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Please Stop Basing Your Rate Strategy On Your Competition

I spend most of my time speaking with hoteliers around the world about their revenue management strategy, whether they have a Revenue Management System (RMS) or not, and one topic that comes up often is: “How should I integrate my competitors’ rates into my revenue strategy?”  My answer is simple: “This is the least of your worries, stop prioritizing it.”

80% Of Hotels Don’t Use Revenue Software

According to Skift’s RMS Landscape report of 2019, more than 80% of hotels do not use an RMS. So how does this 80% manage revenue? It’s usually a combination of Excel spreadsheets and hoteliers’ “gut instincts.”  Remember, these are your competitors.

To take this a step further, consider the fact that many of the hotels that don’t have a RMS, do not have a revenue manager on the payroll either.  

Please also keep in mind that even hotels that do check all of the boxes… 

✅ Has a Revenue Management System

✅ Has a Revenue Management Professional

… also have the ability to override their RMS and anecdotally we know this is more common than you might think.  I’ve spoken with users on legacy RMS’ that override the rates >50% of the time.

Your Competition May Have No Idea What They’re Doing

From market to market, this can vary greatly. In some markets like New York City, London, or Las Vegas, there’s a lot of strong competition that has developed sharp revenue management talent.

Elsewhere, the person running the hotel’s strategy may not even be a revenue manager or DORM; rather, it may be the GM, FOM, or DOSM.  That is to say, it is someone who has been tasked with RM as a part-time job.  

By now you may guess the point I’m trying to make.  Why are you basing your rates on the competition when it is likely that:

❌ Your competition is basing their rate on yours

❌ Your competition is lacking a coherent strategy

❌ Your competition is reverse yielding (setting rates high now and dropping later)

❌ Your competition lacks a dedicated professional or system

❌ Your competition’s rates in no way dictate the rate your hotel can command

So let’s stop looking at problems and start focusing on solutions. Some reading this may think: “If not for my competitors, how should I price?” Let’s consider this:

4 Considerations For Competitive Pricing

1. When should competitor pricing come into play?

Your competition should factor into your pricing if and when it matters and it should only act as a guardrail when applicable. For example, if your hotel product is dated (in need of renovation) and the hotels surrounding it are all recently renovated properties, you can generally say that your rates should not go above those competitors.  However, your strategy should not be ‘always be $10 less than competitor X.”  If this is the case, now competitor X is controlling your rate.  

In addition, keep in mind that this is conditional. Only price yourself below the competition if there’s low demand. If your hotel has a lot of demand for this upcoming Saturday, remove those guardrails. Product quality no longer matters in a constrained market. 

2. How to understand your demand?

At the end of the day, the only thing that matters is whether your hotel is getting bookings at the rates that you desire. To accomplish this you need to understand the demand for your hotel. Not Bob’s Hotel, not Jimmy’s Hotel, your hotel. There are some cool tools out there that show you what your market demand looks like and even your competition’s demand. Still, at the end of the day this is no different than looking at your friends on Instagram and thinking: “I wish my life were as cool as theirs,” or conversely: “Wow, my life is way cooler than theirs.” 

However, understanding your hotel’s demand without an RMS is no easy task. It requires understanding your booking curves, your price points, and how many bookings you get at each price point by every day on the 365-day calendar. It’s a lot of data! 

3. How does a Revenue Management System come into play?

It analyses a lot of data! However, not all of that data is useful and not all RMS’ are equal.

Be very suspicious of an RMS vendor that says that it ‘takes competitor rates into account’. It’s easy for vendors to say this, but you need to understand exactly how and when it is taken into account. When you take the time to do the analysis, there is often little correlation between your competition’s rates and yours.  

Imagine a scenario where your number 1 competitor has a big group in-house on a day that would otherwise be slow for the market. As a result, that competitor has raised their rates higher than normal and you find yourself with a RMS that ‘takes competitor rates into account.’  Suddenly your rates are moving up for seemingly no reason. This is not an ideal outcome but it speaks to another topic…

4. What is ‘willingness to pay’?

This is just one blog and ‘willingness to pay’ is a whole can of worms that I shudder to open, but it’s worth broaching the subject. Willingness to pay, simply put, is the idea that the market may indicate that the best rate for your hotel is $149, but your guests may be ‘willing to pay’ $249.  

This tends to happen in group sales. For example: 

  • The hotel’s BAR rate is $199.
  • A group calls and says “I need 100 rooms and I have a budget of $299 per room”
  • Chaos ensues. This group is willing to pay us $299 per room, but we are selling to the general public at $199. What do we do? Raise the BAR rate to >$299?  Give the group the discount of a lifetime at <$199?

So again, this group was willing to pay $299 regardless of what the market thought.  We can apply this same idea to our transient BAR rate and sub-segments.  

The bottom line is that if you are pricing your hotel off of your competition, you will never come close to understanding willingness to pay. 

Remember that sometimes your competition’s rates will be applicable, but like most things in life, moderation is key.  Do not let your competitors drive your rates. 

If you ever have any doubt about the right way to establish your rate strategy, the team at Duetto is here to help you, or you can consult your local revenue management expert.  

One of the reasons I love Duetto as an RMS is its unique approach to measuring transient willingness to pay. Why not use our ROI Calculator and see how Duetto could boost your revenue?

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Daniel Lofton, Director of Hospitality Solutions, Americas, Duetto

Daniel has served in several roles throughout his time at Duetto over the last four years, with the lion’s share of his time spent in consulting, working in the field with Duetto customers to optimize their revenue strategy. Prior to that, he was a Director of Revenue Management at Landry’s Hospitality where he worked with both their gaming and non-gaming hotels. Over the course of seven years with them, he handled property openings, brand transitions, and expansions.

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