Using data to control unruly hotel pricing

New revenue management research helps hoteliers navigate the online economy

By Jeff Alford, SAS Insights editor

I recently had a chance to interview Kelly McGuire, of SAS, about her new book, Hotel Pricing in a Social World. Having navigated through an online universe of hotel options while planning a recent vacation, I was interested to find out from her research if my decision-making process had been on target (or not).

While Kelly's book is for those on the receiving side of the revenue equation, as a consumer, I found her exploration of hotel room pricing intriguing – a peek behind a very opaque curtain.

So did I follow the best path for choosing a vacation hotel? According to chapter 4 of the book, for the most part, I did. That chapter, about how business and leisure travelers make purchasing decisions, is based on research she and a Pennsylvania State University professor conducted. My takeaways are that ratings matter (but reviews matter more), as does pricing and customer loyalty.

But, again, this book isn't written for consumers, and it's not just for revenue managers either. There is also plenty of advice for marketers (for example, how to integrate revenue management practices and marketing decisions). And sprinkled throughout the book are concise and insightful case studies of real-world implementation of the principles in the book that I think everyone will find interesting.

Below is an all-too-brief interview with Kelly about how the book came about, what has changed for revenue managers in the digital economy and the shift revenue managers and marketers should make now.

What prompted you to write Hotel Pricing in a Social World?

Kelly McGuire: It’s no secret that the market has fundamentally changed in the last several decades. Between economic conditions, the advent of the Internet and social media and a myriad of disruptors who are taking advantage of the move to digital and the emerging connected consumer, hotels are facing more and different competition while dealing with a very distracted and highly empowered customer base.

Over the past few years, I have been blogging, writing articles and speaking at events about how analytics can help hoteliers turn these challenges to opportunities. Because my background is in revenue management, I have put a particular focus on how hotel pricing has evolved with ecommerce, the social web and the connected consumer.

From the reactions of hospitality executives, I realized there was a need in the market for someone to cut through all the hype and help hoteliers understand the real impact of these changes, so that they can make sound business decisions. The title of the book is inspired by some original research I have been doing with Dr. Breffni Noone, a professor at Penn State. We’ve been studying how the availability of user-generated content has changed consumer reaction to price when making a hotel room purchase.

I realized that this title also applies to the broader problem of hotel pricing. Plus, I always just thought it would be really cool to see my name on the cover of a book!

It seems that pricing transparency has the altered the practice of revenue management. What has been the biggest shift you've seen?

Price transparency has probably been the number one cause of a shift in how hotels have to think about pricing.

Before the advent of the Internet and ecommerce (if we can all even remember what that time was like!), it was relatively difficult to access hotel prices in a particular market. Consumers had to rely on a travel agent or call hotels themselves. Pricing in this market was all about opening and closing rates based on expected demand patterns.

For example, if you were expecting to be full for a particular weekend, you would make sure there were no discounted rates available to sell, but if it was going to be slow, you might make a cheaper rate available. You needed to know what others were charging, in general, to ensure you were not too far out of alignment, but all that really mattered was what was going on with your hotel’s demand.

All of that changed with the Internet, as consumers suddenly had easy access to compare all the prices in the market. This means hotels needed to start paying much closer attention to competitors pricing, and consumers became much more price sensitive.

Most consumers may not realize that hotels actually have agreements with the OTAs (online travel agents) that the hotels will not offer rooms for a lower price than the OTAs are given, anywhere on the internet, including the hotel’s own website. Once the hotels could only make one price available for the public, it became even more crucial to understand the relationship between a hotel's price, competitors' prices and consumer demand, in other words, the hotels needed to understand consumers’ willingness-to-pay, and the price sensitivity of demand.

This requires a very different analytical technique than opening and closing rates. I cover this analytical technique, called price optimization, in the book, including how it works, when it’s appropriate and how it changes the way that revenue managers must think about their demand and price. The point is, things changed very dramatically for both consumers and hotels with price transparency!

Has the sharing aspect of the social web really put the customer experience at the forefront hotel executives business strategies?

McGuire: Absolutely!

Consumers now have access to a wealth of information, including reviews and ratings, but even images, audio and video, provided by peers who have actually experienced the product or service. The entire guest experience is completely transparent to the market. Executives now have to pay attention to how consumers are talking about their brand and their properties.

I like to say that, while the invention of the Internet may have given us price transparency, the social web has ushered in an environment of value transparency, where consumers are easily able to assess what they will actually get for the price they are paying.

In fact, as competition for the guest heats up across the hospitality industry, hotel executives are focusing on the guest experience throughout the entire interaction – from research to booking to the stay and post-stay – as the way to earn share of mind and share of wallet.

Careful analysis of reviews, ratings and even images can help to inform hotel executives about what guests value in the experience, and what needs improvement. It can also help revenue managers understand their value proposition, and that of the competition, so they can make better strategic decisions about how they price in a competitive market.

Let's talk about customer reviews. Which has a greater effect on revenue, positive reviews or negative ones? How do reviews affect marketing?

McGuire: Dr. Noone and I have been doing some original research on the impact of user-generated content on consumers' reaction to price when making a hotel purchase.

Among other things, we looked at whether the presence of a positive or negative review influenced how consumers reacted to the price of the room, and ultimately, if they impact a consumer's decision to book. We found that while consumers prefer to pay the lowest possible price, they pay very close attention to reviews. All things being equal, they will pick the lowest priced hotel.

If reviews are more positive versus the market, they will spend a bit more. Positive reviews, therefore, do not guarantee that you can get a higher price if you have competitors that are equally positively reviewed. However, we found that leisure consumers will simply not choose your hotel if the reviews are negative. It doesn’t matter how low your price is, they will not book a room in a hotel that has negative reviews. Because of that, we found that those negative reviews are much more impactful on revenue than the positive ones.

There are some other really interesting findings from this study in the book, including how consumers use ratings in decision making, and as well, how different segments of travelers (leisure versus business) use this information differently.

The central point is that pricing in a social world is not as straightforward any more when comparing your price to your competitors price. Revenue managers need to also consider their reputation versus the competitors, and their business mix. It’s getting extremely complicated.

What do you see as the biggest challenge revenue managers face in the next couple of years, and what are some steps they can take to get ahead in a highly competitive marketplace?

McGuire: Revenue managers, and hoteliers in general will face a lot of challenges in the next couple of years. Competition is heating up, not just from other hotels, but from third party distributors who also want to “own” the guest. This is coming increasingly from alternative lodging choices like AirBnB.

Consumer behavior is changing with the move to digital. Consumers have access to more information, are more empowered, and are making decisions much closer to the date of arrival. Revenue managers in particular need to have a good understanding of how these factors impact their specific hotels in their specific markets. They need access to the right data in the right formats, and need to develop the business acumen not just to predict the future, but to know what to do about it.

To get ahead, revenue managers need to instill a revenue culture across all departments in the organization, which means educating colleagues from operations and marketing how to identify and exploit revenue generating opportunities. They need to demonstrate value and evangelize success across the organization so that hotels are willing to keep investing in the data and systems revenue managers need to anticipate and react to market opportunities. And, of course, the most important step is to read my book!