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The recent recession was particularly difficult for the travel and hospitality industries. Traveler numbers declined as people curtailed leisure travel and corporations reduced budgets. Furthermore, profitability pressures for the travel and hospitality industries intensified as consumers became hypersensitive to price with the onslaught of online sales channels. With challenges like these, selling and delivering services profitably to hotel guests, rail passengers and airline travelers across global markets has never been tougher.
According to the International Air Transport Association, travel and tourism economy GDP contracted by 4.8 percent globally in 2009. Although hotels should enjoy double-digit revenue growth by 2012, market conditions are likely to remain relatively soft until then. Considering the great difficulty in predicting trends in the travel and hospitality industries over the next six to 12 months, companies must understand how to accurately forecast demand for services or products at prices that appeal to travelers while driving increased sales. With the economy on the rebound, travel and hospitality businesses can accomplish this objective by adopting pricing and revenue management strategies that integrate people, processes and technology.
The Importance of a Robust Pricing Strategy
As corporate executives gain a greater understanding of post-recession industry trends and a better sense of the financial strength of their companies, many organizations will begin to look at ways to increase their market share. Pricing will play a key role in determining how companies maximize profit and improve bottom-line results.
Companies should avoid deploying massive discounting measures to stimulate demand for their products or services in order to steal market share from competitors. This strategy can cause long-term damage to a company's brand image and customer base, as well as negatively impact its position in the market. Deep discounting today can result in a profit spiral that's guaranteed to create huge obstacles for companies as they try to compete at a lower price point in the future.
Travel and hospitality companies should also steer clear of raising prices too high too fast without factoring in several key elements, including price levers, capacity and customer loyalty. Utilizing the price lever to manage demand is very powerful - it is a key driver of overall profitability, especially for companies that are supply constrained. Not only can raising prices push consumers to a competitor or to cheaper alternatives, but as the price for a product or service increases, companies may unintentionally leave potential profits on the table.
It's important for businesses to exploit the price lever to their advantage and maximize profit as demand increases or decreases. For example, a leading hotel company operating in 74 countries took a new approach to revenue optimization in order to make profitable pricing decisions on all stay nights, not just the busy ones. Realizing that it had little insight into competitor pricing, the hotel operator developed an innovative program to assess current supply, demand and competitor rate data. The company uses that data to determine optimal stay-night pricing for all of its participating hotels.
Cutting-edge solutions built on supply chain best practices support the hotel operator's approach to revenue management, optimizing prices based on competitor rates, capacity constraints, local market demand and economic factors. As a result, the hotel operator is able to sense and respond quickly to changes in consumer demand and market conditions, further enabling it to leverage pricing as a means to grow profits and market share in an economic upturn or downturn.
Balancing Supply and Demand
As the recession continues to lose its grip, travel companies are also turning their attention to finding ways to strategically balance supply and demand and optimize revenues. Businesses can pull ahead of the competition by using pricing as a lever to control demand for the products and services they offer. As demand begins to improve across the industry, companies with a greater understanding of capacity will not only effectively determine the best price point for their products and services in the marketplace, but will also be able to balance inventory, supply and demand to maximize margins.
A leading passenger rail operator based in the United Kingdom understands the challenge of balancing supply and demand all too well. The company knew it needed to optimize fares for greater profitability. However, the rail operator also realized that pricing fares too high tended to suppress demand on certain routes, while revenue is often diluted by pricing fares too low. The company selected an advanced price optimization solution that uses price-sensitive forecasting to estimate how price will impact demand - instead of focusing on occasions when demand outstrips supply. Early trials revealed that the rail operator's revenues increased by almost 20 percent on certain trains. The increase was mainly achieved by offering more seats at a particular lead-in fare on appropriate trains, minimizing revenue dilution and leading to a 27 percent hike in passenger volume.
Revenue Management Best Practices
Companies can successfully exit the recessionary period through the adoption of industry best practices for pricing and revenue management. The following recommendations can help organizations develop a strategy that incorporates these practices:
• Secure senior executive buy-in. It's critical for an organization to have the strong backing of an executive leadership team that understand the value of strategic pricing and revenue management initiatives. Success comes more quickly when senior leaders take the lead in communicating a culture of change across the organization, helping all stakeholders understand the initiatives and why they are an integral part of the company's business strategy.
• Adopt a well-defined business process. By adopting and implementing a comprehensive and well-defined business process for pricing and revenue management, companies can ensure that effective pricing and revenue management practices are firmly in place and that decision-making activities are aligned in terms of maximizing profit for the business.
• Integrate pricing strategies with business processes. Companies are better equipped to respond to market changes if they understand when products are being sold at a profit or at a loss. This allows them to carefully manage price points to ensure that profitability is maintained. For this reason, a company's strategy for improving pricing and profitability should be closely aligned with their business processes.
• Implement the right technology and capabilities. Having the right tools, technology and capabilities is key to ensuring that the multitude of decisions made each day are quickly done in a seamless fashion. The collaboration, visibility and analytical capability of such tools will help a company make more accurate and efficient business decisions.
• Foster strong vendor relationships. It's important to build better relationships with business partners who can offer innovation and industry expertise. Technology providers who have their finger on the pulse of revenue management should be looking at least 10 years ahead in terms of functionality to help ensure that travel and hospitality companies stay competitive and increase market share.
Consumer confidence and economic optimism are slowly returning to the travel and hospitality industries. While there is a tremendous opportunity for businesses to reap the benefits of healthier economic conditions, it's important to understand how pricing can affect demand for their products or services. By implementing innovative and robust pricing and revenue management solutions, companies create a harmonious balance between supply and demand to further increase revenue, profit margin and market share.
Source: JDA Software
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