guess what is the value that he would put in your products based on the circomstances. Do you offer the best value for money product or service compared to your competitors?
 
Rule n°3: "Create a value statement", that is to say define your points of differentiation with your competitors and state your competitive advantages. It will justify your prices to the customers.
 
Rule n°4: "Make your employees understand there is nothing wrong to earn high profit". Some staff may feel guilty for charging a price higher than what they judge to be fair and  tend to give away discounts more than necessary. You have to remind them that the majority of the guests are not loyal and that the business earn the money necassary to bear the risks of the market.
 
Rule n°5: "A discount today does not necessarily mean a premium tomorrow". Indeed, nothing guarantee that because you offered a discount to a customer, for a trial or whatever, this one will spend the full price for your products or services next time.
 
Rule n°6: "Different customers equal different pricing needs": each customer is different so their needs are also different, differing in 3 main ways: pricing plans, product preferences and product valuations. You need to have a pricing plan taking into account these criteria to be successful.
 
Rule n°7: "The pick-a-plan option" correspond to the customer pricing plans. It means that your customer may want your product but the pricing plan does not work for him: instead of purchasing,  it is maybe more  convenient for him to rent or to lease. By offering a pick-a-plan strategy, you offer a wider range of possibilities and may increase your customer data base.
 
Rule n°8: "Different versions of one product" enables you to answer the customer's need for a more or less elaborated offer (adapting then to different wallets) and to widen your choices.
 
Rule n°9: The "Implement different pricing" strategy consists in elaborating tactics to identify the more and less price sensitive customers. For instance, if a customer took the time to cut out a voucher  in a magazine, you will know he is more price sensitive than another client who would be willing to spend more on the same product.
 
Rule n°10: "See you customer base as a big puzzle": by identifying each new profile of consumers, you will be able to create new products versions, differential pricing and different pricing plans adapted to each or the majority of the customers.
 
If you follow  the 10 rules above, your chance to maximize immediately your revenue are increasing.
 
Comment:
 
I think this article is good sense. It seems to be very obvious when you are told what to do but the truth is, it is not necessarily before you are told so. The 1st rule for example is logical but I am sure most of the sellers base their pricing on this "profitability" requirement, without thinking much on the customers side. 
 
In addition, I realize that I am aware of the 3 pricing ways necessary to adapt each customer's needs but that I may not think to combine the 3 of them for my pricing strategy. I also realize that it is not common to be offered the 3 plans (1 concerning the pricing plan, 1 about the different pricing and 1 for  the different version).
 
I guess that if the method was applied everywhere, life would be so easier, particularly for the pricing plan (offering you to rent, borrow, exchange or lease instead of buying would be just fantastic! There are so many thing you use only once and forget in a corner...) . It would be a win-win strategy: happy sellers with better revenue and happy buyers with the êxact type of product or service they need.
 

Last version of my Prezi presentation for Wednesday, 26th of 2011

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Article for Wednesday, 26th of January 2011

I found a very well written article today about the "Future of hotel pricing". This is a report on the webinar hosted by the Center of Hospitality Research at Cornell University School and SAS.

The participants all agreed that dynamic prices are the future of hotel pricing. Still, they also admitted that none can ignore the many challenges facing that pricing strategy.

As a reminder, dynamic prices are the contrary of set prices. It suggests that revenue managers have to be constantly in alert and be ready to change the hotel prices at any up and down on the market. Being able to make real time decisions is what is considered to be the best way to maximize the revenue opportunities. But isn't it very time-consuming? As we are going to see, this is not the only concern about this method.

As the Revenue Management trends evolve, we are passing from an inventory optimization to a price optimization logic. The goal is not any more to sell the maximum of rooms but to sell them at the best prices (meaning the highest prices the customers are willing to pay). With a dynamic prices strategy, the hoteliers would be able to match the prices in real time, based on the demand. If in the morning the activity seems higher than forecasted, prices would follow the trend. If in that same afternoon or evening, activity decreased and the hotels feared not filling the empty rooms, prices would drop. What would be the impact on the guests? While most of the guests are aware of this practice, particularly with the airline industry, what would they think of such fluctuation in prices?  

One thing we have to keep in mind is that, even if it seems a very rational and logical idea mathematically, the result in practice may be different. We know that depending on the segments (leisure, business etc.), prices sensitivity is different so elasticity of the prices is to be considered as a crucial component. There are now very sophisticated software (like IDeaS) able to calculate what prices should be, including data like competition, past bookings etc., but none of them can integrate such data as prices sensitivity...

Another element to consider is the additional revenue. The key figure today for revenue managers is not RevPAR but TrevPAR, which takes into account not only the room prices but the additional contribution like restaurant expenses, spas etc. These are elements to think about when you price rooms and Las Vegas is one of the best example as room rates are usually very low because guests will spend a lot at the casinos.

Today, most of the hoteliers continue defining their revenue strategy on Excel, while a few already invested in revenue management systems and follow their recommandations. Still, nothing is won in advance even for the better equipped hotels. Statistics are good but adaptation may be necessary as I said. When elaborating the prices, considerations such as the guests characterictics or profile (loyal customers, student etc.), the additional revenue contribution, the segment and prices sensitivity are as many elements to think about.

That is why today revenue managers are considered to be as much inventory managers as marketers. They have to find the best packages and promotions to attract different types of guests. This is their role to improve guests' experience through adapted offers, offers that they will care about. At the end, it is not the hotels that would fight for the guests but the guests who would fight for the best hotel deals. Some even predict that thanks to the technology progress and forecasting evolution, it will be possible soon to propose one on one prices. Is such customization a good thing for hotels and their guests?

Comments:

I personnaly think that dynamic pricing is a clever strategy as it is the best way for a hotel to make profit. However, we should also be careful that it does not affect the guests 'satisfaction and loyalty. It is also no doubt that it is very time consuming. IHG tries to convince its partners to accept that deal and offers a solution by proposing hybrid prices to its corporate clients, mixing fluctuating prices and capped rates as a security. 

This article asks the right questions about the pros and (particularly) cons of dynamic pricing. To mention aonly a few of , we could wonder whether this practice would not turn away our loyal guests, whether it would not make difficult our promotion campaigns and the work of the travel agencies or whether it would not affect our additional revenue. Last but not the least, is it the best way for a hotel image to compete on prices?

Article for Wednesday, 19th of January 2011

This article "Five hidden secret of social media failure" was very instructive and I would like to share it with you.

Social media are the new marketing tools for the companies today and many of them invested in these tools to increase their visibility and potentially, their market share... However, they were also many not having benefited from this investment and not being able to justify such a waste. Here are the reasons for their failure:

•  The myth of planning: the problem of marketers was not that they did not plan enough but rather that they planned too much! Why? Social media are very new and constantly changing, evolving so that it is impossible to forecast on the long-term, contrary to what marketers did. In addition, the selling process via social media is different from what actually happen in real life. Sellers may not seize the opportunities at the right time on social media as the selling methods are different and the moment to conclude as well.
• Not just goals-metrics: The problem is that many marketers and companies in general do not understand that social media are not only necessary for increasing revenue, they also have ancilliary added value, other benefits. Beyond the quantitive aspect (revenue, sales), a qualitative aspect cannot be neglicted. It includes information, competitive intelligence, insight,  a new supplier or partner, publicity, brand awareness, an idea, customer insights...
• Why the boss matters?: Top management should sponsor, encourage the project and imply all the relevant teams on the project. Small wins are also the best way to successfully achieve goals and is better than willing to do everything in one time
• Beyond marketing: For now, the traditional use of social media is by marketers and any services that engage publicly from B to C. How about using social media internally? Your team could benefit from this tool by learning from each other, communicating better, collaborate and innovate.
• The curse of the social media know nothings: Digital marketing is quite new and the problem for companies is to hire the right person. What are the necessary skills, competencies we should expect from a Digital marketer? Tendency is to hire young professional with no knowledge of marketing but who excel on facebook, twitter, blogs etc. That can become a reason for the failure of your strategy...

I think this article was very clear and set the right questions. It is important to understand that social media work differently and we cannot apply the traditional methods of selling and it is also important to realize that social media give you more than an opportunity to sell. It is a way to learn (from clients, competitors, your products and company pros and cons), to have a free database and to increase loyalty. The use of social media at the internal level was also a very clever idea and it could be adopted very soon by companies. I was mostly interested in the question of the professional skills necessary to become a good digital marketer. For my part, the question would be quickly answered: I would definitely hire a great marketer and train him or her on the use of social media rather than a "skilled social networkers" with no or almost no knowledge of marketing.

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Article for Wednesday, 12th of 2011

This article deals with the new management tool that is necessary to understand to be an efficient revenue manager as selling trends are changing rapidly. It is called the "Net ADR Yield" and is used for the management of distribution channel related costs.

Indeed, in the past, revenue managers focused mostly on the top-line revenue or the RevPAR to assess which distribution channel was the best to sell the products. In brief, it was considered that "The higher the total revenue generated by a distribution channel (evaluated by assessing Rooms Sold x ADR); the better the channel."


As you saw in my previous article about the conflict between the airline companies and the intermediaries, RevPAR is not the only element to consider to maximise revenue. Today, hotels, like air companies, are using different distribution channels to offer their guests the choice of booking where, when and how they want. It gives an added value to the hotel products but the problem is, not all distribution channels have the same cost. All the intermediaries have to charge their services to the hotels but the fees between them may vary dramatically. Thus, it is very important to manage these costs. One solution is to manage which channel you use, another is to move repeat buyers from costly distribution channels to less costly channels. How can we measure the profitability of each channel?

The old tool of using ADR and RevPAR is not useful here as it does not take into consideration the distribution channel cost. The new tool to be used then is the Net ADR Yield. You can obtain it by calculating the Net room rate (Standard room rate - cost) divided by the standard room rate. It will give you in percentage what is left to you after you paid for the costs of selling the room. For instance, if you sell the same number of rooms at the same price through 2 different channels that have 2 different fees, 1 very low and 1 high, you will realize that your revenue at the end will dramatically change...

As a consequence, with this tool, you can find which channels have the highest Net ADR Yield, that is which of them are the most profitable. The most important is to calculate the average Net ADR Yield, combining the results of each distribution channel to see how you manage these channels and their related costs. A high Average ADR Yield would show that you have a good control over your distribution channels while a low Average ADR Yield may show that you need to review your channel distribution.

However, it would be restrictive to say that high Net ADR Yield  are always more desiderable than lower Net ADR Yield. A low ADR with a high Net ADR Yield will have a very bad impact on GOPPAR as will a very high ADR with a lower Net ADR Yield. A high Net ADR Yield will also be a problem if it is combined with only a small proportion of rooms sold.
What is important to understand then is that today, revenue manager still have to attach importance to Rev PAR optimization (as ADR times the  room sold gives the revenue) but that they also have to pay attention to the profitability of each channel of distribution.

Comments:

Revenue Management has become a key component in the hotel industry and it will become more and more important as the selling process is changing and the competition is getting harder and harder. The dream for a revenue manager would be of course to reduce or even eliminate the transaction fees the hotel pays to its intermediaries to maximize the hotel profit. New technological tools and practices are already helping hoteliers to attract guests to their site to book directly on their own booking engine. Hotels also are more and more numerous to use the mobile app and mobile websites to respond customers' demand. With the conflict between the airline companies and the intermediaries, would it be unbelievable to think that hotels would follow the trends? I think the current fight is to be watched very closely...

Article analysis for Wednesday, 5th 2011

Since the end of December 2010, a big controversy has surged concerning American Airline's move to distribute its own fares through its new distribution system, cutting out intermediaries. This article explains what the real impacts for this decision are and what is actually at stakes on the short-term and long-term.

On the short-term, this conflict is seen as a price battle, a fight over the commission fees. Indeed, in the past, air companies relied on intermediaries - OTA & GDS - to sell their air tickets. In exchange for their agreement to pay a fee for the intermediaries' services, the intermediaries accepted to reduce their fee structures. While the contracts between the different parties is to be renewed between 2011 and 2013, one of the biggest airline company, American Airline, decided to pull its fares from the OTA Orbitz.com in December 2010, affirming its will to no longer submit to the high fees practiced bu the intermediaries. Instead, it would like all intermediaries to connect directly to its sites to obtain customized information. This decision resulted in Expedia supporting its direct competitor. The famous OTA indeed decided to refuse showing the AA fares on its website. The last wave on this affair was the decision on January 1st 2011 by Sabre GDS to terminate its contract with AA, one month earlier, and to make it more difficult to find AA fares as well as the end of the discounts on the fees applied for the airline company.

At the moment, the air travel industry hopes for a negociation between the parties because they still need each other and a new design of the air ticket distribution would have serious impacts on the market.

On the long-term, we understand thanks to this article that the real aim of the airline companies is to control the air fares research. We are passing from a fare and schedule-led selling to merchandising. In brief, it means that AA does not accept the current system proposed by OTA and GDS that only take into account fares and availibility as research criteria. AA wants to offer tailored services as well to provide better propositions to its guests. Thus, AA would become more a product marketer... What does it have to do with AA's direct platform?

Actually, when guests are looking for fares on OTA, they can only access fares and availibility and the air companies have little say about what is displayed on these sites. They cannot control or justify the prices. Thanks to a direct platform on the airline company's website, they could rebundle, customized and merchandise their products and so, have a better control on what they sell and how they sell.

Still, in spite of a likely inclination to follow the move, air companies will surely not be able to work without intermediaries so soon... Here are 9 issues to watch that are central to the evolution of air companies distribution:

• Airlines readiness= not all airlines are ready to work without intermediaries and to offer an easy to use website for their guests
• the commercial model for merchandising= who will pay for the connection system to the airline companies? Will the ROI worth the high cost?
• consumers= even if they are generally overlooked, they are the final desion makers and what they need is the cheapest fare to go from A to B. The capacity to adapt products and services while providing the best fares and being the most competitive are the key issues.
• comparability and travelers' rights= the new system will make it difficult for intermediaries and guests to compare the competitive fares. In addition, with the rebundling and merchandising practices, it will be hard to compare products as they will not be similar.
• regulatory= the Department of Travel will have to regulate on the merchandising practices to make sure it is not a camouflage for unfair fares.
• technology= if it will undoubtely be a good thing for innovation, the new model will cause problems to GDS, OTA and ITA software to gather information, establish comparison, control fares etc.
• GDS= the GDS have always adapted to the distribution changes and even if they are often considered costly, slow and legacy, they are not going to disappear soon as they are still very powerful.
• Google and ITA purchase= This event could totally redefined the distribution model if it happened.

Comments:

We know that today, companies are trying to lower their distribution fees by reducing the importance of the intermediaries and working on direct booking instead. Revenue management optimization is an issue faced by the hospitality sector (hotels, travel companies) and some solutions are offered by the new technology. For instance, companies can offer customized services and easy online booking and create a stronger link with their guests via smartphone app, website design, blog, social network etc.

Still, the battle does not end there. Companies want to control the whole distribution process. While AA may lose traffic at the begining, it is almost sure that it will be joined soon by other companies and eventually, it is Expedia and all the GDS and OTA that will be in trouble and may not survive...Delta already removed its fare information from 3 small OTA and it is probably the begining of a new trend. If an agreement is not reached soon between the parties, the first to be penalized will of course be the guests, as they will have less possibilities to compare fares and less points of reference because of the merchandising system. Transparency will no longer be possible. This conflict as only at its begining and should be watched very carefully, particularly since the Google claim to purchase ITA. We may also wonder whether it will influence the hotel industry, which I believe will.



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