Pricing as a Competitive Weapon: How IHG`s

Pricing as a Competitive Weapon:
How IHG’s Price Optimization Capability
Revolutionized Pricing for Hospitality
Craig Eister – IHG – Vice President, Global Revenue Management
Dax Cross – Revenue Analytics – President
Craig
C i Eister
Ei t
Vice President, Global Revenue Management
2
IHG Facts Sheet
• System Size – 4,437 hotels; 647,161 rooms, 1,275 in pipeline
• 85% Franchised; 14% Managed; 1% owned
• $20B in rooms revenue through IHG systems
3
IHG Revenue Management Evolution
HIRO
(1993)
Inventory
Optimization
HOLIDEX
Plus
(1999)
Global
System
Integration
P i i ffor
Pricing
Profit
(2003)
Best Flexible
Rate (BFR)
PERFORM
(2006)
Rebranding
HIRO
Extended Stay
PERFORM
Price
Optimization
(2009)
Optimize BFR
and associated
rates
4
$100
$100
$80
$80
PRICE
PRICE
Understanding the Opportunity –
Traditional Revenue Management
$60
$40
$60
$40
$20
$20
$1
$1
1
20
40
60
DEMAND
80
100
1
20
40
60
80
100
DEMAND
5
Understanding the Opportunity – Price
Optimization
$100
PRICE
$80
$60
$40
$20
$1
1
20
40
60
80
100
DEMAND
6
Pricing Inaccuracies Increase the
Opportunity
Benchmark Rate too High
$100
$100
$80
$80
PRICE
PRICE
Benchmark Rate too Low
$60
$40
$60
$40
$20
$20
$1
$1
1
20
40
60
DEMAND
80
100
1
20
40
60
80
100
DEMAND
7
Creating The Value Proposition
Foremost
Challenge:
Hotel Acceptance
Price Optimization
needs to be a
“World--Class”
“World
Capability
Belief that
financial
opportunity is
significant
Need to g
get input
from Owners /
GMs / Revenue
Managers
g
“Step in the Right
Direction” won’t be
accepted by
Hotels
Senior
management
needs to know
impact at
portfolio level
Excitement about
potential to
re-establish
credibility with
hotels
Must account for
factors that hotels
consider,
especially
competitor prices
Desire to
“Leapfrog”
Competitors
Benefits case at
hotel level is
imperative for
acceptance
Price
Optimization
could be “Huge
Win” for IHG
Quantification of
Benefits is Critical
Strong Desire to
establish New
Vision for RM
at IHG
Price
Optimization could
be a platform
for launching
this vision
Price Optimization should be a Catalyst for Change
8
Building a GroundGround-Breaking Capability
Research and Scoping
• Researched models and analytics and developed proof-of-concept models
• Used revenue opportunity modeling to calculate opportunity by brand / region
Feedback Gathering
• Global focus groups with over 50 hotel revenue managers
• Working sessions with over 60 corporate & regional personnel
Design and Prototyping
• Developed Excel-based prototype for proof of concept
• Tested by 18 hotels around the globe for 2-3 months
• Proven 3.2% uplift in RevPAR
Technical Design & Development
• Coordinated development effort (Global IT / Global RM / Revenue AnalyticsTM)
• Designing enterprise capability and integration with PERFORM and HOLIDEX
Plus
9
Integrated Price Optimization into PERFORM
to create a Next Generation Capability
Demand
Forecast
Remaining
Demand
Forecast
PERFORM
SM
Forecast
Multiplier
Competitive
R t
Rates
Module
Price
Optimization
• Rate Differentials
• Business Rules
• Overrides
• Hurdle Points
(or Open/Closed Rates by LOS)
• Occupancy Forecast
Market
R
Response
Module
BFRs by
Room Type
Hurdle Points
(or Open/Closed
Rates by LOS)
• Optimal BFR
• Competitive Rates
User Interface
HOLIDEX®
Plus
• Rates
• Availability
• Bookings
OPERA
PERFORMSM with Price Optimization
10
D
Dax
C
Cross
President, Revenue Analytics
11
Principle Challenge:
How to manage the complexity?
Seasonalit
Seasonality
Group
Dayy
of Week
76,000+
Pricing
Decisions Per
Hotel Per Day
Competition
Customer
C
t
Feedback
Occupancy
Level
Over 273 Million Pricing
Decisions Across IHG Portfolio Per Day
y
12
The Three Pillars of Price Optimization
13
Demand Forecasting requires precision
and granularity
Forecast Type
Level of Detail
Budget / Planning
by Day
• Room Nights and
Revenue
• Group vs. Transient
• OTB and forecasted
pickup
Pricing by Day
• Room nights
• Group
Gro p definites
definites,
tentatives and to-be’s
• Transient rooms by
segment
• Retail
• Corp
• Package / Promotion
• Account for room types
Breakdown
14
Competitor rate changes impact market
p
position
$229
$209
The Hotel
California
$199
Competitor
Competitor
Benchmark
Benchmark
$199
$192
$189
$159
15
Price sensitivity models how demand will
respond
p
to changes
g
in price
p
positioning
p
g
Demand
d
Modeling Demand as a Function of Price
Pickup
Pickup
Low price sensitivity
High price sensitivity
Price Position
How does the answer change for different segments?
• Weekdayy vs. weekend
• Direct vs. third p
party
y web
• Season
• Retail vs. package/promo
16
Price Optimization distills modeling into
key optimization factors to ensure
t
transparent,
t actionable
ti
bl recommendations
d ti
Key Optimization Factors
17
Practical pointers – Demand forecasting
Reducing forecast
error by 50%
generates a 1-2%
revenue uplift
Replace “Last
Replace
Last Year” with a moving average
Interact with RMS f
RMS forecast t
early and often
• Ex: 4-6 week moving
average by DOW
Make your forecast price sensitive
• Ex: Lower forecast if
competitors are
undercutting you on
rate
• Ex: Wash groups
aggressively
18
Practical pointers – Competitive price
positioning
Don’t lead
the way
down!
Track a
benchmark
rate
Focus on 3-4
key competitors
Ex: If competitors typically
follow suit, a rate decrease won’t
grab share
Ex: A 20% rate reduction by
one competitor may not require
an equivalent response
Ex: Top 3 competitors for
transient retail business
19
Demand
Practical pointers – Price sensitivity
Low price sensitivity
High price sensitivity
Price Position
1. Perform market tests to
assess price-response
• Ex: Increase rate vs. comp
set and measure pickup
2. Rate price sensitivity
by segment
2. Conduct breakeven
analysis for decreases
• Ex: “High” price sensitivity
on summer weekends
• Ex: How many room nights
must we sell to break even
on a $25 rate decrease?
20
Craig
C i Eister
Ei t
Vice President, Global Revenue Management
21
“IHG’ Price
“IHG’s
P i Optimization
O ti i ti Capability
C
bilit
Is The Greatest Single
g Achievement
In Revenue Management This Decade”
Over 2000 hhotels
O
l on P
Price
i
Optimization whose revenues
are over $8B
22
“IHG’ Price
“IHG’s
P i Optimization
O ti i ti Capability
C
bilit
Is The Greatest Single
g Achievement
In Revenue Management This Decade”
Measurable 2.7%
2 7% increase
in RevPAR
(2009 Annual Report)
23
“IHG’ Price
“IHG’s
P i Optimization
O ti i ti Capability
C
bilit
Is The Greatest Single
g Achievement
In Revenue Management This Decade”
Fully deployed - $400M per year
5 Year NPV - $1.6B
24
“IHG’ Price
“IHG’s
P i Optimization
O ti i ti Capability
C
bilit
Is The Greatest Single
g Achievement
In Revenue Management This Decade”
Continues to lead the innovation
in the industry with respect
to retail pricing
25
High Praise from User Feedback
“Great
Great Tool! Challenges you to
question your pricing practices.”
- Balazs Szentmary,
Revenue Manager
InterContinental Madrid
“You’ve nailed it.”
- Bob Krypel
GM, Holiday Inn
Memphis
“Highest revenue week ever,
aside from the Derby
weekend, using the
recommended rates of the
tool. The GM became a big
believer in pushing rate after
he saw the revenues from the
fi t night
first
i ht off the
th week.”
k”
- Brian Cauwels, Revenue Manager
Louisville Holiday Inn Express
“I am now officially
hooked on Price
Optimization!”
Optimization!
Michael Tolbert, GM
Holiday Inn Express,
Express Bonita springs
“It’s
It s bloody brilliant!”
brilliant!
- Patrick Wimble
Director of Revenue Management
EMEA
“We enjoyed
“W
j
d using
i th
the ttooll and
d ffeltlt it
was a great benefit in terms of the
discussions we had for Rate
Management …Seeing all the
information on the same page, i.e.,
occupancy, selling rate, competitors
rate,
t forecasted
f
t d occupancy and
d
then a recommendation was
a real bonus.”
- Kay Sawyer
Birmingham Crowne Plaza,
Birmingham, England
26