Does the rate determine the value?
In these days of Corona crisis, there has been a lot of talk about rate strategy.
Convinced that the world will not end tomorrow and that people will start traveling again after this nightmare ends, I’ll share my thoughts regarding room rates.
The pricing topic always brings up conflicts and resistance within companies; rate drops and promotions in trade have always stimulated demand but, on the other hand, high rates are often perceived as synonymous of higher quality.
The high price is used to create value and helps to occupy a single well-defined space in the consumer’s mind. As a result no one would buy a luxury sport car if it’d cost less than an ordinary sedan, however, there are case histories that prove otherwise.
Above all is the example of the entry of low-cost airlines into the aviation sector. The fear of flying is an epidemic that affects six out of ten people worldwide and until a few years ago no one would have ever trusted to book with an airline selling tickets at extremely low price. Aerophobia is a widespread fear but is as much denied by the growth figures recorded by low cost airlines in recent years.
In the last years an average of 88 million Italian travellers took a plane and of these, 50.9% chose low-cost airlines. The latter’s have outperformed traditional flag carriers, demonstrating that a low price can stimulate demand even in the presence of strong psychological resistance.
If over 40 million Italians are willing to take a plane by paying their ticket as much as a couple of pizzas, then you have to ask yourself some questions about the perception of value. In the aviation sector ticket price has been associated with carrier’s quality for almost 70 years.
As soon as consumers understood that low cost airlines were not saving on maintenance checks, instead they were gradually eliminating the unnecessary or superfluous services, the barriers of mistrust were lowered. The new business model has leveraged the price, developing innovative marketing strategies and finding niche thanks to the absence of qualitative differences in the offer.
Obviously if you fly with Ryanair you will have to check in online, get up early in the morning and put a couple of sandwiches in your backpack but you will certainly have the same chances of arriving at your destination as you would have if you bought the ticket from a flag carrier. Low-cost airlines business model reduces the basic services to the bone, ancillary services are absent or sold separately and eliminates the brokerage costs; satisfying the sole transportation need is the target to be met.
Zotye is a Chinese automotive industry that produces cars inspired by European models. In China it seems that the laws on plagiarism are not favourable for western producers so Zotye continues to churn out valuable cars at incredibly low prices. In 2015, the Zotye T700, a clone of the notorious Porsche Macan, was launched. The car is sold at around a quarter of the Macan’s price and it appears that sales were booming before the Corona Virus. So is it still true that a valuable object must conform to the need for expenditure? Are Zoyte and Ryanair demonstrating to the world that the ostentatious consumer economy is starting to lose track?
Last year closed extremely positively for car manufacturers who have found a strong position in the price range certainly not accessible to everyone. Aston Martin quintupled its sales compared to the same month of the previous year, Lamborghini almost tripled and Porsche and Ferrari closed with a doubling. In the absence of clones, in the presence of strong elements of uniqueness and, in a market where objects of desire retain their exclusivity, the ostentatious component of consumption seems to hold up and it is therefore strategic to associate a high price with a high value product. Maintaining a high price is not absolutely right but it is correct to keep the price level since a demand still exists; that demand is there to confirm that those products or services are received as products or services of great value.
Similarly in the hotel and Airbnb sector, there are around sixty international operators who established brands that today are comparable to super luxury cars manufacturers. Observing the average rates implemented by the actors of the glitz, among these brands stand out Four Seasons, Raffles, Six Senses, Intercontinental, Shangri-La, Banyan Tree, St. Regis, Bulgari Hotels, Hilton and Ritz Carlton. They are internationally renowned operators who certainly know their accounts and know how much value the brand gives to maintaining a high rate. Certainly, in relation to lower category hotels, the prices are high but comparing apples with apples it might surprise you to look at how much dynamics rates are present in this segment too. Rates undergo changes and sharp reductions when the demand is not particularly interesting; Revenue staff keep the value received high by playing on resistance tariffs when the demand is high.
The luxury market not only concerns large international operators but also historical real estate assets scattered around the world. These are hotels with breath-taking views, antique furnishings, exclusive locations or designed by great international designers; these are the hotels that contain indisputably unique and extraordinary elements and are often frequented by the international jet set. It is hard to think this hospitality segment offers price reductions and promotions. For these properties, adapting to the demand and levelling their rates would mean devaluing the appeal of the hotel, hence reducing the interest of those who normally frequent it. In these situations, in the event of demand drop, the hotel can count on its financial capacity to ferry towards more favourable moments.
Those hotels, Airbnb Host who are not lucky enough to belong to this sector and do not take advantage of elements of strong characterisation and branding, need to have a different strategy. The high accessibility to products and services creates in the intermediate sector a strong weakening of the differentiation component forcing properties to constantly review their rates or exit the market. Technology has accelerated this process through the filter system. The traveller makes quick decisions through the booking platforms.
With same or similar stars, reviews, bedrooms, bathrooms and locations, the choice is only about aesthetics, design and little else. It is the intangible aspects that determine the price difference. Operators who bet on the mass product are players with only one card in hand: mathematics.
The truth about rates is established by an algorithm that delivers a cold, rational datum into the player’s hands, devoid of any emotional component. Chances that a room receives a reservation at a certain rate is calculated by a software that crosses historic data, analyses future trends, records changes and communicates, with extreme precision, how many possibilities there are to sell a room at a certain rate.
The player, with little chance of winning, is left to take the final decision; try the wheel of fortune or lower the rates and reduce the risk of unsold rooms?
For those in this condition, it is necessary to carry out a temporary strategy aimed at be competitive; subsequently develop a brand and commercial positioning strategy aimed at distinguishing themselves from the pack.
When the Corona crisis is over, initially an attractive price will be the only lever that can be used by operators to restart the machine. In the medium term the need for branding will certainly increase for small and large operators.