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Section 1: The Study and findings ♦ Background

In a study we conducted which included

looking at the variable pricing structure

in the hotel industry we were amazed at

the overall confusion and inconsistency

faced by customers on a daily basis when

purchasing rooms in hotels. The study

was conducted on behalf of a client in a

non-hospitality category that was inter-

ested in adapting a demand based vari-

able pricing system. In order to describe

the process from the consumer point of

view, we tracked prices in two Canadian

hotel properties over a six week period in

May/June of 2003.

The findings were surprising for several

reasons:

We had expected to see a great deal of

movement in prices and price categories

over the time period. This was not the

case, as can be seen in Charts 1 and 2.

Are your customers buying your shopping experience or someone else’s merchandise?

Electronic distribution channels and their inherent tendency to commoditize products

are, in fact, not the major issue affecting hotel branding in the marketplace today.

Rather this distribution channel appears to be an enabler and accelerator for a more

serious and intrinsic danger, namely variable demand based pricing systems – in

other words, yield management systems. The very nature of these systems is to

transfer one of the most powerful determinants of brand position (price) to the

control of a mathematical model. This surely cannot be good for the brand!

Yield management systems pose potential issues for hotel brands for three reasons:

the first, as mentioned above, is their insidious role as engine of commoditization of

the industry (i.e. all hotels are the same); the second is the commoditization of the

internal product (specifically, customers coming to believe that for all practical

purposes, all rooms within any property are the same) and hence the gradual

erosion of margin, leading ultimately, to a single (or at most double) tier pricing

structure within the asset. The third is the elimination of pricing as one of the most

salient cues of brand value and status.

Page 2

Nor was there any effective change in the

number of rooms available in each price

category (the on-line information repre-

sented “available” rooms in each cate-

gory – and, with only a few exceptions,

we did not see any price category fall out

of the listings)

♦ The complexity of room offerings de-

livered to consumers (on the web

sites) and travel agents (through Sa-

bre) made the task of tracking the

prices over time all but impossible

♦ Rates displayed on the internet site

at any given time were beyond con-

fusing – for instance, a room in a

specific category showed the follow-

ing options consistently over the

tracking period

♦ While an argument could be made

that this is harmless as long as it is

invisible, the fact is that it is anything

but invisible. Not only is it likely that

traveling colleagues will compare

rates, the on-line reservation sites of

the hotels make these anomalies

starkly evident:

For any given room type, there were a

variety of different prices, some differen-

tiated by minor service offerings (e.g.

breakfast) and some with no differentia-

tion at all. In other words, a customer

can buy the exact same room in the same

hotel on the same night, booked at the

same time, via the same distribution

channel at a variety of different rates.

While we did not collect this data for our

study, the examples shown in Charts 3

and 4 illustrate the point.

Viewing such discrepancies can’t help but

persuade buyers that hotel rate assign-

ments do not reflect any of the attributes

normally associated with price variance

within a given brand:

Rate Quotes, Regular Room,Montreal Hotel

100

150

200

250

300

350

20-May 26-May 2-Jun June,9 16-Jun 23-Jun 30-Jun

Rate

s

Toll Free

Online

Agent

Rate Quotes, Regular Room,Vancouver Hotel

100

150

200

250

300

350

20-May 26-May 2-Jun June,9 16-Jun 23-Jun 30-Jun

Rat

es

Toll Free

Online

Agent

b

Room Descrip-tion

May 20 June 30

Web Travel Agent Web Travel

Agent

Club room, king size bed, includes break-fast

$375 $299 $339

$339

$409 $229

$409

$630 $630 $630 $630

Tradi-tional, king size bed,

$216 $229 $189 $189

$289 $269 $246 $246

$319 $269 $269

$450 $450 $450

♦ Degree of quality

♦ Degree of scarceness

♦ Degree of added value

In the absence of this logic, it is likely

that the buyer will see rates as, from a

practical perspective, arbitrary. Consum-

ers who believe they are faced with arbi-

trary pricing become defensive, driven by

a concern they will be the recipients of

the negative side of the scale. As a re-

sult, they are likely to insist on the rate

they believe is the best “deal”, or they

are likely to walk away. This behavior is

most apparent in the retail automotive

industry resulting from an engrained be-

lief that the dealer is trying to take ad-

vantage of them. However, given the

perceived behavior of hotel brands it is

not out of the question that this industry

will similarly evaluated.

This complexity is compounded by the

fact that these rates do not necessarily

change in the same proportion at each

given point in time in all channels – the

“discount”, therefore, at any given rate

point, is different, depending not only on

when you book, but also on which of the

different rates for the room you select

(see chart Vancouver on-line rate vari-

ances, next page)

Rates quoted by travel agents for the

same room choices over the period did

not vary at all. Thus the difference be-

tween on-line and travel agent rates var-

ies over time, increasing the confusion

and leading to situations where, travel

agent rates can be lower than internet

rates. Recent actions by hotels to high-

light (and guarantee) lowest internet

rates clearly help this situation, but would

be difficult, if not impossible, to manage

under this structure.

♦ The relationship of rates between the

three channels were consistent for

each property, but not between prop-

erties

♦ Rates ranged as much as $20 in Van-

couver and $36 in Montreal

♦ In Vancouver Travel agent pricing

was consistently midway between on-

line and call-centre

♦ In Montreal Travel agents consistently

quoted a lower rate than on-line or

call centre rates, both of which were

always equal

If there is any doubt that there is a sys-

temic level of confusion that consumers

must find hard to avoid, the following

charts should put it to rest. Travel agents

are likely to be as confused as their cli-

ents. Furthermore, given the ever in-

creasing pressure applied by hotels on

agent commissions, it is unlikely that

travel agents are will act in the interests

of the brand to clarify this confusion.

Travel Agent Rate Quote VarianceMontreal Hotel

Monday June 30, 2003

$0

$100

$200

$300

$400

12 2 5 3 7 11

Number of travel agents

Rat

es $

(Cdn

)

♦ The range of prices available through

travel agents in the snapshot survey

varied as much as $115 from the

highest to the lowest for the same

room in the same hotel on the same

date

♦ In the case of one of the hotels,

there was a roughly even dispersion

of quotations between the lowest

($229) and highest ($344) [Chart

xx]. Noticeably, however, this pat-

tern was completely different for the

second hotel, where agents were di-

vided into two camps, one camp

quoting $229 and the other $269.

While this tracking is by no means an ex-

haustive study of the industry, it is in-

dicative of the real world out there. Sub-

sequent to this project, we periodically

came across similarly confusing situa-

tions that clearly support the findings –

the examples in the box show the 28 rate

categories for a hotel in Boston that

travel agents are required to navigate be-

fore reserving a room for their client. In

addition, we have spot checked a number

of major hotel chains and find little differ-

ence in the complexity and confusion cre-

ated by their on-line reservation sites.

Vancouver Hotel On-line Rate Variances, Traditional King Bed Room

$150

$200

$250

$300

$350

$400

$450

$500

May 20/03 May 26/03 June 2/03 June 9/03 June 16/03 June 23/03 June 30/03

Rat

e $

(Cdn

)

Rate ARate BRate CRack Rate

Section 2: Observations The core of the study involved two hotels

and one point in time. In addition we

looked at several other properties and

chains on different dates to clarify spe-

cific points and add a level of greater

confidence. Nevertheless, we cannot, and

do not, suggest that the results are nec-

essarily indicative of anything other than

these specific properties and dates. That

said, it is worth pointing out, using these

two examples, a few of the issues identi-

fied that should be of interest to brand

development managers.

In all cases other than travel agent

quotes, buyers are penalized for booking

early; in other words, rates achieved are

lower than the initial rates put on the

market. If the system is working, we as-

sume this indicates that demand is low at

the beginning of the period, resulting in a

lowering of prices to increase demand

later on. If this is the case, it suggests

one (or more) of the following things are

happening in the marketplace:

♦ The expected price is too high, re-

flecting an unrealistic rate structure.

This notion is further supported by

the fact that rack rates bear no re-

semblance to quoted rates

♦ The marketplace has become wise to

the system and customers simply

wait until the last moment before

booking

♦ The object of the pricing system is to

replicate the “last minute” travel dis-

count model used by travel wholesal-

ers and consolidators. This probably

makes the most sense for leisure

travel, and would need to be more

sensitive to demand in order to be

successful.

Airlines (who do not necessarily represent

best practice players in this arena) use

the opposite approach – fares increase as

you get closer to the departure date. This

is designed to capitalize on the low de-

mand elasticity among high-margin busi-

ness travelers. Increasingly business

travelers are demonstrating that this as-

sumption is flawed, and that they can and

will plan in advance if there is a savings.

The declining rate pattern detected in

these hotels works directly against this

trend.

Section 3: Effect on the brand For purposes of this discussion, we un-

derstand “brand” to mean the net under-

standing of the franchise resulting from

all impressions of the trustmark and

products – the brand is the words, pic-

tures and emotional impressions that

come to mind when a person hears or

sees the name, logo or trustmark of the

company.

In order to crystallize this “brand image”

consumers combine personal experience

(functional and emotional) with a variety

of accepted cues, such as advertising and

promotion, price, recommendations, pub-

lished information, etc. As the purchase

process moves further from the product

(such as the process of booking a hotel

migrating from the hotel and brand res-

ervation service or travel agent to on-

line) these external cues play an increas-

ingly important role in building the ulti-

mate brand image.

For all practical purposes (using an ex-

tremely simplified model), the brand

serves two purposes for the consumer: It

clarifies the competitive landscape and it

defines the value proposition and hence

determines how much more or less the

product is worth relative to other choices.

The value proposition is an individual cal-

culation in which each individual takes

into account how much he or she will pay

for value received from both functional

(amenities, convenience, room size, loy-

alty programs, etc) and abstract (badge-

value, emotional preferences, personal

validation, etc) attributes

What makes all this particularly compli-

cated for hotel companies is the fact that,

while the consumer may have a particu-

larly strong image of the brand, when he

or she is booking the hotel, they are

thinking about an individual product that,

for purposes of the specific stay in ques-

tion, is quite far removed from the brand.

In each case, based on the location, the

competitive set changes as does the ab-

solute cost (a hotel room in San Francisco

is more expensive than in Sacramento).

Therefore, consumers must build a

unique value proposition for each prop-

erty. This is why a clear, uncompromised

brand promise from the master brand is

essential – this is the only constant that

the buyer can rely on when making the

purchase decision. Failing the existence

of a strong brand, or if the brand is called

in question on the hotel site, the buyer

will necessarily default to a non-brand

environment – i.e. they will see the prod-

ucts in the category as commodities to be

evaluated on price alone.

With this in mind, we will look at potential

effects of the yield management system

as experienced in the two hotels in the

study.

1. Commoditization of the industry

Changing the rate for the same room on

the same date for no apparent reason

questions the inherent value of the room.

This is amplified by the confusion of rates

presented as options to the on-line cus-

tomer (as well as the travel agent cus-

tomer). Finally, the disparity between the

actual rates offered and the “rack rate”

lends a tone of absurdity to the process

and leads consumers to question the sin-

cerity of the product. In that this is seen

as not being isolated to one particular

brand, it is becoming the accepted norm

in the category.

In addition, the vast number of corporate

programs delivering discounted rates to

many (if not most) of the business trav-

elers in the franchise, further reinforces

the notion of arbitrary pricing.

Any value system is predicated on a

transparent relationship between price

paid and product/service quality re-

ceived. In the current situation, this is

clearly not the case – in any given book-

ing situation there are a myriad of incon-

sistent pricing relationships regardless of

which channel the buyer chooses.

2. Commoditization of the property

itself

As long as the overall pricing structure is

arbitrary, guests will become more and

more immune to any form of differentia-

tion. Thus, after realizing that they can

pay less for a superior room than a stan-

dard room depending on when they book

or how well they read the rate quotes on

the internet, they are likely to start be-

lieving that while the rooms might be dif-

ferent, there is limited real value in that

difference.

The result would be that in the absence

of a lower quote for a better room, they

will default to the lowest quoted rate (and

hope they will receive a better room any-

way). Ultimately this suppresses margins

and deflates the brand.

♦ 3. Collapsing the value proposition

– eliminating pricing as a brand

value cue

Given that price is the most important

value “cue”, changing prices must impact

value propositions. This it does in two im-

portant ways:

♦ Different prices for the same

room at the same time

The way in which rates are presented on

the web-sites and through travel agents

confuses the consumer, resulting in what

we might call “value-proposition stasis”.

How can a customer be expected to de-

velop a clear sense of the value that the

experience will deliver when there are

several prices available at the same time

for the same room. Without having done

any consumer investigation on the point,

we can only assume that the smart con-

sumer will default to the lowest price and

build a value proposition on that rate.

This effect can be managed quite easily –

showing only the lowest current rate,

adding booking or payment restrictions or

other terms or in some way differentiat-

ing and explaining each different rate.

This serves the purposes of evening out

the effective value and allows the cus-

tomer to understand the value of the ex-

perience at a higher rate, discounted for

some inconveniences. At the same time

the full rate optionh must be provided (if,

for instance, the “justification” for a lower

rate is a 24hour cancellation penalty, a

rate must be available that does not have

the penalty condition attached)

♦ Rates changing over time

If a guest builds a value proposition

based on a $100 rate on day-one, what

conclusions can he or she draw about the

value when they see the rate has moved

to $120 on day-two:

♦ Case 1: the reservation is confirmed:

If the reservation was confirmed,

there would be a feeling that I “got a

deal”, which makes the guest feel

good, but might build a brand im-

pression that it is only of value when

it is discounted. Following this, the

guest will be loath to pay full price

under any circumstances. If the pur-

chase is deemed a good value at

$100 it will be considered a lesser

value at $120 (unless the guest un-

derstands this lower price to be a

specific deal offered for specific rea-

sons for a specified length of time) In

this case, by moving the price up the

value perception has decreased

among those who did buy at the

lower rate.

♦ Case 2: the buyer does not make the

reservation

In this case, the buyer is likely to try

to ensure that there are no equiva-

lent products available at the initial

good value rate ($100) before re-

turning reluctantly to make the reser-

vation, and he or she is likely to con-

clude that this is not the fairest price

for the room (hence not a fulfilling

value proposition

If the price goes down to $80, the

same conclusions apply in reverse.

Section 5: The role of the internet Our hypothesis is that this situation

would remain true even if the internet

had not entered the marketplace. How-

ever, as in any marketplace, access to

timely information plays an important

role – in this case it serves to spot light

the pricing aberrations and hence speeds

up the process. Consumers are ever

more concerned about their own savvy

as consumers and will work hard to en-

sure their dollar delivers the best value.

Section 6: Solutions Is this a train that has left the station,

never to return, or are there actions ho-

tel brands can take to minimize the effect

and turn around the process? It is true

many (if not most) hotel brands are on

the train and it has left the station.

Those, such as Four Seasons who never

hopped on the train, seem to be building

solid brands that support higher margins

based on attributes and experience,

rather than the shaky territory that other

brands are being forced into – price/

value differentiation. That said, there

may be some immediate remedies that

can be applied to minimize (or turn

around) these effects of revenue man-

agement:

♦ Option 1:

Jettison the yield management system

and sell rooms on a constant inventory

basis, offering consistent rate structures

based on room type and seasonality, and

offering negotiated volume rates to bulk

purchasers, wholesalers and, when nec-

essary, consolidators. In this model an

internet discount would be applicable,

and it would be up to the hotel and time-

frame if lower prices would be available

on travel sites – if they are, however,

they would need to be built into a value

added package of some description or ac-

companied by real restrictions that qualify

the discount.

♦ Option 2:

Revise the execution of yield manage-

ment systems. Starting with the core rate

structure, developing a rack rate that is

somehow believable vis a vis actual rates

paid by guests. Rates quoted at the out-

set should be low in order to reward ad-

vance booking, gradually increasing over

time so that late bookers (in fact business

travelers who can and will pay the higher

prices) pay the full freight. Finally, when-

ever there are rate variances on the same

page (i.e. multiple rates quoted on the

web) clear, logical reasons must be pre-

sented for the different rates.

♦ Option 3

While not directly an alternative remedy,

it is a prevention as well as cure: focus

on building a strong, differentiated brand

that is experienced at every touchpoint –

at the very least, experienced consis-

tently in every property.

These are only a few of what must be

many remedies available. Which is best

can be the subject of many debates;

however, that there is a need among

many hotel brands to find a remedy is not

open to debate.

Page 10

Protean Strategies is a Toronto based management consulting firm specializing in developing brand strate-gies and providing a full range of con-sumer research services. Since its in-ception in 1997, the firm has provided breakthrough strategies for leading Ca-nadian and US brands, including Gen-eral Motors, Fairmont Hotels, Canadian Tourism Commission, American Ex-press, Dell Canada, Energizer Batteries, Unilever , Procter and Gamble, Allstate Insurance and advertising agency part-ners in Toronto, Calgary, New York City, Chicago , London, Amsterdam, Frankfurt and Shanghai.

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