Pricing intelligence tools offered by OTA's... to trust or not to trust?
By Ira Vouk, Co-founder of iRates
As Revenue Management becomes more and more relevant in the Travel industry and more hotels finally begin to understand the importance of dynamic pricing fluctuations, various hospitality companies start introducing products that are aimed at assisting hoteliers with managing their revenue, one way or another. On one side, there are strictly informative/analytical systems that will only perform functional data presentation to the user. On the other side, there are systems that are able to make final pricing decisions in a completely automated mode (for more details on Automation in Revenue Management, please read this article).
The industry has had quite a few years of experience with the first kind (RMS) whose products have proven to be beneficial and effective in helping hotels grow RevPAR. PMS providers followed suit, with tools that are generally less sophisticated but offer the convenience of a built-in RM component without going through the pain of PMS integration. But what about the OTA's?..
How reliable are those tools and how much faith should hoteliers put in them? There are two major aspects that we need to review in order to answer this question:
That's a very broad statement, but what exactly does it mean and how does it affect hoteliers? Let's review.
In simple language, the conflict lies mainly in the difference between how OTA's and hotels make their money.
- Hotels measure their profitability based on the bottom line, the Net rate. OTA's charge their commission on the top line, the Sell rate. The less rooms hotels sell through non-direct commissionable OTA channels – the more money goes to the bottom line. Thus OTA's are not necessarily interested in helping hotels be more profitable.
- Hotels have limited capacity, so the highest potential in growing Revenue lies in the growth of the ADR. OTA's don't have such limited capacity (one hotel sells out - they send their customers to the one next door). OTA's thrive on volume, so therefore they're not interested in helping hotels maximize their ADR through increased prices, even when demand is strong. Their goal is cumulative growth of bookings for the region, driven through their channels. That's why OTA's are all about promotions, promotions and… promotions! Making travel enticing and affordable (not necessarily profitable for you) with the ultimate goal of increasing volume.
- OTA's don't exactly care whether those customers go to you or your competitor, as long as they get their commission. They have their own competitors, which include (believe it or not) hotels' direct non-commissionable channels. They're very well versed in stealing business from those channels, through sophisticated marketing campaigns.
- OTA's have been known to push hotels to run exclusive deals with them (don't tell me your market manager has never asked you to do that). They do know that this contradicts the concept of optimal Revenue Management and negatively affects your profits. They do know that this teaches customers to look for best deals on their website and not yours. They show you how much money the campaign generated but they don't say how much of that is displaced business from less expensive channels that would have brought you higher ADR. All this ultimately drives your RevPAR down. And what's even worse is that it has long-term effect (it takes months and sometimes years to earn that customer loyalty back).
If you're old enough, you may remember the times when OTA's used to dictate prices at which hotels sell their rooms allocated to them. Those times are long gone, but based on what we discussed above, can we conclude that we are still faced with OTAs' attempt to secretly control the market for their benefit, through the tools they offer to hoteliers? I will let each reader decide for themselves.
If you're one of those people who don't believe in conspiracy theories (and I'm in your team by the way, believe it or not) and refuse to think that the only reason for OTA's to offer free Pricing Intelligence tools is to keep manipulating market conditions for their benefit - read further for more bad news in regards to the effectiveness of those tools.
Aside from the conflict of interest, there is one more important aspect that needs to be brought to attention:
Let's shed some light on the subject.
- Any well-built reliable Revenue Management solution has to be integrated with the property's PMS and obtain instant on-demand internal hotel data (number of vacant rooms by room type, groups on the books, OOO rooms, overselling capacity, etc.). This information is crucial in making an optimal price recommendation for any given day in the future. Tools offered by OTA's lack that important piece of the puzzle. Some OTA's have started to obtain hotel's occupancy data. But that is still light years away from what is needed to run adequate algorithms and recommend optimal prices (see this article for more details on this topic).
- In addition, RM/Pricing systems should include some type of methods of adaptation (customization) to each hotel's specific characteristics. Overall physical capacity, number of rooms per room type, not even mentioning historic ADR and occupancy numbers. Also missing.
- OTA's mostly assess market demand strength based on the volume of bookings they receive for a particular region and the number of searches for specific dates in the future. What needs to be taken into account here is the following: while hotels obtain business from multiple different channels, each particular OTA comprises only a small portion of that business (which normally represents only some specific market segments), so their internal data is limited and relatively subjective. Their analysis is not based on the overall demand; it is based only on the demand flowing through this particular channel, which makes it biased by default. Also, considering the fact that many hotels still close OTA allocation during their strongest demand dates knowing that they can sell out on their own, OTA-based "demand patterns" become distorted.
- What OTA's do have is vast amounts of external market data, like detailed information about published prices for any date in the future. This is what normally goes in the algorithms that are built in their pricing intelligence tools, to calculate the recommended room rates. However, "compset-oriented pricing" is quite far from the optimal strategy that hotels should use when making their revenue management decisions (see more details on the subject in this article). There are a few questions we have to ask ourselves. Have they picked the right compset for your property? Yes, you can customize it. But then the question is: have YOU picked the right compset? What IS the right compset? There's really no such thing. Your compset changes from day to day, from season to season, it also changes based on the market segment (for example, leisure travelers will consider one set of hotels and convention attendees will review a whole different number of properties, and your property may be a representative of both). Do your competitors really know what they're doing? Is it really worth following them?
Please don't misunderstand, compset data plays a big role in Revenue Management decisions (logically, those prices are what forms the market situation at any given moment) but one should never ignore the importance of internal hotel data like booking pace, group business on the books, number of vacant rooms, etc. It is impossible to build optimal pricing strategy without having this data on hand.
While many of those pricing intelligent tools offer valuable insights on the regional market situation, they shouldn't be used by hoteliers as a direct guidance for setting their room rates. Proceed with caution. Employ an RMS tool that uses your real, on demand data for calculations, through reliable integration with your PMS. Both external market data as well as internal hotel data need to be in the equation when calculating optimal prices that lead to profit maximization for your hotel.
If you choose to use one of the OTA tools (hey, they're free), definitely make sure you know what goes into the formulas. Ask questions and make sure you understand the algorithm before adhering to those recommendations.
P.s. this article is not sponsored by any organization and reflects the author's personal opinion.
iRates is a new-generation software-as-a-solution Revenue Management system that was developed specifically for limited service and middle-tier hotel properties. The tool was designed with these types of properties in mind. It addresses unique characteristics and requirements of this segment, based on years of experience in this segment.
The extremely user friendly interface along with complete automation of the most important revenue management decisions allow even a junior level employee with no experience to drastically increase production and improve RevPAR. iRates employs the newest adaptive algorithm based on the theory of reinforcement learning that automatically adapts to each hotel's local market conditions and re-adjusts the strategy according to the demand fluctuations, with the goal to maximize the bottom line profits.The algorithm has been successfully applied to other industries but is unprecedented in hospitality.