This is the most important article I’ve analyzed so far and I strongly recommend it to read it. Based on 4,000 hotels in Europe and 10 year period, the authors proved that hotels achieved higher RevPar when they positioned their ADR higher that their direct competitors. Moreover, the consistent relative pricing over time didn’t affect the RevPar what means that variable pricing which is the core principle of nowadays Revenue Management is questionable.
Cathy Enz, Linda Canina, Jean-Pierre van der rest
The Center of Hospitality Research. Cornell University.
This article is a milestone in hospitality research and I found it really interesting as it proved few of my previous thoughts. It is also written by people who really know what they are doing, what makes it reliable and comprehensive. I also liked this article, because the difficult concepts are explained in easy way.
The authors argue the importance of consistent pricing strategy and the resource-based approach, which emphasizes that the hotel should make pricing decision based on its capabilities and their value proposition. Therefore, the study explore how price positioning and price fluctuations affect the performance of hotel performance measured as rev par.
The strategic price positioning shows where the company position it self among the competitors regarding the price. One of the most important tactics that influence pricing is revenue management, that address the fluctuations of demand by price optimization. However, such a logic has an assumption that the demand is price elastic. It means every change in price will affect the demand. The authors not only want to question this assumption but also expect that extensive price fluctuations will diminish revenue performance, due to price variability on customer risk and perception of brand equity.
Because their findings turned out to be quite revolutionary, I decided to explained their method in more details than usual.
The data for the study comes from STR Global and shows monthly hotel-level room revenue and rooms sold for the period 2004 -2013 in Europe. The sample sized (after initial restrictions) consisted of 4,120 hotel properties in 37 countries. The hotel size ranged from 9 to 1,200 rooms and the sample was composed of 26% independent properties versus 74% chain-affiliated. The countries with the highest proportion of chain properties were: UK, Germany, Italy and Span. The lowest, on the other hand had: Azerbaijan, Croatia, Georgia, Kazakhstan and Norway. The sample consisted of all hotel types (defined by STR) as: luxury, upscale, midscale, economy and budget; and all location types: urban, suburban, airport, interstate, resort, small town or metro. The monthly data was aggregated to annual levels to minimize seasonal pricing irregularities. Each competitive st of hotels, within each the ADR was compared was determined by STR Global’s guidelines.
In the study, following measured variables were calculated:
- Performance Over Time: revenue per available room (RevPAR) as total Room Revenue from those 10 years divided into total number of rooms available for sale over those 10 years.
- Price Position Over Time: Relative ADR as annual ADR for each property divided into ADR of the competitive set.
- Price Fluctuation Over Time: as standard deviation of annual ADR percentage difference from the competitive set over 10 years period
- Annual Comparative Price, Occupancy and RevPAR: the percentage difference between property’s measure and competitive set was classified into categories.
The first important finding of this research is visible on the chart below. It shows that relative occupancies don’t significantly fluctuate with changes in relative price, given a reasonably flat percentage difference from the competition. Moreover, the higher ADR than competition didn’t decreased significantly occupancy. What proves one of the hypothesis stated by authors. This also means that, the higher ADR significantly increased the RevPar, and trying to steal the market share by lower prices is actually decreasing RevPAR more than it decreases occupancy. While the pattern of results were same for both chains and independent properties, chains gained higher levels of occupancy and lower of RevPar losses than independent hotels when pricing below competitors. Moreover, because the study was conducted based on 10 years, it was possible to examine the same relationship on smaller periods. However, the results were very similar what implicates that the condition of economy doesn’t influence the findings. The last step of this research was to conduct a multiple regression analysis of the effect of price position and fluctuation, but there was no significant relationship between price fluctuations and revenue. Therefore, there is no proof that higher fluctuation of prices will decrease the hotel performance.
Enz, Cathy, Linda Canina, and Jean-Pierre van der Rest. ‘Competitive Hotel Pricing In Europe: An Exploration Of Strategic Positioning’. The Center for Hospitality Research, Cornell University (2015)
Author: Mateusz Konopelski