29 May 2024
Words John Miller Informer

Embrace the Algorithm

Advances in software and AI have made dynamic pricing accessible to even the smallest accommodation businesses. If you don’t already use it, you’re missing out.

Whether you operate a hotel, motel or caravan park, no matter the size, you face the same issue: a fixed number of rooms. Sure, you can always build more, but you’ll need development approval and have to make a capital expense, which in the current building crisis isn’t an appealing option. Even if you build, your room count will only go so high until you max out on space. There’s no getting away from it; fixed supply remains accommodation business operators’ constant problem when it comes to increasing revenue.

HOW TO SOLVE IT?

The silver bullet is dynamic pricing.

Dynamic pricing uses software to raise or lower an accommodation business' rates several times a day, typically three or four.

Rates are adjusted after accounting for a wide range of factors including competitors’ rates and current and forward supply and demand.

Dynamic pricing is an element of revenue management, though the terms are often used interchangeably.

“Dynamic pricing is a process whereby you’re looking to maximise the supply and demand curves for any accommodation asset in whatever location it may be in,” says Andrew Bullock, CEO, 1834 Hotels.

“If you work on a static rate philosophy, the fixed supply arrangement of hotels means you’re always going to have a certain number of rooms you can sell on any given night.”

“But if you use dynamic pricing, you can increase revenue by driving your rates up in times of high demand. You can also drive occupancy in lower demand periods, by offering discounts, for example, to improve your overall RevPAR.”

1834 Hotels applies dynamic pricing as part of its comprehensive hotel management package. Founded in Adelaide in the 1980s, the white label management company serves a nationwide clientele of hotels, motels, resorts and serviced apartments. Over the more than two decades Bullock has been with 1834 Hotels, the last 15 years as CEO, he has seen the democratisation of dynamic pricing technology make it both accessible and affordable to most operators, regardless of size.

“Once upon a time you needed a team of revenue managers to be able to dynamically price your hotel,” says Bullock. “It was predominantly used by large CBD hotels who had teams of people working manually off spreadsheets to determine rate changes and positioning. That’s just not the case anymore.”

“Dynamic pricing technology has come a long way to where it was even five years ago. With the tools available in today’s market, you can do it with even the smallest accommodation assets.”

1834 Hotels uses dynamic pricing software Duetto and its own proprietary reporting software to adjust rates for the hotels it manages. These programs web scrape rate and other data from a hotel’s competitor set, which can be set as wide as a client likes. After importing the data, the system then makes projections of the hotel’s best rate position by room type.

“Today’s technology uses AI algorithms that will price point your hotel three or four times a day, putting all your competitor set data in, looking at forward demand curves, historical data, etcetera, and then drive your rate and occupancy position without you even touching it almost,” says Bullock. “Obviously, you need companies like ours to manage that process, but these platforms are far more acceptable and easier to use than they once were.”

Bullock says operators who don’t use dynamic pricing don’t realise the substantial returns they’re missing out on.

“It’s often a case of operators not knowing what they don’t know,” he says. “Your hotel may be doing well with good occupancy. But what are you leaving on the table by not being able to move your rate position around? Doing so can deliver enormous revenue uplift. Twenty-five per cent plus in revenue uplift is not out of the question for a hotel moving from a static price model to a dynamically priced model.”

OCCUPANCY AND RATES: TWO SIDES OF THE SAME COIN

Anthony Stanley, Director of Performance and Revenue Management, Choice Hotels Asia-Pac agrees some operators still don’t appreciate the benefits of dynamic pricing.

“We still hear it today, this obsession with occupancy while overlooking rates,” he says. “It’s been an education piece for us to get our franchisees to think about both sides of the equation: occupancy and rates.”

“If you can drive average daily rates higher when compared to occupancy then, ultimately, you’re making the business more profitable because your revenue increases while your operational expenses remain the same.”

Choice Hotels Asia-Pac introduced revenue management as an opt-in program for its franchisees about six years ago. Today, approximately 75 per cent of its franchisees in Australia and New Zealand take advantage of the service.

In an industry first, Choice Hotels International developed its own automated revenue management system, ChoiceMAX, which integrates with its proprietary property management system, ChoiceADVANTAGE.

In Choice’s US homebase, ChoiceMAX is now in its third year of operation. In Asia Pacific, ChoiceMAX is coming into its second year.

While the number of keys will impact how far ChoiceMAX can increase revenue, returns can be significant.

“We’ve proven an average return on investment of five-to-one over the course of a 12-month period,” says Stanley. “So, for every dollar you invest you’re getting five back in terms of revenue uplift.”

Despite the undeniable upside, Stanley says some Choice franchisees are still hesitant to embrace dynamic pricing.

“Some operators get side-tracked by the implementation cost,” he says. “Others believe their revenue potential has peaked. Others can be concerned with a perceived loss of control.”

“But the process can be as hands-off or as collaborative as the operator likes. We have some franchisees our revenue management team never hears from. They’re happy to delegate that responsibility so they can concentrate on the operational aspects of the business. Then we’ve got others proactively working with their revenue manager multiple times a week. How they manage that section of their business is completely in their control.”

DYNAMIC PRICING IN MANAGEMENT RIGHTS

Switch Hotel Solutions, a full-service agency specialising in the management rights sector, uses a combination of software Lighthouse (formerly OTA Insight) and RoomPriceGenie, and benchmarking data STR, alongside its own proprietary system.

“Lighthouse provides market level data for the regions,” says Chris de Closey, Director, Switch Hotel Solutions.

“Say, for example, you have a short-term letting business on the Gold Coast. The first 22 days of December are looking very soft. That means we’re having to adjust our revenue strategy accordingly to meet the demands of the market.”

“Software like RoomPriceGenie assists you to monitor market movements and pricing. So, if the market moves a specific percentage, it will make your property move in the same direction. That way you’re not missing out on any market movements.”

“We use benchmarking data like STR to tell us whether what a particular client is experiencing — higher occupancy, say — is true for the wider market as well. For example, our client might be at 20 per cent whereas the market might be at 10 per cent.”

“Or they might be at 80 per cent and the market might be at 100 per cent. It gives us different levels of data about how the market is performing, how we’re performing against the market and then we make the revenue decisions from there.”

De Closey founded Switch in 2019 and now has over 60 clients around the country, predominantly short-term holiday letting businesses in the 20- to 50-room range.

“Dynamic pricing in a management rights model is a little different because you’re potentially dealing with individual unit owners,” he says. “While we want to optimise prices as much as we can, we still need to get the occupancy as well to ensure we’re getting unit owners returns on their properties.”

Returns after implementing dynamic pricing can vary wildly, says de Closey. “We’ve had some clients see returns of over 50 to 60 per cent year-on-year growth, while others have reported 10 to 20 per cent.”

“It really depends on the business as there are so many different pieces to factor in.”

As with regular hotels, the conversation around dynamic pricing is still one to be had with many operators, says de Closey.

“In the management rights space, some experienced operators can be a bit set in their ways,” he says. “They’ve been doing it for 15 or 20 years and don’t have the understanding or knowledge to increase what they need to do in terms of revenue management.”

“It’s also the case that in the regional markets, dynamic pricing is not as prevalent as the metro markets. It’s really a matter of education and explaining to operators the advantages of dynamic pricing.”

PARKS AND TECH

In the holiday and caravan park space, Australia’s largest owner-operator Discovery Parks has led the way on dynamic pricing. Discovery first trialled dynamic pricing in 2018 and now has 50 of its 87 parks around Australia using AI software Ideas (styled IDeaS).

Pricing is controlled by Adelaide support office, which decides whether a park should go on Ideas, but with the active engagement of park managers. Discovery Parks’ competitor sets include other parks in the area, as well as motels offering facilities similar to caravans such as kitchenettes, and even apartments offering full-size kitchens which are akin to park cabins.

“Generally speaking, we aim to not under-price ourselves against a competitor motel or overprice ourselves against a luxury apartment,” explains Wayne Chang, General Manager – Commercial Strategy, Discovery Parks.

In adjusting prices, Ideas will consider a host of factors, including OTA ratings of competitor parks. If a competitor park offers similar facilities but has a lower rating on Booking.com due to, say, poor guest service, Ideas can adjust the rate of the Discovery Park accordingly.

Says Chang, “Consumers will go online and say, ‘Well, Discovery has a 9.2 rating on Booking.com, but this other one has only 8.1.’ It helps consumers decide, ‘Well, for another $20 a night I’d be happier staying at a place with a higher rating.”

Chang says dynamic pricing benefits park guests as much as park operators.

“With dynamic pricing, we can achieve strong margins when demand is at its highest and offer lower tariffs through off-peak periods,” he says. “This means we’re able to provide a price point that suits a certain segment in the market who can’t afford to travel in peak periods but who now can because we’ve provided affordable rates in times of low demand. That's a win for consumers and allows us to achieve additional occupancy during times we may otherwise be much quieter.”

While the introduction of Ideas and dynamically changing rates has been an education process within business, Chang says today’s consumers are savvy and expect prices to move around.

“Airlines have done a great job educating consumers in this space,” he says. “The pressure is not really on the accommodation industry. Consumers realise if they book late, they could miss out or have to pay more. They understand that, depending on the time of year, if they leave it too late to book, they probably may not get the room type they want and that rates will most probably go up.”

Ideas updates prices three times a day but getting the timing of those updates right is crucial, says Chang.

“Our research shows consumers have a habit of looking for destinations during their work lunch break as well as when they get home from work,” he says. “So, we make sure we update our pricing before the majority of consumer activity happens during the day.”

DYNAMIC PRICING TAKEUP INCREASING

Melissa Kalan, CEO, Australian Revenue Management Association (ARMA), says the adoption of revenue management and dynamic pricing in the accommodation sector has significantly improved in the last decade.

“Larger hotel chains and upscale accommodations were early adopters, starting in the late ‘80s and early ‘90s,” she says. “Over the last 10 years, and particularly from around 2016, we’ve seen a much greater uptake from holiday parks, resorts, apartment-style properties, franchisee networks and many more independent operators.”

ARMA was founded in 2011 to improve the understanding of the practice of revenue management and dynamic pricing within the accommodation sector.

“Operators such as Choice Hotels Asia-Pac and Best Western Hotels & Resorts began offering a revenue management opt-in service for their franchisees with great success,” says Kalan.

“There was a lag in tech operators serving the broader mid-market that could accommodate a broad range of budgets and the nuances that small-medium operators have over large chains. This has changed drastically in the last five years, breaking down barriers to entry for many operators. With an abundance of data, including the AI capabilities of today, many of the larger chains are incorporating data for dynamic personalised pricing and lifetime customer pricing strategies.” END