Driven by intense competition and price transparency, the pressure on price levels in the hospitality industry remains unprecedented, and it isn't going to subside anytime soon.
Just when businesses grasped how internet search engines put comparison shopping a click away, mobile devices changed the game. The internet made it possible for people to find prices instantly, and now with mobile devices the lowest prices can instantly find them. Mobile and social media alerts have turned price transparency into price hyper-transparency.
If businesses aren't careful about being sucked into the pricing hype, they may do serious damage to their profit margins by unnecessarily matching a competitor's unrealistic price.
At the same time, price transparency is here to stay, and operators cannot afford to ignore competitors' rates when setting their own.
So, how can companies survive this high-wire balancing act without resorting to blindly matching every price in the marketplace?
Bill Kotrba is vice president of industry strategy at JDA Software
Five ways to get the price right
1Know your competitors
Nothing throws more money away than price matching against a business that is not a true competitor.
The development of an accurate competitor set is fundamental. And by using publicly available price information captured from the web, it has become easier. An accurate competitor set is the key to identifying a business's own optimal price.
A common approach for identifying a competitor set based on attributes is score-based benchmarking. Starting with a company's own property as a reference point, assigned a baseline score of zero, the potential competitor's individual attributes are then scored with positive or negative values.
For example, if the competitor has a swimming pool and the baseline company does not, then the competitor might be assigned a "+2" score. Conversely, if the competitor does not have a turndown service and the baseline company does, the competitor might receive a "-2" score.
After adding the attributive scores for each competitor, the competitors whose total scores come closest to zero are those who best align as candidates for comparison.
2Market reference price is key
As competitors' prices fluctuate more rapidly than ever, operators must be nimble enough to change with them - or not change at all if that is what an optimal pricing strategy dictates.
Accomplishing this requires both an accurate competitor set and an estimation of customers' willingness to pay, given the prices that the competitor set is charging.
A market reference price should take into account the dynamic nature of prices over time, comparing the price of a service or product across alternatives, and ultimately offering insight into the elasticity of demand.
3Seasonality and strength positioning
Often, a stronger or weaker competitor might still stand as an option in the customers' eyes, depending on certain characteristics. These attributes can be associated with a certain price differential to adjust the competitors' prices when calculating a market reference price using strength positioning.
If there are several factors that separate properties due to an added service or better location, it is possible to calculate a specific price differential and still evaluate them. So if a competitor is commonly £25 more expensive due to location, simply adjust the price down to make it comparable.
It's also worth considering trends based on seasons, which may include weekday versus weekend patterns, to statistically identify which competitors have pricing strategies most similar to the company's own.
4Start with clean data
It is important to remember not to follow internet data blindly. Very often screen-scraped prices will need to be cleaned based on a number of factors.
For example, if a competitor sells out of rooms on a certain date, then there is nothing to base assumptions upon. In these cases, it is crucial to create viable assumptions to algorithmically fill in these gaps as accurately as possible.
However, there may also be pricing outliers that decisions should not be based upon, such as deep discounts or statistically erratic prices. In those instances, it also pays to have logic built into the system that can scrub the data so it doesn't skew results.
5Compete effectively and profitably
Armed with a properly quantified competitive set, a company can learn which prices and competitors are relevant and which ones can be ignored.
Elasticity analytics and revenue management have now intersected in the form of price optimisation, driven by real-time competitor data available via automated price shopping. Best of all, it allows hotels to compete more effectively and profitably in this new pricing reality.