The end of Entry and Last room availability clauses to set the Hotels’ profit strategy free
The abolition of rate parity set a milestone for the Hospitality Industry. It was both a blessing and a curse for the Hotels, but with one ultimate truth: the unlocking of price constraints gave to the intermediated channels the freedom within the commission frame to set prices at their discretion and distribute them to any channel, anytime. This change led to price dumping and price war on the online space that brought incremental costs for all parties involved: promotions, discounts, commission cut, de-ranking and dimming. The last mentioned defensive actions that online channels activate against off-parity prices, lead to immediate volumes and revenue loss for the Hotels.
Despite the natural margins dilution for both the Hotels and OTAs, the battle on pricing is on fire more than ever before.
As a result, the revenue management function has evolved with distribution strategy becoming an integral part of it. It is not about pricing only (it has never been, indeed). The core elements at the base of the discipline must be balanced and effectively managed to ensure profitable and long-lasting returns, beyond pricing.
Back to basics, Hotel Revenue Management existence lies on the perishable, fixed stock of products available: Rooms. Managing and optimizing the available inventory of rooms should be the starting point of the revenue management activity.
With Inventory Management, we define the action of analyzing, adjusting and monitoring the distribution of Hotels’ products (rooms) to drive the optimal RevPAR and profit. It is common practice for Hotels to manage online distribution by optimizing the allocation and availability of rooms in the market. This is executed through yielding of rates, overbooking and restrictions based on market conditions, demand forecasting and availability of products.
Revenue management systems discriminate mostly on the rate level (the last room value or hurdle rate) and rate plan level. Both levels of discrimination affect overall demand. As such, the restrictions are distributed democratically to all different intermediaries, no matter what the specific channel cost.
The contradiction of the current distribution landscape is evident:
- on one side the rate parity abolition led to the fact that every channel is now “allowed” to set its pricing.
- on the other hand, the inventory of rooms from the Hotels to these channels is still distributed democratically and equally on a “first come first serve” basis. (read it also as lowest price — quicker conversion — higher cost basis).
Some Hotels are manually restricting the rooms allocation per channel, by considering the Cost per Sale (CPS: commissions and other costs) and profit margins. The manual inventory management is, however, a non-scalable activity as the impact of forced closures and heavy restrictions — a common practice — is not easy to estimate. To drive efficiency, technology and artificial intelligence are needed.
Artificial Intelligence (AI) e and Machine Learning (ML) are widely used and complicated concepts that most times make people in a defensive mood. However, by merely analyzing the basic metrics involved in the optimization of the inventory, it is evident that humans cannot compute the granularity of insights. Date, room type, rate plan, restrictions, promotions, channels; there is a massive amount of big data involved.
The hospitality industry is lagging as AI, ML and Algo trading are already in use by the large online players. Through technology, they master their cost of acquisition from the inventory hubs and sell hotel rooms through many other resellers with a custom “price cut” that is instantly targeted on their users’ behaviors.
There is another vicious circle: Hotels fought for the rate parity abolition. Rate parity was banished, but both hotels and intermediaries now claim for rate parity across channels. Reality is that nobody has any genuine intention to level the playing field on pricing.
Nevertheless, on the inventory side, hotels are forced to level the playing field due to the Last & Entry Room Availability rules.
- Last Room Availability (LRA): if a hotel has a room for sale, then anyone with such contracted clause has the right to buy it at their contracted terms and prices.
- Entry Room Availability (ERA): the lowest-priced room should be available across all channels, anytime.
Both just mentioned rules are meant to guarantee rate parity, but again wasn’t that abolished?
While the first clause (LRA) is usually explicitly included in the T&C of commercial contracts between hotels and intermediaries; the second clause (ERA) is mostly implicit and taken for granted. These expressed or implicit rules are limiting our abilities as Hoteliers to give birth to a new era. The future holds no price and inventory constraints, total personalization, different prices, distinctive inventory and profit management across various channels.
The hospitality sector is fragmented and every player executes differently in distribution management. The online intermediaries market is more unified: big intermediaries that lead the way and small ones that follow suit. These uniformed and widespread standard practices among online sellers thus overcome the too fragmented and diversified hospitality ones.
Hoteliers must realize, accept and embrace the change in the distribution world and start moving in unison along the same strategic direction to get back control of online distribution, revenue and profit margins.
- Focus on inventory management first, by starting to apply selective distribution per channel, to elevate the revenue management application towards a profit management approach.
- Granular price and inventory management discrimination per room, per channel, per customer with a fully personalized revenue management approach.
No-Strings-Attached distribution management is the natural evolution and future of Revenue & Profit management.
You may say that I am a dreamer, but I am not the only one! Cit.