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Hospitality and Tourism News

Pricing power becomes evident in hotel metrics

GLOBAL REPORT—Ever since the U.S. hotel industry metrics bottomed-out around January 2010, demand has led a slow-but-steady recovery. Throughout 2010 and 2011, consumer confidence grew and businesses were able to put more employees back on the road adding to group demand.

Now that demand has rebounded to peak levels and the hotel industry is selling record numbers of rooms, hoteliers are turning to effective rate strategies to capitalize on that demand by boosting rate.

Rate is leading the recovery race now.

“If you track back to the early part of the recovery, it was demand and bookings that were stealing the show,” said Julie Parodi, senior director of strategic planning and analysis with Pegasus Solutions and editor of The Pegasus View. “Now booking growth has leveled off, but yet here we go … now rate is slowly setting new marginal records.” 

 Pegasus analyzes data from transactions that took place across the global distribution systems and across multiple online channels. In February, Pegasus data showed U.S. corporate rates up 7.1% year over year and leisure rates up 7.3% year over year. Both numbers were the highest year-over-year increases recorded in any month since the downturn.

“Both corporate and leisure rates are showing solid improvement,” Parodi said. “So far it has been a slow and steady going that hasn’t garnered a lot of attention, but these are new growth records.”

Data from STR,’s parent company, shows U.S. hotels reported average daily rate at $103.18 in February, up 4% year over year. 

“As demand and occupancy comparisons become more difficult throughout the year, room rates become increasingly important in maintaining our current levels of RevPAR growth,” STR’s President Amanda Hite said in anews release.

Breaking it down

On the corporate side, companies are seeing earnings improve and can afford to send more people on the road. That leads to additional pricing power for hoteliers, Parodi said. In addition, as contracts negotiated during the downturn expire, hotels are negotiating at higher rates.

“That’s also sustaining this rate growth,” Parodi said.

Savvy revenue management has led to the record 7.3% rate growth on the leisure side, Parodi said. “It’s resolve or resourcefulness or a combination of both,” she said.

Looking beyond North America, global corporate rates were up 3.7% year over year and global leisure rates were up 7.6%, according to Pegasus data.

“Global growth is steady also,” Parodi said.

February regional performance

February (corporate) YTD Feb (corporate) February (leisure) YTD Feb (leisure)
North America 7.1% 7.0% 7.3% 6.7%
South America 5.6% 6.9% 13.9% 9.8%
Europe 1.7% 1.5% 4.0% 3.3%
Africa/Asia/Oceania -0.2% -0.9% 1.6% 1.8%
Global 3.7% 3.8% 7.6% 7.3%

Source: Pegasus Solutions (year-over-year percent changes)


Other than the typical “rate lags demand” theory, Davidson Hotel Company’s Regional Director of Revenue Management Melanie Buller offered a few anecdotal operator factors leading to rate growth across U.S. hotels.

Rate increases could be attributed to capital expenditures and major renovations that were completed at many hotels during the past few years. “In all of our hotels that have done major renovations and the hotels that have experienced brand changes, we’ve seen significant ADR boosts in every one of those,” Buller said. A handful of hotels that were repositioned to compete in a higher chain scale are experiencing “triple-digit percent change.”

Another factor for rate boosts across Davidson’s portfolio is the absence of niche discounted demand the company saw last year. In 2011, a few hotels in Davidson’s portfolio were hosting record numbers of airline staff, as much as 50 or 60 rooms per hotel, week in and week out. This year, schedule changes have shrunk that demand, which leaves more room for managing revenue from transient demand. 

Forward looking

Historical views of demand and rate growth show demand rebounds more quickly than rate, but even as demand growth tapers off rates continue to improve for a number of months.

Despite an expected slowdown in April, forward-looking booking data shows demand increasing at a steady pace into the spring and summer, Pegasus’ Parodi said.

On the leisure side, more Americans will be taking vacations at higher rates.

“More people are going to work—the unemployment rates are starting to slowly edge up—and it’s hard to dispute the fact that if more people are working more people can take vacation,” she said. “People are taking shorter but more frequent trips.”

Business travelers also will be hitting the road hard, Parodi said.

“When you’re talking about assuring accounts sign up with you again, meeting with them face-to-face sends a message that you’re important to them,” she said. “Companies are willing to spend money if it’s bringing more money in.”

STR’s most recent forecast predicts ADR will grow 3.8% in 2012 and 4.4% in 2013. 

On the ground level
For hoteliers to take advantage of the strong demand and continue rate growth, Parodi said it is important to convey what it is about the hotel that differentiates it from its competitors. That value might be location, charm or extra features. On the flipside, hoteliers should know their target audience and know what matters most to them, she said.

“Keep rates up but give extra value,” she said. “Promote extended-stay offers. Give an additional night either free or at a discount. That way, the consumer gets to enjoy a longer or pampered vacation but the hotel can uphold rate parity.”

At Denihan Hospitality Group, the goal is to drive revenue per available room through a balanced approach of growing both occupancy and rate. In the first two months of 2012, RevPAR was driven primarily through occupancy, but looking at future pace data, bumps in rate are expected, said Terence Sham, regional director of revenue strategy.

“Our philosophy is: during slower demand days to drive as much RevPAR through occupancy; on high demand days we drive the same amount of RevPAR but through rate,” he said. “In February, we used occupancy to drive RevPAR but there were a few days with a little more demand and those days we drove rate.”

As spring and summer bring higher demand, Denihan will rely less on building a base in advance and will leave more room for short-term demand, which the company can price higher, Sham said.

“Looking at rates, there is a lot of different stuff we’re doing, whether that be less discounting or trying to drive more traffic in a shorter window to get that rate jump. Last-minute (corporate) travelers are less price sensitive,” he said. “We do have different types of promotions, such as non-refundable bookings. If you want a 24-hour cancellation policy, we would charge as much as our competitors, but if you want a little deal we can offer either a longer length of stay or a non-refundable offer.”

Sham said Denihan won’t use flash sales in high-demand periods, for example, and will shift inventory into channels with a longer booking window.

Davidson’s pricing strategy centers on the philosophy that the product is worth what the consumer is willing to pay for it. Davidson will capitalize on what Buller calls “internal demand”—or demand created at the hotel level by taking in more group business, for example—differently than it will with overall market demand.

“During these weeks, our strategy is to sell more of the club rooms. That’s one place we can yield our money,” she said. “We can afford to get higher rates for those rooms. We can fill that floor up and then we open up the general sale inventory. Or you can leave them both open at the same time and put length-of-stay requirements on the general inventory.”

Buller’s philosophy is to not cut off certain distribution channels during high periods of demand.

“We do ratchet down the opaque channels, but we try not to cut them off completely,” she said. “We make the upper end available and if consumers want to pay close to what our retail rate is.”

Jason Q. Freed



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