28 May 2020 | Pricing strategy, Revenue management, Rate parity, Distribution
The emergence of COVID-19 has turned everyone’s expectations on their heads. Revenue managers, hotel owners and operators who previously expected steady or growing demand for 2020 have a much less predictable future ahead of them now. The fact that nothing even remotely similar to this pandemic has ever been managed by anyone currently working in the hospitality industry doesn’t make this any easier. It does, however, put everyone in the same boat. Right now, nobody has all the answers and all we can do is make educated assumptions about how our industry will recover.
Nation-wide lockdowns and restrictions on domestic and international travel have wiped out base business for hotels around the world. With some restrictions easing and hotels being able to reopen, many properties are starting from scratch. Most bookings were cancelled, leaving them with little to no on-the-books business and accurate forecasting is a challenge since previously known demand patterns are now unreliable. This will lead to an increased reliance on revenue managers manually adjusting prices and reviewing RMS rate suggestions. With international travel restrictions set to stay in place for at least a few more months, hotels will need to look at new strategies to generate business.
As the COVID-19 crisis began unfolding, experts first compared it to the SARS and MERS outbreaks as well as the global financial crisis and 9/11. This was done hoping the industry could rely on past recovery data to inform decisions this time around.
By now it has become clear that we’re dealing with an entirely new situation and it’s hard to say when we’re likely to see some degree of normality in the hospitality and tourism industry again. For the time being, this leaves hotels with the only option of taking all the business they can in the short term.
Once current travel restrictions and safety measures ease, nations will start rekindling their economy and some people who can afford to will want to travel after being under lockdown for weeks or even months - be it true leisure and resort style travel to explore or to visit family and friends.
Since international borders will remain closed for the coming months, pent-up demand will result in a focus on and hope for steady pick-up of domestic corporate and leisure business. Staycations and weekend trips are expected to gain in popularity, especially among families wanting a change in scenery all while staying somewhat close to home. However, growing demand will be met by a slower supply chain in all parts of the hospitality industry. Transport capacity will need to be ramped up again after airlines reduced flight schedules, and businesses which have recently let people go will not be operating at full capacity from the start.
Rehiring and scaling up operations will follow demand and only take place once it steadies. This could slow the recovery process, especially for long-haul trips where air travel is the only option.
The airline industry’s approach to pricing, especially in the early phases, will also have an impact. If rates are high at the beginning, this will likely be a deterrent but will help airlines cover costs. Low rates, on the other hand, could help encourage bookings once borders reopen. For business beyond personal or business-related road trips, the accommodation sector will be dependent on a sustainable, well managed return to growth in the transportation sector.
Since recovery is difficult to predict in this unprecedented situation and will vary greatly from market to market, blanket recommendations and predictions can’t be made.
Instead, it will be more important than ever for revenue managers to closely monitor their competition and have a deep understanding of their own pick up and performance by segment.
With everyone adjusting to a new situation at the same time, markets will be increasingly dynamic at first, until a new baseline is found, and hotels once again have data to base their pricing decisions on. While some hotels may increasingly partner with travel agents to offer static rates in the beginning, the overall trend towards dynamic rates is expected to continue.
Working closely with the sales team and monitoring data will help hotels know when there is a rise in demand from long-term business. This may allow hotel operators to offer some limited short-term discounts to targeted segments where appropriate.
However, general consensus is that it is important not to cut rates drastically. In the short term, this strategy only helps properties with lower costs but creates downward pressure on all properties who are fighting for market share.
Decreasing rates below cost has never been sustainable, and should be avoided especially right now, considering that hotels will face higher costs due to more elaborate hygiene procedures becoming the norm. Hotels will have to absorb these costs initially, similarly to when they started providing free Wi-Fi without increasing room rates immediately. Rather, rates will likely increase slowly in the coming years.
In the buyer’s market that will likely follow after the pandemic, rates will be more demand-driven than before due to an oversupply of product, unless hotels open gradually, floor by floor, or some competitors drop out. This will make it especially important for hotels to intelligently manage costs since holding rates will be challenging and there will be fewer chances to generate revenue. Understanding their new customer - and their wallet - will be key.
When coming out of this crisis, it will be important for hotels to leverage all their options to generate additional revenue. Rather than having a high leading price including services guests may not need, offering a lower base rate with the option to add ancillary services can help boost revenue and provide a more customised stay. Where the customer is open to this, this creates a flexible value proposition for guests and can help hotels see which ancillary products and services are most popular and may warrant additional promotion.
Overbooking of base category rooms and then attempting to up-sell guests is another option to generate ancillary income. Many hotels already do this in some form, but now is the time to refine these strategies and possibly test an automated up-selling solution to make this process more efficient and effective.
How successful a hotel will be with up-selling and cross-selling depends on many factors including its business mix, its location and the guests’ average length of stay. Despite this, it’s an option worth exploring.
The performance of other revenue-generating departments such as F&B, events and the spa will also play a role in a hotel’s performance after the crisis.
However, in many places, these departments are still facing heavy restrictions because they require close contact between large numbers of guests and staff. For now, the best many hotels can do is to wait for governments to update local regulations and be ready for clients to return slowly but surely.
In the events domain, new health and safety procedures will likely lead to smaller gatherings being held by senior executives as well as a trend towards more digital meetings. This could change again once travel becomes safer and easier in the future. There will be room to find creative ways to monetise meetings & event space in a world where certain activities may now require additional space.
The food and beverage department is in a similar situation. Hotels must remain informed about any changes in local restrictions, ensure they comply with safety guidelines and market to domestic and local guests. With F&B venues being a major cost factor but rarely a profit centre in most hotels, owners and operators may start looking at this area with a new lens with the goal of rethinking the idea of hotel F&B. Ghost restaurants offering deliveries have provided some revenue during the lockdown for some hotels; the next creative idea is needed now.
Minibars typically don’t perform well in terms of revenue and profitability but now find themselves at odds with a new environment and focus on hygiene in the guest room. Instead of letting it be a time- and cost-intensive low-yield offering, hotels could use the minibar to cater to the increased demand for healthy lifestyle options, less need to leave the room and interact with others and add a new value proposition for guests.
Given guests’ safety concerns, most hotels do not expect much demand for their spa immediately upon reopening. Instead, the focus is first on implementing strict hygiene and sanitation regimens and communicating this with guests to build trust with them. Then the spa can be promoted again since it is an important part of the customer experience and is likely to grow in popularity as demand for health and lifestyle offerings may rise again after the crisis.
While some of these projections may seem a bit bleak, it can be comforting to know that revenue managers everywhere are facing similar challenges right now. We encourage you to stay open to new developments and carefully monitor the day-by-day and week-by-week changes in your market to make the most of rebounding demand. In this unprecedented situation, relying on and sharing with your team the most up-to-date competitor, market and performance information is your best bet to maintain your positioning and come out on the other side strong.
We thank our revenue management experts for sharing their time and expertise for this article:
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