Over the past decade the use of Revenue Management Systems (RMS) has grown dramatically. Beginning in about 2013 RMS systems shifted focus from big-box hotels to limited-service properties with fewer than 100 rooms. While estimates still show that fewer than 20% of all properties globally utilize some form of RMS, 45% of all revenues are touched by an RMS. Given that at least 4 major US brands have full deployment of RMS systems, this number is likely much higher than reported.
Price Based RMS are not your Fathers RMS
The concept of the RMS has changed dramatically over the years. Early systems were very “user oriented”. They had multi-level forecasts, sophisticated displacement methods, and leaned heavily on the “unconstrained” room concept. While this approach works well for a 600-room hotel with a variety of client types, room types and booking patterns, it often does very little for the smaller hotels. To provide solutions to larger numbers of hotels and reduce the complexity of the systems for properties who could not justify full time revenue management personnel, the “price based” RMS became the norm for most installations since 2015. Price based RMS lean less heavily on accurate forecasting, require much less understanding of displacement and offer hotels insight into the simple thing most of hoteliers know well about their property – THE BEST AVAILABLE RATE.
Personally I think Price Based RMS are Genius
Despite the more simple approach, I do not diminish their value. Let’s face it, if you suddenly are given an impetus to raise your price by $5 and have a tool telling you it will do nothing to slow your booking pace, why not do it? Who would refuse an extra $5 from every booking they take? We’ve successfully used the tools to get past that awful “prices should end in 0 or 9” fallacy, so there is a lot to be thankful for Price RMS tools. Count me in as a big fan. Anoint me an ambassador for signing up every hotel. But proceed with caution.
Make Sure You are Prepared – you can’t just “turn these things on“
The most important portion of your Price-based RMS implementation will come long before you generate a single recommendation. In the world of “garbage in – garbage out” Price -based RMS are the kings. Nothing is more important to these systems than a properly selected and well thought out approach to the list of competitors. If your RMS provider doesn’t spend considerable time discussing this with you, they are the wrong provider. Simply put – GET YOUR COMPSET right.
Market Reference Price Weighted vs Non-Weighted
To illustrate this issue, lets understand the concept of the “market reference price” (MRP). The MRP is nothing more than an aggregation of the BAR rates of your competitors. For example:
| Competitor Hotel | BAR Rate |
|---|---|
| Hotel A | $110 |
| Hotel B | $119 |
| Hotel C | $135 |
| Hotel D | $105 |
| Hotel E | $133 |
| Market Reference Rate | $120.40 |
The simple non-weighted approach is show above. If my rate is $109, my relative position is “pinged” to $120.40 (roughly 90.5% of the market price). Any change to any of the 5 competitors, should require a change from my hotel to maintain my position. This example ignores the “most important competitor approach”. Thus, a concept of “weightings” is generally applied. GMs are asked to “rank competitors” and apply weightings to each competitor, so that the “market reference” price becomes a rate specific to the reference hotel. For example:
| Competitor Hotel | BAR Rate | Competitor Weighting |
|---|---|---|
| Hotel A | $110 | 35% |
| Hotel B | $119 | 25% |
| Hotel C | $135 | 10% |
| Hotel D | $105 | 20% |
| Hotel E | $133 | 10% |
| Market Reverence Rate | $116.05 |
Using a weighted approach, the MRP drops to $116.05 and the reference hotel now indexes at 94% of the market. In simple terms, it is a 3.5-point change in relative position. While a small number, it represents a strategic missed opportunity or worse an oversight that costs bookings. I’ll make it even more simple, if your RMS provider promised you a 3.5% return on your investment – you’d jump at it. Because 3.5% is a huge improvement in your rates. So, starting with a 3.5 point “deviation” is huge. Determining the weightings, to date, has not been science so much a tribal knowledge. It’s a risky proposition.
What if My Compset isn’t Correct?
What if one of the 5 competitors isn’t really a “price” competitor or an “alternative” hotel for potential bookers? If Hotel C truly doesn’t belong in this compset and my RMS has been making recommendations using irrelevant data – my problem gets worse. I have, in fact, used technology to harm my hotel’s relevant position in the market. What if seasonally I have a different set of competitors? What if my competitors vary on weekends?
Enter Compset Analyzer (CSA). Compset Analyzer is a tool that performs an objective view of your marketplace. CSA identifies hotels who consumers (not hoteliers) would be considering booking if they were also considering booking your hotel. It assesses your services offered, amenities offered, guest review profile, location (and relative location), published rate behavior and web search result commonality in your area. It scans hundred of potential competitors, scores each for similarity to your property and rank orders them in a concise manner. The result is an unbiased view of the hotels that Consumer A would also be shopping if they had looked at your property. Each candidate is scored and ultimately, a recommend compset is generated. That recommend set further delivers proposed “weightings” that could feed a Price based RMS. Finally, the process generates an “optimal rate index” against the proposed compset. This index allows you understand where you should position your hotel against a “market reference” rate to maintain the proper rate on a day-to-day basis. The CSA process has no restriction on brand, competitor type or any other roadblock.
Using the outputs from CSA will “kick start” your Price based RMS and put you in a position where the outputs are more meaningful. If your RMS provider hasn’t walked you through a scenario like CSA does, you could very well be hurting your hotel’s position rather than helping it.
If you would like to find out more about Compset Analyzer, please contact Hotel Compete at [email protected].
Where do we go next?
Compset Analyzer is just a part of this discussion. An important part, but not the entire discussion. In the next two parts of this discussion, we will address monitoring the performance of your RMS. We will take a deeper dive into how well you maintain your position in your compset. We will answer questions about your rate volatility relative to your competitors. We will take stock in what happens when you change your rate versus a competitor changing their rate. All with an eye on building trust in your RMS investment.
Who knows, you might learn a thing or two you didn’t know.