The reverse auction

The lodging industry has become one where technology and transparency have changed how travelers select and book hotel rooms, resulting in a reactionary evolution relative to how owners and operators promote and sell room nights. In years past, at this point in the cycle with robust occupancy levels, market compression alone could be relied upon to drive strong rate growth.

Today, this is no longer the case as complete market transparency has led to the rise of a behavior known as the “reverse auction.” A reverse auction occurs when a hotel that needs demand the most re-prices the market by dropping its rates on OTA sites, forcing competing hotels to follow it down. This phenomenon has created a paradigm shift within the lodging industry’s operating environment, namely a spiral down in room rates as day of arrival gets closer.

Although data based analysis of market trends is very valuable in developing strategy, a significant challenge evolves  around how and when to measure  progress to ensure it happens early enough in the booking cycle to make a difference. The complexity of today’s market continues to increase as the reverse auction now occurs on branded websites as well, placing even greater pressure on overall average room rate. Brands require that the best room rates be available on their labeled websites, therefore they must be as good as or better than those offered by hotel operators on OTA sites. Typically this obligation is achieved through the use of restricted room rates that require an advance purchase.

Consequently, as owners and operators price available rooms competitively enough on OTAs to capture demand parity, with restricted rates on a brand website must also be maintained. If, on a branded website, the gap between flexible retail and volume account rates and restricted rates becomes too large, brand loyal customers who are traditionally not price sensitive will buy down, thus inducing customers to book a room at rate below what they were willing to pay.

The industry’s challenge is when there is a need for more occupancy, how to price available rooms competitively with the OTA market while not allowing the gap in brand restricted product to get too large from retail or volume account pricing.  Various booking channels have different pick up windows, with value travelers willing to reserve earlier and brand loyal customers buying closer to arrival date. Unfortunately, it is not as simple as closing off advance purchase product 10 days before arrival. To be successful at maximizing both occupancy and rate, hotels must accurately project the exact depth of the value business needed on any given night and capture such demand requirements early in the booking cycle which may be as much as 60 days in advance of arrival. Once a property’s value demand requirement is fulfilled, room rate integrity can be maintained on the OTA sites and their corresponding restricted rates on the brand sites to prevent loyal customers from buying down during their later booking window.

As a result, owners and operators need to reverse a practice that has been a cornerstone of the sector for decades, specifically to be the first in the market to sell out not the last. Optimally a hotel needs to be sold out at least three days before arrival, coupled with sufficient oversell that allows for absorption of normal cancelations that occur without having to participate in the reverse auction. Hoteliers must be proactive in measuring their transient pace early in the booking cycle ensuring capture of the room rate premium associated with early reservations and, that the superior rates of brand loyal guests are maintained throughout the booking period.

The operating challenges faced by the lodging industry have never been more complicated, as the days of increasing demand curing all problems are long gone.   The sector will continue to rapidly change and grow more complex. Only those hotel owners and operators whose platforms are nimble and can readily adapt to capitalize on a forever changing landscape will succeed.