NEW YORK CITY As the industry rebounds from historical lows in occupancy and ADR, many hoteliers are wondering how to recover the pricing power that was lost over the last two years.
Nick Graham, the New York City-based director of market management for online travel agency Expedia Inc., offers five tips on how to drive rates in the coming year without negatively impacting occupancy. Graham’s advice is specific to Manhattan, but his observations and recommendations can be applied to any market that is experiencing even modest occupancy growth.
1. Grow your yieldable channels mix. Adjusting your segmentation to reflect more yieldable business, such as OTA channels, is the best place to start because it is where rate adjustments can have the most immediate impact. In Manhattan, Expedia ADR has been growing faster than the market as a whole. Expedia ADR for Manhattan in June was up nearly 25% year over year, versus market-wide ADR growth of just under 18%. Year to date, the spread is just as pronounced, as the market has grown ADR by 9%, versus Manhattan ADR growth of 14% on Expedia. That means the OTA segment is growing at 57% the pace of the market, and this is due to the fact that the OTA channel is yieldable, as opposed to other pieces of business that were contracted at lower rates prior to the recovery.
Because OTA pricing floats off of a hotel’s best available rate, revenue managers can raise or lower rates in immediate response to the market, while hotels are locked into fixed rates with traditional wholesale or contract segments. In a recovery environment such as the one we find ourselves in now, pockets of demand that allow for rate increases may not become pronounced until closer to the date. In these instances, the hotels that achieve the highest rate increases will be those that can yield up a larger percentage of their business, as opposed to hotels that may already have contracted fixed pricing.
2. Implement a need date strategy. Every market, even in a recovery, has slow periods. But with the right strategy, it is possible to grow rate over these need dates. In Manhattan a prime example is the autumn weekend on which Yom Kippur falls. Corporate travelers check out early, and the locals leave town. Year after year, the market tends to react to the gap in occupancy about three weeks prior to the actual date, and cuts pricing to drive last minute occupancy. But once the three-week window is reached, not only has the prime booking window passed, but the business in that window is at a considerably lower ADR than in the preceding four months.
By anticipating need dates, hotels can use advance-purchase promotions to fill their rooms further ahead. As long as the dates are identified correctly, promotional rates and the occupancy advantage a hotel gains earlier on will result in a higher ADR than if the hotel waits until the last minute to pick up occupancy. And if you have rooms left at the last minute, having that occupancy base allows you to discount safely through an opaque channel, as opposed to dropping your retail pricing. To successfully implement this strategy, it is critical to know the booking windows, which for many markets may be further out than expected. For example, in Manhattan, 50% of Expedia’s international package business is already booked 90 days prior to arrival. For international standalone, the average booking window is 60 days. These patterns are examples of the information hotels can use to implement promotional strategies to target the customer during their shopping cycle.
3. Use value-adds rather than rate promotions. Once you have identified your need periods, the next step is to create an offer that will help shift business in your direction without leaving rate on the table. One effective way is to use value-adds. For example, the best-performing value adds we have seen in Manhattan are free breakfast and free upgrades. If your property does not have a managed restaurant onsite or the ability to fulfill a value-add at check-in, some OTAs will manage the value-add on your behalf. For example, Hotels.com’s inline merchandising program recently offered a “free” pre-paid US$50 Mastercard with qualifying bookings. Participating hotels saw a lift in their bookings, without an impact on their rate.
4. Turn up the volume on demand during peak compression dates. Some hoteliers talk about cutting distribution costs over peak dates by closing out OTAs. But many successful hoteliers have realized that they can achieve higher rates over peak periods by ensuring inventory remains available through distribution channels while yielding rate up in response to the significant demand that ensues. Expedia recently looked at one of Manhattan’s highest compression years in recent history. That year, there were 50 days with above 95% occupancy. Over those dates, the market ADR was US$344 and Expedia’s net ADR was US$354. The reason behind this is that Expedia brings a lot of fairly price-insensitive demand at two to three weeks prior to peak compression dates, driven by customers that cannot find availability at their usual hotel.
By keeping inventory open and adjusting rates up, hotels not only fill rooms at higher rates on Expedia, but also on their own channel through the “billboard effect.” Expedia recently started sharing new peak compression date data with hotel partners, providing advance guidance to determine when a hotel has the opportunity to increase rates, or in some cases to revisit and perhaps reduce rates for specific dates.
5. Stop giving away room upgrades. Many hotels offer some assortment of room types, even if it is just a choice between standards and suites. The trouble is, the lead-in room type is often overbooked, forcing the property to upgrade the guest for free at check-in. By applying a promotional strategy for upgraded room types, being sure to target dates or upgraded room types that might typically go unsold, hotels can entice bookings for higher rate rooms and achieve a higher ADR overall. For example, a typical mix of bookings at one hotel in Manhattan was 75% standard rooms and 25% suites. After it began applying a promotional rate just for the suites, it boosted the mix of suite bookings to 33% and grew overall ADR from US$226 to US$253.