Guest Column: Beware of Relying on Only a Few Statistics

Discussions about whether hotels should or shouldn’t raise rates have
dominated pricing strategy in 2011, as evidenced by a recent article “The
Fundamentals of Sustainable Hotel Demand Growth.” Of course, these
discussions have also had a dramatic effect on the travel industry as a
whole. While prognostications abound, only one thing has been determined:
travel-related businesses should proceed with caution, especially when
experts offer generalized predictions based on only one or two "key"
variables.

Let’s take the hotel industry for example: instead of creating a strategy
focused on incrementally raising rates, hotels should be prepared to respond
to market variables by both raising and lowering rates. The same could be
said about any travel-related business: react based on as much information
as you can, and don’t "lock in" to any one action. Which action (either
raising or lowering rates) you choose should always be determined by
utilizing the most up-to-date information and variables based on your
market, and should always be done with flexibility.

Let’s take a look at the main topics regarding the latest travel and
hospitality industry prognostications:

Hotels: ADR and Occupancy
ADR is far from being established as a variable that, by itself, represents
the road to recovery. While 2010 provided a boon to the hotel industry, not
all hotels experienced an upswing, and ADR grew primarily through
occupancy-driven strategies such as heavy discounting and the "return" of
business travel. What happens when the strategy shifts from
occupancy-driven discount rates to a strategy that focuses on pre-recession
rates based on a single year’s ADR growth? Maybe demand accommodates the
increased rate. Or maybe such an increase in rates kills tourism growth and
lowers ADR. Both scenarios are possible — the fact is, nobody can know for
sure, even when given every variable known to man, much less one or two.

Not to throw cold water on what is otherwise great news-2010’s ADR growth is
a very positive statistic for the industry-but it is only one element of
recovery. ADR and occupancy are just that, statistics. While they provide
a representation of the past, they should only be taken as two of many
variables to forecast the future. ADR and occupancy should only help in
formulating your pricing strategy, not determine it.

This same theme can be extended to the travel industry at large: statistics
that show hotel occupancy, airline rates, economic growth, etc., should aid
in pricing strategy, not be the decisive factors alone.

Economic Forecasts
While we all like to believe that economic recovery is imminent, it’s not a
foregone conclusion. Most people didn’t see it coming in the first place, so
placing an abundance of faith on forecasts that predict exactly when the
travel industry will be "out" of the recession is foolhardy. Furthermore,
there is almost as much speculation on a "Double Dip Recession," suggesting
the importance of pricing based on both "favorable" and "unfavorable"
forecasting data-humans tend to favor the former, not the latter.

Interest rates, unemployment, real estate recovery (both nationally and
locally) and GDP growth all need to improve. Using only a selective few
indicators such as "pricing" and "local economic activity" to generate a
pricing strategy is much like buying stock based on only two earnings
ratios: you’re taking a gamble by not completing all of the research
necessary. Travel professionals must hedge their rate-pricing strategy by
carefully monitoring all variables.

Bottom Line: Micromanage Your "Sphere"
Micromanaging room rates, ticket prices-practically anything within the
travel industry-based on multiple variables within your own sphere will
always yield the best results for pricing strategy. While there is always
some prediction involved, the most effective solution lies in forecasting
based on all meaningful variables and marketing channels. A successful
pricing strategy is then achieved by adjusting rates (either lower or
higher) to correspond with your existing inventory. It’s a monumental task,
but it’s the closest "take it to the bank" strategy in the
industry-regardless of the prevailing prognostications.
 

Jean Francois Mourier is CEO of REVPAR GURU, which provides hotels around the world alternative revenue management software solutions designed to deliver maximum bookings and profits. The company offers custom-designed yield Dynamic Price Engines in real-time revenue management software.