Am I Optimizing My Price Based RMS Tool?

A Scenario with my new tool

Imagine your price-based RMS has been up and running for a few months now.  You feel pretty good about a few of the recommendations you received.  You’ve made a few rate changes that you might not have made before, and you’ve skipped a few that didn’t look correct.  Your confidence grows daily in this new tool.  You may already have given thought to allowing the tool to go to “auto-pilot” and simply allow the system to make changes on your behalf.  But if you do, how can you be sure things are working well? How can you be certain that the tool that was intended to make your life easier and generate more revenue, is accomplishing its goals?

Your price-based RMS should perform three very important functions for you.  Two are simply maintenance items.  The first question to ask is: Did your hotel maintain its position within your compset?  I have 5 competitors and my rate is usually the 3rd highest.  Did my price-based tool maintain my ranking in the compset?  Have I moved up?  Have I moved down?  Changing my ranking on a few select days is acceptable, but a change every day represents an entirely new strategy.  The second function is even more important.  Is my relative price point to my competitors remaining intact?  Long ago my hotel set a strategy to be “$10 behind competitor Z and $5 above competitor Y.”  Am I still executing my strategy?  A permanent change in relative position usually requires a known change in my offering or a change in competitors offering.  If that hasn’t taken place, correcting your rate position is often in order.

The tools are driving higher volumes of rate change

The third function is a bit trickier.  The proliferation of these types of tools has generated a much higher volume of rate changes than in years past.  At Hotel Compete, we track the volume of rate changes within the hotel category each day.  Limited-service and mid-scale hotels are now behaving much differently than they have over the past 5 years.  The comparisons are dramatic.

Both limited-service and mid-scale properties are changing their rates at more than twice the frequency they were in 2017 and 2018.  Branded properties are changing at even greater frequency.  If you drill down and focus on the brands who we know are utilizing price-based RMS systems, the rate of change is even more dramatic.  It is the exact intended outcome the tools promise.  The changes are likely generated from two methods: 1) Better focus on high demand dates and 2) Better response to competing hotel rate changes.

Am I changing rates for the right reasons?

It gets interesting when you start tracking the volume of your rate changes against those of your competitors.  Full-service hotels can lean more on internal high demand dates due to greater business mix (groups/corporate/special events) to facilitate rate changes.  Limited-service/mid-scale hotels often reside in markets where those factors are less impactful.  Thus price-based RMS tools lean heavily on “response” to competitor changes.  When one hotel changes its rate for some reason, the tools are going to recommend corresponding responses from your hotel.  It may do so even when there isn’t a significant demand change at your property.  I have always viewed this as “communal revenue management”.  Why not take advantage of the other guy’s increased demand and net a few more dollars on my own bookings?  Relatively speaking, my product offering versus my competitor hasn’t changed, so it is a win for all!!

Is my price-based RMS doing its job?

Let’s make a few assumptions.  My compset is correct (I used Hotel Compete’s Compset Analyzer tool and found the perfect compset).  I’ve applied the proper weight to my competitor’s rates so I can aggregate the market rate properly (thanks again CSA).  I’ve even used CSA to establish my “optimal rate index” for positioning my rate relative to the compset.  I’m all set and I am confident in my strategy.  Now how do I track my RMS and ensure I am executing my well thought out pricing strategy?

At Hotel Compete, we’ve identified 3 metrics that combine to ensure we are always moving in the right direction.  We call it Rate Momentum Monitoring.  The three metrics provide an overall view of what is going on in your compset.  The three metrics are as follows:

  1. Rate Rank Indexing – Measures the day-to-day variance in my “rank” within a compset.  If I expect to be 2nd of 5 comps, how frequently am I in that position?  How long do I wait when I get “out of position” to get back into position?  How does that position change over a normal booking window?
  2. Rate Position Indexing – Mentally you consider the “$10 higher and $5 lower” mechanics, but what you are really doing is maintaining a constant “my hotel to the compset” index in price.  Because you “can’t match everybody”, what you aim for is a relative index that remains constant.  This is even better when you ping this position to an “optimal rate index”.
  3. Rate Volatility Indexing – Understanding the impact of the frequency of rate changes within your compset.  When I change my rates, who follows?  When a competitor changes his rates, do I follow? 

When you couple the three together, you can measure how well your hotel is utilizing the tools and how well the tools are positioning your hotel for optimal rate capture.  We do this by identifying a starting point in the “evolution” of a published rate and then day-by-day tracking the “rate events” that take place over a period leading up to the check in date.  Like any good metric, it can be boiled down to a simple score that you track daily.

How does it work?

Let’s walk through an example:

It’s 30 days to arrival and my hotel has established its desired position relative to the compset.  I’ve used CSA to verify I have the right comps.  I’ve created an effective “weighted compset rate”.  I’ve positioned myself right in the middle of the compset price wise.  Now all that needs to happen is for me to “maintain” and grow with the comps.  Let’s see what happens on day 2 of this booking trend.

Some change is taking place.  Comps 1 and 2 in the market both raised their rates.  Now I find myself in the proper order, but suddenly missing 5.5 points of relative rate position.  Comps 1 and 2 have started the “volatility clock” and await the market response.  The “path to arrival date” clock is also ticking.  On the morning of 8/5/2021, my price-based RMS recommends I move my rate to $114.  I accept the recommendation and wake up the next morning looking back to normal (I’m also collecting an additional $5 for each booking I take – which is nice).

A job well done

This cycle continues and with proper due diligence and attention, you find yourself at the arrival date in the following position.

I’ve maintained my rank; I’ve maintained my relative position and I’ve maximized the volatility of the market with my own changes.  If I were to grade my RMS on this date, it would receive high marks.  I grew my rate with the market and maintained my value proposition against my competitors.  This is a near perfect scenario for my price-based RMS.  But am I doing this on every check-in date?  Are there any “response gaps” where my lack of response cost me dollars on my bookings?  Are there dates where I moved my rate, and the responses of my comps didn’t maintain my position?

One person can’t do this daily – you need help

Using our abundant rate data and a proprietary algorithm, Hotel Compete has created a process that helps you track and grade the performance of your tools.  We can tell if you are doing well or doing poorly.  More importantly, we can help you proactively identify dates when you are putting yourself at risk or are missing an opportunity.  We consider it “insurance” on your investment.  You wouldn’t own a car without gauges to tell you if you are overheating.  Why would you simply trust that a price-based RMS is always doing its job?

Next up we will review some aggregate data on a few “anonymous” brands (don’t worry brands and providers – we will protect your identity) and tell you how you can get access to grading your own performance.  Stay tuned.

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