January 18, 2018
You can't afford to be a follower
The concept of price leader or setter versus price follower is often used among revenue managers. But what do these terms actually mean? And, more importantly, what use can we put them to?
Starting from the beginning, the theory is that a company with a strong position in its market has the power to dictate prices to customers and suppliers.
Applying this to hospitality, there are hotels in any market which are perceived the leading property in their segment. Hotel Sacher in Vienna or Grand Hotel in Stockholm are good examples but every market has a leader. The implication of being a market leader is that they have more pricing power.
Practically, your revenue management strategy in this situation will be a more confident one. You will be more interested in looking at macro-trends and overall demand. And you will be less worried about whether your price is able to capture this demand.
OK - but what about “price followers”?
But what about everybody else in the market? Are they just followers? We don’t think so. Strictly speaking you will only be a follower if price sensitivity is very, very high.
That is the case in a perfectly competitive market. If you run a retail store and sell milk 25% higher than competition your sales will be zero. But hospitality market are anything but perfect. Demand moves very quickly up and down and nobody has a perfect view of prices.
Even if we rate-shop we never really know what’s going on behind the scenes with other properties in our market. They might have an entirely different corporate to transient mix or sell discounted through opaque channels we can’t see.
So what should “price followers” do?
What we always know is how our own property is doing. This needs to be the true north for revenue management. We may be headed for low occupancy or ADR for a given week or day. And we need to take action.
Let’s look at the following (admittedly overly simplistic) example :
Without analysis it is impossible to know ahead of time which the optimal occupancy and ADR is to grow our RevPAR. Unless we have access to a tool the crunches all the numbers and can simulate 000s of different outcomes.
At Pace our starting point is that guests always have some sensitivity to price. When we discover what this is we can find the optimal price for any given day or room. It’s not a perfect science, and it’s very hard to do but it makes a very big difference to our results.
In conclusion, we all need to understand the connection between price and bookings and in this sense we are all price leaders
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