Faculty & Research
Low-price Guarantees: How Hotel Companies Can Get It Right
Vol 5 No 10
By: Steven A. Carvell Ph.D. and Daniel C. Quan Ph.D.
Executive Summary: With the growth of the internet, the increase in the volume of online bookings has altered and multiplied the hotel industry's distribution channels. While this growth has driven up the profits of online travel agencies, hotel operators are experiencing a loss of control over the pricing of rooms and a potential transfer of pricing authority to third-party internet-based companies. The popularity of such services stems from consumers' desire to obtain the lowest rate within their desired market segment. One possible cure applied by many hotel chains is to offer a best-rate guarantee on their own web sites. A calculation of the option value of such guarantees shows, however, that current rate guarantees have little value to consumers. Instead, an application of option-pricing approaches demonstrates how a hotel company can structure a best-rate guarantee that would provide value to consumers by offering the guest the option of purchasing a price guarantee. Such an option would give the guest the lowest price posted on a specified set of web sites, up to the time the guest arrives at the hotel. The pricing of this option would be based on a well-established exotic-option pricing formula. A demonstration of how to price this best-rate guarantee shows that its value (and its price) diminishes as the arrival date approaches, so consumers should be willing to pay for the option, because the price is set according to the likelihood that prices will change. Using this approach hotel companies should be able to eliminate the incentive for consumers to engage in search-and-switch behavior, reestablish the price integrity of their product, and simultaneously create a revenue stream from the sale of the best-rate-guarantee options to their customers.
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- Low-price Guarantees: How Hotel Companies Can Get It Right By: Steven A. Carvell Ph.D. and Daniel C. Quan Ph.D.
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Comments
I agree Hotels need to take control of their own inventory offering the best rates and offers on their own controled website. This coupled with reservation portals will enable real time inventory of rooms, however I do believe the better way to go is actually raise the price closer to the time not drop it. As far as I understand it that is a strong belief of a number of travelers, they expect to pay less for something they book well in advance as opposed to closer to the time. Just like airline seats often get more expensive closer to the time that they fly.
Generally though I have a strong belief that hotels would be better off to offer a high season rate and and off season rates that is fixed.
James Billing
Duty Manager Kingsgate Hotel Parnell Auckland
There is great opportunity to challenge and change the way our industry sells room inventory. Instead, we follow and copy others. Many of us are resistant too experiment for fear of failure. Revenue managers must break out of the one-size-fits-all box.
It amazes me how many cities (certainly not all comparable) now have a minimum rack rate of $300 per night, with an average minimum daily rate of $229 nonrefundable and $235 discounted fully refundable. The hotels charge those rates regardless of being a 3- or 4-star and regardless of where the property is located. [[[Many properties are using only nonrefundable rate plans???]]]. Other desirable rate plans and packages that are guest friendly have frequently been banished?including many of the membership rate plans.
Even in a city as prosperous as San Diego I have seen comments from past guests saying they are angry and feel that they have been gouged, having spent $380 plus tax a night and upwards in the Gaslamp district for an average quality, 350-square-foot guest room. In some cases those guests vow to take it out on the city and not return. How can it be a surprise then that the city slipped a bit this year in overall hotel revenue. (That rate slippage was predicted by other consultants after big major sporting events with rooms rates reaching the stratosphere.???) Do hoteliers believe that guests will not look elsewhere and remember high rates long after the convention is over?
We may have been without technology years ago but had many more educated or just plain smart business folks who considered a customers lifetime value over short-term profitability. Now hotels seem to use a state-of-the-art G I W Y C Strategy (Get It While You Can).
Then there are other policies. Do we remember when a 6:00 PM arrival was the industry standard? When true guest satisfaction mattered more often than not? When taking care of our best customers was essential and we worked with them in good times and bad.
Many of my exceptional and bright professors at Cornell knew the right way to do business and inspired many of us. I ask myself why is there a disconnect from what we know to be the right business practices and what many of us do in the real business world? Is greed our chief motivator? Perhaps...
When did the hospitality industry decide that it would follow the questionable example of the airlines in managing room rates and policies. We all copy that model as we do each other?s pricing. We sell rooms as if they are deeply discounted seat inventory. We inherited the airlines? bad customer-relationship-management habits and integrated them into our low and high priced inventory. More and more frequently as demand remains strong, I see hotels selling over rack rate at times.
Noting the number of bankrupt airlines, we must ask whether hotel companies want to attract the same level of fleeting consumer loyalty and contempt that airlines have created for themselves? Is fuel and labor the only real blame factor for the failure of much of our airline industry?
..Continued..
Were airlines really so brilliant at CRM? If our industry follows the airlines? formula might it not be a recipe for long-term disaster?
If brand X hotel is commanding a particular rate should we also? While spying on each other?s occupancy levels to see if we might be doing the right thing in our business plans and projections, did some of us realize that not all of us have flat screen TVs, duvets, or the same highly desirable location? Then there?s the hotels that haven't been renovated in 25 years. Names of guilty brands withheld here.
We are frequently an industry in denial. Customers today are smarter than we give them credit. In the internet era larger numbers will continue to become more educated and more knowledgeable than some of those doing the selling.
It is a mighty tough expectation to live up to when you overprice your product. In addition to expecting much of the hotel, the guest?s expectations of the city experience rises among consumers we study who pay high ADRs. Many hoteliers don't even begin to assess their product honestly before they price their product.
It is my belief the hotel business is still about delivering reasonable value for whatever the rate paid, while still making a healthy profit. Long-term satisfied customers are still the best revenge over every competitor out there. They are also our industry/'s future.
Don Weidhorn
Consultant Count Down Loyalty Marketing
Seaford Harbor, New York
Other Reports or Articles You May Find of Interest
- Quantifying Impact: The Effect of New Hotels and Brand Conversions on Revenues of Existing Hotels, By Arturs Kalnins, Ph.D.
- Best-available-rate Pricing at Hotels: A Study of Customer Perceptions and Reactions by Kristin Rohlfs and Sheryl Kimes, Ph.D.
About Steven A. Carvell Ph.D.
Steven Carvell is a professor and associate dean for Academic Affairs at the School of Hotel Administration. He has taught finance courses at the school since 1986. Carvell’s research is directed toward new approaches to hotel valuation and investment decisions. Recent projects have focused on adjusted present value analysis and the valuation of sequential real options within a hotel valuation framework; the valuation of exotic reservation options in hotels; and determining optimal brand standards for hotel companies. Carvell recently finished a major project designed to identify the determinants of hotel demand in the U.S. He is also involved with evaluating the effectiveness of hotel company business strategies, using strategic benchmarking and Economic Value Added analysis. Carvell is the co-author of "In the Shadows of Wall Street," (Prentice-Hall, Inc. Strebel, Paul and Steven Carvell, 1988). publisher, year). He has published ten articles in academic and professional journals including the Financial Analysts Journal and the Harvard Business Review. His work has been featured in the Wall Street Journal, The New York Times, Forbes, Fortune, Institutional Investor and Financial World. Carvell has worked for professional money managers in applied strategy in the equity market and served as a consultant to the Presidential Commission on the 1987 stock market crash. He specializes in new approaches to valuation and risk analysis in feasibility studies, hotel debt capacity models, strategic benchmarking and Economic Value Added Analysis. Professor Carvell has conducted numerous specialized Executive Education seminars for some of the largest hotel companies in the world. Carvell holds a Ph.D. from the State University of New York, Binghamton.
For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=11
About Daniel C. Quan Ph.D.
Daniel Quan joined the School of Hotel Administration as an associate professor of Financial Management in the fall of 1999 and in January 2007 became a full professor. His teaching and research interests include real estate and real estate finance, with a special emphasis on securitization and structured finance. Prior to his Cornell appointment, Quan was the chief mortgage economist at the Board of Governors of the Federal Reserve in Washington, D.C. He was responsible for monitoring and reporting on all matters relating to both the primary and the secondary mortgage markets for both the residential and the commercial sector. Before joining the Federal Reserve Board, he held academic appointments at the University of Texas, Austin’s McComb School of Business, UCLA’s Anderson School of Business, University of British Columbia and Uppsala University. Quan attended the University of British Columbia, the London School of Economics and the University of California at Berkeley where he received his PhD in business administration in finance and real estate. He serves on the editorial boards of several academic journals and is a board of director member for the Asian Real Estate Society. His publications include papers on auction theory, international performance of commercial real estate, role of information in real estate markets, and the pricing and hedging of risk in the hospitality industry.
For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=63
