Hotel Occupancy Continues to Reach New Heights but Rate Not Keeping Pace
September 8, 2017 10:56am
By Leland Pillsbury
The U.S. hotel industry’s ongoing run of monthly RevPAR increases and its recent record occupancy levels are obscuring a more unsettling trend, one that many hotel groups will be unable to overcome quickly when the hot streak ends and a downturn finally comes to lodging.
Robust occupancy, especially in the major destination markets, does not fit with the slowdown in RevPAR growth and anemic ADR growth in the industry. Something is going wrong with hotels’ pricing power, and hospitality companies are blaming several things, from increasing supply outpacing demand, to difficulties with online travel agencies and the effects of Airbnb.
Those are all legitimate challenges, but there’s a larger issue at play. Hoteliers should be looking inward to solve their problems. There is no excuse not to be yielding rates more aggressively with occupancy continuing to climb beyond already record levels.
Take the disparity between transient and group ADR growth. According to STR data presented to the Industry Real Estate Financing Advisory Council this year, monthly growth in transient ADR has lagged behind group ADR since January 2016.
Transient rates are within revenue managers’ control, yet the industry has not managed to push these prices much higher than 1 percent to 2 percent per month for the past year and a half while demand continued to grow. Meanwhile, hotel sales teams have managed to grow group rates consistently at about 3-percent year-over-year increases each month.
In many markets and chain scales, hotels haven’t been able to price the way one would anticipate. STR noted that all industry segments achieved occupancy above 65 percent in June, including levels above 80 percent for upscale and upper upscale. Yet those two chain scales had the lowest RevPAR increases for the month, at 1.4 percent and 1.2 percent, respectively, compared with a year earlier.
The effect is more pronounced for some of the biggest U.S. destinations. Despite an occupancy of 90.6 percent in June, the New York City market recorded a 3.7 percent decrease in ADR for the month.
Something doesn’t add up. It’s not just Airbnb and the OTAs. It’s a much more systemic problem. Hotels, from smaller independents to the biggest brand companies, are using the same strategies they used decades ago to manage pricing, and they’re no longer effective. Hotel owners are leaving money on the table.
Hotels should have far more sophisticated strategies for yielding rates than they do, especially given the evolution in hotel technology and in the kinds of data available. Instead, they’re using what worked decades ago, when the GDS handled most of the industry’s distribution, Airbnb didn’t exist and the OTAs weren’t the behemoths they are today.
It amazes me that the approach being used by many companies today is still based on the system I helped pioneer with Marriott in the late 1980s. At the time, yield management—or revenue management, as the hotel industry came to call it—was the innovative new approach driving significant revenue gains in the airline industry.
We moved beyond static rates and began yielding room rates based on demand. Revenue management evolved again at the turn of the millennium with the wider adoption of technology, which ushered in a tiered-Best Available Rate system that helped hotels price rooms across the digital-distribution landscape that had begun to grow rapidly.
When hotels first started using revenue-management systems to forecast demand and price rooms, they would yield one primary, “best available” rate, usually the same for every customer segment or room type. As the number of channels continued to grow, hotels would differentiate prices across its distribution by using tiered discounts off BAR, usually a fixed percentage that moved in lockstep if the main rate moved up or down on different dates.
For example, If the retail rate was $200, the promotional rate might have been a 10-percent discount for $180. If the hotel reduced BAR on a low-demand day to $150, the promo price would still be 10-percent less and $135. Or the hotel would shut off that promotion entirely.
Things have continued to change since then, but far more for the OTAs and other intermediaries, and not enough for hotels.
I can see why many companies still use the dated BAR method. It works within the current tech ecosystem. It’s a way around the limited number of rate codes most property-management systems use. A lack of true integrations among the source systems needed to run a hotel have made this approach industry standard, but that isn’t acceptable anymore.
When a hotel is handcuffed to a static room rate and fixed discounts, like the typical 10-percent off for AAA or a promotional rate, it only has a few bad options. When rooms start to fill up, or when demand unexpectedly shoots up, the hotel can close off certain offers and channels or leave them open but fill too many rooms with lower-rate business.
BAR pricing, especially when it involves length-of-stay restrictions, severely restrains revenue managers from dynamically yielding customer segments or different distribution channels when the opportunity arises to do so. An easy tactic for driving more top-line revenue out of a hotel’s existing inventory is to yield by room type, but today’s technology hampers a property’s ability even to do that.
A more sophisticated strategy requires better data to forecast demand and to make the optimal pricing and distribution decisions. A hotel’s own historical data and its competitors’ pricing collected through rate shops will always be important, but there are so many other sources of information that can elevate a property’s strategy today.
Comp set and digital-review data can be accessed from several third-party providers and integrated into pricing decisions.
Another source of crucial information is available on a hotel’s own booking site. You should be tracking not only the consumers shopping on your website and booking a room, but also the potential guests who look for a room and don’t book. If a consumer gets all the way to the end of the booking path, does not like the price, and decides to exit in order to book somewhere else, that can tell you a lot about guests’ sensitivity to the price they were quoted.
If too many people abandon without booking, perhaps the prices you’re quoting for that stay date are too high. If you’re turning away too many shoppers because there’s no availability, perhaps you should have been raising rates earlier in the booking window.
Better data help a hotel identify where the opportunities are to yield rate higher, even by a little bit.
Because of the limited number of rate codes used by most property-management systems, hotels have been limited by the number of price points they can offer. For example, a revenue-management system may recommend a rate or bid price of $209, but if the options allowed by the technologies are either $200 and $220, the BAR would become $200. But if your data is right and you could get $209 for the same number of bookings as $200, imagine how much money you’re leaving on the table.
And ask yourself again why ADR has not maintained the same pace as occupancy.
The picture is becoming much clearer. Imagine that same scenario happening every single day across every single one of your rooms. With better data and technology that would allow getting those optimal rates across all channels and room types, hoteliers would be seeing significant increases to rate and RevPAR, and they’d be dominating their competition, too.
As a hotel owner, I know those dollars flow through to the bottom line. It’s far more efficient to boost net operating income through smart, aggressive pricing of inventory than through costly renovations or marketing campaigns.
This is one of many reasons why my passion for the hotel industry has extended to hotel technology, which is now my focus as managing partner of Thayer Ventures. The industry has long lagged in technology and relied on legacy systems, and revenue management is one obvious area where new approaches are needed.
As an example, I sit on the board of Duetto, a revenue strategy technology company that has brought new data and approaches to the traditional tiered BAR method outlined above. In a study of more than 1,000 hotels and casinos, Duetto’s fully deployed customers averaged a RevPAR Index increase of 6.5-percent year-over-year in 2016. That kind of performance validates the importance of new pricing strategies and how crucial technology will be to the success of the hotel industry. That’s just one example and I know there are many innovative companies out there offering new solutions to other facets of hotel operations, guest service and distribution.
As an owner, I’ve enjoyed the long and sustained growth we’ve seen for almost a decade now, but it can’t go on forever and I know we could and should have been far more aggressive with our pricing all along.
It’s time we demand more from our staffs and managers, our management companies and hotel brands, and our technology providers. But more importantly, it’s time we demand more from ourselves. The status quo isn’t good enough anymore.
When occupancy begins to slow, what happens to our pricing power then? I wouldn’t wait to find out.
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Leland Pillsbury is managing director of Thayer Ventures, a San Francisco-based firm that invests in technology companies that focus on the travel and hospitality spaces. Among other businesses, Pillsbury co-founded Thayer Lodging Group, where he spent more than 15 years overseeing strategic expansion and a successful sale to Brookfield Asset Management. He began his career with a 19-year tenure with Marriott, where he rose to the position of EVP, revamping the group’s pricing strategies, creating the industry’s first revenue and yield management systems and more.
Contact: Michael Frenkel
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