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Get your rates right

31 August 2004
Get your rates right

The challenge
The proliferation of distribution channels, caused largely by the growth of the internet, has opened up a Pandora's box for independent hotels and the hotel industry in general. Coping with rate transparency, ensuring rate parity and rate integrity, is one of the greatest challenges facing the independent hotelier.

The implications If a hotel is to maximise revenue, it needs to use a range of distribution channels to reach its customers - including its own website, travel agents, a global distribution system (GDS), booking consortia and third-party online booking systems.

The growing role of the internet means that customers now have unprecedented choice over how they book. Equally, they have unprecedented access to information on rates.

Rate transparency, therefore, is virtually unavoidable for any hotel that wishes to take advantage of anything but the most simplistic distribution model.

However, transparency represents a challenge for the industry. It places terrific pressure on hoteliers to ensure that their rate structure has integrity and parity. There is the risk that rate conflicts will ruin third-party booker relationships. Indeed, if they get it really wrong, hoteliers will even start to alienate their guests.

At the same time, though, hoteliers need to retain the flexibility to manipulate their promotional rates to maximise occupancy as demand fluctuates or as competitors become more aggressive.

The tension between these two requirements is as obvious as it is critical.

Controlling distribution channels also has implications for profitability. In times of peak demand, a hotel should look to use the cheapest distribution channels - normally its own website or reservations office. So how can it attract bookings without risking conflict with other channels?

Linked to this is the investor issue. In the main, hotels are valued on the basis of their potential profitability. Rate transparency throws hotel profitability into doubt, as it makes it very difficult to control which distribution channels are used at critical times.

At peak times, for instance, a hotel will want to maximise bookings through channels that give maximum profit. Rate transparency makes this difficult to achieve - and hence calculating overall potential profitability is a big problem.

Keeping the peace: a scenario A commonplace scenario sums up the complexity of the situation - and the potentially disastrous consequences of getting it wrong.

Imagine that your hotel is undersold for a quiet period. Understandably, your sales effort will be working on short-term promotional deals to fill empty rooms, and any prospects may be offered substantial discounts against the rack rate on application.

One particularly savvy guest arrives at 4pm and asks for a discount in return for his immediate business. Front desk eagerly accedes to his request and offers him, say, a 25% discount to secure the booking.

Now, imagine the same gentleman having a quiet drink in the hotel bar later on. He strikes up a conversation with another guest. The talk turns to room rates - both guests love the hotel and feel they got a terrific deal. Our gentleman tells the other about his 25% discount; the other guest pales slightly and says he has to make a phone call.

However, this is worse than an individual guest feeling upset that they missed out on an exceptional last-minute deal. The problem is that the other guest is the chief executive of a multinational corporation that has a negotiated rate agreement in place with the hotel. At a stroke, the off-the-cuff promotional deal offered by the front desk has undermined the rate structure that underpins an enormous contract for the hotel.

At best, the situation will lead to an awkward conversation for a sales manager; at worst, it could lead to the loss of a massive source of business.

The solution A controlled sales and distribution strategy, backed by a strong knowledge management ethos across sales and operations teams, is essential for minimising the threat posed by rate transparency. Some key techniques include:

1. Staff training Hotels have to make a great effort to ensure that all staff who are likely to broker deals - whether individual ad hoc arrangements with guests or long-term contractual arrangements with large businesses or third-party bookers - are aware of the rate structure and know the acceptable levels they need to operate within.

2. Floating rack rates Establishing rate integrity by carefully training staff to observe rate structures does not solve the issue of how to create the flexibility necessary to drive more business in quiet times or to respond to aggressive competitor promotions.

A growing practice is the use of floating rack rates, which enable existing rate structures to be scaled up or down in their entirety to accommodate peaks and troughs.

For example, a floating rack rate can be set to offer a discount of, say, 5% or a fixed amount from the official rack rate for a given period, and this reduction will be applied to all negotiated rates - including your contractual rates - for the duration of the deal.

3. Ring-fencing promotional deals Another technique to avoid rate conflicts is to ring-fence, or restrict, short-term deals to differentiate them from any contractual rates.

In other words, it may be possible to offer a lower rate to guests during a quiet period, providing you adopt strict booking policies - such as placing a minimum stay requirement or advance purchase requirement on the offer.

4. Using other promotional methods On a similar point, the headache of maintaining rate integrity can be avoided by implementing ad hoc promotional deals that do not involve rate manipulation.

Instead, consider using other "value added" incentives - for instance, complimentary drinks or a free spa session - to attract bookings in the short term. This prevents any direct rate comparison and hence avoids any potential conflicts. n

Richard Lewis is managing director of Summit Hotels and Resorts, part of the Independent Hotel Corporation (IndeCorp)

The general manager's view "Transparency is a critical issue for the industry. Most general managers have dealt with problems with rate parity and are under mounting scrutiny to ensure rate integrity is maintained - not least because the reputation and credibility of the hotel can be seriously harmed if things go awry.

"For me, the solution lies in staff training - ensuring all staff are well briefed to maintain a consistent rate structure. Keeping this structure as simple as possible is important - the more complex your rate hierarchy, the more likely you are to make mistakes and offend major customers."
Daniel Pereira, general manager, Glasshouse hotel, Edinburgh

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